2007 Annual Report

To Our Stockholders

National Instruments had another record year in 2007, as we delivered record annual revenue of $740 million, up 12 percent year-over-year. This represented the 30th year of revenue growth in the company’s 31-year history. We saw our revenue growth rate increase slightly each quarter on a sequential basis, with the fourth quarter being our strongest of the year. We believe this was significant as the industrial economy, especially in the U.S., was seeing a slowdown as the year ended. Our continued strong investment in R&D has helped us strengthen our graphical system design platform so that engineers and scientists can use our modular hardware and flexible software to not only test and measure but also improve inefficient products and processes by rapidly designing, prototyping, and deploying new machines, technologies, and methods. In 2007, we saw the continued growth of our products in test and measurement applications as well as in industrial and embedded applications. Our system-level platforms, including the PXI modular instrumentation platform and the CompactRIO embedded control system, saw very strong growth and helped drive our success in selling larger systems. Orders greater than $20,000 made up 35 percent of our revenue in 2007, compared to 25 percent in 2003. In addition, we saw a record average order size of $3,600 in Q4 2007. The diversity of our business across geographies, industries, customers, and applications has been a key factor in our long track record of growth. In 2007, we sold products to more than 25,000 different companies in more than 90 countries around the world. No single company accounted for more than 3 percent of our revenue and no single industry accounted for more than 10 percent of our total revenue.

Business Strategy

Our mission is to create innovative, computer-based products that improve everyday life by delivering the most advanced technologies for test, control, and design. Our customers are engineers, scientists, and technology professionals in industry, government, and academia. With our innovative software and hardware tools, we give our customers flexible, high-performance products to create reliable, user-defined solutions for test, control, and design. Our strategy is to innovate, constantly improve, and produce a steady stream of new products that deliver value to our customers and increase our business opportunities.

For more than 30 years, NI has revolutionized the measurement and automation industry through virtual instrumentation, an innovative approach NI pioneered and continues to lead. With virtual instrumentation, we combine off-the-shelf, mainstream commercial computer technologies with our own innovative modular hardware and software products, such as our flagship National Instruments LabVIEW product family. Our approach empowers customers to easily build open, flexible, user-defined solutions rather than rely on closed, fixed-function, vendor-defined traditional instrumentation. With virtual instrumentation, our customers can save time and money, easily integrate a wide variety of devices for their unique application needs, and improve their design and development productivity.

Engineers and scientists now use this software and hardware architecture in every stage of the product design cycle to simultaneously design and test new products, take real-time measurements, perform hardware-in-the-loop testing, and conduct embedded control and monitoring. This modern graphical system design approach empowers engineers to design, prototype, and deploy their complex, next-generation systems quickly and reliably. The National Instruments graphical system design platform leverages our industry-proven LabVIEW platform, with modular measurement and control hardware tailored for industrial and embedded applications. With graphical system design, NI redefines how engineers work throughout the entire product design cycle, resulting in reduced time to market and lower development costs. Engineers are able to not only replace custom electronic designs in embedded systems, such as autonomous vehicles or industrial machines, but also implement customized modulation schemes, special signal processing, bit-error-rate testing, and order analysis – all in customizable hardware on our world-class modular instruments. This is part of our embedded and graphical system design strategy, which helps customers more efficiently design, prototype, and deploy their systems while greatly improving their system performance.

We believe our software-based approach continues to gain momentum in test and measurement applications, and we are pleased with the success we have experienced with our differentiated graphical system design platform in industrial and embedded applications.

Products

In 2007, we made significant progress in graphical system design. We continue to produce innovative new products to drive our business into new areas – such as LabVIEW 8.5 for multicore processors, PXI Express modular instruments, and higher-performance and lower-cost CompactRIO systems. These new products combined with solid execution from our sales force fueled very strong growth of large-system sales.

When our company was founded more than 30 years ago, we started by building a leadership position in instrument control products that allow computers to control traditional instruments made by other vendors. Today, our instrument control products (GPIB and VXI) have matured, and their sales have generally correlated to the overall sales of the general test and measurement industry. Our leadership in instrument control hardware and software has given us a large base of loyal customers who have become a target market for our newer products. In 2007, instrument control products represented only 9 percent of our revenue as compared to 30 percent in 2000. More than 90 percent of our revenue comes from our virtual instrumentation and graphical system design products. The strong growth of these products in 2007 continues to validate our continued investment in R&D.

The cornerstone of the National Instruments business is software, and, in 2007, we continued to see strong adoption of our software platforms. By selling more software to more customers, we continued to expand our reach in test, control, and design applications. When we invented LabVIEW more than 20 years ago, our goal was to do for test and measurement what the spreadsheet had done for financial analysis. In 2007, we introduced LabVIEW 8.5, the latest version of our flagship software that builds on the success of LabVIEW as a robust development platform to help engineers design, prototype, and deploy their systems. Since its release, we have seen strong orders and adoption from both new users and customers upgrading from previous versions of LabVIEW. This new version leverages the performance of multicore processors, which has generated a strong response from accounts and industries historically focused on traditional, text-based programming languages. With enhanced support for hardware such as FPGAs and touch panel PCs, LabVIEW 8.5 can be used for new applications, particularly in the industrial and embedded space.

Throughout 2007, we introduced new high-end data acquisition devices that improved the average selling price and gross margin of the product line. Our USB data acquisition products continue to be a strong growth driver, strengthening our leadership position in portable, easy-to-use measurements. We also saw success in industrial and embedded applications driven by the revenue growth of our FPGA-based CompactRIO systems. CompactRIO has been instrumental in helping us win business in new application areas including robotics and autonomous vehicle control.

PXI marked its 10th anniversary in 2007 and continued to show its strength as a market-leading modular test platform with record revenue for NI. We are pleased that there are now more than 1,200 different PXI products available from more than 70 vendors, including some of the largest test and measurement companies. PXI serves even the most demanding measurement and automation applications, from industrial and embedded applications to mainstream electronics testing for consumer electronics and military/aerospace systems. Our PXI modular instrumentation revenue reached a new record in 2007 to become one of our larger product areas. In addition, we continue to see strong sales of RF modular instruments for applications such as spectral monitoring and testing of emerging wireless standards that benefit from the flexibility of our software-based approach to measurement and signal analysis.

The success of our new products continues to be a key driver of growth, and I would like to thank our global R&D teams for their excellent execution in 2007. I look forward to further innovation and strong new product output in 2008.

Finance

In 2007, we delivered a new all-time revenue record of $740 million, up 12 percent year-over-year. We also reported record annual net income of $107 million. Our employees did an outstanding job in managing expenses, driving revenue growth, improving our operating margins, and executing on strategic investments in 2007. We also maintained our strategy of focusing on R&D investment, demonstrating our continued commitment to investing in the future growth of the company. We finished the year with $289 million in cash and short-term investments. Given the record year for revenue and profits in 2007 and our very strong balance sheet, the NI Board of Directors approved a 10 percent quarterly dividend increase to 11 cents per common share.

I am pleased with our solid execution this year, delivering strong operating leverage while maintaining our strong investment in R&D. The company made significant progress toward our long-term operating margin goal. We will continue to expand our efforts in sales and R&D to pursue larger opportunities and deliver new products.

Outlook

Our focus in 2008 is to further invest in our system-level business while maintaining strong profitability. We will accelerate growth of our field sales resources while maintaining our investment in R&D at 16 percent of revenue to maintain a strong pipeline of new products.

Our direct field sales force is a competitive advantage in helping identify, develop, close, and support the larger opportunities made available by our system-level platforms. Given the strong progress R&D has made with our new platforms and the product releases we expect in 2008, we believe now is the right time in our product cycle to aggressively expand our sales team to leverage this R&D investment and drive future growth for the company.

As mentioned earlier, the diversity of our business has been one of the keys to our sustained track record of growth and profitability. While the new year starts with some questions on the health of the economy, we continue to believe in the opportunity we have in test, industrial, and embedded applications. While some industries will face a challenging environment in 2008, there are other areas that will see increased investment and, thus, are opportunities for growth for NI. One such area that I want to touch on is the increased focus on the environment and the next generation of energy. The rapidly increasing R&D being put into areas such as renewable energy, energy-efficient machines, and environmental monitoring requires engineers and scientists to first of all acquire the data and make the measurements to gauge where we are today before they invest in fixing the problems by designing, prototyping, and deploying better solutions. This is a great fit for our graphical system design platform. In fact, we have already seen success in many areas of what we call “green engineering,” including the design and test of wind power, prototypes of hydrogen and fuel-cell powered cars, and the acquisition of environmental data in the rain forest. These are just a few of the many applications where NI products are helping engineers and scientists find the innovations to address some of the world’s most pressing and complex challenges.

Culture

I am proud of the National Instruments innovative spirit, which I spend much of my time fostering. This spirit is a key reason that in January, FORTUNE magazine named National Instruments to its 100 Best Companies to Work For list for the ninth consecutive year. National Instruments is composed of talented employees worldwide who not only contribute to our success but also inspire our culture, and I am pleased that our employees recognize the company’s engaging environment and consistent commitment to innovation.

I would like to recognize all NI employees for another record year in 2007, with record revenue, record net income, and very strong cash flow. Thank you to our shareholders, customers, and suppliers for their continued support throughout 2007. We will continue to align R&D, sales, and marketing to strengthen our core and expand our opportunities. We are determined to continue to innovate, execute effectively, and deliver long-term value to our shareholders. I look forward to new opportunities for growth in 2008.

Dr. James Truchard,

President, CEO, and Chairman

This letter contains forward-looking statements as defined under securities laws, and such statements are intended to be covered by safe harbors created under the Securities Act of 1993, the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements related to our strategy to innovate, constantly improve, and produce a steady stream of new products; increasing our business opportunities; momentum in our software-based approach; further innovation and strong new product output in 2008; long-term goal of 18 percent operating margin; continuing to expand efforts in sales and R&D to pursue larger opportunities and deliver new products; further investment in our system-level business; continuing to generate strong profitability; maintaining our R&D investment at 16 percent of revenue and a strong pipeline of new products; accelerating growth in our direct field sales resources and sales team to leverage our R&D investment and drive our growth; continuing opportunities for us in test, industrial, and embedded applications even if some industries face challenging economic conditions in 2008; opportunities for us in the environmental and renewable energy sectors; continuing to align R&D, sales, and marketing to strengthen our core and expand our opportunities; and delivering long-term value to our shareholders. Actual results could differ materially from those predicted in the forward-looking statements as a result of a number of risks and factors including future changes in the global economy, delays in the release of new products, fluctuations in customer demand for our current products and our new products, unexpected changes in expenses and labor costs, current exchange fluctuations, the outcome of any current or future litigation involving intellectual property or other matters, and our ability to successfully identify and execute strategic transactions. We direct you to the documents we file with the SEC, including our recently filed annual report on Form 10-K, for additional risks.

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