2008 Annual Report

To Our Stockholders

National Instruments turned in another strong performance in 2008, as we delivered record annual revenue for the 31st year in our 32-year history. Despite a challenging economic environment with the U.S. in recession through 2008, we saw continued success across many areas of the business, including software, data acquisition, PXI and modular instrumentation, and distributed I/O. We also made significant strides to strengthen our product portfolio, especially in high-growth areas for the business including RF test and industrial embedded applications. Our operating business model again proved its strength and resilience as we were able to continue to make strategic investments in R&D and field sales while closely managing expenses in other areas of the business and delivering strong operating profit.

Our Products and Markets

National Instruments transforms the way engineers and scientists around the world design, prototype, and deploy systems for test, control, and embedded design applications. Using NI open graphical programming software and modular hardware, customers simplify development, increase productivity, save money, and dramatically reduce time to market. This diversity of our product portfolio combined with the technical prowess of our direct sales force gives us the flexibility to respond quickly to changes in market conditions and allows us to take advantage of areas where investments are flowing. The wide range of applications we serve continues to give us a broad customer base and remains a key factor in our long track record of growth and profitability. Last year we sold products to more than 30,000 companies in nearly 100 nations 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.

National Instruments introduced approximately 150 new products to the market in 2008, including the newest version of our LabVIEW software platform, new PXI modular instruments, and new products based on our reconfigurable I/O (RIO) architecture. The latest version of LabVIEW, version 8.6, builds on the success of our flagship software as a robust development platform to help engineers design, prototype, and deploy systems. This new version adds functionality for targeting FPGAs as well as further leverages the performance of multicore processors, which has generated a strong response from accounts and industries that were previously focused on traditional, text-based programming languages. Since its release, we have seen strong orders and adoption from both new users and customers upgrading from previous versions of LabVIEW. We also saw growth in sales of volume license agreements for LabVIEW, which is a strong indicator that companies continue to see the value of investing in and standardizing on LabVIEW across a department or throughout the organization.

We reinforced our leadership position in data acquisition with the release of new high-performance USB devices in addition to our first wireless-enabled data acquisition devices. This new wireless capability is well-suited to applications where cabling would be difficult or impossible, and we have seen successes in application areas as diverse as agriculture, mining, and facility monitoring.

PXI and modular instruments continued to be a strong growth driver for us in 2008. This open industry platform now features 1,500 different PXI products from more than 70 vendors, including some of the largest test and measurement companies in the world. We significantly expanded our RF measurement capability in the PXI platform with the introduction of new PXI Express 6.6 GHz RF modular instruments. The new modules extend the capabilities of PXI into new applications such as WiMAX and multiple input, multiple output (MIMO) testing that we were previously unable to address. This offers both significant reductions in testing time, as well as a reduced number of test systems required for a given volume of production units, which makes our PXI RF solutions especially attractive during periods of tightening capital spending.

In the industrial embedded area, we added a new family of single-board RIO products, which offer customers lower-cost deployment options for higher-volume OEM applications in fields such as medical devices, industrial machinery and green energy. NI CompactRIO hardware breaks the traditional barriers for engineers by enabling the domain expert to harness the power of FPGA technology via the intuitive graphical programming of LabVIEW.

The R&D investments we have made over the last few years have enabled us to produce a steady stream of products and grow rapidly in large application areas where our products are highly differentiated from the incumbent technology. This investment combined with growth in our field sales has allowed us to expand our business into new growth areas despite adverse changes in the global PMI.

A Company Built to Last

Over the past several years, we have transformed from a transaction-focused PC peripheral company to a platform-basedbusiness that closes large-system sales for high-end test, industrial, and embedded applications. Sales of distributed I/O products, including CompactRIO, have more than tripled since the end of 2003, and sales of PXI modular instrumentation have increased more than six times in that same five-year period. The success of these system-level platforms has led to a shift in our business and sales model, as evidenced by our average order size increasing to $3,700 USD at the end of 2008, a 35 percent increase compared to the end of 2003. Additionally, orders more than $20,000 USD were 38 percent of our business in 2008, compared to only 25 percent of our business in 2003.

A key contributor to our performance is our field sales force, which again proved to be a powerful asset because it served a breadth of customers and markets capitalizing on areas where investments are flowing. Some of these investments include manufacturing, where customers continue to show significant caution in increasing production capacity but also have a greater need for efficiency gains and cost reduction. Software-based test systems with PXI and modular instrumentation are well-suited to meet this need, providing much faster bandwidth, shorter test times, and greater flexibility than traditional instruments. This results in lower per-unit test costs.

In industrial embedded applications, CompactRIO continued to give our customers the ability to run sophisticated control algorithms on the FPGA, which enables more efficient motor control, improved energy management, and reduced scrap. In R&D, we see an opportunity to help customers improve efficiency and reduce design times. For example, the ability to design application-specific code in LabVIEW and deploy to reconfigurable FPGAs provides significant advantages and efficiency gains in prototyping and design validation of products ranging from advanced engine control units to nextgeneration semiconductors.

Our instrument control revenue has historically been tightly correlated to the test and measurement industry. This trend continued in 2008 as the instrument control portion of our business saw an 11 percent year-over-year decline, largely in line with the contraction of the test and measurement industry in 2008. Our mature instrument control business now represents less than 10 percent of revenue while our virtual instrumentation and graphical system design product sales, now represent more than 90 percent of revenue, increased 13 percent yearover-year in 2008.

We are also extremely proud of the performance of our employees. FORTUNE magazine named National Instruments to its 100 Best Companies to Work For 2008 list for the 10th consecutive year. This is another landmark achievement in our company's history. In addition, we will showcase our commitment to being a responsible corporate citizen to our global communities and stakeholders in our sustainability report, which will be published in 2009. I am proud of our company's innovative spirit and the open culture– something we like to call the “NI Way.” National Instruments is composed of brilliant, talented employees worldwide who both contribute to our success and inspire our culture, and I am pleased that our employees recognize the company's engaging environment and commitment to innovation.

Looking Forward

As we enter 2009 it is clear that the very weak global economy continues to make this one of the most challenging and turbulent periods in the history of the company, but I believe it's during these times that the strength and resilience of our business model truly shows its merit. In light of the historic weakness in the global Purchasing Manager's Index (PMI) and considering the severe contraction reported recently by others in the T&M industry, it is clear that we have continued to weather the storm better than most and gained market share since the start of the economic downturn.

We have also continued to show agility in quickly identifying and responding to opportunities and application areas that continue to see growth and funding, including academic teaching and research, alternative energy, and structural health monitoring of civil structures such as bridges, tunnels and dams. Our new products in modular instruments, particularly in RF, provide additional growth opportunities into new areas for the business. Our ability to drive success and win large orders in these newapplication areas can be directly attributed to the value and success of our field sales force and has been a key reason forour continued investment to grow this channel.

As we navigate this environment, we remain realistic about the economy but also optimistic about NI's future. In addition to finding creative ways to reduce costs, our employees remain dedicated to delivering highly differentiated new products to increase share in our existing market while driving growth into new application areas. This continued innovation will provide opportunity for NI even in the current economic climate, as our customers focus on doing more with less, reducing risk, and shortening design cycles. We will maintain our strategic investments to fund future growth even as we increase our focus and dedication to managing our expenses. We believe striking this balance will allow us to continue to outperform our market and peers in the current environment and emerge in an even stronger position in the next up cycle.

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 harbor provisions of 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 responding quickly to changes in market conditions and taking advantage of areas where investments are flowing, companies seeing the value in LabVIEW, expanding our business into new growth areas, our business model showing its merits, weathering the storm and gaining market share since the start of the downturn, quickly identifying and responding to opportunities, growth opportunities into new areas, being optimistic about NI’s future, increasing share in existing markets and driving growth into new areas, maintaining our strategic investments, outperforming the market and peers and emerging in an even stronger position. Our actual results could differ materially from those predicted in our forward-looking statements as a result of a number of risks and factors including future changes in the global economy and customer ordering patters, 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, currency 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.