2009 Annual Report

To Our Stockholders

While 2009 was one of the most challenging financial periods in company history, our investments in R&D and field sales coupled with excellent execution throughout the organization enabled us to outperform the industry. We delivered annual revenue of $677 million and a GAAP operating margin of 6.9% for the full year which we regard as a very good performance through the most difficult economic cycle since our founding. We also saw continued success across many key areas of the business, including software, data acquisition, PXI modular instrumentation, and distributed I/O. Additionally, we made significant strides to strengthen our product portfolio, especially in strategic areas for the business including academic, RF test and industrial embedded applications.

Over the last 33 years, National Instruments has established a track record of strong revenue growth and built a reputation as a stable supplier, business partner, employer, and corporate citizen. It is a testament to the strength and resiliency of our business model that throughout this downturn we have been able to continue investing in the strategic initiatives that keep us at the forefront of innovation. We believe these investments will allow us to continue our strong legacy of growth and profitability.

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 can simplify development, increase productivity, save money, and dramatically reduce time to market. The diversity of our product portfolio combined with the technical expertise 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 gives 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 15 percent of our revenue.

National Instruments brought approximately 200 new products to the market in 2009, 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, LabVIEW 2009, builds on the success of our flagship software as a robust development platform to help engineers design, prototype, and deploy systems. This new version harnesses key technologies such as multicore processers, FPGAs, wireless platforms and real-time math to empower innovation in new opportunity areas such as infrastructure monitoring, wireless test and biomedical device design.

We also reinforced our leadership position in data acquisition with the release of new data acquisition boards for the PCI Express and PXI Express buses. These new boards leverage the latest semiconductor technology and implement a new design to lower manufacturing costs, increase reliability and improve performance.

We were pleased to see record annual revenues in our wireless and Ethernet data acquisition devices. Microsoft’s release of Windows 7 is another closely watched technology in our data acquisition business, given the promised performance improvements, security and data throughput which may entice engineers and scientists on older operating systems to make the switch. We have tested Windows 7 to ensure our products are supported, and we believe it will have a positive impact on our hardware and software business in 2010.

PXI and modular instruments saw record revenue in Q4 2009, while our RF products delivered record annual revenue in 2009. Software-based test systems with PXI and modular instrumentation are well-suited to meet the need of customers seeking to increase production capacity, while achieving efficiency gains and cost reductions by providing much faster bandwidth, shorter test times, and greater flexibility than traditional instruments, resulting in lower per-unit test costs. 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 are also pleased to be working with Tektronix to develop the industry's fastest PXI digitizer combining Tektronix’s industry leading signal acquisition technology with National Instruments' expertise and modular instrumentation software. While NI and Tektronix have collaborated on various projects for more than 20 years, this digitizer represents the first joint hardware development project between the two companies.

In the industrial embedded area, we continue to see success with our FPGA-based CompactRIO products in prototyping applications and higher unit volume applications in industries including oil and gas, military/aerospace, and automotive/transportation, and were pleased to see CompactRIO deliver record annual revenue in 2009. 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 combination of LabVIEW and CompactRIO helps engineers quickly test and modify new designs using the graphical system design approach and achieve a faster time to market.

Our instrument control revenue has traditionally highly correlated with overall test and measurement industry revenues. When comparing Q4 2007 to Q4 2009, revenue for our instrument control products was down 30 percent, and we believe this is a good approximation of the net decline in the overall test and measurement industry since the start of this recession in December 2007. In contrast, revenue for other NI products in Q4 2009 has increased slightly compared to Q4 2007, indicating our gain in market share. We believe these results, delivered in a period of significant excess capacity in the industrial economy and with U.S. industrial production well below its 2008 peak, demonstrate that our investment strategy and market position have created significant growth opportunities for NI.

The academic community’s interest in growing their relationship with NI, in order to introduce engineering students to the latest technologies and better prepare them for industry, was strong throughout 2009. We saw record annual revenue from academic institutions in 2009, making up 13 percent of overall revenue. In addition to benefitting from the financial consistency and stability of academic institutions, we believe teaching science and engineering students how to make measurements and design control systems using NI products will provide strong returns in the long term as these students graduate and enter industry.

Growth in our field sales force has allowed us to expand our business into new areas despite the challenging environment that dominated 2009. Additionally, the R&D investments we have made over the last few years in key areas like RF test 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.

A Company Built to Last

Over the last decade, we have transformed from a transaction-focused PC peripheral company to one that continues to find better ways to serve our high-volume, transactional customers while closing large system sales in high-end test, industrial, and embedded applications. Annual 2009 revenue levels returned to revenues above 2007 levels in key focus areas like industrial embedded and modular instruments products. In addition, annual revenue for our most strategic products in those areas, CompactRIO and RF instrumentation, has increased almost 50 percent compared to 2007. 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 approximately $3,800 USD at the end of 2009, a 9 percent increase compared to the end of 2007. We were also pleased to see improvement in large orders closing at the end of 2009.

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.

We are also extremely honored that, in a time when the U.S. went through the most challenging job climate in decades, FORTUNE magazine named National Instruments to its 2010 "100 Best Companies to Work For" list for the 11th consecutive year. This landmark achievement illustrates the rock-solid success of our 100-year plan for being a stable company that balances the long-term NI vision and culture with short-term goals. I am proud of our company’s innovative spirit and open environment that empowers employees and inspires customers to improve everyday life and address many of the challenges that our world faces today such as the need for clean drinking water, reduced pollution, and breakthrough medical devices. These efforts along with our commitment to being a responsible corporate citizen to our global communities and stakeholders will be showcased in our second annual citizenship report, which will be published in April 2010.

Looking Forward

I believe that it's during times like the past year that the strength and resilience of our business model truly shows its merit. Our intent is to continue to be disciplined on managing expenses and to drive operating leverage until NI revenues recover to the record levels seen in 2008. We believe that the strong sequential revenue growth we saw in the fourth quarter indicates the beginning of an apparent recovery in our business. 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 plan to continue executing on our long-term vision and invest in the success of our four stakeholders – employees, shareholders, customers, and suppliers. It is this focus on long-term success that allowed us to remain profitable even as we maintained our strategic investments in new product R&D and expanded our field sales force during the most significant downturn in company history. Our investments in new product R&D are delivering significant benefits to our customers, as we help them lower costs, reduce risk, and shorten design cycles. Additionally, the field sales force continues to work closely with our customers as trusted advisors, helping to ensure their success with the NI platform. Throughout the recession we have focused on deepening our customer relationships and providing unwavering support for their needs. As a result, we are encouraged by customer feedback, strong loyalty and new opportunities that I believe will accelerate our recovery.

As we navigate this environment, we remain realistic about the economy but also optimistic about our 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. We believe 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 plan to 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 next year.

Best regards,

Dr. James Truchard,
President, CEO, and Chairman

This letter contains forward-looking statements as defined under applicable 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 keeping us at the forefront of innovation, continuing our strong legacy, responding quickly to changes in market conditions and taking advantage of areas where investments are flowing, positive impact on our hardware and software business from Windows 7, academic sales providing strong in the long-term, our investment strategy and market position creating growth opportunities, continuing to be disciplined on expenses and driving operating leverage, apparent recover in our business, plan to continue executing on our long-term vision and investing in the success of our stakeholders, accelerating our recovery, being optimistic about our future, maintaining our strategic investments to fund future growth, outperforming our 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 any acquisition transactions. We direct you to the documents we file with the SEC, including our recently filed annual report on Form 10-K, for information on additional risks.