UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                                             
                                    FORM 10-K
(Mark One)
|X|  Annual Report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934
For the fiscal year ended:  December 31, 1998
                                       OR
|_|  Transition  Report  pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934
For the transition period from ____________ to ____________
                              Commission File Number 0-25426
                                                          

                        NATIONAL INSTRUMENTS CORPORATION
             (Exact name of registrant as specified in its charter)

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            Delaware                                         74-1871327
 (State or other jurisdiction of                          (I.R.S. Employer
  incorporation or organization)                       Identification Number)
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   11500 North MoPac Expressway
         Austin, Texas                                         78759
 (address of principal executive                             (zip code)
            offices)
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       Registrant's telephone number, including area code: (512) 338-9119
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        Securities registered pursuant to Section 12(b) of the Act: None

Securities  registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value                                                    (Title of Class)
                                                            
     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No.

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant at the close of business on February 25, 1999, was $451,953,598 based
upon the last sales price reported for such date on the NASDAQ  National  Market
System. For purposes of this disclosure,  shares of Common Stock held by persons
who hold more than 5% of the outstanding  shares of Common Stock and shares held
by officers and  directors of the  registrant  as of December 31, 1998 have been
excluded in that such persons may be deemed to be affiliates. This determination
is not necessarily conclusive.

     At the close of business on February 25, 1999,  registrant had  outstanding
32,987,119 shares of Common Stock.
                                                              
                       DOCUMENTS INCORPORATED BY REFERENCE


     Part I and Part III incorporate  certain  information by reference from the
definitive  proxy statement for the Annual Meeting of Stockholders to be held on
May 11, 1999 (the "Proxy Statement").

<PAGE>

                                     PART I


     Certain  information  required  by Part III is omitted  from this Report in
that the Registrant  intends to file a definitive  proxy  statement  pursuant to
Regulation  14A  with  the  Securities  and  Exchange   Commission  (the  "Proxy
Statement")  relating to its annual meeting of  stockholders  not later than 120
days  after  the end of the  fiscal  year  covered  by  this  Report,  and  such
information is incorporated by reference herein.


ITEM 1.     BUSINESS

     National Instruments  Corporation (the "Company" or "National Instruments")
is a leading supplier of  computer-based  instrumentation  hardware and software
products that engineers and scientists use in a wide range of industries.  These
industries are spread across two large markets: test and measurement ("T&M") and
industrial automation ("IA"). The Company provides flexible application software
and modular,  multifunction  hardware that users combine with  industry-standard
desktop  computers,  portable  computers  and  workstations  to create  "virtual
instruments."

     A virtual  instrument  consists of an industry  standard desktop  computer,
portable  computer or  workstation  equipped  with the  Company's  user-friendly
application software,  cost-effective hardware and driver software that together
perform  the  functions  of  traditional  instruments.  Virtual  instrumentation
represents   a   fundamental    shift   from    traditional    hardware-centered
instrumentation   systems  to   software-centered   systems   that  exploit  the
computational,  display,  productivity and connectivity  capabilities of popular
desktop  computers,   portable  computers  and  workstations.   Because  virtual
instruments exploit these computation and display capabilities, users can define
and change the functionality of their instruments,  rather than being restricted
by  fixed-functions  imposed by traditional  instrument  vendors.  The Company's
products empower users to monitor and control  traditional  instruments,  create
innovative  computer-based systems that can replace traditional instruments at a
lower cost, and develop systems that integrate  measurement  functionality  with
industrial  automation.  The Company  believes that giving users  flexibility to
create their own virtual instruments for an increasing number of applications in
a wide  variety of  industries,  and making such  instruments  portable  between
popular computers and operating  systems,  shortens system  development time and
reduces both short- and  long-term  costs of  developing,  owning and  operating
measurement  and automation  systems,  and improves  efficiency and precision of
applications spanning research, design, production and service.

     The Company is based in Austin,  Texas and was incorporated  under the laws
of the State of Texas in May 1976 and was  reincorporated  in  Delaware  in June
1994. On March 13, 1995,  the Company  completed an initial  public  offering of
shares of its Common Stock.  The Company's  Common  Stock,  $0.01 par value,  is
quoted on the NASDAQ National Market System under the trading symbol NATI.

Industry Background

     Engineers and  scientists  have long used  instruments  to observe,  better
understand and manage the real-world phenomena,  events and processes related to
their  industries  or  areas  of  expertise.  Instruments  measure  and  control
electrical signals, such as voltage,  current and power, and physical phenomena,
such as temperature, pressure, speed, flow, volume, torque and vibration. Common
instruments include voltmeters, signal generators,  oscilloscopes,  dataloggers,
spectrum  analyzers  and  temperature  and pressure  monitors  and  controllers.
Instruments  generally  perform  three basic  functions:  data  acquisition  and
control;  data  analysis;  and  presentation  of results.  Instruments  are used
pervasively in research,  education,  manufacturing and service  applications in
numerous    fields     including     electronics,     automotive,     aerospace,
telecommunications,  medical  research  and  pharmaceutical,  semiconductor  and
petrochemical.

     Instrument  applications can be generally  categorized as either T&M or IA.
In  research  and  development  settings,   scientists  and  engineers  use  T&M
instruments to collect and analyze  experimental  data,  and IA instruments  and
systems to simulate  manufacturing  processes or  techniques.  In  manufacturing
environments,  engineers  use T&M  instruments  to test and  verify  the  proper
operation of the products being  manufactured  while IA instruments  and systems
monitor and control the manufacturing machines and processes.

                                      -2-

<PAGE>

     Test and Measurement

     A typical  T&M  instrument  is a  stand-alone  unit that has signal  input,
output and  analysis  capabilities;  knobs,  switches  and push buttons for user
operation;  and gauges,  meters or other displays for visual data  presentation.
Traditionally, most T&M instruments were vendor-defined,  fixed-function devices
designed  to  address  specific  applications.  As a result,  users had  limited
flexibility to adapt their instruments to changing requirements.  In the 1960's,
vendors  began  to  incorporate  integrated  circuits,   including  programmable
microcontrollers,  to increase instrument  flexibility.  In the mid-1970's,  the
General Purpose Interface Bus ("GPIB" or "IEEE 488") was developed as a standard
interface  to connect  instruments  to external  computers.  The first  computer
controllers   for  GPIB   instruments   were  based  on   proprietary   hardware
architectures.  In the later 1970's, some minicomputers with general purpose but
complex  operating  systems were equipped for GPIB  instrument  control.  In the
early 1980's,  personal  computers with limited  processing  power equipped with
MS-DOS,  a  standard,   character-based   operating   system,   began  replacing
minicomputers as the preferred platforms for instrument control applications.

     Industrial Automation

     IA systems have long included mechanical devices, analog gauges and meters,
and since the 1960's,  have also included  electronic  instruments  such as data
loggers and strip chart recorders. In the 1970's, programmable logic controllers
("PLCs"),  special-purpose,  proprietary stand-alone industrial computers,  were
introduced  and were used primarily for  "discrete"  manufacturing  applications
such as automobile  assembly.  PLCs have  traditionally  had primitive  operator
interface  panels  incorporating  buttons,  lights and indicators.  In parallel,
sophisticated   instrumentation   systems  called  distributed  control  systems
("DCSs") were also adopted to provide computer control of large-scale continuous
processes,  such as those found in oil refineries.  DCSs integrated a variety of
sensors and control  elements  using both  analog and digital  connections,  all
controlled  by  a  central  computer  running  proprietary   software.   In  the
mid-1980's,  when industrial PC-based IA systems came into use, another approach
became  available.  These early  PC-based  systems  generally  ran  proprietary,
vendor-defined  software and  incorporated  plug-in data  acquisition  boards or
interfaced to PLCs.

     Limitations of Traditional Approaches to Instrumentation

     Instruments  and systems for both the T&M and IA markets have  historically
shared  common  limitations,  including:  fixed,  vendor-defined  functionality;
proprietary,  closed  architectures that were generally difficult to program and
integrate  with other  systems;  and inflexible  operator  interfaces  that were
usually  cumbersome  to operate and change.  These  problems  have been  further
complicated   in  the  IA  market   because   specialized   data   transfer  and
communications  standards have not evolved rapidly or been widely  adopted.  For
example, PLCs, while greatly improving control of individual processes,  created
multiple  "islands of information"  that were generally unable to communicate or
share  data  with  other  systems   throughout  the  manufacturing   enterprise.
Furthermore,  proprietary  instrumentation  systems have traditionally been very
expensive,  with IA system prices ranging as high as several million dollars and
T&M instrumentation  system prices often ranging in the hundreds of thousands of
dollars. In addition,  the limitations on programmability of traditional systems
means that adopting these systems to changing requirements is both expensive and
time consuming, and users are often required to purchase multiple single-purpose
instruments.

     Although  desktop  computers  in the  1980's  typically  were based on open
architectures, until recently they have lacked higher-level application software
development   tools  and   intuitive   graphical   user   interfaces   ("GUIs").
Consequently,  the process of creating  intuitive operator interface and control
panels was difficult and  expensive.  These early desktop  computers also lacked
the power to rapidly  process and analyze the volume of data  characteristic  of
many high data rate T&M and IA applications. In addition, desktop computers were
difficult to network reliably until standard network  operating  systems evolved
late in the decade. For all of these reasons,  users and vendors were relatively
slow to incorporate desktop computers in their instrumentation systems.

                                      -3-

<PAGE>

     In the 1990's,  desktop and portable  computers  improved  significantly in
data and graphics  processing  power,  storage and  communication  capabilities,
user-friendliness  and  reliability.   Nevertheless,  users  accustomed  to  the
flexibility,  efficiency,  power and open architecture of these later-generation
computers,  and the highly evolved  application  software available for business
computing  needs,  have been generally  frustrated in their efforts to integrate
these computers into instrumentation solutions.  Standard desktop computers were
not  equipped  with the hardware  connections  required to control many types of
instruments and lacked  instrumentation-specific  application development tools,
including GUI development  environments.  Neither standard programming languages
such as C/C++ and Visual Basic, nor operating systems such as Windows, Linux and
UNIX,  are  "instrument  aware."  Without  the  aid of  instrumentation-specific
software  to  facilitate  the  integration  of  various  instrumentation  system
capabilities  and components,  engineers and scientists could not easily utilize
the full potential of their modern desktop and portable  computers to meet their
instrument requirements.

The Company's Virtual Instrument Approach to Measurement and Automation

     The Company  pioneered a new  instrumentation  approach to measurement  and
automation called virtual instrumentation in 1986 when it introduced its LabVIEW
application  software,  which is a graphical  programming  environment.  While a
traditional  instrument bundles the data acquisition,  analysis and presentation
functions in a single,  stand-alone unit, a "virtual  instrument" consists of an
industry   standard   computer  or  workstation   equipped  with  the  Company's
user-friendly application software,  cost-effective hardware and driver software
that together  perform the functions of traditional  instruments.  By unbundling
the key instrumentation  functions,  virtual instruments represent a fundamental
shift   from   traditional   hardware-centered    instrumentation   systems   to
software-centered systems that exploit the computational,  display, productivity
and  connectivity  capabilities  of popular  desktop and portable  computers and
workstations.   The  Company's  virtual  instrumentation   application  software
products give users the power and flexibility to define,  implement,  modify and
control  each of the three  core  instrumentation  functions.  Users can mix and
match their choice of the Company's  DAQ,  GPIB,  VXI, PXI,  image  acquisition,
motion  control  or  industrial   communications   products  to  create  virtual
instrumentation  systems that meet their  specific  instrumentation  needs.  The
Company's products empower users to monitor and control traditional instruments,
create   innovative   computer-based   systems  that  can  replace   traditional
instruments  at a lower  cost,  and  integrate  measurement  functionality  with
industrial  automation  to improve  efficiency  and  precision  of  applications
spanning  research,   design,  production  and  service.  Because  much  of  the
instrumentation  functionality  resides in the software, in a significant sense,
the software is the instrument.

User Benefits

     Compared with traditional solutions,  the Company believes its products and
virtual  instrumentation  approach  provide the following  significant  customer
benefits:

     Performance, Ease-of-Use and Efficiency

     The Company's virtual instrument  application software brings the power and
ease-of-use  of desktop and portable  computers to the  instrumentation  market.
With  features  such  as  graphical   programming,   automatic  code  generation
capabilities,  graphical  tools  libraries,  ready-to-use  example  programs and
libraries  of specific  instrumentation  functions,  users can  quickly  build a
virtual  instrument  system that meets their individual  application  needs. For
example,  a user may build the data  acquisition  and  analysis  functions of an
instrument   by  selecting  and   connecting   icons   representing   particular
instrumentation  functions  and may  customize  the  display  on the  computer's
monitor to reflect the desired presentation. With faster time to solution, users
have more time to optimize system functionality and performance,  and can devote
more time to their core work rather than to programming instruments.

     Modularity, Reusability and Reconfigurability

     The Company's  products include reusable hardware and software modules that
offer considerable flexibility in configuring systems. This ability to reuse and
reconfigure  instruments  systems  allows users to reduce  development  time and
maximize efficiency by eliminating duplicated programming efforts and to quickly
adapt their  instruments to new and changing needs. In addition,  these features
help protect both hardware and software investments against obsolescence.

                                      -4-

<PAGE>

     Mix and Match Capabilities

     The flexibility of the Company's virtual  instrumentation  approach permits
users  to mix and  match  many  combinations  of  GPIB,  VXI,  DAQ,  PXI,  image
acquisition,  motion  control and  industrial  communications  products to build
customized  instrument  solutions.   The  Company's  open  product  architecture
provides a high level of  integration  between the Company's  products and other
industry standard  instrumentation  products.  This approach provides users with
the  flexibility  to mix  and  match  the  Company's  and  third-party  hardware
components when developing custom virtual instrumentation systems.

     Long-Term Compatibility Across Multiple Computer Platforms

     The Company offers a variety of  multi-platform  software products so users
can choose the platform and programming  methodology that best meets their needs
and skills.  These software products also have portable,  open  architectures so
users  can move  their  applications  among  multiple  platforms  and  operating
systems.  In addition,  the Company  strives to ensure  long-term  compatibility
between  its  products  and the latest  industry-standard  computers,  operating
systems, programming languages and tools, as well as backward compatibility with
its own product offerings.

     Network and Integrate with Customers' Computing Environments

     The  Company's   products   facilitate   connectivity  of  measurement  and
automation  systems  with the  enterprise  by utilizing  industry  communication
standards such as Ethernet and TCP/IP.  The Company's  products provide data and
file transfer between computers, distributed access to databases and remote test
and measurement and process monitoring capabilities.  In addition, the Company's
products  are also  compatible  with a wide  variety  of  familiar,  easy-to-use
software applications such as word processors,  spreadsheets,  web browsers, and
databases.  In many cases, a single  computer or workstation  can serve both the
instrumentation and general purpose computing needs of scientists and engineers.

     Large User Base

     The Company supports and encourages the sharing of ideas,  derived software
libraries   and  modules   among  its  broad  user  base  through  user  groups,
newsletters,  conferences and seminars.  This large base of users stimulates the
expansion of the  Company's  network of over 500 third party system  integrators
and  consultants,  who can save  users time and money by  providing  value-added
expertise,  software  programs  and  integration  of  systems  for use  with the
Company's products.

     Lower Total Solution Cost

     The  Company  believes  that  its  virtual  instrumentation   products  and
solutions offer price/performance  advantages over traditional  instrumentation.
Virtual instrumentation  provides users the ability to utilize industry standard
computers  and  workstations  equipped  with  modular and  reusable  application
software,  cost-effective hardware and driver software that together perform the
instrumentation   functions  that  would   otherwise  be  performed  by  costly,
proprietary  instrumentation systems. In addition, virtual instrumentation gives
users the  flexibility  and  portability  to adapt to  changing  needs,  whereas
traditional  closed systems are both  expensive and time consuming to adapt,  if
adaptable at all.

Strategy

     The   Company's   objective  is  to  be  a  leading   supplier  of  virtual
instrumentation  products and solutions to engineers,  scientists  and others in
both the T&M and IA markets. To achieve this objective,  the Company is pursuing
a strategy that includes the following elements:

     Expand Broad Customer Base

     Serve Two Large Markets.  The Company's  products and services are designed
to serve the broad  customer  bases  found in both the T&M and IA  markets.  The
Company  defines  product  features  and  capabilities  by working  closely with
technically  sophisticated  customers  in each of  these  markets  and  seeks to
achieve  high unit  volumes by selling  these same  products  to a large base of
customers.

     Support Many Computer and Instrument  Options.  The Company diversifies its
customer base by accommodating  many popular computer platforms and a variety of
instrumentation  options. In addition, the Company expects to continue to create
or adapt  products for computer  systems and  instrumentation  options that gain
market acceptance.  Customers are provided a range of price/performance  options
through the Company's extensive line of products.

                                      -5-

<PAGE>

     Provide  Worldwide  Marketing and  Distribution.  The Company uses multiple
coordinated  distribution  channels in its major world  markets.  The  Company's
distribution channels include direct sales, distributors, OEMs, VARs and systems
integrators and consultants.  By using this broad range of channels, the Company
seeks to develop and maintain  relations with its customers and prospects and to
provide the levels of support,  training and  education  required by the market.
The Company  devotes  significant  resources to direct sales  activities  in the
United States and in key  international  markets.  To address the range of sales
opportunities,  the  Company  expects to continue  to pursue  value-added  sales
channels  through formal  relationships  with OEMs,  VARs,  consultants or other
third parties when such  relationships can add significant value to its products
or revenues.  The Company intends to expand each of these distribution  networks
to take advantage of market opportunities.

     Acquire New Technologies.  The Company has in the past acquired  companies,
products,  and  technologies  to augment its product  offerings,  and intends to
continue  to seek  opportunities  to  satisfy  customer  needs and build  market
penetration through acquisitions of new products and technologies in the future.
In connection with these acquisitions, the Company has leveraged its established
sales channels in an effort to accelerate  the delivery of the acquired  product
to the market and build market share.

     Target Academic Environments. The Company markets and sells its products to
colleges  and  universities,  increasing  the  potential  for  future  growth as
students gain experience  using the Company's  products before entering the work
force.

     Maintain High Levels of Customer Satisfaction

     Offer Innovative Modular and Integrated  Solutions.  The Company intends to
continue to deliver  innovative,  modular software and hardware tools with open,
portable  architectures that can be easily integrated to create  instrumentation
systems and solutions. The Company solicits regular feedback from its customers,
resulting in the addition of new product features and enhanced  performance,  to
help  ensure  that   existing  and  new  products   meet  or  surpass   customer
expectations.

     Provide Comprehensive  Customer Support and Education.  The Company's sales
and marketing  engineers  have the technical  expertise  necessary to understand
customers'  instrumentation  application  needs and work  with them to  identify
cost-effective solutions using the virtual instrumentation approach. The Company
also offers comprehensive customer support,  including technical support via fax
and  telephone,  electronic  mail and world-wide  web forums,  bulletin  boards,
newsletters,  warranty  service  and  repair,  upgrade  programs,  free and paid
seminars and technical classes.

     Deliver Long-Term Compatibility.  The Company emphasizes consistency in the
implementation  of its  products  across  different  platforms  and  strives  to
maintain  a high  degree of  backward  compatibility  between  existing  and new
products, engendering a high degree of customer loyalty.

     Leverage External and Internal Technology

     Leverage Generally Available Technology. The Company leverages the research
and  development  efforts  of  vendors of desktop  and  portable  computers  and
workstations,  operating systems, programming languages and software development
tools, and their suppliers.  These  technologies are combined with the Company's
products to achieve advanced solutions at a lower development cost.

     Support Open Architecture on Multiple Platforms. The Company approaches the
market with an open  architecture  so users have the  flexibility to combine the
Company's products with those from traditional  instrument  suppliers,  computer
vendors and competitors.

     Leverage  Core  Technologies.  The  Company  designs  proprietary  ASICs to
optimize  performance and reduce  production  costs.  The Company utilizes these
ASICs and its other  internally  developed  hardware and software  components in
multiple products to achieve consistency and compatibility between products.

     Develop and Support Industry Standards.  The Company actively  participates
in  efforts  to  standardize  key  technologies  by  participating  in  industry
consortia and serving on standards  committees,  such as IEEE 488,  VXI, PXI and
the Interchangeable Virtual Instrumentation Foundation, also called IVI, for the
T&M  market  and  Fieldbus  and OPC for the IA  market.  The  Company's  ongoing
strategy is to conform its products to  established  and  emerging  standards in
both the general computer and the instrumentation industries.

                                      -6-

<PAGE>

Products and Technology

     The  Company  offers  an  extensive  line  of  hundreds  of  computer-based
products.  Engineers,  scientists and other users in both the T&M and IA markets
can use these products with desktop and portable  computers and  workstations to
develop customer-defined virtual instruments.  The Company's products consist of
application  software,  and hardware  components  together  with related  driver
software. In T&M applications, the Company's products can be used to monitor and
control traditional instruments or to create computer-based instruments that can
replace the traditional instruments. In IA applications,  the Company's products
can be  used in the  same  ways  as in T&M  and  can  also be used to  integrate
measurement  functionality with process automation  capabilities.  The Company's
products are designed to work either in an  integrated  solution or  separately.
The Company believes that the flexibility,  functionality and ease of use of its
application software promotes sales of the Company's other software and hardware
products.  There are now several books  available on the  Company's  technology,
both in English and other languages.

     Application Software

     The Company's  application  software products include both  instrumentation
and  automation  software.  The Company  believes that  application  software is
playing an  increasingly  important role in the  development  of  computer-based
instruments  and  systems  in  measurement  and  automation  applications.   The
Company's  application  software products leverage the increasing  capability of
desktop and portable computers and workstations for data analysis,  connectivity
and  presentation  power  to  bring  increasing   efficiency  and  precision  to
measurement and automation applications.  The Company's instrumentation software
products  include  LabVIEW,  LabWindows/CVI,  ComponentWorks,  Measure,  Virtual
Bench, TestStand and DASYLab. The Company's automation software products include
BridgeVIEW and Lookout.  All of the Company's  application software products are
highly integrated with the Company's hardware/driver software.

     Instrumentation Software

     The  Company   offers  a  variety  of  software   products  for  developing
instrumentation  applications  to meet the  different  programming  and computer
preferences of its customers.  LabVIEW,  LabWindows/CVI  and  ComponentWorks are
programming  environments with which users can develop GUIs, control instruments
and acquire,  analyze and present data. With these software products,  users can
design  custom  virtual  instruments  by creating a GUI on the  computer  screen
through  which they operate the actual  program and control  selected  hardware.
Users can  customize  front  panels  with  knobs,  buttons,  dials and graphs to
emulate  control  panels of traditional  instruments  or add custom  graphics to
visually  represent  the  control  and  operation  of  processes.   LabVIEW  and
LabWindows/CVI  also have  ready-to-use  libraries for  controlling  hundreds of
programmable instruments,  including serial, GPIB and VXI, the Company's plug-in
DAQ boards and PXI/PCI computer-based instruments.  ComponentWorks has libraries
for  controlling  GPIB  instruments and the Company's  plug-in DAQ boards.  Once
created,  virtual  instruments  can be modified or used as components of another
program by the original developer or another user.

     The principal difference between these products is in the way users develop
programs.  With  LabVIEW,  users  program  graphically,  developing  application
programs by connecting icons to create "block diagrams" which are natural design
notations for scientists and engineers. LabVIEW is based on dataflow programming
techniques invented and patented by the Company.  LabWindows/CVI is designed for
instrumentation   users   who  are  more   comfortable   programming   with  the
conventional,  text-based language of C, and automatically  generates and debugs
code for instrumentation programs.  ComponentWorks adds application-specific OLE
or ActiveX controls and libraries to the Microsoft Visual Basic,  Visual C++ and
Borland Delphi development environments.

     The Company  also sells a range of optional  add-on  products  for LabVIEW,
LabWindows/CVI and ComponentWorks, such as advanced analysis libraries, database
tools and Internet integration.

     The  Company  also offers a class of software  products,  VirtualBench  and
Measure,  which do not require any programming.  VirtualBench is a collection of
"turnkey" virtual  instruments that mimic the operation of traditional  benchtop
instruments,  through  the use of a PC and a plug-in  DAQ  board.  Measure is an
instrumentation  add-on for Microsoft  Excel that lets  engineers and scientists
collect instrumentation data directly into a spreadsheet.

                                      -7-

<PAGE>

     In 1998, the Company added DASYLab to its line of instrumentation  software
products.  DASYLab  is a  schematic  environment  by  which  users  can  quickly
configure simple DAQ  applications  using both the Company's and third-party DAQ
boards.

     Also  in  1998,  the  Company  introduced  a new  software  product  called
TestStand  targeted  for  the  T&M  market.   TestStand  is  a  test  management
environment for organizing,  controlling,  and running automated production test
systems on the factory  floor.  It also  generates  customized  test reports and
integrates product and test data across the customers' enterprise and across the
Internet. TestStand manages tests that are written in LabVIEW, LabWindows/CVI, C
and C++, and  VisualBasic,  so test  engineers  can easily share and re-use test
code throughout their  organization and from one product to the next.  TestStand
is a key  element  of  the  Company's  strategy  to  broaden  the  reach  of its
application software products across the corporate enterprise.

     Automation Software

     The  Company's  Lookout and  BridgeVIEW  automation  software  products are
targeted for the IA market. Lookout is a non-programming solution.  Lookout is a
human machine  interface/supervisory  control and data acquisition ("HMI/SCADA")
software  product  that  requires  no  programming  or script  writing.  Lookout
provides a scalable  architecture for  applications  ranging from HMIs to large,
sophisticated  SCADA  applications.  BridgeVIEW  industrial  automation software
offers a new  approach  to  automation.  The  graphical  programming  technology
pioneered by the Company's LabVIEW data acquisition and instrumentation software
is core to  BridgeVIEW.  In the  automation  world,  LabVIEW  has been  used for
applications ranging from manufacturing execution systems (MES) in a frame plant
to  supervisory  control of paper  machines.  BridgeVIEW  builds on LabVIEW with
tools tailored to IA systems.

     Hardware Products and Related Driver Software

     The Company's  hardware and related driver software  products include GPIB,
VXI, DAQ, PXI, image acquisition, motion control, and industrial communications.
The Company  believes it can deliver  significant  cost/performance  benefits to
users  and  clearly  distinguish  its  products  from  competitive  products  by
designing  proprietary ASICs for use in its hardware products.  Software drivers
are  necessary  to link  hardware  to the  operating  system  and the  Company's
application  software.  The high  level of  integration  between  the  Company's
products  provides  users  with  the  flexibility  to  mix  and  match  hardware
components when developing custom virtual instrumentation systems.

     GPIB Interfaces/Driver Software. GPIB, also known as the IEEE 488 standard,
has existed  since 1975 and defines the protocol for  transferring  data between
certain instruments and computers over an industry-standard  cable. The computer
must be equipped with a GPIB interface.  Driver software  controls the interface
and the  transfer  of data  between the  instrument  and the  computer.  GPIB is
largely used in the T&M market.

     The Company began  selling GPIB products in 1977 and is a leading  supplier
of GPIB  interface  boards  and driver  software  to  control  traditional  GPIB
instruments.  These  traditional  instruments  are  manufactured by a variety of
third-party  vendors and are used  primarily  in the T&M market.  The  Company's
diverse portfolio of hardware and software products for GPIB instrument  control
is  available  for  a  wide  range  of  desktop   computers,   workstations  and
minicomputers.  The  Company's  GPIB  product  line also  includes  products for
portable  computers  such as a  PCMCIA-GPIB  interface  card,  and  products for
controlling GPIB instruments  using the computer's  standard  parallel USB, IEEE
1394 (Firewire) and Ethernet ports.

     Portability  of GPIB  application  programs is  provided  by the  Company's
NI-488.2 driver software,  considered a de facto industry standard,  and NI-VISA
driver software.  The Company offers  networking  capabilities  through its GPIB
products.  With these  products,  users can  communicate  with and control  GPIB
instruments from any point on an Ethernet-based TCP/IP network. The Company also
offers a variety of GPIB  support  products,  including  converters,  expanders,
extenders,  data  buffers and GPIB system  analyzers as well as cables and other
accessories.

     VXI  Controllers/Driver  Software.  VXI is an  industry  standard  high-end
instrumentation  platform  developed in 1987 through an industry  consortium  to
take advantage of the computation and display  capabilities of desktop computers
and workstations. With VXI, the physical size of multiple instrument systems can
be  decreased  and  communication  between  instruments  and  computers  can  be
dramatically  improved.  Like GPIB, VXI is supported by a variety of traditional
third-party instrument manufacturers and is largely used in the T&M market.

                                      -8-

<PAGE>

     VXI  instruments  are  modular  in  design  and  can be  inserted  into  an
industry-standard  chassis.  Unlike GPIB instruments,  VXI modules do not have a
front  panel for  manual  operation  or  visual  data  presentation.  Therefore,
software  is  necessary  for users to create,  define the  functionality  of and
operate VXI  instrumentation  systems.  Today,  VXI is being used  primarily  to
supplement or replace high-end GPIB products in T&M applications.

     The Company is a leading supplier of VXI computer  controller  hardware and
the accompanying NI-VXI and NI-VISA driver software.

     DAQ Hardware/Driver Software. DAQ hardware and driver software products are
"instruments   on  a  board"  that  users  can  combine  with  sensors,   signal
conditioning  hardware and software to acquire analog data and convert it into a
digital format that can be accepted by a computer. The Company believes that DAQ
products are typically a lower-cost solution than traditional instrumentation.

     The Company  believes that  applications  suitable for automation  with DAQ
products  are  widespread  throughout  many  industries  for  both  T&M  and  IA
applications,  and that many systems currently using traditional instrumentation
(either manual or computer-controlled)  could be displaced by DAQ-based systems.
The Company offers a range of DAQ products, including models for digital, analog
and timing  input-output,  and for  transferring  data  directly to a computer's
random-access memory.

     In 1997, the Company introduced a family of computer-based instruments that
deliver  stand-alone  instrument  quality and measurement  capabilities with the
flexibility  and  scalability  inherent  to  PC-based  virtual   instrumentation
solutions. Computer-based instruments deliver features comparable to stand-alone
traditional instruments such as oscilloscopes,  DMMs, and function and arbitrary
waveform generators.

     The Company's DAQ products  provide a range of  price/performance  options,
and include products for high speed  applications such as on-line monitoring and
control as well as products designed for long-term  recording of slowly changing
data such as  temperatures.  The  Company  offers DAQ  hardware/driver  software
products for numerous  desktop and notebook  computers.  The Company also offers
SCXI  (signal  conditioning  extensions  for  instrumentation)  hardware,  which
expands the types and quantity of sensors that can be connected to the Company's
data acquisition boards.

     PXI Modular Instrumentation. The Company's PXI modular instrument platform,
which was  introduced in 1997, is a desktop PC packaged in a small,  rugged form
factor  with  expansion  slots  and  instrumentation   extensions.  It  combines
mainstream  PC  software  and  PCI  hardware   with   advanced   instrumentation
capabilities   designed  in  the  VXI  architecture.   In  essence,  PXI  is  an
instrumentation  PC -  delivering  many of the benefits of VXI in a much smaller
package and at much lower prices.  In 1998, the Company expanded its PXI product
offerings  to  include   modules  which  address  a  wide  variety  T&M  and  IA
applications.  Also,  during  1998,  PXI  was  formally  established  as an open
industry standard and received endorsements from over 40 suppliers.  The Company
has targeted its PXI products for both the T&M and IA markets.

     Image  Acquisition.  In late 1996,  the Company  introduced its first image
acquisition  hardware and software for the machine vision  market.  In the past,
building PC-based machine vision systems was reserved for integrators, OEMs, and
vision experts.  Today, with the advanced technologies in personal computers and
the Company's vision products,  it is cost-effective  for end-users to integrate
vision into their T&M and IA  applications.  The  Company's  vision  software is
designed  to  work  with  many  different   environments,   including   LabVIEW,
LabWindows/CVI,  ComponentWorks  and BridgeVIEW.  Image  acquisition is commonly
used in applications for quality control of manufactured products.

     Motion Control.  During 1997, the Company acquired  technologies and assets
that resulted in the addition of a line of motion control hardware, software and
peripheral  products.  This  intelligent  PC-based  motion  control  hardware is
programmable from industry standard development  environments including LabVIEW,
LabWindows/CVI, and BridgeVIEW. Virtual instrument software tools for motion are
easily  integrated  with the  Company's  product  line,  allowing  motion  to be
combined  with  image  acquisition,  test,  measurement,  data  acquisition  and
automation.  As in many areas,  motion control is moving to PC-based systems and
the motion  products allow users to leverage  standard  hardware and software in
measurement and automation applications to create robust, flexible solutions.

                                      -9-

<PAGE>

     Industrial  Communications  Interfaces.  In  mid-1995,  the  Company  began
shipping its first interface boards for communicating with serial devices,  such
as dataloggers and PLCs targeted for IA applications,  and benchtop instruments,
such as oscilloscopes,  targeted for T&M applications.  Industrial  applications
need  the  same  high-quality,  easy-to-use  hardware  and  software  tools  for
communicating  with industrial  devices such as process  instrumentation,  PLCs,
single-loop  controllers,  and a  variety  of  I/O  and  DAQ  devices.  National
Instruments  offers  three  hardware  and  driver  software  product  lines  for
communication   with  industrial   devices  -  Controller  Area  Network  (CAN),
Foundation   Fieldbus,   and  RS-485  and  RS-232.   The  Company's   industrial
communication  products  are  designed  to work with  standard  serial  software
drivers,   and  Windows  versions  of  LabVIEW,   LabWindows/CVI,   Lookout  and
BridgeVIEW.

     Distributed  Input/Output  Hardware/Software.  The Company  introduced  its
FieldPoint  product for distributed I/O applications in mid-1997.  FieldPoint is
an intelligent, distributed, and modular I/O system that gives industrial system
developers an economical solution for monitoring and control  applications.  The
FieldPoint  system includes  isolated  analog and digital I/O modules,  terminal
base options,  and network modules.  FieldPoint  software includes a server that
provides  seamless  integration  into  BridgeVIEW,  driver libraries for support
under LabVIEW,  LabWindows/CVI and Lookout, and an OPC server that provides wide
compatibility of FieldPoint  hardware with other industrial  automation software
packages.

     Customer Training Courses

     The Company offers fee-based  training  classes and self-paced  course kits
for its LabVIEW, LabWindows/CVI, Lookout, BridgeVIEW, ComponentWorks, GPIB, VXI,
DAQ, image  acquisition,  and signal  processing  products.  On-site courses are
quoted per  customer  requests.  The  Company  also  offers  programs to certify
programmers and instructors for its products.

Markets and Applications

     The  Company's  products  are used across many  industries  in a variety of
applications from research and development to production  testing and industrial
control.

Customers

     The Company has a broad customer base, with no customer accounting for more
than 3% of the Company's sales in 1998, 1997 or 1996.

Marketing

     Through its worldwide  marketing  efforts,  the Company  strives to educate
engineers  and   scientists   about  the  benefits  of  the  Company's   virtual
instrumentation  philosophy,  products  and  technology,  and to  highlight  the
performance,  ease of use and cost advantages of its products.  The Company also
seeks to present its  position as a  technological  leader  among  producers  of
instrumentation  software and hardware and to help promulgate industry standards
that will benefit users of computer-controlled instrumentation.

     The Company reaches its intended  audience through  distribution of written
and electronic  materials and demonstration  disks,  participation in tradeshows
and technical  conferences  and training and user  seminars.  An in-house  staff
develops the advertising,  publicity, and promotional materials that the Company
uses  worldwide.  The primary  marketing/sales  tool is the  Company's  catalog,
published  annually and  distributed  worldwide.  The catalog is over 800 pages,
with detailed  tutorial  information  that educates  readers about the Company's
integrated product architecture and virtual instrumentation concept.  Short-form
versions of the catalog are  typically  also  available  in  languages  of major
international markets,  including French, German, Spanish and Japanese.  Product
and technical  information is also provided through the Company's World Wide Web
site on the Internet and through  interactive CD-ROM. In 1997, the Company began
selling  some of its  products  over the  Internet.  During  1998,  the  Company
introduced  several new web initiatives  including features that allow customers
to view the Company's on-line catalog,  interactively  configure a system, place
orders,  track the  status of orders,  register  products  and  obtain  software
upgrades.  On January 1, 1999,  the Company  introduced  a new feature to enable
customers to obtain pricing in U.S. dollars,  euros and yen. The Company expects
to increase efforts in this area in the future.

     The Company  also uses two  quarterly  newsletters  to educate  current and
prospective  customers  about its  products  and  technologies:  Instrumentation
Newsletter  and  AutomationVIEW.  The  Instrumentation  Newsletter  includes new
product   information,   feature   articles  that  educate   readers  about  new
instrumentation   technology,   user   solution   case  studies  of   real-world
applications,  product news from Alliance Program members and key customers, and
event and customer education schedules. The Company's AutomationVIEW  newsletter
is targeted at IA prospects and customers.

                                      -10-

<PAGE>

     The Company actively markets its products in higher education environments,
and identifies many colleges,  universities  and trade and technical  schools as
key accounts. The Company offers special academic pricing and products to enable
universities to utilize Company products in their classes and laboratories.  The
Company  believes its prominence in the higher  education area can contribute to
its future success because students gain experience using the Company's products
before they enter the work force.

Sales and Distribution

     The Company distributes its software and hardware products through a direct
sales organization, independent distributors, OEMs, VARs, system integrators and
consultants.  The  Company  has sales  offices  in the  United  States and sales
offices and  distributors  in key  international  markets.  International  sales
accounted for approximately  44%, 41% and 43% of the Company's revenues in 1998,
1997 and 1996,  respectively.  The Company expects that a significant portion of
its total  revenues will continue to be derived from  international  sales.  See
Note 12 of Notes to Consolidated Financial Statements for details concerning the
geographic   breakdown  of  the  Company's  net  sales,   operating  income  and
identifiable assets.

     Through all of its sales channels,  the Company seeks to approach potential
customers with a highly  technical  sales force.  The Company  believes that the
majority of sales are made directly to those persons within an organization  who
actually use the Company's products to integrate their own systems.  The Company
identifies and targets major end-user accounts as those having a large number of
actual or potential  end users,  and  believes  that it achieves a high level of
repeat  customer  sales.  The Company  targets major  accounts with a variety of
targeted  sales  and  marketing   campaigns  such  as  seminars,   user  groups,
newsletters and direct mail.

     Direct Sales

     The Company  directly  markets and sells its products in the United States,
Canada and many  European  and  Asia/Pacific  countries.  The  Company has sales
offices  located  throughout  the  United  States  (including  the  District  of
Columbia) and in key international markets. Many of the Company's  international
sales offices employ application  engineering  technical support  specialists as
well as sales, marketing and administrative personnel.

     The Company's  international sales are subject to inherent risks, including
fluctuations in local  economies;  difficulties in staffing and managing foreign
operations;  greater  difficulty in accounts  receivable  collection;  costs and
risks of  localizing  products  for  foreign  countries;  unexpected  changes in
regulatory requirements,  tariffs and other trade barriers,  difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws.  The Company's  sales outside of North  America are  denominated  in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations  in currency  rates.  In particular,  increases in the value of the
dollar  against  foreign  currencies  decrease the dollar value of foreign sales
requiring the Company either to increase its price in the local currency,  which
could render the Company's product prices  noncompetitive,  or to suffer reduced
revenues  and gross  margins as  measured  in US dollars.  These  dynamics  have
adversely affected revenue growth in international  markets in recent years. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and Note 11 of Notes to Consolidated Financial Statements.

     Distributors

     The  Company  utilizes  distributors  primarily  to market its  products in
geographic areas not served by the Company's direct sales organization.

     OEMs

     The Company utilizes OEMs such as traditional instrument  manufacturers who
offer  integrated  systems and/or services to their customer bases.  The Company
approaches  OEM accounts  with its standard  product  lines and offers  quantity
discounts based on volume  commitments and technical  support  capabilities  and
requirements.  The Company also promotes its sales and marketing capabilities to
its OEMs by providing specialized product training, documentation, packaging and
part numbers to simplify ordering, flexible shipping and warranty repair options
and joint promotion.

                                      -11-

<PAGE>

     VARs, System Integrators and Consultants

     The Company has relationships with third-party VARs, system integrators and
consultants who offer add-on  products and system  integration  services.  These
third-party  developers  expand the Company's market and sales  opportunities by
adding  value to the  Company's  standard  products,  making them  suitable  for
vertical  market   applications  such  as  manufacturing   automation  or  image
processing   and   analysis.   The  Company   maintains  a  formal   third-party
sales/marketing/training  program, called the Alliance Program, which it uses to
work with many of the VARs, system integrators and consultants.  Applicants must
be sponsored  for  membership by a Company sales  engineer,  pass  qualification
criteria  and pay a nominal  annual  membership  fee. In late 1998,  the Company
introduced an elite level of its Alliance  Program  called  Select  Integrators.
Select  Integrators  must  qualify  for the  program  based upon their  level of
business  with the  Company.  As of December 31, 1998,  the  Company's  Alliance
Program had over 500 members including several Select  Integrators.  The Company
publishes  on-line  directories on its website of third-party  Alliance  Program
member  products  and  services  for use by its sales force and its end users to
locate  additional  products  and/or  services  compatible  with  the  Company's
products. The Company makes available to qualified third-parties the opportunity
to  participate  in joint  marketing  and sales  programs,  such as trade shows,
customer  sales events and the  Instrumentation  Newsletter.  In addition to its
relationships  with third party VAR,  system  integrators and  consultants,  the
Company  has a direct  presence  in the German DAQ  systems  integration  market
through its DATALOG subsidiary.

Customer Support

     The  Company  believes  the  ability to provide  comprehensive  service and
support to its  customers is an important  factor in its  business.  The Company
permits customers to return products within 30 days from receipt for a refund of
the purchase price less a restocking  charge,  and generally provides a two-year
warranty  on GPIB  hardware  products,  a one-year  warranty  on other  hardware
products,   and  a  90-day  warranty  on  cables  and  software  (medium  only).
Historically, warranty costs have not been material. Some of the key elements of
the Company's service and support strategy include:

     Customer Technical Support

     The  Company  maintains  a large  staff  of  application  engineers  at its
corporate facility,  all of whom are highly qualified  technical  professionals.
Application  engineers are also assigned to the  Company's  major  international
offices. These application engineers provide customer support by telephone, fax,
electronic mail and world-wide web forums,  and electronic  bulletin boards, and
are trained in both instrumentation and computer technology.

     Upgrades

     The Company  typically  offers  programs in which  existing  customers  can
upgrade to the latest Company products at a reduced cost.  Application  software
customers  have the option of purchasing a one-year  renewable  maintenance  and
support program,  which entitles them to new software releases for no additional
charge and priority access to the Company's technical support hotline.

     Customer Education

     The Company offers a variety of fee-based training classes ranging in scope
from  basic and  introductory  courses  for new users to  advanced  courses  for
experienced users.

Competition

     The  markets in which the Company  operates  are  characterized  by intense
competition from numerous  competitors,  and the Company expects to face further
competition  from  new  market  entrants  in the  future.  A key  competitor  is
Hewlett-Packard   Company  ("HP"),  which  has  been  the  leading  supplier  of
traditional  instrumentation  solutions for decades.  The Company believes HP is
the dominant supplier of GPIB and VXI-compatible  instruments and systems in the
T&M market.  HP is also a leading supplier of equipment used in data acquisition
and  control  applications.  Although  HP  offers  its own  line  of  instrument
controllers,   HP  also  offers   hardware  and  software  add-on  products  for
third-party  desktop  computers and workstations  that directly compete with the
Company's virtual instrumentation  products. HP is aggressively  advertising and
marketing  its  products  and  system  integration  services.  Because  of  HP's
dominance in the instrumentation business,  changes in its marketing strategy or
product  offerings  could have a material  adverse  affect on the  Company.  The
Company also faces competition from a variety of other competitors.

                                      -12-

<PAGE>

     Certain  of  the  Company's   competitors  have   substantial   competitive
advantages  in terms of breadth of  technology,  sales,  marketing  and  support
capability and resources,  including the number of sales and technical personnel
and their  ability to cover a  geographic  area and/or  particular  account more
extensively  and with more complete  solutions  than the Company can offer,  and
more extensive  warranty support,  system  integration and service  capabilities
than those of the Company.  In addition,  large competitors can often enter into
strategic alliances with key customers or target accounts of the Company,  which
can  potentially  have a negative  impact on the  Company's  success  with those
accounts.

     The  Company  believes  its  ability to compete  successfully  depends on a
number of factors  both  within and  outside  its  control,  including:  product
pricing, quality and performance;  success in developing new products;  adequate
manufacturing  capacity and supply of components  and  materials;  efficiency of
manufacturing  operations;  effectiveness  of sales and marketing  resources and
strategies;  strategic relationships with other suppliers; timing of new product
introductions  by the Company and its  competitors;  protection of the Company's
products by effective use of  intellectual  property  laws;  general  market and
economic  conditions;  and  events  related to weather  and  government  actions
throughout the world. There can be no assurance that the Company will be able to
compete successfully in the future.

     The Company is continually  designing new and improved products to maintain
its competitive  position.  Because of the rapidly changing computer  technology
for which many of the Company's products are designed, the Company believes that
its future success will depend in part on its ability to continue to improve its
products and technologies.  In the past, certain competitors have cloned some of
the  Company's  hardware  products  at much lower  prices,  and  promoted  these
hardware  products  as being  capable of running  the  Company's  software.  The
Company has  responded to this tactic in the past by releasing  new and improved
versions of its products  designed around  proprietary  ASICs that have improved
performance and functionality in an effort to surpass the competition.

Research and Development

     The Company  believes that its  long-term  growth and success  depends,  in
part,  on  delivering  high quality  software and hardware  products on a timely
basis.  The Company  intends to focus its  research and  development  efforts on
enhancing  existing  products  and  developing  new  products  that  incorporate
appropriate  features  and  functionality  to be  competitive  with  respect  to
technology and price/performance.

     The Company's  research and development staff strives to build quality into
products  at the design  stage in an effort to reduce  overall  development  and
manufacturing  costs. The Company's  research and development staff also designs
proprietary  ASICs, many of which are designed for use in several products.  The
goal of the ASIC  design  program  is to  further  differentiate  the  Company's
products from competing  products,  to improve  manufacturability  and to reduce
costs.  The  Company  seeks to reduce  the time to market  for new and  enhanced
products by sharing its internally  developed  hardware and software  components
across multiple products.

     In  the  past,  the  Company  has  experienced  significant  delays  in the
introduction  of new  products.  The Company's  strategy of developing  products
based  primarily  on third  parties'  operating  environments  is  substantially
dependent on the Company's ability to gain pre-release access to, and to develop
expertise in, current and future product  developments of such companies.  There
can be no assurance  that the Company will continue to receive such  pre-release
access from any of these companies,  or, even with such access, that the Company
will be able to develop  products  on a timely  basis that are  compatible  with
future releases.

     The Company has implemented  certain  programs,  including  pre-release bug
analysis measures and enhanced project-tracking efforts, in order to improve the
product  development  process and to permit more  accurate  product  development
scheduling.  Nonetheless,  there can be no assurance that the Company's research
and development  efforts will not encounter delays or other  difficulties,  that
development efforts will result in commercially successful products, or that the
Company's  products will not be rendered obsolete by changing  technology or new
product announcements by other companies.

     As of  December  31,  1998,  the  Company  employed  424  people in product
research and development.  The Company's research and development  expenses were
$34.8  million,  $30.3  million,  and $24.4  million for 1998,  1997,  and 1996,
respectively.

                                      -13-

<PAGE>

Intellectual Property

     The Company relies on a combination of patent, trade secret,  copyright and
trademark  law,  contracts and  technical  measures to establish and protect its
proprietary  rights in its products.  The Company believes that legal protection
through means such as the patent and copyright laws will be less  influential on
the  Company's  ability to compete  than such factors as the  creativity  of its
development  staff, its ability to expand its market share,  develop new markets
and serve its customers.

     As of December 31, 1998,  the Company held 65 United  States  patents and 4
patents in foreign  countries (one patent  registered in Europe and 8 countries;
one patent in Canada,  one patent in Europe and 3  countries,  and one patent in
Japan), and had 89 patent applications  pending in the United States and foreign
countries.  Twenty-three  of such United  States  patents are  software  patents
related to LabVIEW,  and cover fundamental aspects of the graphical  programming
approach  used in LabVIEW.  The Company's  patents  expire from 2007 to 2017. No
assurance  can be given that the  Company's  pending  patent  applications  will
result in the  issuance of patents.  The Company  also owns  certain  registered
trademarks in the United States and abroad.

     Although the Company  relies to some extent on trade secret  protection for
much of its technology,  and regularly obtains  confidentiality  agreements with
key  customers  who wish to know more about the  Company's  product  development
philosophy  and/or  future  directions,  there can be no  assurance  that  third
parties will not either  independently  develop the same or similar  technology,
obtain unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access.

     The laws of certain  foreign  countries treat the protection of proprietary
rights of the  Company  in its  products  differently  from  those in the United
States, and in many cases the protection afforded by such foreign laws is not as
strong as in the United States. The Company believes that its products and their
use do not infringe the  proprietary  rights of third  parties.  There can be no
assurance, however, that infringement claims will not successfully be made.

Manufacturing and Suppliers

     The Company  manufactures its products at its facilities in Austin,  Texas.
Product manufacturing  operations at the Company can be divided into four areas:
electronic circuit card and module assembly;  cable assembly;  technical manuals
and  product  support  documentation;  and  software  duplication.  The  Company
manufactures  most  of  the  electronic  circuit  card  assemblies  and  modules
in-house,  although  subcontractors  are used  from  time to time.  The  Company
manufactures  some  of  its  electronic  cable  assemblies  in-house,  but  many
assemblies are produced by  subcontractors.  The Company primarily  subcontracts
its  software  duplication  and  packaging   functions.   Reliance  on  contract
manufacturers  entails  risks of  quality  problems,  less  control  of  product
pricing, and potential  unavailability of or delays in delivery of products, any
of which  could  have a  material  adverse  effect on the  Company's  results of
operations.  There  can be no  assurance  that the  Company,  together  with its
third-party manufacturers,  will be able to produce sufficient quantities of the
Company's products in a timely manner.

     The  marketplace  dictates that many of the  Company's  products be shipped
very  quickly  after  an  order  is  received.  Since  purchased  component  and
manufacturing  lead  times  are  typically  much  longer  than the  short  order
fulfillment  time, the Company is required to keep adequate  amounts of finished
goods inventory and must use an accurate system for forecasting demand for those
products in its production planning  operations.  Fluctuations in demand for the
Company's  products  typically  result  from  month-to-month  variations  in the
quantity and mix of products and from normal, seasonal variations.  A variety of
circumstances,   including   inaccurate   forecasts  of  customer  demand,  poor
availability of purchased  components,  supplier  quality  problems,  production
equipment  problems,  carrier  strikes or damage to  products  in  manufacturing
operations,  could create a buildup of excess  finished goods on the one hand or
an  inability  to  timely  deliver  product  on  the  other.  See  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

     Engineering refinements to the Company's new hardware and software products
are  fairly  common.   These  changes  can  result  in  the  disruption  of  the
manufacturing  operation and concurrent delays in delivery dates. Finished goods
inventory at the Company's  international  branches  typically has a short shelf
life due to engineering  changes and product upgrades initiated by the Company's
product  development  operation,  and,  if  managed  incorrectly,  can result in
significant quantities of obsolete inventory.  This relatively short shelf life,
and the resulting  requirement  to properly  manage the quantity of inventory to
meet  customer  demand while  minimizing  inventory  obsolescence,  has been and
continues  to be a  challenge  to  the  Company  and  its  branch  offices.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

                                      -14-

<PAGE>

     The  Company  obtains  most of its  electronic  components  from  suppliers
located  principally  in the  United  States  and Asia.  Some of the  components
purchased by the Company,  including ASICs, are sole-sourced.  Any disruption of
the Company's  supply of sole or limited source  components,  whether  resulting
from  quality,  production  or delivery  problems,  could  adversely  affect the
Company's  ability to  manufacture  its products,  which could in turn adversely
affect the Company's business and results of operations.

Backlog

     The Company  typically ships products  shortly  following the receipt of an
order.  Accordingly,  the Company  does not view backlog data as an indicator of
future sales.

Employees

     As of December 31, 1998, the Company had 1,658 employees,  including 424 in
research and development,  803 in sales and marketing and customer support,  220
in manufacturing  and 211 in administration  and finance.  None of the Company's
employees is represented by a labor union and the Company has never  experienced
a work stoppage. The Company considers its employee relations to be good.


I
TEM 2.     PROPERTIES

     The Company's principal  administrative,  sales, marketing,  manufacturing,
research  and  development  activities  are  conducted  at  three  Company-owned
buildings in Austin,  Texas. The Company owns  approximately 69 acres of land in
north Austin,  Texas. In 1998, the Company  completed  construction of a 232,000
square foot office facility, which is located next to an existing 140,000 square
foot manufacturing  facility. The Company also owns a 136,000 square foot office
building in Austin, Texas in which it houses certain of its sales operations.  A
portion of the  136,000  square  foot office  building  is  currently  leased to
International Business Machines Corporation.

     As of December 31, 1998, the Company also  maintained a number of sales and
support offices in the United States and overseas. The Company believes existing
field  sales  and  support   facilities   are   adequate  to  meet  its  current
requirements.


ITEM 3.     LEGAL PROCEEDINGS

     Not Applicable.


ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was  submitted  to a vote of security  holders  during the fourth
quarter of the fiscal year covered by this report.

                                      -15-

<PAGE>


                                         PART II



ITEM 5.     MARKET  FOR  THE  REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
            MATTERS

     The Company's  Common Stock,  $0.01 par value,  began trading on the Nasdaq
National Market System under the symbol NATI effective March 13, 1995.  Prior to
that date,  there was no public  market for the Common  Stock.  The high and low
closing  prices for the Common  Stock in the  following  table,  as  reported by
Nasdaq,  have been  retroactively  restated to reflect the  three-for-two  stock
split  declared  by the  Company's  Board of  Directors  on October 15, 1997 for
holders of record as of the close of business on October 28, 1997.

                1998           High           Low

      First Quarter 1998       34 7/8         25 1/4
      Second Quarter 1998      36 3/8         26 5/8
      Third Quarter 1998       34 1/4         21 7/8
      Fourth Quarter 1998      34 4/7         19

                1997           High           Low

      First Quarter 1997       25 5/6         20 2/3
      Second Quarter 1997      23 1/2         18 1/2
      Third Quarter 1997       31             21 5/6
      Fourth Quarter 1997      33 1/3         25

     At the close of business on February 25, 1999, there were approximately 896
holders of record of the Common Stock and  approximately  5,000  shareholders of
beneficial interest.

     The Company believes  factors such as quarterly  fluctuations in results of
operations,  announcements  by the  Company  or its  competitors,  technological
innovations, new product introductions,  governmental regulations, litigation or
changes in  earnings  estimates  by analysts  may cause the market  price of the
Common Stock to fluctuate, perhaps substantially.  In addition, stock prices for
many technology  companies fluctuate widely for reasons that may be unrelated to
their operating results.  These broad market and industry fluctuations were most
recently  noted  during the third  quarter of 1998 when many  technology  stocks
declined in price.  There can be no assurances  that these market  concerns will
not continue in the immediate  future and may adversely  affect the market price
of the Company's Common Stock.

     To date,  the Company has not paid any cash  dividends on its Common Stock.
The Company  currently  anticipates  that it will retain any available  funds to
finance the growth and operation of its business and does not anticipate  paying
any cash dividends in the immediate future.

                                      -16-

<PAGE>


ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA

          The following selected  consolidated  financial data should be read in
     conjunction with the consolidated financial statements, including the Notes
     to Consolidated  Financial  Statements.  The information set forth below is
     not necessarily indicative of results of future operations. The information
     should be read in conjunction with "Management's Discussion and Analysis of
     Financial Condition and Results of Operations."

                                            Years Ended December 31,
                                ------------------------------------------------
                                  1998      1997      1996      1995      1994
                                --------  --------  --------  --------  --------
                                     (in thousands, except per share data)
Statements of Income Data:
Net sales:..............
  North America.........       $153,435  $141,784  $114,382  $ 93,001  $ 77,333
  Europe................         86,961    66,318    58,108    51,145    38,505
  Asia Pacific..........         33,834    32,777    28,225    20,673    11,165
                                --------  --------  --------  --------  --------
  Consolidated net sales        274,230   240,879   200,715   164,819   127,003

Cost of sales...........         65,187    55,096    49,755    39,525    30,627
                                --------  --------  --------  --------  --------
  Gross profit..........        209,043   185,783   150,960   125,294    96,376
                                --------  --------  --------  --------  --------

Operating expenses:
  Sales and marketing...        100,783    87,096    72,067    63,733    49,957
  Research and development       34,757    30,296    24,387    19,991    15,163
  General and administrative     20,455    18,508    17,129    15,071    11,414
                                -------   --------  --------  --------  --------
  Total operating expenses      155,995   135,900   113,583    98,795    76,534
                                --------  --------  --------  --------  --------

  Operating income......         53,048    49,883    37,377    26,499    19,842

Other income (expense):
  Interest income.......          3,439     3,455     2,405     1,635       240
  Interest expense......           (463)     (502)     (844)     (875)     (542)
  Net foreign exchange             
   (loss) gain..........           (224)   (2,649)     (899)      150     1,556
                                --------  --------  --------  --------  --------
  Income before income taxes     55,800    50,187    38,039    27,409    21,096

Provision for income taxes       18,414    16,562    12,553     9,986     8,129
                                --------  --------  --------  --------  --------

  Net income............       $ 37,386  $ 33,625  $ 25,486  $ 17,423  $ 12,967
                                ========  ========  ========  ========  ========

Basic earnings per share       $   1.14  $   1.03  $   0.79  $   0.56  $   0.48
                                ========  ========  ========  ========  ========
Weighted average shares
outstanding-basic.......         32,832    32,563    32,359    31,158    27,164
                                ========  ========  ========  ========  ========

Diluted earnings per share     $   1.10  $   1.00  $   0.77  $   0.55  $   0.47
                                ========  ========  ========  ========  ========
Weighted average shares
outstanding-diluted.....         34,100    33,656    32,943    31,424    27,483
                                ========  ========  ========  ========  ========

                                                  December 31,
                                ------------------------------------------------
                                  1998      1997      1996      1995      1994
                                --------  --------  --------  --------  --------
                                                      (in thousands)
Balance Sheet Data:
Cash and cash equivalents      $ 51,538  $ 31,943  $ 30,211  $ 12,016  $  7,526
Short-term investments..         49,158    51,067    48,956    37,765       ---
Working capital.........        133,510   112,142    99,294    74,546    26,869
Total assets............        249,786   204,490   169,225   137,102    70,751
Long-term debt, net of     
current portion                   4,379     5,151     9,175    11,603     9,083
Total stockholders' equity      204,184   161,754   126,953    98,736    40,474

                                      -17-

<PAGE>


ITEM 7.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

          The  discussion in this  document  contains  trend  analysis and other
     forward-looking  statements  within  the  meaning  of  Section  27A  of the
     Securities  Act of 1933,  as amended,  and  Section  21E of the  Securities
     Exchange Act of 1934, as amended.  Actual  results could differ  materially
     from those  projected in the  forward-looking  statements  throughout  this
     document as a result of a number of important factors.  For a discussion of
     important factors that could affect the Company's results,  please refer to
     the risk  factors  set  forth  below in  Factors  Affecting  the  Company's
     Business,  in the financial  line item  discussions  below and elsewhere in
     this document.

Overview

          National Instruments Corporation designs,  develops,  manufactures and
     markets  instrumentation  and automation  software and specialty  interface
     cards for general commercial,  industrial and scientific applications.  The
     Company offers hundreds of products used to create virtual  instrumentation
     systems for  measurement  and  automation.  The Company has  identified two
     major  markets  for its  products:  test  and  measurement  and  industrial
     automation.   Many  of  the  Company's  products  may  be  used  in  either
     environment,  and  consequently,  specific  application  of  the  Company's
     products is  determined by the  end-customer  and often is not known to the
     Company at the time of sale.  The Company's  products are used in a variety
     of  applications  from research and  development to production  testing and
     industrial  control.  In test and measurement  applications,  the Company's
     products can be used to monitor and control  traditional  instruments or to
     create computer-based instruments that can replace traditional instruments.
     In industrial automation  applications,  the Company's products can be used
     in the  same  ways  as in test  and  measurement  and  can  also be used to
     integrate measurement  functionality with process automation  capabilities.
     The  Company  sells to a large  number of  customers  in a wide  variety of
     industries.  No single customer accounted for more than 3% of the Company's
     sales in 1998, 1997 or 1996.

          The  Company's  revenues  have  grown  every  year  since 1977 and the
     Company  has been  profitable  in every  year since  1990.  There can be no
     assurance  that the  Company's  net sales will continue to grow or that the
     Company will remain profitable in future periods.  As a result, the Company
     believes  historical  results of  operations  should not be relied  upon as
     indications of future performance.

Results of Operations

          The  following  table  sets  forth,  for the  periods  indicated,  the
     percentage  of net sales  represented  by certain  items  reflected  in the
     Company's consolidated statements of income:

                                            Years Ended December 31,
                                     ---------------------------------------
                                        1998          1997          1996
                                     -----------   -----------   -----------
Net sales
  North America.............             56.0%         58.9%         57.0%
  Europe....................             31.7          27.5          29.0
  Asia Pacific..............             12.3          13.6          14.0
                                     -----------   -----------   -----------
  Consolidated net sales....            100.0         100.0         100.0
Cost of sales...............             23.8          22.9          24.8
                                     -----------   -----------   -----------
  Gross profit..............             76.2          77.1          75.2
Operating expenses:
  Sales and marketing.......             36.7          36.1          35.9
  Research and development..             12.7          12.6          12.2
  General and administrative              7.5           7.7           8.5
                                     -----------   -----------   -----------
    Total operating expenses             56.9          56.4          56.6
                                     -----------   -----------   -----------
    Operating income........             19.3          20.7          18.6
Other income (expense):
  Interest income ..........              1.3           1.4           1.2
  Interest expense..........             (0.2)         (0.2)         (0.4)
  Net foreign exchange loss.             (0.1)         (1.1)         (0.4)
                                     -----------   -----------   -----------
Income before income taxes..             20.3          20.8          19.0
Provision for income taxes..              6.7           6.9           6.3
                                     -----------   -----------   -----------
Net income..................             13.6%         13.9%         12.7%
                                     ===========   ===========   ===========

                                      -18-

<PAGE>

    Net Sales.  In 1998,  net sales for the Company's  products  reached $274.2
million,  a 14%  increase  from the level  achieved in 1997,  which  followed an
increase in net sales of 20% in 1997 over the level achieved in 1996.  This year
marks the twenty-second  year of double-digit  annual sales growth. The increase
in sales in these periods is primarily  attributable to the  introduction of new
and  upgraded  products  in each  period,  increased  market  acceptance  of the
Company's  products in each of the major geographical areas in which the Company
operates,  and an expanded  customer base. The decrease in the 1998 U.S.  dollar
annual growth rate,  14% as compared to 20% in 1997, is attributed to a slowdown
in sales growth in North America and Asia Pacific.

     North American revenue was $153.4 million in 1998, an increase of 8.2% from
1997, following a 24% increase in 1997 over 1996. The increase in sales in North
America in 1998 is primarily  attributable to increased demand for the Company's
products in the telecom and automotive  industries and the industrial automation
market.  The decrease in the North American revenue growth rate is attributed to
a decrease in sales of the Company's products as a result of an overall downturn
in the test and measurement  market.  This downturn was most pronounced in sales
to  customers  in the  automated  test  equipment,  semiconductor,  defense  and
aerospace  industries.   The  slowdown  in  the  automated  test  equipment  and
semiconductor  markets  is  partially  attributable  to the  effect  on the U.S.
economy of the Asian  economic  situation.  In  addition,  the  Company  was not
successful in increasing  its U.S. field sales force until the fourth quarter of
1998.

     European  revenue was $87.0  million in 1998, an increase of 31% over 1997,
following a 14% increase in 1997 from 1996.  The  increase in revenue  growth in
Europe is primarily attributable to market acceptance of the Company's products,
the strong local  economies  and the Company's  expansion in its European  sales
force.

     Asia Pacific revenue grew 3% to $33.8 million in 1998, which followed a 16%
increase in 1997 over 1996  levels.  The  decrease in the Asia  Pacific  revenue
growth rate during 1998 is primarily attributed to the weakening of the Japanese
yen,  Korean  won and  other  Asian  currencies  and the  weak  state  of  these
economies.  See the discussion below for more information  concerning the impact
of foreign currency fluctuations on sales growth.

     International sales (sales to customers outside of North America) accounted
for 44%, 41% and 43% of the Company's  consolidated net sales for 1998, 1997 and
1996, respectively.  The Company intends to continue to expand its international
operations by increasing market presence in existing markets,  and continuing to
use  distributors  to sell its  products in  countries in which the sales volume
does not justify direct sales activities.

     The Company's  international sales are subject to inherent risks, including
fluctuations in local  economies;  difficulties in staffing and managing foreign
operations;  greater  difficulty in accounts  receivable  collection;  costs and
risks of  localizing  products  for  foreign  countries;  unexpected  changes in
regulatory requirements,  tariffs and other trade barriers;  difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws.  The Company's  sales outside of North  America are  denominated  in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations  in currency  rates.  In particular,  increases in the value of the
dollar  against  foreign  currencies  decrease the U.S.  dollar value of foreign
sales  requiring the Company either to increase its price in the local currency,
which could render the Company's  product  prices  noncompetitive,  or to suffer
reduced revenues and gross margins as measured in U.S.  dollars.  These dynamics
have  adversely  affected  revenue growth in  international  markets in 1998 and
1997.  The Company's  foreign  currency  hedging  program  includes both foreign
currency forward and purchased option contracts to reduce the effect of exchange
rate  fluctuations.  However,  the hedging program will not eliminate all of the
Company's foreign exchange risks.  (See "Foreign  Exchange  Gain/Loss" below and
Note 11 of Notes to Consolidated Financial Statements.)

                                      -19-

<PAGE>

     Sales made by the Company's direct sales offices in Europe and Asia Pacific
are denominated in local currencies, and accordingly, the U.S. dollar equivalent
of these sales is affected by changes in the weighted  average value of the U.S.
dollar.  This weighted  average is calculated  as the  percentage  change in the
value of the currency  relative to the dollar,  multiplied by the  proportion of
international sales recorded in the particular  currency.  Between 1997 and 1998
this  weighted  average  value of the U.S.  dollar  increased by 4%,  causing an
equivalent  decrease in the U.S. dollar value of the Company's  foreign currency
sales and expenses.  If the weighted average value during 1998 had been the same
as that in 1997, the Company's  consolidated  net sales for 1998 would have been
$278.9 million  representing an increase of $4.7 million,  which  represents 16%
consolidated  sales growth.  If the weighted  average value during 1998 had been
the same as that in 1997, the Company's  consolidated  operating  expenses would
have  been  $157.0  million,  representing  an  increase  of $1.0  million.  The
preceding   proforma  amounts  and  percentages  are  presented  for  comparison
purposes.

     Gross Profit. As a percentage of sales,  gross profit  represented 76%, 77%
and 75% in 1998,  1997, and 1996,  respectively.  The  relatively  high software
content of the Company's  products is demonstrated in the gross margins achieved
by  the  Company.  In  1998,  the  effect  of  foreign  currency  exchange  rate
fluctuations  and the weak Asia Pacific  economies  negatively  impacted revenue
growth  and gross  margin.  A lesser  factor  affecting  gross  margin  includes
increased  manufacturing  expenses  attributable  to  the  addition  of a  third
production  line in April  1998.  The  higher  margin  in 1997 is the  result of
reduced direct material costs used in production and the favorable leveraging of
our production  overhead expenses against the increase in sales. There can be no
assurance that the Company will maintain its historical margin.

     The  marketplace  for the  Company's  products  dictates  that  many of the
Company's  products be shipped  very quickly  after an order is  received.  As a
result, the Company is required to maintain significant inventories.  Therefore,
inventory  obsolescence  is a risk for the Company  due to frequent  engineering
changes,  shifting customer demand,  the emergence of new industry standards and
rapid  technological  advances  including the introduction by the Company or its
competitors of products  embodying new technology.  While the Company  maintains
valuation  allowances for excess and obsolete inventory and management continues
to monitor the adequacy of such valuation allowances,  there can be no assurance
that such valuation allowances will be sufficient.

     The  Company  believes  its  current  manufacturing  capacity  is more than
adequate to meet current needs.

     Sales and Marketing. Sales and marketing expense in 1998 increased 16% from
1997,  which  followed an increase of 21% in 1997 from 1996. The increase in the
expense in absolute  amounts during 1998 and 1997 is primarily  attributable  to
programs to increase the Company's  international  presence in both the European
and Asia  Pacific  markets,  increases  in sales and  marketing  personnel  both
internationally and in North America, increased marketing for new products and a
worldwide seminar series.  Sales and marketing personnel increased by 132 during
1998 from 671 at  December  31,  1997 to 803 at  December  31,  1998.  Sales and
marketing  expense as a percentage of revenue  increased to 37% in 1998 from 36%
in 1997 and 1996.

     The Company  expects  sales and  marketing  expenses  in future  periods to
increase in absolute dollars, and to fluctuate as a percentage of sales based on
initial  marketing and  advertising  campaign  costs  associated  with major new
product   releases  and  entry  into  new  market  areas,   increasing   product
demonstration costs and the timing of domestic and international conferences and
trade shows.

     Research  and  Development.   Research  and  development  expense  in  1998
increased  15% compared to 1997  following an increase of 24% in 1997 over 1996.
Excluding the effect of acquisition of products, technology and assets, research
and  development  expense  grew 12%,  26% and 17%  during  1998,  1997 and 1996,
respectively.  (See Note 8 of Notes to Consolidated  Financial  Statements for a
description  of the  Company's  acquisitions.)  The  increase  in  research  and
development  expenditures (excluding the acquisition related charges in 1998 and
1997) in  absolute  amounts  and as a  percentage  of sales in each  period  was
primarily  due  to the  hiring  of  additional  product  development  engineers.
Research and  development  personnel  increased from 373 at December 31, 1997 to
424 at December 31, 1998. The Company believes that a significant  investment in
research and development is required to remain  competitive and continue revenue
growth.

                                      -20-

<PAGE>

     The Company  capitalizes  software  development  costs in  accordance  with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer  Software  to be Sold,  Leased,  or  Otherwise  Marketed."  The Company
amortizes  such  costs  over the  related  product's  estimated  economic  life,
generally three years,  beginning when a product  becomes  available for general
release.  Amortization  expense  totaled  $2.8  million,  $1.5  million and $2.1
million during 1998, 1997 and 1996,  respectively.  The increase in amortization
expense is due  primarily  to  amortization  of $750,000 of  purchased  software
capitalized  in  the  1998  Datalog  acquisition.   Software  development  costs
capitalized during such years were $3.3 million,  $2.1 million and $3.0 million,
respectively.  The levels of capitalization  for 1998 were primarily a result of
LabVIEW 5.0 and 5.1, NI-DAQ 6.5 and purchased software development costs related
to the Datalog  acquisition.  The significant  items capitalized in 1997 include
NI-DAQ,  LabVIEW 5.0,  LabWindows/CVI and purchased  software  development costs
related  to the  nuLogic  acquisition.  (See  Note 5 of  Notes  to  Consolidated
Financial Statements for a description of intangibles.)

     General and  Administrative.  General and  administrative  expenses in 1998
increased  10.5% from 1997,  considerably  lower than the increase in revenue of
14%. The continued leveraging of expenses is primarily due to the implementation
of new management information systems in the U.S., Europe and Japan. In absolute
dollars,  the  majority of the increase was  comprised of cost  attributable  to
staffing  increases in the  information  system  department.  Support of the new
management  information  systems and web based  applications  was the main focus
areas for  incremental  investment  in 1998.  The 1998  increase  followed an 8%
increase in 1997 which also was driven by training and  implementation  costs of
the new management information systems. General and administrative expenses as a
percentage  of  revenue  declined  to 7.5%  during  1998.  This  marks the third
consecutive year of reduced general and administrative  expenses as a percent of
revenue.  This decline is  attributable  to the  efficiencies  brought on by the
improvements  made in  recent  years  to the  worldwide  management  information
system. The Company expects that general and administrative  costs will continue
to increase in absolute amounts as the Company continues to invest in developing
web based commerce and management information systems.

     Interest  Income and Expense.  Interest  income in 1998 was flat from 1997,
which  followed  an increase  of 44% in 1997 from 1996.  The  primary  source of
interest  income is from the investment of proceeds from the Company's  issuance
of common  stock  under an initial  public  offering in March 1995 and cash flow
generated  from  operations.  Net cash provided by operating  activities in 1998
totaled $46.0 million.  During the first half of 1998, $16.5 million was used to
pay  construction  costs of the  Company's  new office  building.  During  1997,
interest  income  increased  due  to  the  investment  of  cash  generated  from
operations.  Interest expense  decreased 8% from 1997, which followed a decrease
of 41% in 1997 from 1996.  Interest expense represents less than 1% of net sales
and fluctuates as a result of bank borrowings and interest terms thereon. The 8%
decrease  in  interest  expense  in 1998 from 1997 is  attributed  to  scheduled
repayments on the  manufacturing  facility  loan. The large decrease in interest
expense from 1996 to 1997 is  attributed to repayments of equipment and facility
loans  during  January  1997.  (See  Note 6 of Notes to  Consolidated  Financial
Statements for a description of the Company's debt.)

     Foreign Exchange  Gain/Loss.  The Company  experienced net foreign exchange
losses of $224,000 in 1998,  compared to losses of $2.6  million and $899,000 in
1997 and 1996, respectively. These results are attributable to movements between
the U.S.  dollar and the local  currencies  in countries in which the  Company's
sales subsidiaries are located. The Company recognizes the local currency as the
functional currency of its international subsidiaries.

     During  1998,  the  Company  utilized  foreign  currency  forward  exchange
contracts to economically  hedge a majority of its foreign  currency-denominated
receivables  in order to reduce its  exposure to  significant  foreign  currency
fluctuations.  The Company typically limits the duration of its foreign exchange
forward contracts to 90 days.

     In December 1997, the Company expanded its foreign currency hedging program
to also include foreign  currency  purchased option contracts in order to reduce
its exposures to  fluctuations  in future net foreign  currency cash flows.  The
Company's  policy  allows  for the  purchase  of 5%  "out-of-the-money"  foreign
currency  purchased  option  contracts  for up to 80% of its risk and limits the
duration of these  contracts to 12 months.  As a result,  the Company's  hedging
activities only partially  address its risks in foreign  currency  transactions,
and there can be no assurance that this strategy will be successful.

     Effective  January  1, 1999,  the  Company  elected to adopt SFAS No.  133,
"Accounting for Derivative  Instruments and Hedging Activities." (See Note 15 of
Notes to Consolidated Financial Statements.)

                                      -21-

<PAGE>

     The Company does not currently invest in contracts for speculative purposes
nor does it intend to do so in the foreseeable  future. (See Note 11 of Notes to
Consolidated Financial Statements for a description of the Company's forward and
purchased option contracts and hedged positions.)

     Provision  for Income Taxes.  The  provision  for income taxes  reflects an
effective tax rate of 33% in 1998, 1997 and 1996.

     At December 31, 1998,  seven of the Company's  subsidiaries  had available,
for  income  tax  purposes,   foreign  net  operating  loss   carryforwards   of
approximately $4.2 million,  of which $3.5 million expire between 2000 and 2008.
The remaining $654,000 of loss carryforwards may be carried forward indefinitely
to offset future taxable income in the related tax jurisdictions. (See Note 7 of
Notes  to  Consolidated  Financial  Statements  for  further  discussion  of the
Company's income tax provision.)

Liquidity and Capital Resources

     The Company is currently financing its operations and capital  expenditures
through cash flow from operations. At December 31, 1998, the Company had working
capital of  approximately  $133.5 million compared to $112.1 million at December
31, 1997.

     Accounts  receivable  increased to $45.6  million at December 31, 1998 from
$37.4  million  at  December  31,  1997,  as a result  of higher  sales  levels.
Receivable days outstanding at December 31, 1998 was 57 days compared to 54 days
outstanding at December 31, 1997. Consolidated inventory balances have increased
to $16.5  million at December 31, 1998 from $15.5  million at December 31, 1997.
Inventory  turns of 4.2 per year represent an improvement  over turns of 4.1 per
year at December  31,  1997 and reflect  improvements  in  inventory  management
occurring at the Company's manufacturing facility in Austin, Texas as well as at
the centralized European warehouse in Amsterdam.

     Cash used for investing  activities in 1998 includes  $28.0 million for the
purchase of property and equipment, capitalization of software development costs
of $2.8 million and purchase  price of $2.2 million for the purchase of Datalog.
The Company  completed  an office  building  located  next to its  manufacturing
facility  in  Austin,  Texas in the  summer of 1998.  The total cost for the new
building, including furniture, fixtures and equipment was $31.0 million of which
$16.5 million was paid in 1998 out of cash generated from operations.

     The Company currently expects to fund expenditures for capital requirements
as well as  liquidity  needs  created  by  changes  in  working  capital  from a
combination  of available cash and short-term  investment  balances,  internally
generated  funds,  and  financing   arrangements   with  its  current  financial
institutions.  The Company has a $28.5 million credit agreement with NationsBank
of Texas,  N.A. which consists of (i) a $20.0 million  revolving line of credit,
and (ii) an $8.5 million  manufacturing  facility loan. As of December 31, 1998,
the Company had no  outstanding  balance on the line of credit and had a balance
of $5.2 million on the manufacturing facility loan. The revolving line of credit
expires on December 31, 1999. The Company's  credit  agreements  contain certain
financial covenants and restrictions as to various matters, including the bank's
prior approval of significant  mergers and  acquisitions.  Borrowings  under the
line of credit are  collateralized by substantially all of the Company's assets.
(See  Note 6 of  Notes  to  Consolidated  Financial  Statements  for  additional
information regarding the Company's debt.)

     The Company believes that the cash flow from operations,  if any,  existing
cash  balances  and  short-term  investments  and  credit  available  under  the
Company's  existing  credit  facilities,  will be  sufficient  to meet  its cash
requirements for at least the next twelve months.  Cash requirements for periods
beyond the next twelve months depend on the Company's profitability, its ability
to manage working capital requirements and its rate of growth.

Market Risk

     The Company is exposed to a variety of risks,  including  foreign  currency
fluctuations and changes in the market value of its  investments.  In the normal
course of business,  the Company employs established  policies and procedures to
manage its exposure to  fluctuations  in foreign  currency values and changes in
the market value of its investments.

                                      -22-

<PAGE>

     Foreign Currency Hedging  Activities.  The Company's  objective in managing
its exposure to foreign  currency  exchange rate  fluctuations  is to reduce the
impact of adverse  fluctuations in such exchange rates on the Company's earnings
and cash flow.  Accordingly,  the Company  utilizes  purchased  foreign currency
option  contracts  and forward  contracts to hedge its  exposure on  anticipated
transactions  and firm  commitments.  The  principal  currencies  hedged are the
British pound,  Japanese yen, German deutsche mark,  French franc,  Italian lire
and Swedish krona. The Company monitors its foreign exchange exposures regularly
to ensure the overall  effectiveness  of its foreign  currency hedge  positions.
However,  there can be no  assurance  the  Company's  foreign  currency  hedging
activities  will  substantially  offset the impact of  fluctuations  in currency
exchange rates on its results of operations and financial position. Based on the
foreign exchange instruments outstanding at December 31, 1998, an adverse change
(defined as 20% in certain Asian currencies and 10% in all other  currencies) in
exchange  rates would  result in a decline in income  before  taxes of less than
$4.0 million. Additionally, as the Company utilizes foreign currency instruments
for hedging anticipated and firmly committed transactions,  a loss in fair value
for those  instruments  is  generally  offset by  increases  in the value of the
underlying exposure.  (See Note 11 of Notes to Consolidated Financial Statements
for a description  of the Company's  financial  instruments at December 31, 1998
and 1997.)

     Short-term  Investments.  The fair value of the  Company's  investments  in
marketable  securities  at December 31, 1998 was $49.2  million.  The  Company's
investment  policy is to manage its investment  portfolio to preserve  principal
and liquidity while  maximizing the return on the investment  portfolio  through
the full investment of available funds.  The Company  diversifies the marketable
securities   portfolio  by  investing  in  multiple  types  of  investment-grade
securities.   The  Company's  investment  portfolio  is  primarily  invested  in
short-term  securities  with at least an  investment  grade  rating to  minimize
interest  rate and credit risk as well as to provide for an immediate  source of
funds.  Based  on the  Company's  investment  portfolio  and  interest  rates at
December  31,  1998,  a 100 basis point  increase or decrease in interest  rates
would result in a decrease or increase of less than $400,000,  respectively,  in
the fair value of the investment  portfolio.  Although changes in interest rates
may affect the fair value of the investment portfolio and cause unrealized gains
or losses, such gains or losses would not be realized unless the investments are
sold.

Factors Affecting the Company's Business

     Fluctuations  in  Quarterly  Results.  The  Company's  quarterly  operating
results  have  fluctuated  in the past and may  fluctuate  significantly  in the
future due to a number of  factors,  including:  changes in the mix of  products
sold; the availability and pricing of components from third parties  (especially
sole sources);  the timing of orders;  level of pricing of international  sales;
fluctuations  in foreign  currency  exchange rates like the past  devaluation in
certain Asian currencies;  the difficulty in maintaining margins,  including the
higher margins  traditionally  achieved in  international  sales; and changes in
pricing policies by the Company, its competitors or suppliers.  Specifically, if
the Asian  currencies  again weaken  against the U.S.  dollar,  and if the local
sales  prices  cannot  be  raised,  the  Company  could  experience   additional
deterioration of its Asian profit margin. As has occurred in the past and as may
be expected to occur in the future,  new software products of the Company or new
operating  systems of third parties on which the  Company's  products are based,
often  contain bugs or errors that can result in reduced  sales and/or cause the
Company's  support  costs to  increase,  either of which  could  have a material
adverse impact on the Company's operating results.  Furthermore, the Company has
significant  revenues  from  customers  in  industries  such as  semiconductors,
automated test equipment, telecommunications,  aerospace, defense and automotive
which are  cyclical in nature.  Downturns  in these  industries  have  adversely
affected revenue growth in 1998 and they could continue to do so.

     In  recent  years,  the  Company's  revenues  have  been  characterized  by
seasonality,  with revenues  typically being  relatively  constant in the first,
second and third  quarters,  growing in the fourth quarter and being  relatively
flat or declining  from the fourth  quarter of the year to the first  quarter of
the following year. If this historical pattern continues, revenues for the first
quarter of 1999 may not exceed  revenues  from the fourth  quarter of 1998.  The
Company's  results of  operations  in the third quarter of 1999 may be adversely
affected by lower sales levels in Europe which typically occur during the summer
months.  The Company  believes the  seasonality of its revenue  results from the
international  mix of its  revenue  and the  variability  of the  budgeting  and
purchasing cycles of its customers throughout each international region.

                                      -23-

<PAGE>

     New  Product  Introductions  and  Market  Acceptance.  The  market  for the
Company's  products is characterized  by rapid  technological  change,  evolving
industry  standards,   changes  in  customer  needs  and  frequent  new  product
introductions, and is therefore highly dependent upon timely product innovation.
The  Company's  success is  dependent  in part on its  ability  to  successfully
develop and  introduce  new and  enhanced  products on a timely basis to replace
declining  revenues  from  older  products,  and on  increasing  penetration  in
international  markets.  In the past,  the Company has  experienced  significant
delays between the announcement and the commercial availability of new products.
Any  significant  delay in releasing new products could have a material  adverse
effect on the ultimate success of a product and other related products and could
impede  continued  sales of  predecessor  products,  any of which  could  have a
material  adverse  effect on the Company's  operating  results.  There can be no
assurance  that the Company will be able to introduce new products in accordance
with announced  release dates,  that new products will achieve market acceptance
or that  any such  acceptance  will be  sustained  for any  significant  period.
Failure of new  products to achieve or sustain  market  acceptance  could have a
material adverse effect on the Company's operating results.  Moreover, there can
be no assurance that the Company's international sales will continue at existing
levels or grow in  accordance  with the  Company's  efforts to increase  foreign
market penetration.

     Operation  in  Intensely  Competitive  Markets.  The  markets  in which the
Company  operates  are  characterized  by  intense   competition  from  numerous
competitors, and the Company expects to face further competition from new market
entrants in the future.  A key  competitor is  Hewlett-Packard  Company  ("HP"),
which has been the leading supplier of traditional instrumentation solutions for
decades.  Although  HP offers its own line of  instrument  controllers,  HP also
offers hardware and software add-on products for third-party  desktop  computers
and workstations that provide solutions that directly compete with the Company's
virtual instrumentation  products. HP is aggressively  advertising and marketing
products  that are  competitive  with the  Company's  products.  Because of HP's
strong  position  in the  instrumentation  business,  changes  in its  marketing
strategy  or  product  offerings  could have a  material  adverse  effect on the
Company's operating results.

     The  Company  believes  its  ability to compete  successfully  depends on a
number of factors  both within and outside its control,  including:  new product
introductions by competitors;  product pricing; quality and performance; success
in  developing  new  products;  adequate  manufacturing  capacity  and supply of
components and materials; efficiency of manufacturing operations;  effectiveness
of sales and marketing  resources and strategies;  strategic  relationships with
other suppliers;  timing of new product introductions by the Company; protection
of the  Company's  products by  effective  use of  intellectual  property  laws;
general market and economic  conditions;  and government  actions throughout the
world.  There  can be no  assurance  that the  Company  will be able to  compete
successfully in the future.

     Management Information Systems.

     During 1998,  the Company  implemented a contact  management  and technical
support  incident  tracking  system in 10 European  branches,  as well as a data
warehouse to aid in real-time worldwide sales information analysis. In 1999, the
Company will complete  implementation  of the contact  management  and technical
support incident tracking system in the three remaining European  branches,  the
U.S.  and  Japan.  The  Company  will  also  devote  significant  effort  on the
development of our web commerce offerings.

     Implementation of the new order entry,  distribution and finance management
information  systems  in Europe  and Japan was  completed  in 1997.  As with any
information  system,  unforeseen issues may arise that could affect management's
ability to receive adequate,  accurate and timely financial information which in
turn could inhibit effective and timely decisions.  Furthermore,  it is possible
that one or more of the  Company's  three  regional  information  systems  could
experience a complete or partial  shutdown.  If this shutdown  occurred near the
end of a quarter it could impact the Company's product shipments and revenues as
product   distribution  is  heavily  dependent  on  the  integrated   management
information  systems  in each  region.  Accordingly,  operating  results in that
quarter would be adversely  impacted due to the shipments  which would not occur
until the following period.  The Company is working to achieve reliable regional
management  information  systems to control  costs and  improve  the  ability to
deliver its products in substantially  all of its direct markets  worldwide.  No
assurance  can be given  that the  Company's  efforts  will be  successful.  The
failure to receive  adequate,  accurate and timely financial  information  could
inhibit management's ability to make effective and timely decisions. For further
information  related to the management  information system see the discussion of
the Impact of Year 2000 included in this document.

                                      -24-

<PAGE>

     Risks  Associated  with  International  Operations  and Foreign  Economies.
International  sales are subject to inherent  risks,  including  fluctuations in
local  economies,  difficulties  in staffing  and managing  foreign  operations,
greater  difficulty  in  accounts  receivable  collection,  costs  and  risks of
localizing  products for foreign  countries,  unexpected  changes in  regulatory
requirements, tariffs and other trade barriers, difficulties in the repatriation
of earnings  and the burdens of complying  with a wide variety of foreign  laws.
The  regulatory  environment in some emerging  countries is very  restrictive as
their  governments  try to protect  their local economy and value of their local
currency  against the U.S.  dollar.  Sales made by the  Company's  direct  sales
offices in Europe and Asia  Pacific are  denominated  in local  currencies,  and
accordingly, the U.S. dollar equivalent of these sales is affected by changes in
the  weighted  average  value of the  U.S.  dollar.  This  weighted  average  is
calculated as the percentage change in the value of the currency relative to the
dollar,  multiplied by the  proportion of  international  sales  recorded in the
particular  currency.  Between 1997 and 1998 this weighted  average value of the
U.S. dollar  increased by 4%, causing an equivalent  decrease in the U.S. dollar
value of the Company's  foreign  currency  sales and  expenses.  If the weighted
average  value  during  1998 had been  the same as that in 1997,  the  Company's
consolidated  net sales for 1998 would have been $278.9 million  representing an
increase of $4.7 million, which represents 16% consolidated sales growth. If the
weighted  average  value  during  1998 had  been  the same as that in 1997,  the
Company's  consolidated  operating  expenses  would  have been  $157.0  million,
representing  an increase of $1.0 million,  or 15% from 1997. If the U.S. dollar
strengthens  again in the future,  it could have a materially  adverse effect on
the operating results of the Company.

     Dependence  on Key  Suppliers.  The Company's  manufacturing  processes use
large volumes of high-quality  components and subassemblies  supplied by outside
sources.  Several of these  components  are  available  through  sole or limited
sources.    Sole-source    components   purchased   by   the   Company   include
application-specific  integration  circuits ("ASICS") and other components.  The
Company has in the past  experienced  delays and quality  problems in connection
with sole-source  components,  and there can be no assurance that these problems
will not recur in the future.  Accordingly,  the failure to receive  sole-source
components from suppliers could result in a material  adverse effect on revenues
and results of operations.

     Proprietary  Rights and  Intellectual  Property  Litigation.  The Company's
success depends in part on its ability to obtain and maintain  patents and other
proprietary rights relative to the technologies used in its principal  products.
Despite the Company's  efforts to protect its proprietary  rights,  unauthorized
parties  may have in the past  infringed  or violated  certain of the  Company's
intellectual  property rights.  As is typical in the industry,  the Company from
time  to  time  may  be  notified  that  it  is  infringing  certain  patent  or
intellectual  property rights of others.  While no actions are currently pending
by or against the Company, there can be no assurance that litigation will not be
initiated  in  the  future  which  may  cause  significant  litigation  expense,
liability and a diversion of  management's  attention  which may have a material
adverse effect on results of operations.

     Dependence on Key Management and Technical Personnel. The Company's success
depends to a  significant  degree upon the  continued  contributions  of its key
management,  marketing,  research  and  development  and  operational  personnel
including Dr. Truchard,  Mr. Kodosky and other members of senior  management and
key  technical  personnel.  The  Company  has no  agreements  providing  for the
employment  of any of its key employees for any fixed term and the Company's key
employees may  voluntarily  terminate  their  employment with the Company at any
time.  The loss of the services of one or more of the Company's key employees in
the future  could have a  material  adverse  effect on  operating  results.  The
Company  also  believes  its future  success  will depend in large part upon its
ability to attract and retain additional highly skilled  management,  technical,
marketing,  research and development,  and operational personnel with experience
in managing large and rapidly changing companies as well as training, motivating
and  supervising  the employees.  In addition,  the recruiting  environment  for
software   engineering,   sales  and  other  technical   professionals  is  very
competitive.  Competition  for  qualified  software  engineers  is  particularly
intense and is likely to result in increased personnel costs. Failure to attract
or retain  qualified  software  engineers  could have an  adverse  effect on the
Company's  operating  results.  The Company also  recruits  and employs  foreign
nationals to achieve its hiring goals primarily for entry-level  engineering and
software positions.  There can be no guarantee that the Company will continue to
be able to  recruit  foreign  nationals  to the  current  degree  if  government
requirements  for  temporary  and  permanent   residence  becomes   increasingly
restrictive.  These factors further intensify competition for key personnel, and
there can be no assurance  that the Company will be  successful in retaining its
existing key personnel or attracting and retaining additional key personnel.

                                      -25-

<PAGE>

     Risk of Product  Liability Claims.  The Company's  products are designed in
part to provide  information upon which the users may rely. The Company attempts
to assure the quality and accuracy of the  processes  contained in its products,
and to limit its product liability exposure through  contractual  limitations on
liability,  including  disclaimers in its "shrink wrap" license  agreements with
end-users.  If future products contain errors that produce  incorrect results on
which  users  rely,  customer  acceptance  of the  Company's  products  could be
adversely  affected.  Further,  the Company could be subject to liability claims
that could have a material adverse effect on the Company's  operating results or
financial position.  Although the Company maintains liability  insurance,  there
can be no assurance that such insurance or the  contractual  provisions  used by
the Company to limit its liability will be sufficient.

     Impact of Year 2000.  Like many  other  companies,  the Year 2000  computer
issue  creates  risks for the  Company.  If  internal  systems do not  correctly
recognize and process date  information  beyond the year 1999, there could be an
adverse impact on the Company's  operations.  There are two other related issues
which could also lead to incorrect  calculations  or failures:  i) some programs
assign special meaning to certain dates,  such as 9/9/99,  and ii) the fact that
the Year  2000 is a leap  year.  To  address  these  Year 2000  issues  with its
internal  systems,  the Company has initiated a  comprehensive  program which is
designed to deal with the most critical  systems  first.  These  activities  are
intended to  encompass  all major  categories  of systems in use by the Company,
including network and communications infrastructure, manufacturing, research and
development,  facilities  management,  sales,  finance and human resources.  The
Company's   manufacturing   equipment   and   systems   are  highly   automated,
incorporating PC's, embedded processors and related software to control activity
scheduling,  inventory  tracking and  manufacturing.  As of December  1998,  the
majority  of the  Company's  critical  and  priority  manufacturing  systems and
non-manufacturing  systems were  determined to be already Year 2000 capable,  or
replacements,  changes, upgrades or workarounds have been determined and tested.
These replacements, changes and upgrades may not yet have been deployed.

     The Company is continuing to test, gather and produce information about its
products.  Certain older products will not be tested. The Company is classifying
its tested  products into the following  categories  of  compliance:  compliant,
compliant with minor issues, and not compliant.  Most of the products tested are
either  compliant or compliant  with minor issues.  If a product is stated to be
non-compliant,  the Company  plans to make  information  available  as to how an
organization  could avoid possible Year 2000 issues regarding that product.  The
Company is also providing  additional  information  and references to help other
organizations  test their products and  applications so that end-users'  systems
are Year 2000 compliant.

     A Year 2000  Readiness  Disclosure  Statement  is available at the National
Instruments  web site.  Information  on the  Company's  web site is  provided to
customers  for the sole purpose of assisting in planning for the  transition  to
the Year 2000.  No  assurances  can be made that problems will not arise such as
customer  problems with other software  programs,  operating systems or hardware
that disrupt  their use of the  Company's  products.  There can be no assurances
that such  disruption  would not negatively  impact costs and revenues in future
years.

     The  Company is also  actively  working  with  suppliers  of  products  and
services to  determine  the extent to which the  suppliers'  operations  and the
products  and services  they provide are Year 2000 capable and to monitor  their
progress  toward  Year 2000  capability.  Highest  priority  is being  placed on
working with suppliers  that are critical to the business.  The Company has made
inquiry of its major suppliers and to date has received written responses to its
initial inquiries from 72% of critical suppliers.  Follow-up  activities seek to
determine  whether the supplier is taking all appropriate steps to fix Year 2000
problems and to be prepared to continue functioning effectively as a supplier in
accordance with National  Instruments'  standards and requirements.  Contingency
plans are being  developed to address  issues  related to suppliers that are not
considered to be making  sufficient  progress in becoming Year 2000 capable in a
timely  manner.  The  Company is also  developing  contingency  plans to address
possible  changes in customer  order  patterns due to Year 2000 issues.  As with
suppliers,  the  readiness of customers to deal with Year 2000 issues may affect
their operations and their ability to order and pay for products.

     The Company  believes  that its most likely worst case Year 2000  scenarios
would relate to problems with the systems of third parties  rather than with the
Company's internal systems or its products. It is clear that the Company has the
least  ability to assess and  remediate  the Year 2000 problems of third parties
and the  Company  believes  the risks are  greatest  with  infrastructure  (e.g.
electricity supply, water and sewer service), telecommunications, transportation
supply chains and critical suppliers of materials.

                                      -26-

<PAGE>

     A worst case scenario  involving a critical  supplier of materials would be
the partial or complete shutdown of the supplier and its resulting  inability to
provide critical supplies to the Company on a timely basis. The Company does not
maintain the  capability  to replace  most third party  supplies  with  internal
production.  Where efforts to work with  critical  suppliers to ensure Year 2000
capability have not been successful,  contingency  planning generally emphasizes
the  identification  of substitute and second-source  suppliers,  and includes a
planned increase in the level of inventory carried.

     The  Company  is not in a position  to  identify  or to avoid all  possible
scenarios;  however,  the Company is currently  assessing  scenarios  and taking
steps to mitigate the impacts of various  scenarios if they were to occur.  This
contingency planning will continue through 1999 as the Company learns more about
the  preparations  and  vulnerabilities  of third  parties  regarding  Year 2000
issues.  Due to the large  number of  variables  involved,  the  Company  cannot
provide an estimate of the damage it might suffer if any of these scenarios were
to occur.

     In 1994, the Company  commenced the  replacement of its legacy  information
systems with a new generation of integrated  applications.  Since that time, the
Company has progressively replaced its manufacturing  distribution,  order entry
and financial systems in the U.S., Europe and Japan.  These changes were made to
improve  management's  control  of the  organization  and  increase  operational
efficiency.  This early  replacement of many of the Company's legacy systems has
reduced the extent of the Company's internal Year 2000 exposure.

     The Company's Year 2000 efforts have been  undertaken  almost entirely with
its existing  personnel.  In some  instances,  consultants  have been engaged to
provide specific  guidance or services.  Activities with suppliers and customers
have also involved their staffs and consultants.

     The  Company  currently  expects  that the  total  cost of these  programs,
including both incremental  spending and redeployed  resources,  will not exceed
$3.7 million. Approximately $2.4 million has been spent on the programs to date.
Expected  Year  2000  costs for  manufacturing  and  non-manufacturing  internal
systems in 1998  represent 37% of the total  information  technology  budget for
1998. No  significant  internal  systems  projects are being deferred due to the
Year 2000 program  efforts.  The  estimated  costs do not include any  potential
costs  related to customer or other  claims,  or  potential  amounts  related to
executing   contingency   plans,  such  as  costs  incurred  on  account  of  an
infrastructure or supplier  failure.  The Company has adequate general corporate
funds with which to pay for the programs' expected costs. All expected costs are
based on the current assessment of the programs and are subject to change as the
programs progress.

     As we get closer to December 31, 1999,  certain of the Company's  customers
may decide to delay  purchases  of the  Company's  products as part of a general
restriction on new system  implementations.  Should a significant  number of the
Company's  customers  adopt this strategy,  this could have a material impact on
the Company's operating results.

     Based on currently available information,  management does not believe that
the Year 2000 matters  discussed  above related to internal  systems or products
sold to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations;  however,  it is uncertain
to what extent the Company may be affected by such matters.  In addition,  there
can be no  assurance  that the  failure  to  ensure  Year 2000  capability  by a
supplier,  customer or another  third  party  would not have a material  adverse
effect on the  Company's  financial  condition  or overall  trends in results of
operations.

     Euro  Conversion.  Effective  January  1,  1999,  eleven  of the 15  member
countries of the European Union adopted a single European currency, the euro, as
their common legal currency. Like many companies that operate in Europe, various
aspects of the Company's  business and financial  accounting will be affected by
the  conversion  to the euro.  The Company has adopted the euro  currency as its
main operating  currency for its European  operations.  The transition from many
different pricing  arrangements to one standard price list, in euros, for all of
Europe allows for European  pricing.  In addition,  the Company does not believe
that  the  conversion  to  the  euro  will  result  in the  cancellation  of any
significant   contracts,   or  cause  it  to  incur   significant   adverse  tax
consequences,  or  significantly  affect its foreign  currency  risk  management
operations.  The  Company  will  continue  to  evaluate  the  impact of the euro
conversion  going forward.  The Company  believes that its internal  accounting,
order management and finance and banking systems will accommodate the conversion
with minimal  modification.  There can be no assurances that the conversion will
not adversely impact the Company's pricing,  tax, currency hedging strategies or
other systems and processes in the future.

                                      -27-

<PAGE>

I
TEM 7(a).  MARKET RISK

     Response to this item is included in "Item 7 -  Management's  Discussion of
Analysis of Financial Condition and Results of Operations - Market Risk" above.


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The  information  required by this item is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-20 hereof.


ITEM 9.     CHANGES  IN  AND  DISAGREEMENTS WITH  ACCOUNTANTS  ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

      Not applicable.

                                      -28-

<PAGE>


                                   PART III


     Certain  information  required  by Part III is omitted  from this Report in
that the Registrant  intends to file a definitive  proxy  statement  pursuant to
Regulation  14A  with  the  Securities  and  Exchange   Commission  (the  "Proxy
Statement")  relating to its annual meeting of  stockholders  not later than 120
days  after  the end of the  fiscal  year  covered  by  this  Report,  and  such
information is incorporated by reference herein.


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information concerning the Company's directors required by this Item is
incorporated  by reference to the Company's  Proxy  Statement  under the heading
"Election of Directors."

     The information  concerning the Company's  executive  officers  required by
this Item is  incorporated  by reference to the Company's  Proxy Statement under
the heading "Executive Officers."


ITEM 11.    EXECUTIVE COMPENSATION

     The  information  required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Not applicable.

                                      -29-

<PAGE>


                                     PART IV



ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) Documents Filed with Report

          1.   Financial  Statements.   See  Index  to  Consolidated   Financial
               Statements  at  page  F-1 of this  Form  10-K  and the  Financial
               Statements  and Notes  thereto which are included at pages F-2 to
               F-20 of this Form 10-K.

          2.   Exhibits

               Exhibit
               Number   Description

               3.1*     Certificate of Incorporation of the Company.
               3.2*     Bylaws of the Company.
               4.1*     Specimen of Common Stock certificate of the Company.
               4.2*     Rights Agreement dated as of May 19, 1994, between the
                        Company and The First National Bank of Boston.
              10.1*     Form of Indemnification Agreement.
              10.2*     1994 Incentive Plan.
              10.3*     1994 Employee Stock Purchase Plan.
              10.5**    Loan Agreements dated as of June 30, 1998, between the
                        Company and NationsBank of Texas, N.A., as amended and
                        supplemented.
              11.1      Computation of Earnings Per Common Share.
              21.1      Subsidiaries of the Company.
              23.1      Consent of Independent Accountants.
              24.0      Power of Attorney (see page 32).
              27.0      Financial Data Schedule (see Part II, Item 6).

                   *    Incorporated by reference to the Company's Registration
                        Statement on Form S-1 (Reg. No. 33-88386) declared
                        effective March 13, 1995.
                 **     Incorporated by reference to the Company's Quarterly
                        Report on Form 10-Q for the quarter ended June 30, 1998.
 
     (b) Reports on Form 8-K.

          Not Applicable.

     (c) Exhibits

          See Item 14(a)(2) above.

                                      -30-

<PAGE>
                                  

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                              Registrant

                              NATIONAL INSTRUMENTS CORPORATION

March 11, 1999                BY:  /s/ James J. Truchard
                                   Dr. James J. Truchard
                                   Chairman of the Board and President

                                POWER OF ATTORNEY

     KNOW ALL  PERSONS  BY THESE  PRESENTS,  that each  person  whose  signature
appears  below  constitutes  and appoints Dr. James J. Truchard and Alexander M.
Davern,  jointly and severally,  his  attorneys-in-fact,  each with the power of
substitution,  for him in any and all capacities, to sign any amendments to this
Report on Form  10-K,  and to file the same,  with  exhibits  thereto  and other
documents in connection therewith,  with the Securities and Exchange Commission,
hereby ratifying and conforming all that each of said attorneys-in-fact,  or his
substitute or substitutes, any do or cause to be done by virtue hereof.

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.
- --------------------------------------------------------------------------------

         Signature                 Capacity in Which Signed             Date

- --------------------------------------------------------------------------------

/s/ James J. Truchard             Chairman of the Board and
Dr. James J. Truchard           President (Principal Executive    March 11, 1999
                                           Officer)
- --------------------------------------------------------------------------------

/s/ Alexander M. Davern             Chief Financial Officer            
Alexander M. Davern            and Treasurer (Principal Financial March 12, 1999
                                    and Accounting Officer)
- --------------------------------------------------------------------------------

/s/ Jeffrey L. Kodosky                     Director               March 11, 1999
Jeffrey L. Kodosky
- --------------------------------------------------------------------------------

/s/ William C. Nowlin                      Director               March 11, 1999
William C. Nowlin, Jr.
- --------------------------------------------------------------------------------

/s/ L. Wayne Ashby                         Director               March 11, 1999
L. Wayne Ashby
- --------------------------------------------------------------------------------

/s/ Donald M. Carlton                      Director               March 12, 1999
Dr. Donald M. Carlton
- --------------------------------------------------------------------------------

/s/ Ben G. Streetman                       Director               March 12, 1999
Ben G. Streetman
- --------------------------------------------------------------------------------

                                      -31-

<PAGE>

                       NATIONAL INSTRUMENTS CORPORATION

                          INDEX TO FINANCIAL STATEMENTS

                                                                       Page No.
Financial Statements:
Report of Independent Accountants                                        F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997             F-3
Consolidated Statements of Income for the Three Years Ended
December 31, 1998                                                        F-4
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1998                                                        F-5
Consolidated Statements of Stockholders' Equity for the Three
Years Ended December 31, 1998                                            F-6
Notes to Consolidated Financial Statements                               F-7

Financial Statement Schedules:
For the Three Years Ended December 31, 1998
     Schedule II - Valuation and Qualifying Accounts

     All other  schedules  are omitted  because they are not  applicable  or the
required information is shown in the financial statements or notes thereto.

                                      -F1-

<PAGE>


                        Report of Independent Accountants


To the Board of Directors and Stockholders of National Instruments Corporation

     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related  consolidated  statements of income and stockholders' equity and of cash
flows,  present  fairly,  in all material  respects,  the financial  position of
National  Instruments  Corporation and its subsidiaries at December 31, 1998 and
1997,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.



/s/ PricewaterhouseCoopers LLP
Austin, Texas
January 22, 1999


                                      -F2-

<PAGE>

                          Consolidated Balance Sheets
                        (In thousands, except share data)

                                     Assets

                                                          December 31,
                                                      ---------------------
                                                        1998        1997
                                                      ---------   ---------
Current assets:...........................
 Cash and cash equivalents................           $  51,538   $  31,943
 Short-term investments...................              49,158      51,067
 Accounts receivable, net.................              45,622      37,411
 Inventories..............................              16,454      15,505
 Prepaid expenses and other current assets               6,687       5,387
 Deferred income tax, net.................               4,937       7,900
                                                      ---------   ---------
    Total current assets..................             174,396     149,213

Property and equipment, net...............              66,131      46,805
Intangibles...............................               9,259       8,472
                                                      =========   =========
    Total assets..........................           $ 249,786   $ 204,490
                                                      =========   =========


                   Liabilities and Stockholders' Equity

Current liabilities:......................
 Current portion of long-term debt........           $     849   $      851
 Accounts payable.........................              17,242       16,946
 Accrued compensation.....................               7,895        8,219
 Accrued expenses and other liabilities...               5,011        2,455
 Income taxes payable.....................               5,893        4,871
 Other taxes payable......................               3,996        3,729
                                                      ---------   ----------
    Total current liabilities.............              40,886       37,071

Long-term debt, net of current portion....               4,379        5,151
Deferred income taxes.....................                 337          514
                                                      ---------   ----------
    Total liabilities.....................              45,602       42,736
                                                      ---------   ----------

Commitments and contingencies.............                 ---          ---
Stockholders' equity:
    Common stock: par value $.01; 60,000,000
    shares authorized; 32,942,740 and
    32,656,473 shares issued and outstanding,            
    respectively..........................                 329          326
Additional paid-in capital................              51,662       47,160
Retained earnings.........................             153,601      116,215
Accumulated other comprehensive loss......              (1,408)      (1,947)
                                                      ---------   ----------
    Total stockholders' equity............             204,184      161,754
                                                      ---------   ----------
    Total liabilities and stockholders' equity       $ 249,786   $  204,490
                                                      =========   ==========


The accompanying notes are an integral part of these financial statements.

                                      -F3-

<PAGE>

                        Consolidated Statements of Income
                      (In thousands, except per share data)


                                                     For the Years
                                                   Ended December 31,
                                           ----------------------------------
                                              1998        1997        1996
                                           ----------  ----------  ----------

Net sales.......................           $ 274,230   $ 240,879   $ 200,715
Cost of sales...................              65,187      55,096      49,755
                                           ----------  ----------  ----------
 Gross profit...................             209,043     185,783     150,960
                                           ----------  ----------  ----------

Operating expense:
   Sales and marketing..........             100,783      87,096      72,067
   Research and development.....              34,757      30,296      24,387
   General and administrative...              20,455      18,508      17,129
                                           ----------  ----------  ----------
   Total operating expenses.....             155,995     135,900     113,583
                                           ----------  ----------  ----------

   Operating income.............              53,048      49,883      37,377

Other income (expense):
   Interest income..............               3,439       3,455       2,405
   Interest expense.............                (463)       (502)       (844)
   Net foreign exchange loss ...                (224)     (2,649)       (899)
                                           ----------  ----------  ----------
   Income before income taxes...              55,800      50,187      38,039
Provision for income taxes......              18,414      16,562      12,553
                                           ==========  ==========  ==========
   Net income...................           $  37,386   $  33,625   $  25,486
                                           ==========  ==========  ==========

Basic earnings per share........           $    1.14   $    1.03   $    0.79
                                           ==========  ==========  ==========

Weighted average shares                       
outstanding-basic...............              32,832      32,563      32,359
                                           ==========  ==========  ==========

Diluted earnings per share......           $    1.10   $    1.00   $    0.77
                                           ==========  ==========  ==========

Weighted average shares                     
outstanding-diluted.............              34,100      33,656      32,943
                                           ==========  ==========  ==========


The accompanying notes are an integral part of these financial statements.

                                      -F4-

<PAGE>

                     Consolidated Statements of Cash Flows
                                 (In thousands)

                                               For the Years Ended December 31,
                                              ----------------------------------
                                                 1998        1997        1996
                                              ----------  ----------  ----------

Cash flow from operating activities:
 Net income...............................    $  37,386   $  33,625   $  25,486
 Adjustments to reconcile net income to
  cash provided by operating activities:
 Charges to income not requiring cash
  outlays:
     Depreciation and amortization........       11,638       8,715       9,210
     Provision for (benefit from) deferred        
     income taxes.........................        1,529      (3,072)       (779)
     Purchase of in-process research &              
     development..........................          ---       1,400       1,000
 Changes in operating assets and
  liabilities:
     Increase in accounts receivable......       (5,678)     (4,059)     (4,715)
     (Increase) decrease in inventory.....         (605)     (4,335)      3,275
     Increase in prepaid expenses and            
     other assets.........................       (1,162)     (5,753)       (402)
     Increase in accounts payable.........        1,128       4,741       2,582
     Increase in accrued expenses and             
     other liabilities....................        1,730       1,199       4,620
                                              ----------  ----------  ----------
 Net cash provided by operating activities       45,966      32,461      40,277
                                              ----------  ----------  ----------

Cash flow from investing activities:
 Payments for acquisitions, net of cash          
  received................................       (1,519)     (2,000)     (1,200)
 Capital expenditures.....................      (27,985)    (21,998)     (6,811)
 Additions to intangibles.................       (2,667)     (2,102)     (1,568)
 Purchases of short-term investments......      (52,188)    (48,408)    (68,790)
 Sales of short-term investments..........       54,097      46,298      57,619
                                              ----------  ----------  ----------
Net cash used in investing activities.....      (30,262)    (28,210)    (20,750)
                                              ----------  ----------  ----------

Cash flow from financing activities:
 Repayments of long-term debt.............         (824)     (4,640)     (3,017)
 Net proceeds from issuance of common
  stock under employee plans..............        4,505       2,874       1,891
                                              ----------  ----------  ----------
Net cash provided by (used in) financing          
 activities...............................        3,681      (1,766)     (1,126)
                                              ----------  ----------  ----------

Effects of translation rate changes on cash         210        (753)       (206)
                                              ----------  ----------  ----------

Net increase in cash and cash equivalents.       19,595       1,732      18,195
Cash and cash equivalents at beginning of        
 period...................................       31,943      30,211      12,016
                                              ==========  ==========  ==========
Cash and cash equivalents at end of period    $  51,538   $  31,943   $  30,211
                                              ==========  ==========  ==========

Cash paid for interest and income taxes
 Interest.................................    $     499   $     451   $     904
                                              ==========  ==========  ==========
 Income taxes.............................    $  16,008   $  21,490   $  11,135
                                              ==========  ==========  ==========


The accompanying notes are an integral part of these financial statements.

                                      -F5-

<PAGE>

                 Consolidated Statements of Stockholders' Equity
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                   Accumulated
                                                                      Other      Total
                         Common     Common   Additional              Compre-     Stock-   Compre-
                         Stock      Stock     Paid-In    Retained    hensive    holders'  hensive
                        (Shares)    Amount    Capital    Earnings     Loss       Equity   Income
                       ----------  --------  ----------  --------  -----------  ---------  --------
<S>                    <C>         <C>       <C>         <C>       <C>          <C>        <C>
Balance at December    
31, 1995.............. 32,207,844  $   322   $  41,170   $ 57,104  $      140   $ 98,736
Comprehensive income
  Net income..........        ---      ---         ---     25,486         ---     25,486   $25,486
   Foreign currency
   translation                 
   adjustment and
   other..............        ---      ---         ---        ---        (389)      (389)     (389)
                                                                                           ========
Comprehensive income                                                                        25,097
                                                                                           ========
Issuance of common
stock in connection      
with acquisition......     91,374        1       1,228        ---         ---      1,229
Issuance of common
stock under employee    
plans.................    164,143        2       1,889        ---         ---      1,891
- ---------------------------------------------------------------------------------------------------

Balance at December    
31, 1996.............. 32,463,361      325      44,287     82,590        (249)   126,953
Comprehensive income
  Net income..........        ---      ---         ---     33,625         ---     33,625    33,625
   Foreign currency       
   translation                 
   adjustment and
   other..............        ---      ---         ---        ---      (1,698)    (1,698)   (1,698)
                                                                                           ========
Comprehensive income                                                                        31,927
                                                                                           ========
Issuance of common        
stock under employee    
plans.................    193,112        1       2,873        ---         ---      2,874    
- ---------------------------------------------------------------------------------------------------

Balance at December    
31, 1997.............. 32,656,473      326      47,160    116,215      (1,947)   161,754
Comprehensive income
  Net income..........        ---      ---         ---     37,386         ---     37,386    37,386
   Foreign currency    
   translation                 
   adjustment and
   other..............        ---      ---         ---        ---         539        539       539
                                                                                           ========
Comprehensive income                                                                       $37,925
                                                                                           ========
Issuance of common
stock under employee    
plans.................    286,267        3       4,502        ---         ---      4,505
- ---------------------------------------------------------------------------------------------------

Balance at December    
31, 1998.............. 32,942,740  $   329   $  51,662   $153,601  $   (1,408)  $204,184     
                       ==========  ========  ==========  ========  ===========  =========
</TABLE>


The accompanying notes are an integral part of these financial statements.

                                      -F6-

<PAGE>


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1: Operations and summary of significant accounting policies

     National  Instruments  Corporation  (the "Company") was incorporated on May
14, 1976 under the laws of the State of Texas. On June 10, 1994, the Company was
reincorporated in Delaware.  On March 13, 1995, the Company completed an initial
public offering of shares of its common stock.  The offering and the exercise of
the  over-allotment  option by the  underwriters  generated net cash proceeds of
$39.6 million.

     The Company engages in the design,  development,  manufacture and marketing
of   instrumentation   software  and  specialty   interface  cards  for  general
commercial,  industrial and scientific applications. The Company offers hundreds
of products  used to create  virtual  instrumentation  systems.  The Company has
identified  two  major  markets  for its  products:  test  and  measurement  and
industrial automation. The Company's products may be used in either environment,
and consequently,  specific  application of the Company's products is determined
by the customer  and often is not known to the Company at the time of sale.  The
Company  approaches  both markets with  essentially  the same products which are
used in a variety of  applications  from research and  development to production
testing and industrial  control.  The following  industries and applications are
served  worldwide  by the Company:  advanced  research,  automotive,  commercial
aerospace,   computers  and  electronics,   continuous  process   manufacturing,
education,  government/defense,  medical research/pharmaceutical,  power/energy,
semiconductors, automated test equipment, telecommunications and others.

     Principles of consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly-owned  subsidiaries.  All significant  intercompany  accounts and
transactions have been eliminated.

     Use of estimates

     Judgments and estimates by management  are required in the  preparation  of
financial  statements to conform with generally accepted accounting  principles.
The estimates and underlying  assumptions  affect the reported amounts of assets
and  liabilities,  the disclosure of contingencies at the balance sheet date and
the reported  revenues and expenses for the period.  Actual results could differ
from those estimates.

     Cash and cash equivalents

     Cash and cash equivalents  include cash and highly liquid  investments with
maturities of three months or less at the date of acquisition.

     Short-term investments

     Short-term  investments  consist  of state and  municipal  securities  with
readily  determinable  fair market  values and original  maturities in excess of
three months. The Company's investments are classified as available-for-sale and
accordingly  are  reported  at fair  value,  with  unrealized  gains and  losses
reported as other  comprehensive  income.  Unrealized losses are charged against
income when a decline in fair value is  determined  to be other than  temporary.
The specific  identification  method is used to determine the cost of securities
sold.

     Inventories

     Inventories  are stated at the lower of cost or market.  Cost is determined
using  standard costs which  approximate  the first in, first out (FIFO) method.
Cost  includes  the  acquisition  cost  of  purchased   components,   parts  and
subassemblies,  in-bound freight costs, labor and overhead. Market, with respect
to raw materials,  is replacement cost and, with respect to work-in-process  and
finished goods, is net realizable value.

     Property and equipment

     Property and equipment are recorded at cost. Depreciation is computed using
the  straight-line  method over the estimated useful lives of the assets,  which
range  from  twenty to forty  years for  buildings  and three to five  years for
equipment.  Leasehold  improvements are depreciated over the shorter of the life
of the lease or the asset.

                                      -F7-

<PAGE>

     Intangible assets

     The  Company  has   capitalized   costs  related  to  the  development  and
acquisition  of certain  software  products.  In  accordance  with  Statement of
Financial  Accounting  Standards  ("SFAS") No. 86  "Accounting  for the Costs of
Computer Software to Be Sold, Leased or Otherwise  Marketed,"  capitalization of
costs begins when  technological  feasibility has been established and ends when
the product is  available  for general  release to  customers.  Amortization  is
computed on an individual  product basis for those products available for market
and  has  been  recognized  based  on the  product's  estimated  economic  life,
generally  three  years.   Intangible  assets  are  periodically   assessed  for
impairment of value and any loss is recognized upon impairment.

     Concentrations of credit risk

     Financial   instruments   that   potentially   subject   the   Company   to
concentrations  of credit risk consist  principally of foreign  currency forward
and option  contracts,  cash and cash  equivalents,  short-term  investments and
trade accounts receivable. In management's opinion, no significant concentration
of credit risk exists for the Company.

     The Company's  counterparties  in its foreign  currency  forward and option
contracts  are major  financial  institutions.  The Company does not  anticipate
nonperformance  by these  counterparties.  The Company  maintains  cash and cash
equivalents  with  various  financial  institutions  located  in many  countries
worldwide.  Company  policy  is  to  limit  exposure  in  foreign  countries  by
transferring  cash  to  the  U.S.  The  Company's  short-term   investments  are
diversified  among and  limited  to  high-quality  securities  with high  credit
ratings.  Concentration of credit risk with respect to trade accounts receivable
is limited due to the large number of customers and their dispersion across many
countries and industries.  The amount of sales and trade accounts  receivable to
any individual customer was not significant for the periods presented.

     Revenue recognition

     Sales  revenue  is  recognized  on the date the  product  is shipped to the
customer.  Provision is made for estimated sales returns. Revenue related to the
sale of extended service  contracts is deferred and amortized on a straight-line
basis over the service  period.  The  Company  adopted  the AICPA  Statement  of
Position  97-2  "Software  Revenue  Recognition"  which did not have a  material
impact on the consolidated balance sheet or statement of income.

     Accounts  receivable  are net of allowances  for doubtful  accounts of $3.7
million and $4.0 million at December 31, 1998 and 1997, respectively.

     Warranty expense

     The Company offers a one-year  limited  warranty on most hardware  products
and a 90-day warranty on software  products which is included in the sales price
of many of its products.  Provision is made for estimated  future warranty costs
at the time of sale.

     Advertising expense

     The Company  expenses its costs of  advertising  as  incurred.  Advertising
expense for the years ended  December 31, 1998,  1997 and 1996 is $31.3 million,
$27.1 million and $22.2 million, respectively.

    Foreign currency translation

     The functional currency for the Company's  international  operations is the
applicable  local currency.  The assets and liabilities of these  operations are
translated  at the rate of exchange in effect on the balance  sheet date;  sales
and expenses are translated at average rates. The resultant gains or losses from
translation are included in a separate component of other comprehensive  income.
Gains and  losses  resulting  from  remeasuring  monetary  asset  and  liability
accounts that are denominated in a currency other than a subsidiary's functional
currency are included in determining net income.

     Foreign currency hedging instruments

     The Company  enters into foreign  currency  forward  contracts to hedge its
exposure on material foreign currency receivables.  The Company does not hold or
issue financial  instruments for trading purposes.  These financial  instruments
are carried at market value, which is measured on the basis of spot rates on the
balance  sheet date.  Realized  and  unrealized  gains and losses on the forward
contracts  are netted  against the  related  foreign  currency  loss or gain and
included in other income for the period.

                                      -F8-

<PAGE>

     The Company  uses  foreign  currency  purchased  option  contracts to hedge
anticipated  transactions for periods not exceeding twelve months.  Realized and
unrealized  gains and premiums of foreign  currency  purchased  option contracts
that are  designated  and effective as hedges of  anticipated  transactions  are
deferred and recognized in income in the same period as the hedged  transaction.
The risk of loss associated with purchased options is limited to premium amounts
paid for the contracts, which could be significant.

     Income taxes

     The  provision  for income  taxes is based on pretax  financial  accounting
income.  Deferred tax assets and liabilities are recognized for the expected tax
consequences  of  temporary  differences  between  the tax bases of  assets  and
liabilities  and their reported  amounts.  Valuation  allowances are established
when  necessary to reduce  deferred tax assets to amounts  which are more likely
than not to be realized.

     Earnings per share

     Basic  earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed by dividing net income by the weighted  average number of common
shares and common  share  equivalents  outstanding  (if  dilutive)  during  each
period.  Common share  equivalents  include stock options.  The number of common
share  equivalents  outstanding  relating to stock options is computed using the
treasury stock method.

     The  reconciliation of the denominators used to calculate the basic EPS and
diluted EPS for the years ended December 31, 1998,  1997 and 1996,  respectively
is as follows (in thousands):

                                         Years Ended December 31,
                                      ----------------------------------
                                         1998        1997        1996
                                      ----------  ----------  ----------
Weighted average shares                 
outstanding-basic................       32,832      32,563      32,359

Plus: Common share equivalents
  Stock options..................        1,268       1,093         584
                                      ----------  ----------  ----------

Weighted average shares                 
outstanding-diluted..............       34,100      33,656      32,943
                                      ==========  ==========  ==========

     Stock  options to acquire  763,124,  14,285 and 3,762  shares for the years
ended December 31, 1998,  1997 and 1996,  respectively  were not included in the
computations of diluted earnings per share because the effect of including stock
options would have been anti-dilutive.

     Stock-based compensation plans

     The Company has adopted  the  disclosure-only  provisions  of SFAS No. 123,
"Accounting  for  Stock-Based  Compensation."  As allowed by SFAS No.  123,  the
Company continues to apply the provisions of Accounting Principles Board Opinion
No. 25 "Accounting for Stock issued to Employees" and related interpretations in
accounting for its plans.  Accordingly,  compensation  cost for stock options is
measured as the  excess,  if any, of the quoted  market  price of the  Company's
stock at the date of the grant over the amount an  employee  must pay to acquire
the stock.

     Comprehensive income

     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." The standard, which was effective for
financial  statements  issued  for  periods  ending  after  December  15,  1997,
established  standards for reporting,  in addition to net income,  comprehensive
income and its components  including,  as applicable,  foreign  currency  items,
minimum pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities.  The Company adopted this standard in
the first quarter of 1998 and has reclassified  prior year financial  statements
to reflect the provisions of this statement.

                                      -F9-

<PAGE>

Note 2: Short-term investments

     Short-term  investments at December 31, 1998 and 1997,  consisting of state
and municipal  securities,  were acquired at an aggregate  cost of $49.1 million
and $51.1 million, respectively. The contractual maturities of these securities,
which are  classified as  available-for-sale  and carried at fair value,  are as
follows (in thousands):

                                                    December 31,
                                                  -------------------
                                                    1998       1997
                                                  --------   --------
      90 days to one year...........              $ 26,639   $ 38,724
      One year through two years....                22,519     12,343
                                                  --------   --------
                                                  $ 49,158   $ 51,067
                                                  ========   ========

Note 3: Inventories

      Inventories consist of the following (in thousands):

                                                    December 31,
                                                  -------------------
                                                    1998       1997
                                                  --------   --------
      Raw materials.................              $  7,194   $  6,985
      Work-in-process...............                   943      1,315
      Finished goods................                 8,317      7,205
                                                  --------   --------
                                                  $ 16,454   $ 15,505
                                                  ========   ========

Note 4: Property and equipment

      Property and equipment consist of the following (in thousands):

                                                    December 31,
                                                  -------------------
                                                    1998       1997
                                                  --------   --------
      Land..........................              $  4,006   $  4,006
      Buildings.....................                43,894     16,873
      Furniture and equipment.......                56,956     40,839
                                                  --------   --------
                                                   104,856     61,718
      Accumulated depreciation......               (38,725)   (30,922)
      Construction in process.......                    --     16,009
                                                  --------   --------
                                                  $ 66,131 $   46,805
                                                  ========   ========

     Depreciation  expense for the years ended December 31, 1998, 1997 and 1996,
is $8.9 million, $7.1 million and $7.1 million, respectively.

Note 5: Intangibles

     Intangibles  at December  31, 1998 and 1997  include  capitalized  software
development costs of $3.9 million and $3.4 million, respectively,  which are net
of  accumulated  amortization  of $3.8 million and $7.1  million,  respectively.
Total  amortization  costs were $2.8 million,  $1.6 million and $2.1 million for
the years ended December 31, 1998,  1997 and 1996,  respectively.  Substantially
all of these amounts were amortization of software development costs.

                                      -F10-

<PAGE>

Note 6: Debt

      Debt consists of the following (in thousands):             December 31,
                                                                ----------------
                                                                 1998     1997
                                                                -------  -------
      Short-term debt:  Revolving line, LIBOR (5.63% at
      December 31, 1998), $20,000,000 commitment,
      matures December 31, 1999..........................       $   ---  $   ---
                                                                =======  =======
      Long-term debt: Manufacturing facility loan, LIBOR        
      (5.63% at December 31, 1998), $8,480,000 commitment,
      half the principal is payable, together with 
      interest, in equal quarterly installments over a          
      five-year term, beginning September 1995,
      remainder due at maturity at February 28, 2001.....       $ 5,151  $ 6,002

      Other.............................................             77      ---
                                                                -------  -------
      Total debt........................................          5,228    6,002
         Less current portion...........................            849      851
                                                                -------  -------
      Long-term portion.................................        $ 4,379  $ 5,151
                                                                =======  =======

     The terms of the Company's debt agreements  include various covenants which
require,  among other things,  a minimum  tangible net worth of $154.0  million.
First  security  interests  are in land and  building of the  manufacturing  and
corporate headquarter site.

     Long-term  debt  maturing in years 1999 and 2000 is  $849,000  per year and
$3.5 million in 2001.
 
Note 7: Income taxes

     The  components  of income  before the  provision  for income  taxes are as
follows (in thousands):

                                        Years Ended December 31,
                                   ----------------------------------
                                      1998        1997        1996
                                   ----------  ----------  ----------
      Domestic..........           $  46,817   $  42,400   $  35,108
      Foreign...........               8,983       7,787       2,931
                                   ----------  ----------  ----------
                                   $  55,800   $  50,187   $  38,039
                                   ==========  ==========  ==========

     The  provision  for income taxes  charged to  operations  is as follows (in
thousands):

                                        Years Ended December 31,
                                   ----------------------------------
                                      1998        1997        1996
                                   ----------  ----------  ----------
      Current tax expense
         U.S. federal...           $  11,945   $  15,140   $  10,234
         State..........               1,109       1,468         985
         Foreign........               3,831       3,026       2,113
                                   ----------  ----------  ----------
      Total current.....              16,885      19,634      13,332
                                   ----------  ----------  ----------
      Deferred tax expense
      (benefit)
         U.S. federal...               2,352      (2,719)       (201)
         State..........                 329        (227)       (180)
         Foreign........              (1,152)       (126)       (398)
                                   ----------  ----------  ----------
      Total deferred....               1,529      (3,072)       (779)
                                   ----------  ----------  ----------
      Total provision...           $  18,414   $  16,562   $  12,553
                                   ==========  ==========  ==========

                                      -F11-

<PAGE>

     Deferred  tax  liabilities  (assets) at  December  31, 1998 and 1997 are as
follows (in thousands):

                                                    December 31,
                                               ----------------------
                                                  1998        1997
                                               ----------  ----------
      Capitalized software..........           $   1,068   $     735
      Unrealized exchange gain......                 192         ---
                                               ----------  ----------
         Gross deferred tax liabilities            1,260         735
                                               ----------  ----------
      Depreciation and amortization.                (311)       (842)
      Operating loss carryforwards..              (1,774)       (272)
      Vacation and other accruals...              (1,358)     (1,385)
      Inventory valuation and warranty            (1,246)     (2,225)
      provisions....................
      Doubtful accounts and sales                 (1,311)     (1,362)
      provisions....................
      Unrealized exchange loss......                 ---        (649)
      Intercompany profit...........                (599)       (762)
      Undistributed earnings of foreign             (525)       (364)
      subsidiaries..................
      Other.........................                (615)       (615)
                                               ----------  ----------
         Gross deferred tax assets..              (7,739)     (8,476)
                                               ----------  ----------
      Valuation allowance...........                 303         269
                                               ----------  ----------
      Net deferred tax asset........           $  (6,176)  $  (7,472)
                                               ==========  ==========

     The  increase in the  deferred  tax assets  valuation  allowance in 1998 of
$34,000 is attributable  to the operating  losses in foreign  jurisdictions  the
benefits of which are not assured of realization at December 31, 1998.

     A reconciliation  of income taxes at the U.S. federal  statutory income tax
rate to the effective tax rate follows:
                                                       Years Ended December 31,
                                                       ------------------------
                                                        1998     1997     1996
                                                       ------   ------   ------
      U.S. federal statutory tax rate..............      35%      35%      35%
      Foreign sales corporation benefit............      (2)      (1)      (2)
      Loss from unconsolidated foreign subsidiaries     ---      ---        1
      Foreign tax credits utilized.................     ---       (1)      (2)
      Tax exempt interest..........................      (2)      (2)      (2)
      State income taxes, net of federal tax benefit      2        2        2
      Other........................................     ---      ---        1
                                                       ------   ------   ------
         Effective tax rate........................      33%      33%      33%
                                                       ======   ======   ======

     As  of  December  31,  1998,  seven  of  the  Company's  subsidiaries  have
available, for income tax purposes,  foreign net operating loss carryforwards of
approximately $4.2 million, of which $3.5 million expire during the years 2000 -
2008 and $654,000 of which may be carried forward indefinitely.

     A deferred  income tax  benefit of  $161,000  was  provided in 1998 for the
estimated foreign tax credits that will be utilized upon the anticipated  future
repatriation of approximately $3.6 million of foreign undistributed  earnings in
the form of dividends.  The Company has not provided for U.S. federal income and
foreign   withholding   taxes  on   approximately   $1.2   million  of  non-U.S.
subsidiaries'  undistributed  earnings as of December  31,  1998,  because  such
earnings are intended to be reinvested indefinitely. These earnings would become
subject to U.S. tax and foreign  withholding tax, if they are actually or deemed
to be remitted to the parent  company as dividends or if the Company should sell
its stock in these subsidiaries. If these earnings were distributed, foreign tax
credits  should  become  available  under current law to reduce or eliminate the
resulting U.S. income tax and foreign withholding tax liabilities.

                                      -F12-

<PAGE>

Note 8: Acquisitions

     On August 17, 1998, the Company  acquired all of the issued and outstanding
shares of common  stock of  DATALOG  GmbH/DASYtec  GmbH  (Datalog)  and  related
subsidiaries for an aggregate purchase price of approximately $2.2 million.  The
acquisition was accounted for as a purchase. The results of Datalog's operations
have been combined with those of the Company since the date of the  acquisition.
The  Company  amortized  $750,000  of the  purchased  software  during the third
quarter of 1998. This amortization period was utilized due to the nature of this
technology and timing of the revenue streams associated with it. If this expense
had not been taken,  net income for the year ended  December 31, 1998 would have
been $37.9 million or $1.11 per share-diluted.

     In 1997,  the Company  acquired the products,  technology and net assets of
nuLogic,  Inc. for a purchase price of  approximately  $2.0 million in cash. The
acquisition was accounted for as a purchase. The results of nuLogic's operations
have been combined with those of the Company since the date of acquisition.

     In 1996, the Company  acquired all of the issued and outstanding  shares of
common stock of Georgetown Systems, Inc. ("GSI") for an aggregate purchase price
of  approximately  $2.0  million,  paid with 91,374  unregistered  shares of the
Company's  common stock and $764,000 in cash. The  acquisition was accounted for
as a purchase.  The results of GSI's operations have been combined with those of
the Company since the date of acquisition.  Also in 1996, the Company  purchased
imaging acquisition software technology for $500,000.

Note 9: Stockholders' equity

     Common stock

     The Company's  reincorporation into Delaware on June 10, 1994 resulted in a
change in par value  from no par to $.01 par value per  share.  All  outstanding
stock was  exchanged on a one-for-one  basis as of the date of  reincorporation.
The  reincorporation  increased  the  Company's  authorized  stock to 60,000,000
shares of Common Stock and 5,000,000  shares of Preferred  Stock.  Additionally,
the Company effected a six-for-one  stock split on January 11, 1995, the date of
filing the Company's  initial  registration  statement  with the  Securities and
Exchange Commission.

     On October 15,  1997,  the Company  declared a stock split  effected in the
form of a dividend of one share of common stock for each two shares outstanding.
The  dividend was paid on November 12, 1997 to holders of record as of the close
of business on October 28, 1997.

     All share information included in the accompanying  consolidated  financial
statements and notes has been retroactively adjusted to reflect the exchange and
stock splits.

     Stock-based compensation plans

     At December 31, 1998, the Company has two active  stock-based  compensation
plans and one inactive plan. The two active  stock-based  compensation plans are
the 1994  Incentive  Stock Option Plan and the Employee  Stock Purchase Plan. No
compensation cost has been recognized in the Company's financial  statements for
the fixed stock option plan and the stock  purchase plan. If  compensation  cost
for the  Company's two active  stock-based  compensation  plans were  determined
based  on the  fair  value  at the  grant  date for  awards  under  those  plans
consistent with the method established by SFAS No. 123, the Company's net income
and  earnings  per share  would  have  been  reduced  to the pro  forma  amounts
indicated below (in thousands, except per share data).

                                               Years Ended December 31,
                                          ----------------------------------
                                             1998        1997        1996
                                          ----------  ----------  ----------
Net income                 As reported    $  37,386    $ 33,625    $ 25,486
                           Pro-forma         31,281      29,829      23,458

Basic earnings per share   As reported    $    1.14     $  1.03     $  0.79
                           Pro-forma           0.95        0.92        0.72

Diluted earnings per share As reported    $    1.10     $  1.00     $  0.77
                           Pro-forma           0.92        0.89        0.71

                                      -F13-

<PAGE>

     Stock option plans

     The Company had a 1983 Incentive Stock Option Plan under which options were
granted to certain key employees  pursuant to award agreements  executed in 1983
(exercisable at $0.05 per share), 1985 (exercisable at $0.11 per share) and 1989
(exercisable  at $1.55 per share).  This plan  terminated  on November 30, 1993.
Under the plan,  options were granted at a price not less than fair market value
on the date of grant. All options must be exercised within ten years of the date
of grant.

     The  stockholders  of the Company  approved the 1994 Incentive Stock Option
Plan on May 9, 1994. At the time of approval,  4,050,000 shares of the Company's
common stock were reserved for issuance  under this plan. In 1997, an additional
3,150,000  shares of the Company's common stock were reserved for issuance under
this plan.  The 1994 Plan,  administered  by the  Compensation  Committee of the
Board of  Directors,  provides for  granting of incentive  awards in the form of
stock options to directors,  executive officers and employees of the Company and
its subsidiaries.  Awards under the plan must be granted within ten years of the
effective date of the 1994 Plan.  Options granted may be either  incentive stock
options  within the  meaning  of Section  422 of the  Internal  Revenue  Code or
nonqualified options. The right to purchase shares vests over a five to ten year
period,  beginning on the date of grant.  Stock options must be exercised within
ten years from date of grant.  Stock  options are issued at market  price at the
grant date. Shares available for grant at December 31, 1998 were 3,327,089.

    Transactions under all plans are summarized as follows:

                                                Number of          Weighted
                                                  shares           average
                                                   under           exercise
                                                  option             price
                                             ----------------   ----------------
      Outstanding at December 31, 1995.          1,028,445       $      9.07
         Exercised.....................            (13,763)            10.14
         Canceled......................            (88,976)            11.57
         Granted.......................          1,081,725             13.58
                                             ----------------   ----------------
      Outstanding at December 31, 1996.          2,007,431             11.39
         Exercised.....................            (62,754)            11.52
         Canceled......................           (151,898)            15.47
         Granted.......................          1,245,402             22.10
                                             ----------------   ----------------
      Outstanding at December 31, 1997.          3,038,181             15.57
         Exercised.....................           (163,127)             7.67
         Canceled......................           (134,875)            21.86
         Granted.......................            987,910             33.80
                                             ----------------   ----------------
      Outstanding at December 31, 1998.          3,728,089       $     20.54
                                             ================   ================

      Options exercisable at December 31:
         1996..........................            410,841       $      9.98
         1997..........................            801,970             12.07
         1998..........................          1,237,201             15.43

      Weighted average, grant date fair                         Weighted average
      value of options granted during:                            fair value
                                                                ----------------
         1996..........................          1,081,725       $      6.25
         1997..........................          1,245,402             10.15
         1998..........................            987,910             15.50


                                December 31, 1998
- --------------------------------------------------------------------------------
                Options Outstanding                      Options Exercisable
- ----------------------------------------------------   -------------------------

                                         Weighted
                              Weighted    average                     Weighted
                  Number of   average    remaining      Number of     average
   Exercise        options    exercise   contractual     options      exercise
    price        outstanding    price    life (yrs)     exercisable     price
- --------------   -----------  ---------  -----------    -----------   ---------
$ 1.55 -  1.55       18,000    $  1.55       1                 ---    $   1.55
  9.67 - 13.17      731,315       9.83       6             455,872        9.82
 13.33 - 21.08      929,185      13.74       7             420,615       13.67
 21.67 - 21.67      982,356      21.67       8             262,692       21.67
 22.25 - 35.00    1,067,233      33.09       9              98,022       32.39
                 -----------                            -----------
  1.55 - 35.00    3,728,089      20.54       8           1,237,201       15.43

                                      -F14-

<PAGE>

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions:

                                           1998        1997        1996
                                        ----------  ----------  ----------
      Dividend expense yield                   0%          0%          0%
      Expected life.........              5 years   7.2 years   7.2 years
      Expected volatility...                33.3%       30.6%       30.6%
      Risk-free interest rate                5.6%        6.3%        6.3%

      Employee stock purchase plan

     The Company's stock purchase plan became  effective March 13, 1995 upon the
first date of  registration  of the  Company's  Common  Stock.  The plan permits
substantially all domestic employees and employees of designated subsidiaries to
acquire the  Company's  Common Stock at a purchase  price of 85% of the lower of
the market price at the beginning or the end of the  participation  period.  The
semi-annual  periods begin on October 1 and April 1 of each year.  Employees may
designate  up to 15% of their  compensation  for the  purchase of Common  Stock.
Common Stock reserved for future employee purchases  aggregated 1,876,875 shares
at December 31, 1998.  Shares  issued under this plan were 124,258 in 1998.  The
fair  value  of  the  employees'   purchase   rights  was  estimated  using  the
Black-Scholes model with the following assumptions:

                                           1998        1997        1996
                                        ----------  ----------  ----------
      Dividend expense yield                   0%          0%          0%
      Expected life.........             6 months    6 months    6 months
      Expected volatility...                  40%         50%         60%
      Risk-free interest rate               5.31%       5.22%       5.22%


      Weighted average, grant date
      fair value of purchase
      rights  granted under the            Number of      Weighted average
      Employee Stock Purchase Plan:          shares          fair value
                                        ----------------  ----------------
           1996.....................          140,403        $   4.77
           1997.....................          117,373            7.68
           1998.....................          130,119            7.74

     Stockholders' rights plan

     The Board of  Directors  and  stockholders  approved and adopted the Rights
Agreement prior to the Company's  initial public offering (the  "offering").  On
March 13,  1995,  the  effective  date of the  offering,  the Board of Directors
declared a dividend  distribution  of one common share  purchase  right for each
outstanding  share of Common Stock. The rights become  exercisable under certain
conditions  involving  acquisition of the Company's Common Stock.  Under certain
other conditions  where the Company is consolidated or merged,  each holder of a
right shall have the right to  receive,  upon  exercise of the right,  shares of
Common Stock of the Company,  or acquiring company,  having a value of twice the
exercise  price of the right.  The rights  expire on March 13, 2005,  and may be
redeemed  in whole by the Company  for $.01 per right.  The rights are  excluded
from earnings per share  computations  because they qualify as contingent shares
and therefore are excluded as long as the  conditions  that require  issuance of
the shares are not imminent.

Note 10: Employee retirement plan

     The Company has a defined contribution  retirement plan pursuant to Section
401(k) of the Internal Revenue Code.  Substantially all domestic  employees with
at least one year of  continuous  service are  eligible to  participate  and may
contribute up to 15% of their  compensation.  The Board of Directors has elected
to make matching contributions equal to 50% of employee contributions, which may
be  applied  to a  maximum  of 6% of each  participant's  compensation.  Company
contributions vest immediately.  Company  contributions  charged to expense were
$933,000, $799,000 and $686,000 in 1998, 1997 and 1996, respectively.

                                      -F15-

<PAGE>

Note 11: Financial instruments

     Fair value of financial instruments

     The estimated fair value amounts  disclosed  below have been  determined by
the Company using  available  market  information  and  valuation  methodologies
described  below.  However,  considerable  judgment is required in  interpreting
market data to develop these estimates of fair value. Accordingly, the estimates
presented herein are not necessarily  indicative of the amounts that the Company
could  realize  in a  current  market  exchange.  The  use of  different  market
assumptions  could  have a  significant  effect on the  estimates.  For  certain
financial  instruments  of the  Company,  including  cash and cash  equivalents,
accounts  receivable,  accounts  payable and accrued  liabilities,  the carrying
amount  approximates  fair  value  due  to  the  short-term  maturity  of  these
instruments.  The estimated fair values of the other assets (liabilities) of the
Company's remaining  financial  instruments at December 31, 1998 and 1997 are as
follows (in thousands):

                                                 December 31,
                                ------------------------------------------------
                                         1998                     1997
                                ----------------------    ----------------------
                                 Carrying      Fair        Carrying     Fair
                                  Amount       Value        Amount     Value
                                ---------  -----------    ---------  -----------
      Short-term investments    $ 49,158    $  49,158     $ 51,067    $  51,067
      Other assets/liabilities:
         Forward contracts        (1,151)      (1,151)         662          662
         Purchased options         1,194          467          740          816
      Long-term debt......        (4,379)      (3,899)      (5,151)      (4,379)

     The fair values of short-term  investments and foreign  exchange  purchased
option  contracts  were  estimated  based  upon  quotes  from  brokers as of the
applicable  balance sheet date.  Foreign currency forward contracts' fair values
are estimates using quoted exchange rates at the applicable  balance sheet date.
The fair value of long-term  debt was estimated by  discounting  the future cash
flows using rates currently available for debt of similar terms and maturity.

     Foreign currency hedging

     The Company uses foreign currency  forward  contracts to hedge its exposure
on material  foreign  currency  receivables.  The risk of loss  associated  with
forward  contracts is equal to the exchange rate  differential from the time the
contract is entered into until the time it is settled.  These  foreign  currency
forward contracts are for 90 day periods. At December 31, 1998, the Company held
forward contracts with a notional amount of $22.3 million,  a carrying amount of
($1.2) million and a net realized loss of $1.2 million.

     In addition to utilizing  forward  contracts to hedge the Company's foreign
currency  receivables,  the Company has entered into foreign currency  purchased
option  contracts to hedge a  percentage  of planned net foreign  currency  cash
flows.  The maturities on these  instruments  are 12 months or less. At December
31, 1998, the Company held purchased  option contracts with a notional amount of
$50.5 million,  a carrying amount of $1.2 million and a net unrealized  deferred
loss of  $727,000.  The carrying  amount  represents  premiums  deferred and was
recorded in prepaid expenses and other current assets.

     Foreign  currency  forward  and  purchased  option  contracts  reduced  the
Company's net foreign  exchange gain for December 31, 1998 by $1.9 million,  and
reduced the net foreign  exchange  loss for  December  31, 1997 and 1996 by $2.0
million and $674,000, respectively.

Note 12: Segment information

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
an Enterprise and Related  Information,"  which the Company adopted in the first
quarter of 1998. The statement  supersedes SFAS No. 14 "Financial  Reporting for
Segments of a Business  Enterprise",  replacing the "industry  segment" approach
with the "management"  approach. The management approach designates the internal
organization  that is used by  management  for making  operating  decisions  and
assessing  performance as the source of the Company's  reportable  segments.  It
also requires  disclosures  about  products and services,  geographic  areas and
major customers.

                                      -F16-

<PAGE>

     While the  Company  sells  its  products  to many  different  markets,  its
management  has chosen to organize  the Company by  geographic  areas,  and as a
result has determined that it has one reportable  segment.  Substantially all of
the interest income, interest expense, depreciation and amortization is recorded
in  North  America.  Net  sales,   operating  income  and  identifiable  assets,
classified by the major geographic areas in which the Company  operates,  are as
follows (in thousands):

                                                   Years Ended December 31,
                                              ----------------------------------
                                                 1998        1997        1996
                                              ----------  ----------  ----------
Net sales:
North America:
  Unaffiliated customer sales..........       $ 153,435   $ 141,180   $ 114,382
  Geographic transfers.................          32,451      29,128      26,388
                                              ----------  ----------  ----------
                                                185,886     170,308     140,770
                                              ----------  ----------  ----------
Europe:
  Unaffiliated customer sales..........          86,961      66,318      58,108
                                              ----------  ----------  ----------
Asia Pacific:
  Unaffiliated customer sales..........          33,834      33,381      28,225
                                              ----------  ----------  ----------
Eliminations...........................         (32,451)    (29,128)    (26,388)
                                              ----------  ----------  ----------
                                              $ 274,230   $ 240,879   $ 200,715
                                              ==========  ==========  ==========
 
                                              Year Ended
                                               December
                                                  31,
                                              ----------
                                                 1998
                                              ----------
Operating income:
North America..........................       $  44,669
Europe.................................          29,964
Asia Pacific...........................          13,172
Unallocated:
Research and development expenses......         (34,757)
                                              ----------
                                              $  53,048
                                              ==========

     The  Company's  segment  operating  income  disclosure  for  1998  has been
conformed to the presentation required by SFAS No. 131. Management believes that
the cost to develop  comparative  segment operating income information for prior
years would be excessive and accordingly, will not be presented.

                                                   December 31,
                                              ----------------------
                                                 1998        1997
                                              ----------  ----------
Identifiable assets:
North America..........................       $ 204,215   $ 169,895
Europe.................................          29,978      22,472
Asia Pacific...........................          15,593      12,123
                                              ----------  ----------
                                              $ 249,786   $ 204,490
                                              ==========  ==========

Note 13: Commitments and contingencies

     The Company has commitments under noncancelable  operating leases primarily
for office  facilities  and  equipment.  Future  minimum  lease  payments  as of
December  31,  1998,  for  each  of the  next  five  years  are as  follows  (in
thousands):

           1999........................        $   724
           2000........................            557
           2001........................            337
           2002........................            119
           2003........................              5
           Thereafter..................            ---
                                               --------
                                               $ 1,742
                                               ========

                                      -F17-

<PAGE>

     Rent expense under operating leases was  approximately  $2.6 million,  $5.0
million and $4.2 million for the years ended  December 31, 1998,  1997 and 1996,
respectively.

Note 14: Quarterly results (unaudited)

     The  following   quarterly   results  have  been  derived  from   unaudited
consolidated  financial  statements that, in the opinion of management,  reflect
all adjustments  (consisting only of normal recurring adjustments) necessary for
a fair presentation of such quarterly information. The operating results for any
quarter are not  necessarily  indicative  of the results to be expected  for any
future  period.  The unaudited  quarterly  financial  data for each of the eight
quarters in the two years ended  December 31, 1998 are as follows (in thousands,
except per share data):

                                                Three Months Ended
                                  ----------------------------------------------
                                     March       June        Sept.       Dec.
                                      31,         30,         30,         31,
                                     1998        1998        1998        1998
                                  ----------  ----------  ----------  ----------
Net sales.....................    $  65,353   $  67,770   $  67,874   $  73,233
Gross profit..................       49,784      51,681      51,588      55,990
Operating income..............       12,784      13,033      11,994      15,237
Net income....................        8,831       9,198       8,527      10,830
Basic earnings per share......    $    0.27   $    0.28   $    0.26   $    0.33
Weighted average shares              
outstanding-basic.............       32,668      32,800      32,850      32,934
Diluted earnings per share....    $    0.26   $    0.27   $    0.25   $    0.32
Weighted average shares              
outstanding-diluted...........       34,100      34,200      33,950      34,100
 
                                                Three Months Ended
                                  ----------------------------------------------
                                     March       June        Sept.       Dec.
                                      31,         30,         30,         31,
                                     1997        1997        1997        1997
                                  ----------  ----------  ----------  ----------
Net sales.....................    $  54,571   $  60,092   $  60,595   $  65,621
Gross profit..................       42,278      46,083      46,381      51,041
Operating income..............       11,569      12,401      10,717      15,196
Net income....................        7,568       8,581       7,599       9,877
Basic earnings per share......    $    0.23   $    0.26   $    0.23   $    0.30
Weighted average shares              32,475      32,552      32,572      32,651
outstanding-basic.............
Diluted earnings per share....    $    0.23   $    0.26   $    0.23   $    0.29
Weighted average shares              33,450      33,435      33,750      34,003
outstanding-diluted

Note 15: Subsequent event

     In June 1998,  the FASB  issued SFAS No. 133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities."  SFAS No. 133 is effective for all fiscal
quarters of all fiscal  years  beginning  after June 15,  1999;  the Company has
elected to adopt SFAS No.  133 early on January 1, 1999.  SFAS No. 133  requires
that all derivative  instruments be recorded on the balance sheet at fair value.
Changes in the fair value of  derivatives  are  recorded  each period in current
earnings or other  comprehensive  income,  depending on whether a derivative  is
designated as part of a hedge  transaction  and, if it is, depending on the type
of hedge transaction.  For fair-value hedge transactions in which the Company is
hedging changes in an asset's,  liability's,  or firm  commitment's  fair value,
changes in the fair value of the derivative  instrument will generally be offset
in the  income  statement  by  changes  in the hedged  item's  fair  value.  For
cash-flow hedge  transactions in which the Company is hedging the variability of
cash  flows  related  to a  variable-rate  asset,  liability,  or  a  forecasted
transaction,  changes in the fair  value of the  derivative  instrument  will be
reported in other  comprehensive  income. The gains and losses on the derivative
instrument that are reported in other comprehensive  income will be reclassified
as earnings in the periods in which earnings are impacted by the  variability of
the cash flows of the hedged item. The ineffective portion of all hedges will be
recognized in current-period earnings.

     The Company will record an adjustment to reflect all derivative instruments
at fair value as of January 1, 1999. This adjustment will be recorded  through a
net-of-tax cumulative effect type adjustment of approximately $530,000.

                                      -F18-

<PAGE>

 
                                                                    SCHEDULE II


                        NATIONAL INSTRUMENTS CORPORATION

                      VALUATION AND QUALIFYING ACCOUNTS(1)
                                 (In thousands)




Allowance for doubtful accounts

                                     Balance    Provision              Balance
                                       at         for      Write-Offs    at
Year          Description           Beginning   Bad Debt   Charged to  End of
                                    of Period    Expense   Allowances  Period
- ----    ----------------------      ---------  ----------  ----------  --------
1996    Allowance for doubtful      
        accounts                    $  1,601    $  1,490   $    671    $ 2,420
1997    Allowance for doubtful         
        accounts                       2,420       1,914        334      4,000
1998    Allowance for doubtful         
        accounts                       4,000         183        513      3,670

Valuation allowances for excess and obsolete inventory

                                     Balance   Provision               Balance
                                       at      Charged to  Write-Offs    at
Year          Description           Beginning   Cost of    Charged to  End of
                                    of Period    Sales     Allowances  Period
- ----    ------------------------    ---------  ----------  ----------  --------
1996    Valuation allowances for
        excess and                      
        obsolete inventory          $  1,801    $  1,138   $  1,093    $ 1,846
1997    Valuation allowances for
        excess and                     
        obsolete inventory             1,846       1,829        515      3,160
1998    Valuation allowances for
        excess and                     
        obsolete inventory             3,160         ---      1,356      1,804


(1)  Deferred  tax assets  valuation  is omitted as required  information.  This
     information is shown in Note 7 to the consolidated financial statements.


<PAGE>


                                                                   EXHIBIT 11.1


                NATIONAL INSTRUMENTS CORPORATION AND SUBSIDIARIES

                STATEMENTS RE: COMPUTATION OF EARNINGS PER SHARE
                      (In thousands, except per share data)



 

                                                 Years Ended December 31,
                                               1998         1997         1996
                                            ----------   ----------   ----------

Net income                                  $  37,386    $  33,625    $  25,486
                                            ==========   ==========   ==========

Basic earnings per share                    $    1.14    $    1.03    $    0.79
                                            ==========   ==========   ==========

Weighted average shares outstanding-basic      32,832       32,563       32,359
                                            ==========   ==========   ==========

Diluted earnings per share                  $    1.10    $    1.00    $    0.77
                                            ==========   ==========   ==========

Weighted average shares outstanding-                       
diluted                                        34,100       33,656       32,943
                                            ==========   ==========   ==========


Calculation of weighted average shares:
   Weighted average common stock               32,832       32,563       32,359
outstanding-basic
   Weighted average common stock options,
    utilizing the treasury stock method         1,268        1,093          584
                                            ----------   ----------   ----------

Weighted average shares outstanding-
diluted                                        34,100       33,656       32,943
                                            ==========   ==========   ==========


<PAGE>


                                                                    EXHIBIT 21.1

                           Subsidiaries of the Company


(Unless noted as a Texas  corporation,  all  subsidiaries are formed under local
law.)


NI/GSI, Inc., a Texas corporation
N.I. Export (Barbados) Ltd., Barbados
National Instruments (Ireland) Limited, Ireland
National Instruments (Korea) Corporation, Korea
National Instruments Australia Corporation, a Texas corporation
National Instruments Belgium N.V., Belgium
National Instruments Brazil, Brazil
National Instruments Canada Corporation, a Texas corporation
National Instruments Corporation (UK) Limited, United Kingdom
National Instruments de Mexico, S.A. de C.V., Mexico
National Instruments Europe Corporation, a Texas corporation
National Instruments Finland Oy, Finland
National Instruments France Corporation, a Texas corporation
National Instruments Germany GmbH, Germany
National Instruments Gesellschaft m.b.H., Salzburg, Austria
National Instruments Hong Kong Limited, Hong Kong
National Instruments India Corporation, a Texas corporation
National Instruments International Distribution B.V., Netherlands
National Instruments Israel Ltd., Israel
National Instruments Italy s.r.l., Italy
National Instruments Japan Kabushiki Kaisha, Japan
National Instruments Netherlands B.V., Netherlands
National Instruments Netherlands Investments B.V., Netherlands
National Instruments Scandinavia Corporation, a Texas corporation
National Instruments Singapore (PTE) Ltd., Singapore
National Instruments Spain, S.L., Spain
National Instruments Sweden A.B., Sweden
National Instruments Switzerland Corporation, a Texas corporation
National Instruments Taiwan Corporation, a Texas corporation
NI Cayman Islands, Cayman Islands
Shanghai NI Instruments LTD (China)
Travis Investments C.V. (a limited partnership), Amsterdam
Visual Speed Sdn Bhd, Malaysia (subsidiary of NI Singapore)
DATALOG Systeme zur  Messwerterfassung  GmbH & Co. KG, Germany (subsidiary of NI
Germany)
DASYTEC USA, Incorporated (a New Hampshire corporation and subsidiary of DATALOG
Systeme zur Messwerterfassung GmbH & Co. KG)


<PAGE>


                                                                   EXHIBIT 23.1

                         Consent of Independent Accounts


We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statement on Form S-8 of National  Instruments  Corporation  of our report dated
January 22, 1999, appearing on page F-2 of the Form 10-K.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Austin, Texas
March 18, 1999


<PAGE>





<TABLE> <S> <C>
                                      
<ARTICLE>                                  5
<LEGEND>                              
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AND STATEMENTS OF INCOME FILED
AS PART OF THE DECEMBER 31, 1998 FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH REPORT
</LEGEND>                             
<MULTIPLIER>                                            1000
                                            
<S>                                          <C>
<PERIOD-TYPE>                                           Year
<FISCAL-YEAR-END>                                Dec-31-1998
<PERIOD-START>                                   Jan-01-1998
<PERIOD-END>                                     Dec-31-1998
<CASH>                                                51,538
<SECURITIES>                                          49,158
<RECEIVABLES>                                         49,292
<ALLOWANCES>                                           3,670
<INVENTORY>                                           16,454
<CURRENT-ASSETS>                                     174,396
<PP&E>                                               104,856
<DEPRECIATION>                                        38,725
<TOTAL-ASSETS>                                       249,786
<CURRENT-LIABILITIES>                                 40,886
<BONDS>                                                    0
<PREFERRED-MANDATORY>                                      0
<PREFERRED>                                                0
<COMMON>                                                 329
<OTHER-SE>                                           203,855
<TOTAL-LIABILITY-AND-EQUITY>                         249,786
<SALES>                                              274,230
<TOTAL-REVENUES>                                     274,230
<CGS>                                                 65,187
<TOTAL-COSTS>                                         65,187
<OTHER-EXPENSES>                                     155,995
<LOSS-PROVISION>                                           0
<INTEREST-EXPENSE>                                       463
<INCOME-PRETAX>                                       55,800
<INCOME-TAX>                                          18,414
<INCOME-CONTINUING>                                   37,386
<DISCONTINUED>                                             0
<EXTRAORDINARY>                                            0
<CHANGES>                                                  0
<NET-INCOME>                                          37,386
<EPS-PRIMARY>                                           1.14
<EPS-DILUTED>                                           1.10
        


</TABLE>