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, 1996
                                            OR
o     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)

- -------------------------------------------------------------------------------
            Delaware                                       74-1871327
 (State or other jurisdiction of                        (I.R.S. Employer
  incorporation or organization)                      Identification Number)
- -------------------------------------------------------------------------------

   6504 Bridge Point Parkway Austin, Texas                   78730
 (address of principal executive offices)                  (zip code)

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

       Registrant's telephone number, including area code: (512) 338-9119
- -------------------------------------------------------------------------------
     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 as of March 3, 1997, was $348,767,440 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,  have been excluded in that such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.

At March 3,1997, registrant had outstanding 21,651,791 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 13, 1997 (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  and
industrial  automation.  The Company provides flexible  application software and
modular,  multifunction  hardware  that  users  combine  with  industry-standard
desktop computers and workstations to create "virtual instruments."

      A virtual instrument  consists of an industry standard desktop 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 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  believes that giving users  flexibility to create their own virtual
instruments,  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 instruments.

      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,  $.01 par value,  trades
on the Nasdaq National Market tier of the Nasdaq Stock Market under the 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 test and
measurement ("T&M") or industrial automation ("IA"). In research and development
settings,  scientists  and engineers use T&M  instruments to collect and analyze
experimental  data, and IA instruments and  instrumentation  systems to simulate
manufacturing processes or techniques.  In manufacturing systems,  engineers use
T&M  instruments  to test and verify the proper  operation of the products being
manufactured  while IA  instruments  and  instrumentation  systems  monitor  and
control the manufacturing machines and processes.

      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.

                                      -2-

<PAGE>

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  instrument  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.

      In the  1990's,  desktop  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
desktop  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 and C++,  nor  operating  systems such as DOS,
Windows   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 computers to
meet their instrument requirements.

                                       -3-

<PAGE>


The Company's Virtual Instrument Approach

      The  Company  pioneered  a new  instrumentation  approach  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   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 and  instrument  control  hardware/driver  software with GPIB, VXI or serial
instruments to create virtual  instrumentation  systems that meet their specific
instrumentation needs. 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:

      Ease-of-Use and Efficiency

      The Company's virtual instrument application software brings the power and
ease-of-use of desktop 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  and  instrumentation  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.

      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 and  industrial
communications hardware 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 multiplatform  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.


                                      -4-

<PAGE>

      Network and Integrate with Customers' Computing Environments

      The Company's products facilitate connectivity of instruments by utilizing
industry  communication  standards  such as Ethernet  and TCP/IP.  Its  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 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 400 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 and  scientists 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 the four
major instrumentation  types: GPIB, VXI, DAQ and industrial  communications.  In
addition,  the  Company  expects to  continue  to create or adapt  products  for
computer  systems  which  gain  market  acceptance,  such  as  Windows  NT-based
computers.  Customers are provided a range of price/performance  options through
the Company's extensive line of products.

      Provide Worldwide  Marketing and  Distribution.  The Company uses multiple
coordinated  distribution  channels in the major world  markets which it serves.
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  and, as of December  31,  1996,  had 42 sales  offices in the
United  States and 29 sales offices  located 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.


                                      -5-

<PAGE>

      Acquire New  Technologies.  The Company has in the past acquired  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   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 and VXI for the
T&M market and Fieldbus 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.

Products and Technology

      The  Company  offers an  extensive  line of  hundreds  of  instrumentation
products.  Engineers,  scientists and other users in both the T&M and IA markets
can use these  products  with  desktop  computers  and  workstations  to develop
customer-defined  virtual instruments.  The Company's  instrumentation  products
consist  of   application   software,   which  includes   LabVIEW,   LabWindows,
ComponentWorks,  Measure,  BridgeVIEW,  Lookout  and  HiQ,  and  hardware/driver
software,  which includes  GPIB,  VXI, DAQ and  industrial  communications.  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
instrumentation products.


                                      -6-

<PAGE>

      Application Software

      The  Company  offers  a  variety  of  application  software  products  for
developing  instrumentation  applications to meet the different  programming and
computer  preferences of its customers.  LabVIEW,  LabWindows and ComponentWorks
are based on application-specific  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 also have ready-to-use libraries for controlling hundreds
of programmable  instruments,  including serial, GPIB and VXI, and the Company's
plug-in  DAQ  boards.   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.

Platform/Operating      LabVIEW   LabWindows ComponentWorks  Measure   Virtual
System                                                                 Bench
- ------------------      -------   ---------- --------------  -------   -------
PCs:
  DOS                                 x
  Windows 3.x              x          x                       x          x
  Windows 95               x          x           x           x          x
  Windows NT               x          x           x           x          x
  NEC Windows              x          x

Macintosh/Power
Macintosh:
  Mac OS                   x

UNIX Workstations:
  Sun                      x          x
  Hewlett-Packard          x          x

Concurrent PowerMax        x


      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
is designed for instrumentation users who are more comfortable  programming with
conventional,  text-based languages,  such as 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 environment.  Prices for
LabVIEW, LabWindows and ComponentWorks range from $495 to $3,495.

      The  Company  also sells a range of  optional  features  for  LabVIEW  and
LabWindows,  such as advanced analysis libraries and toolkits, at prices ranging
from  $295 to  $1,995.  The  Company  also has a  student  edition  of  LabVIEW,
published and distributed through Prentice Hall. New products introduced in 1996
include updated versions of LabVIEW,  LabWindows, and Measure software. Expected
to ship in 1997 are upgrades of ComponentWorks,  VirtualBench,  and new Internet
Developer Toolkits for LabVIEW, BridgeVIEW, and LabWindows/CVI.


                                      -7-


<PAGE>


      The Company  also offers a class of software  products,  VirtualBench  and
Measure,  that 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. Prices for Measure and
VirtualBench range from $195 to $495.

      The Company offers HiQ on the Macintosh, Power Macintosh, and recently for
Windows 95 and Windows NT as a natural  companion to LabVIEW for modeling,  data
visualization and report generation. HiQ starts at $495 and is also bundled with
LabVIEW in a package called LabSuite.

      Two new software products were added to the Company's product offerings in
1996:  Lookout and  BridgeVIEW.  Both  products  are targeted for the IA market.
Lookout is a non-programming  solution.  BridgeVIEW is based on LabVIEW but with
specific  functionality for the IA market. Lookout is available for Windows 3.1,
Windows 95 and  Windows NT  starting  at $1,795.  BridgeVIEW  is  available  for
Windows 95 and Windows NT starting at $3,995.

       Hardware/Driver Software

      The Company's hardware and driver software products include GPIB, VXI, DAQ
and industrial communications.  Although each of these instrumentation types can
be  used  in T&M  applications,  GPIB  and  VXI are  most  widely  used.  For IA
applications,  users  typically  design  instrumentation  systems  using DAQ and
industrial communications products, although some GPIB and VXI hardware products
are applicable. 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.


Platform/Operating          GPIB         DAQ         VXI      Ind.Comm.
System
- --------------------        ----         ---         ---      ---------
Desktop and Portable
PCs:
  DOS                         x           x           x           x
  Windows 3.x                 x           x           x           x
  Windows 95                  x           x           x           x
  Windows NT                  x           x           x           x
  NEC Windows                 x           x

Macintosh/Power
Macintosh:
  Mac OS                      x           x           x

UNIX Workstations:
  Sun                         x           x           x
  Hewlett-Packard             x

Other:                        x                       x

      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 board.  Driver software controls
the board and the transfer of data between the instrument and the computer.

      The Company began selling GPIB products in 1977 and is a leading  supplier
of GPIB interface boards and driver software. The Company's diverse portfolio of
hardware and software  products for GPIB instrument  control are 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 a product for controlling GPIB instruments using
the computer's standard parallel port.


                                      -8-

<PAGE>

      Portability  of GPIB  application  programs is  provided by the  Company's
NI-488.2 driver software,  considered a de facto industry standard.  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.

      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 driver software. The VXl plug-and-play Systems Alliance,
an industry group comprised of over 50 VXI  instrumentation  vendors,  including
Hewlett-Packard  Company,  has designated  the Company's  LabVIEW and LabWindows
software as core technologies for developing special drivers used to control VXI
instruments.

      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.   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
and for the Sun SPARCstation.  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.

      Industrial Communications  Interfaces. In 1996, the Company began shipping
two new industrial automation software products: Lookout and BridgeVIEW. Lookout
was obtained through the Company's acquisition of Georgetown Systems Inc. in the
second quarter of 1996. Lookout is a man machine  interface/supervisory  control
and data acquisition  ("SCADA") software product that requires no programming or
script writing. Available in a 16-bit version for Windows 3.1 at the time of the
Georgetown acquisition,  the Company released later in 1996 a 32-bit version for
Windows 95 and  Windows  NT.  Lookout  provides  a  scaleable  architecture  for
applications ranging from simple man machine interfaces 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.

      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 and LabWindows.  Prices begin
at $245.


                                      -9-

<PAGE>

      Customer Training Courses

      The Company offers fee-based  training classes and self-paced  course kits
for its LabVIEW,  LabWindows, GPIB, VXI and DAQ products. A LabVIEW introductory
instructional  video  is  also  available.  Prices  range  from  $95 to  $1,895,
depending  on course and  location.  On-site  courses  are  quoted per  customer
requests.

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. The Company approaches both the T&M and IA markets with essentially the
same products and sales, marketing and customer support strategies.

Customers

      The Company has a broad  customer  base,  with no customer  accounting for
more than 3% of the Company's sales in 1996, 1995 or 1994.


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  and  publicity   materials  that  the  Company  uses
worldwide. The primary marketing/sales tool is the Company's catalog,  published
annually and  distributed  worldwide.  The 1997  catalog is over 600 pages,  and
includes hundreds of products,  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  English
(anglicized),  French,  German,  Spanish and  Japanese.  Product  and  technical
information  regarding the Company is also provided  through the Company's World
Wide Web site on the Internet and through interactive CD-ROM.

      The Company also uses its quarterly Instrumentation  Newsletter to educate
current and prospective  customers about its products and  technologies.  In its
eighth  year  of  publication,  the  24-page  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. In 1996, the Company launched its AutomationVIEW Newsletter
targeted at IA prospects and customers.

      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
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.


                                      -10-

<PAGE>


Sales and Distribution

      The Company  distributes  its  software and  hardware  products  through a
direct  sales  organization,   independent  distributors,   OEMs,  VARs,  system
integrators and  consultants.  As of December 31, 1996, the Company had 42 sales
offices in the United  States,  29 sales  offices  outside the United States and
more  than  25  distributors   worldwide.   International  sales  accounted  for
approximately  43%, 44% and 39% of the Company's revenues in 1996, 1995 and 1994
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.  As of December 31, 1996,
the  Company  had 42 sales  offices  located in the United  States and 29 direct
international  sales offices  located in Australia,  Austria,  Belgium,  Canada,
Denmark,  Finland, France, Germany, Hong Kong, Israel, Italy, Japan, Mexico, the
Netherlands,  Norway, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan
and the United Kingdom. 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 1996, and they
could continue to do so. 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.  As of
December  31,  1996,  the  Company  had  distributors  located  in more  than 25
countries.

      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. As of December 31, 1996, the
Company's  Alliance  Program  had  over  400  members.   The  Company  publishes
directories 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.

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 one-year
warranty on hardware  products and a 90-day warranty on 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.  The  Company  has also added  self-paced  course kits and a
LabVIEW introductory training video to its educational product offerings.

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  proprietary
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,  1996,  the  Company  employed  279 people in product
research and development.  The Company's research and development  expenses were
$24.4  million,  $20.0  million  and  $15.2  million  for  1996,  1995 and 1994,
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, 1996,  the Company held 19 United States  patents and 9
patents  in foreign  countries,  and had 61 patent  applications  pending in the
United States and foreign  countries.  The Company's patents expire from 2007 to
2014. Ten of such United States patents are software patents related to LabVIEW,
and cover  fundamental  aspects of the  graphical  programming  approach used in
LabVIEW.   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.  During 1996,
the Company completed implementation of a European centralized inventory plan to
address this issue at the European 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,  1996,  the Company  had 1,142  full-time  employees,
including  279 in  research  and  development,  519 in sales and  marketing  and
customer support,  195 in manufacturing  and 149 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 and sales and marketing activities
are conducted at a Company-owned  136,000 square foot building in Austin, Texas.
The Company also leases  approximately  27,700  square feet of office space also
located  in Austin,  Texas to house  additional  research  and  development  and
marketing personnel.

      The Company  owns 69 acres of land in north  Austin,  Texas,  at which its
manufacturing,  research  and  development,  and certain  other  operations  are
conducted  in a 140,000  square foot  facility.  The Company is currently in the
process of designing and developing an office building to be located next to the
manufacturing  facility,  on which  construction is planned to begin in 1997. In
addition,  the Company presently plans to construct other buildings at this site
and to move the balance of its Austin-based operations to this new site.

      As of December 31, 1996, 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.  The  Company  plans to  continue  to expand  its field  sales and
support facilities worldwide where appropriate to further penetrate existing and
new market  opportunities.  The Company  believes  that  suitable  additional or
substitute  space will be available as in the  foreseeable  future in the United
States.


ITEM 3.     LEGAL PROCEEDINGS

            Not Applicable.


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

            The  information  required by this Item is incorporated by reference
to the Company's Proxy Statement.

                                      -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 following table
sets forth for the periods  indicated  the high and low  closing  prices for the
Common Stock, as reported by Nasdaq:

                                                            High       Low
                  1996
      First Quarter 1996                                    21 1/2     17
      Second Quarter 1996                                   24 1/2     20 3/4
      Third Quarter 1996                                    29 1/4     21 1/4
      Fourth Quarter 1996                                   32         26 1/2

                  1995
      First Quarter 1995 (from March 13, 1995)              22 3/4     14 1/2
      Second Quarter 1995                                   21 1/8     17
      Third Quarter 1995                                    22         17 1/2
      Fourth Quarter 1995                                   20 1/4     18



      As of March 3, 1997,  there were 568 holders of record of the Common Stock
and approximately 2,700 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  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 foreseeable 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,
                               -------------------------------------------------
                                1996      1995      1994       1993       1992
                               --------  --------  -------   ---------   -------
                                       (in thousands, except per share data)
Statements of Income Data:
Net sales:..............
  North America.........    $  114,382 $  93,001 $  77,333 $   65,190  $ 51,340
  Europe................        58,108    51,145    38,505     31,631    25,732
  Asia Pacific..........        28,225    20,673    11,165      8,707     5,754
                               --------  --------  --------  ---------   -------
  Consolidated net sales       200,715   164,819   127,003    105,528    82,826

Cost of sales...........        49,755    39,525    30,627     25,526    20,586
                               --------  --------  --------  ---------   -------
  Gross profit..........       150,960   125,294    96,376     80,002    62,240
                               --------  --------  --------  ---------   -------

Operating expenses:
  Sales and marketing...        72,067    63,733    49,957     41,571    38,998
  Research and development      24,387    19,991    15,163     11,761    10,725
  General and administrative    17,129    15,071    11,414      9,370     6,938
                               --------  --------  --------  ---------   -------
  Total operating expenses     113,583    98,795    76,534     62,702    56,661
                               --------  --------  --------  ---------   -------

  Operating income......        37,377    26,499    19,842     17,300     5,579

Other income (expense):
  Interest income.......         2,405     1,635       240        23          7
  Interest expense......          (844)     (875)     (542)     (681)      (805)
  Foreign exchange (loss)
   gain, net.............         (899)      150     1,556      (785)       (51)
                               --------  --------  --------  ---------   -------
  Income before income
    taxes.............          38,039    27,409    21,096     15,857     4,730

Provision for income taxes      12,553     9,986     8,129      5,782     2,395
                               --------  --------  --------  ---------   -------

  Net income............    $   25,486 $  17,423 $  12,967 $   10,075  $  2,335
                               ========  ========  ========  =========   =======

Earnings per share......    $     1.16 $    0.83 $    0.71 $     0.55  $   0.13
                               ========  ========  =========   =======  ========
Weighted average shares
 outstanding.............       21,962    20,949    18,322     18,289    18,270
                               ========  ========  ========  =========   =======

                                                 December 31,
                               -------------------------------------------------
                                1996      1995       1994      1993      1992
                               --------  --------   -------  ---------  --------
                                               (in thousands)
Balance Sheet Data:
Cash and cash equivalents      $30,211   $12,016   $ 7,526   $  4,443  $  1,280
Short-term investments..        48,956    37,765       ---        ---       ---
Working capital.........        99,294    74,546    26,869     20,016     9,022
Total assets............       169,225   137,102    70,751     51,275    41,212
Long-term debt, net of
current portion .......          9,175    11,603     9,083      9,137     5,850
Total stockholders' equity     126,953    98,736    40,474     27,379    17,019

                                      -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  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 end-customer and often is not known to the Company
at  the  time  of  sale.  The  Company  approaches  both  markets  equally  with
essentially the same products which are used in a variety of  applications  from
research and  development  to production  testing and  industrial  control.  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 1996, 1995
or 1994.

      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,
                                    ---------------------------------------
                                       1996         1995           1994
                                    -----------  ------------   -----------
Net Sales
  North America.................         57.0%        56.4%          60.9%
  Europe........................         29.0         31.1           30.3
  Asia Pacific..................         14.0         12.5            8.8
                                    -----------  ------------   -----------
  Consolidated net sales........        100.0        100.0          100.0
Cost of sales...................         24.8         24.0           24.1
                                    -----------  ------------   -----------
  Gross profit..................         75.2         76.0           75.9
Operating expenses:
  Sales and marketing...........         35.9         38.7           39.3
  Research and development......         12.2         12.1           12.0
  General and administrative....          8.5          9.1            9.0
                                    -----------  ------------   -----------
    Total operating expenses....         56.6         59.9           60.3
                                    -----------  ------------   -----------
    Operating income............         18.6         16.1           15.6
Other income (expense):
  Interest income ..............          1.2          1.0            0.2
  Interest expense..............         (0.4)        (0.5)          (0.4)
  Foreign exchange (loss) gain, net      (0.4)         0.1            1.2
                                    -----------  ------------   -----------
  Income before income taxes....         19.0         16.7           16.6
Provision for income taxes......          6.3          6.1            6.4
                                    -----------  ------------   -----------

   Net income...................         12.7%        10.6%          10.2%
                                    ===========  ============  ===========


                                      -18-

<PAGE>

      Net Sales.  In 1996,  a  continued  increase  in demand for the  Company's
products  generated a 23%  increase  over 1995 in net sales which  follows a 30%
increase from 1994 to 1995. This year marks the thirteenth  consecutive  year of
annual sales  growth  exceeding  20%. 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,  and an expanded
customer  base.  The  relatively  higher  rate of growth  in 1995 was  primarily
attributable  to  significant   investments   which  the  Company  made  in  its
international sales and marketing  operations during 1994 and 1995 including the
opening  of five Asia  Pacific  sales  offices as well as  increasing  localized
products for international markets.

      North  American  revenue was $114 million in 1996, an increase of 23% from
1995,  following  a 20%  increase  in 1995 over 1994.  European  revenue was $58
million,  an  increase of 14% over 1995,  following a 33%  increase in 1995 from
1994. Asia Pacific revenue grew 37% to $28 million, following an 85% increase in
1995 over 1994 levels.  International sales (sales to customers outside of North
America) accounted for 43%, 44% and 39% of the Company's  consolidated net sales
for 1996, 1995 and 1994,  respectively.  The decline in European sales growth in
early 1996, experienced by many other technology companies during the past year,
which  resulted  in a 2%  decrease  in sales  in the  first  quarter  of 1996 is
attributable  primarily to the generally weak state of the European  economy and
to the delayed release of certain localized products. European sales improved in
the later half of 1996 with 21% sales growth in the fourth quarter  resulting in
14% growth for the year ended  December 31, 1996. The growth in the Asia Pacific
region is driven by increased  customer  acceptance  of  localized  products and
support,  particularly  in Japan,  and the  opening of direct  sales  offices in
Singapore,  South  Korea and Taiwan in late 1994 and in Hong Kong in early 1995.
The  Company  intends to  continue  to expand its  international  operations  by
increasing market presence in existing markets, completing the implementation of
a Japanese and centralized  European  information  system, and continuing to use
distributors  to sell its  products in  countries in which the sales volume does
not justify direct sales  activities.  The Company  anticipates sales outside of
North  America to continue to represent a  significant  and possibly  increasing
portion of its revenues.

      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 U.S.  dollars.  These  dynamics  have
adversely  affected  revenue growth in  international  markets in 1996, and they
could  continue to do so. The Company has a hedging  program  which  reduces the
effect of exchange rate fluctuations but does 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.

      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
1995 and 1996 this weighted  average value of the U.S.  dollar  increased by 2%,
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 1996 had been
the same as that in 1995,  the Company's  consolidated  net sales for 1996 would
have been  $205  million  representing  an  increase  of $5  million  or 2.5% of
consolidated net sales which represents 24%  consolidated  sales growth.  If the
weighted  average  value during 1996 and 1995 had been the same as that in 1994,
the comparable sales growth factors would have been 24% growth in 1996 over 1995
and 25% growth in 1995 over  1994.  Since  most of the  Company's  international
operating  expenses are also incurred in local currencies the change in exchange
rates has a corresponding effect on operating expenses. As of February 28, 1997,
the weighted  average value of the  currencies  in which the Company  operates a
direct sales office  versus the U.S.  dollar has increased by 6.8% from December
31, 1996.  The  preceding  proforma  amounts and  percentages  are presented for
comparison  purposes and are not a reflection of actual results.  If the current
trend in exchange rates  continues  throughout  1997, it will have the effect of
lowering  the U.S.  dollar  equivalent  of  international  sales  and  operating
expenses.


                                      -19-

<PAGE>

       Gross Profit. As a percentage of sales,  gross profit  represented 75.2%,
76.0%  and 75.9% in 1996,  1995 and  1994,  respectively.  The  relatively  high
software content of the Company's  products is demonstrated in the gross margins
achieved by the Company.  The relatively lower margin in 1996 is a result of the
foreign  exchange effect on sales during 1996, as discussed above, and increased
costs from the  outsourcing  of software  duplication  to a  third-party  vendor
during the first three  quarters  of 1996.  There can be no  assurance  that the
Company will maintain the 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.   In  addition,   the  Company   completed
centralization of its European inventory at a third-party warehouse in Amsterdam
during 1996 and is already seeing  improvements  in its inventory  management in
the European region. During 1997, the Company expects to transition its Japanese
operations  to a new inventory  management  system in  conjunction  with the new
information  system  being  implemented.  There  can be no  assurance  that  the
inventory  management  improvements  will  continue,  that the Company  will not
experience  order  processing or product shipment delays in connection with this
transition, or that anticipated benefits will actually occur.

      Sales and  Marketing.  Sales and marketing  expense in 1996  increased 13%
from 1995,  which followed an increase of 28% in 1995 from 1994. The increase in
these   expenses  in  absolute   amounts  during  1996  and  1995  is  primarily
attributable  to programs to increase the  Company's  international  presence in
both the European and Asia Pacific  markets and increases in sales and marketing
personnel both internationally and in North America. Sales and marketing expense
as a percentage of revenue declined to 35.9% of revenue during 1996, following a
decline in 1995 to 38.7% from 39.3% in 1994.  The Company  continues  to benefit
from reduced  promotional  costs as a result of  converting  to more  electronic
media such as the Company's interactive CD-ROM application,  InstrupediaTM, more
cost-effective  demonstration disks and the use of the  InstrumentationWeb,  the
Company's World Wide Web server accessed through the Internet.

      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,  increasing  product  demonstration  costs and the  timing of
domestic and international conferences and trade shows.

      Research and Development.  Research and development expense as reported in
1996  increased  22%  compared to 1995.  When  adjusted for the  acquisition  of
Georgetown Systems,  Inc. ("GSI") and another software  acquisition during 1996,
which is discussed  below,  research and  development  expense grew 14% in 1996,
following  a 32%  increase  in 1995 over 1994.  The  increase  in  research  and
development  expenditures  (excluding  the GSI  acquisition  costs  in  1996) in
absolute  amounts in each period was  primarily  due to the hiring of additional
product development  engineers.  The decline in research and development expense
as a  percentage  of  revenue is due to  increased  capitalization  of  software
development  costs as discussed  below.  The Company believes that a significant
investment in research and development is required to remain competitive.

      The Company  capitalizes  software  development  costs in accordance  with
Statement of Financial  Accounting  Standards No. 86. 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 $2.1 million,  $1.2 million,  and $945,000 during 1996, 1995 and
1994,  respectively.  The increase in  amortization  expense is due primarily to
amortization of development costs capitalized as a result of the GSI and imaging
acquisition  software purchases.  Software  development costs capitalized during
such years were $3.0  million,  $793,000  and $1.1  million,  respectively.  The
significant  items  capitalized  in 1996  include  BridgeVIEW,  LabVIEW  4.0 and
purchased  software  development  costs. The levels of  capitalization  in prior
years are  primarily a result of  completing  significant  upgrade  projects for
LabVIEW and LabWindows/CVI.

                                      -20-

<PAGE>

      General and Administrative.  General and administrative  expense increased
14% from  1995,  which  followed  an  increase  of 32% in 1995  from  1994.  The
increased  spending  in  absolute  dollars  in  1996  was  primarily  due to the
increased sales volume and the related supporting activities and also due to the
costs of supporting the Company's  worldwide  management  information  system in
North America and Europe.  The increased  spending in absolute dollars from 1994
to 1995 was  attributable  to  expenses  incurred in North  America  relating to
upgrading the Company's  management  information  systems,  the costs associated
with opening the new Asia Pacific  sales  offices,  and the  increased  spending
associated  with the  centralization  of the  Company's  European  warehouse and
administrative operations. General and administrative expense as a percentage of
revenue declined to 8.5% of revenue during 1996. This decline is attributable to
the  efficiencies in North America and Europe achieved  primarily as a result of
the implementation of the new management information system. The Company expects
that  general and  administrative  expense in future  periods  will  increase in
absolute amounts and will fluctuate as a percentage of net sales.

      Interest  Income and Expense.  Interest  income in 1996 increased 47% from
1995,  which  followed  an  increase of 581% in 1995 from 1994 due to the income
from the  investment  of proceeds  from the  Company's  issuance of common stock
under an initial public  offering in March 1995.  During 1996,  interest  income
continued  to increase as a result of a full year of invested  proceeds and also
due to the  investment  of cash  generated  from  operations.  Interest  expense
decreased  4% from 1995,  which  followed  an increase of 61% in 1995 from 1994.
Interest expense represents less than one percent of net sales and fluctuates as
a result of bank  borrowings and interest  terms thereon.  The large increase in
interest  expense from 1994 to 1995 is due to increased bank  borrowings for the
manufacturing facility completed in 1995.

      Foreign Exchange  Gain/Loss.  The Company experienced net foreign exchange
losses of $899,000  during 1996,  compared to gains of $150,000 and $1.6 million
in 1995 and 1994,  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.  The loss
in 1996 is  primarily  attributable  to the  strengthening  of the  U.S.  dollar
against  the  Japanese  yen  and  correlates  to the  1994  gain  when  the  yen
appreciated dramatically against the dollar.

      The Company utilizes foreign currency forward exchange contracts against a
majority  of  its  intercompany  and  certain   European   third-party   foreign
currency-denominated  receivables in order to reduce its exposure to significant
foreign currency  fluctuations.  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.  If the  strengthening  of the
U.S.  dollar that occurred  throughout  1996 continues in 1997, the Company will
continue to experience  significant  foreign  exchange losses due to the foreign
exchange risks that are not addressed by the Company's hedging strategy.

      The  Company  typically  limits  the  duration  of  its  foreign  exchange
contracts to 90 days and does not currently hedge anticipated transactions.  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
contracts and hedged positions.

     Provision  for Income Taxes.  The  provision  for income taxes  reflects an
effective tax rate of 33%, 36% and 39% in 1996, 1995 and 1994, respectively. The
decrease in the effective tax rate for 1996 resulted from a change in the mix of
income among taxing  jurisdictions and utilization of tax credits for taxes paid
in higher tax rate  jurisdictions.  The decrease from 1994 to 1995 resulted from
income tax benefits  attributable  to the Company's  foreign sales  corporation,
utilization of foreign net operating loss  carryforwards  and higher  nontaxable
interest income.

      At December 31, 1996,  five of the Company's  subsidiaries  had available,
for  income  tax  purposes,   foreign  net  operating  loss   carryforwards   of
approximately  $963,000,  of which  $618,000  expire  between 1999 and 2005. The
remaining $345,000 of loss carryforwards may be carried forward  indefinitely to
offset future taxable income in the related tax jurisdictions.


                                      -21-

<PAGE>


Liquidity and Capital Resources

      The Company is currently financing its operations and capital expenditures
through cash flow from operations.  Historically,  the Company also financed its
capital  expenditures,  such as the new  manufacturing  facility  constructed in
1995, through borrowings from financial institutions.  At December 31, 1996, the
Company had working capital of approximately $99 million compared to $75 million
at December  31,  1995.  The  increase in working  capital is  reflected  in the
increase of cash and cash  equivalents  of $18 million from December 31, 1995 to
December 31, 1996, because of cash flow generated from operating activities.

      Accounts receivable increased to $33 million at December 31, 1996 from $29
million at December 31, 1995,  as a result of higher  sales  levels.  Receivable
days  outstanding of 57 days at December 31, 1996 represent an improvement  over
59 days outstanding at December 31, 1995.  Consolidated  inventory balances have
decreased  to $12 million at December  31, 1996 from $15 million at December 31,
1995. Inventory turns of 3.7 per year represent an improvement over turns of 2.7
per year at  December  31,  1995 and  indicate  the  Company's  improvements  in
inventory management occurring at the manufacturing facility in Austin, Texas as
well as at the centralized European warehouse in Amsterdam.

      Cash used for  investing  activities in 1996 includes $6.8 million for the
purchase of property and equipment, capitalization of software development costs
of  $1.6  million,  net  short-term  investment  purchases  of $11  million  and
acquisition  costs of $1.2  million  for the  purchases  of GSI and the  imaging
acquisition  software  technology.  The Company is  currently  in the process of
designing  and  developing  an  office  building  to  be  located  next  to  its
manufacturing  facility in Austin,  Texas.  It is currently  anticipated  that a
significant  portion of the construction costs will be paid out of the Company's
existing  working  capital with the remaining  costs being funded through credit
from the Company's  current  financial  institutions.  The Company estimates the
total cost for the new building,  including  furniture,  fixtures and equipment,
will range from $30  million  to $35  million  with  approximately  $27  million
expected to be incurred during 1997 and the remainder in early 1998. The Company
has entered into firm  commitments  of  approximately  $2.5 million for building
design and site  development  costs.  The Company is not  committed to spend the
remaining  amounts and the actual  level of  spending  may vary  depending  on a
variety of factors including site development issues,  progress of the Company's
third-party contractors and availability of resources.

   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 $31.7 million credit agreement with NationsBank
of Texas,  N.A. which consists of (i) an $8.0 million  revolving line of credit,
(ii) a $7.5 million  line of credit for new  equipment  purchases,  (iii) a $3.9
million loan to finance  equipment  purchased prior to 1993, (iv) a $3.8 million
loan to finance the Company's Millenium office building located in Austin, Texas
and (v) an $8.5  million loan to finance the  recently  completed  manufacturing
facility. As of December 31, 1996, the Company had no outstanding balances under
the revolving and new equipment lines of credit, $488,000, $3.3 million and $6.8
million,  under  such  other  credit  facilities,  respectively.  Subsequent  to
December 31, 1996 the Company paid off the  equipment  loan and  Millenium  loan
which leaves only the  manufacturing  facility loan  outstanding.  The revolving
line of credit  expires  on June 30,  1998 and the  equipment  line of credit is
available for draws until June 30, 1997. 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 borrowing activity.

      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.



                                      -22-

<PAGE>


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; 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.  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,  having a material adverse impact on the Company's  operating results.
In addition,  the Company serves a number of industries such as  semiconductors,
telecommunications,  aerospace,  defense and  automotive  which are  cyclical in
nature.  Downturns in these  industries  could have a material adverse effect on
the Company's operating results.

      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 1997 would not exceed  revenues from the fourth  quarter of 1996. The
Company's results of operations 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.

      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 on a timely
basis,  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  efforts  to  increase   international   market  penetration  will  be
successful.

      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 proprietary 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  dominance  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.


                                      -23-

<PAGE>

      Management Information System Limitations.  The Company does not currently
have an integrated worldwide management information system. While the Company is
in the process of implementing a new worldwide system, the existing  information
resources have at times inhibited management's ability to manage certain aspects
of the  Company's  operations  in a timely  manner.  The Company  has  completed
implementation  of the system for North  America.  Implementation  for  European
operations began in October 1995 with the centralization of European warehousing
which was completed in July 1996. The centralization of administrative functions
in Europe will continue  until  mid-1997.  The Company is in the early stages of
implementation for its Japanese operation which will be ongoing throughout 1997.
All of the Company's  Asia Pacific  operations are currently  using  independent
management   information  systems.   Until  the  new  worldwide  system  can  be
implemented in this region, the growth of the Company's Japanese  operations may
be inhibited by the  deficiencies of its current system.  The Company is working
to achieve a  worldwide  management  information  system that will allow for the
consolidation  of common  functions 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.

       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  European  economies,  particularly  the French and  German  economies,  are
experiencing  weak  conditions.   In  addition,   recent  indicators  suggest  a
struggling  Japanese  economy.  There can be no assurances  that these  economic
conditions will improve or stabilize in 1997 and  accordingly  these factors may
affect  the  Company's  direct  sales  offices  located in these  countries  and
negatively impact future consolidated sales and operating results.

      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.  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.

      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 affect 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  affect 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,   product  development  and  operational
personnel with  experience in managing large and rapidly  changing  companies as
well as training, motivating and supervising the employees.  Competition for key
personnel  is intense 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.



                                      -24-

<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.


I
TEM 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.



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



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

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



                                     -25- .

<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.
             10.4*   Loan  Agreement  dated  as of July  6,  1993,  between  the
                     Company  and  NationsBank  of Texas,  N.A.,  as amended and
                     supplemented.
             10.5**  Loan  Agreements  dated as of June 27,  1996,  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 Public Accountants.
             24      Power of Attorney (see page 27).

                  *  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, 1996.


      (b)   Reports on Form 8-K.

            Not Applicable.

      (c)   Exhibits

            See Item 14(a)(2) above.


                                      -26-


<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 27, 1997                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 Joel
B. Rollins, 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           March 27, 1997
Dr. James J. Truchard   President (Principal Executive Officer)
- -------------------------------------------------------------------------------

/s/ Joel B. Rollins   Vice President, Finance, Chief Financial   March 27, 1997
Joel B. Rollins      Officer and Treasurer (Principal Financial
                             and Accounting Officer)
- -------------------------------------------------------------------------------


/s/ Jeffrey L. Kodosky              Director                     March 27, 1997
Jeffrey L. Kodosky
- -------------------------------------------------------------------------------

 /s/ William C. Nowlin, Jr.         Director                     March 27, 1997
William C. Nowlin, Jr.
- --------------------------------------------------------------------------------

 /s/ L. Wayne Ashby                 Director                     March 27, 1997
L. Wayne Ashby
- -------------------------------------------------------------------------------

                                    Director                     March __, 1997
Dr. Donald M. Carlton
- -------------------------------------------------------------------------------

/s/ Peter T. Flawn                  Director                      March 27,1997
Dr. Peter T. Flawn
- -------------------------------------------------------------------------------

/s/ Gerald T. Olson                 Director                     March 27, 1997
Gerald T. Olson

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


                                      -27-


<PAGE>


                        NATIONAL INSTRUMENTS CORPORATION
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                        Page No.
Financial Statements:
Report of Independent Accountants                                          F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995               F-3
Consolidated Statements of Income for the Three Years Ended
   December 31, 1996                                                       F-4
Consolidated Statements of Cash Flows for the Three Years
   Ended December 31, 1996                                                 F-5
Consolidated Statements of Stockholders' Equity for the Three
  Years Ended December 31, 1996                                            F-6
Notes to Consolidated Financial Statements                                 F-7

Financial Statement Schedules:
For the Three Years Ended December 31, 1996
      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.







                                       F-1

<PAGE>




                        Report of Independent Accountants


To the Board of Directors and Stockholders of National Instruments Corporation

      In our  opinion,  the  consolidated  financial  statements  listed  in the
accompanying  index  present  fairly,  in all material  respects,  the financial
position of National  Instruments  Corporation and its  subsidiaries at December
31, 1996 and 1995, and the results of their  operations and their cash flows for
each of the three years in the period ended  December 31,  1996,  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/Price Waterhouse LLP
Austin, Texas
January 24, 1997





                                       F-2

<PAGE>


                           Consolidated Balance Sheets
                        (In thousands, except share data)

                                 Assets

                                                    December 31,
                                               ---------------------
                                                  1996        1995
                                               ---------   ---------
Current assets:
 Cash and cash equivalents..................  $  30,211   $  12,016
 Short-term investments.....................     48,956      37,765
 Accounts receivable, net...................     33,442      28,789
 Inventories................................     11,778      15,295
 Prepaid expenses and other current assets..      2,059       2,515
 Deferred income tax, net...................      5,139       4,273
                                              ---------   ---------
    Total current assets....................    131,585     100,653

Property and equipment, net.................     32,184      32,596
Intangibles and other assets................      5,456       3,853
                                              =========   =========
    Total assets............................  $ 169,225   $ 137,102
                                              =========   =========


                   Liabilities and Stockholders' Equity

Current liabilities:
 Current portion of long-term debt..........  $   1,517   $   2,137
 Accounts payable...........................     11,430       9,783
 Accrued compensation.......................      6,367       5,005
 Accrued expenses and other liabilities.....      2,993       2,308
 Income taxes payable.......................      6,823       4,568
 Other taxes payable........................      3,161       2,306
                                              ---------   ---------
    Total current liabilities...............     32,291      26,107

Long-term debt, net of current portion......      9,175      11,603
Deferred income taxes, net..................        806         656
                                              ---------   ---------
  Total liabilities.........................     42,272      38,366
                                              ---------   ---------

Commitments and contingencies ..............       ---          ---

Common stock: par value $.01; 60,000,000
  shares authorized; 21,642,241 and
  21,471,896 shares issued and outstanding,
  respectively..............................        216         215
Additional paid-in capital..................     44,396      41,277
Retained earnings...........................     82,590      57,104
Other.......................................       (249)        140
                                              ----------  ---------
  Total stockholders' equity................    126,953      98,736
                                               ---------  ---------
  Total liabilities and stockholders' equity   $169,225    $137,102
                                              =========   ==========


                                       F-3

<PAGE>


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




                                                  For the Years
                                                Ended December 31,
                                          -------------------------------
                                           1996       1995       1994
                                          --------  ---------  ----------

Net sales..........................     $ 200,715 $  164,819 $   127,003
Cost of sales......................        49,755     39,525      30,627
                                          --------  --------   ---------
 Gross profit......................       150,960    125,294      96,376
                                          --------  ---------  ----------

Operating expense:.................
   Sales and marketing.............        72,067     63,733      49,957
   Research and development........        24,387     19,991      15,163
   General and administrative......        17,129     15,071      11,414
                                          -------- ---------  ----------
   Total operating expenses........       113,583     98,795      76,534
                                          --------  ---------  ----------
   Operating income................        37,377     26,499      19,842
Other income (expense):............
   Interest income.................         2,405      1,635         240
   Interest expense................          (844)      (875)       (542)
   Foreign exchange (loss) gain, net         (899)       150       1,556
                                          --------  ---------  ----------
   Income before income taxes......        38,039     27,409      21,096
Provision for income taxes.........        12,553      9,986       8,129
                                          --------  =========  ==========
   Net income......................     $  25,486 $   17,423 $    12,967
                                          ========  =========  ==========

Earnings per share.................     $    1.16 $     0.83 $      0.71
                                          ======== =========  ==========

Weighted average shares outstanding        21,962     20,949      18,322
                                          ========  =========  ==========

                                       F-4


<PAGE>




                      Consolidated Statements of Cash Flows
                                 (In thousands)

                                               For the Years Ended December
                                                           31,
                                              -------------------------------
                                                1996       1995       1994
                                              ---------  ---------  ---------

Cash flow from operating activities:
 Net income............................    $    25,486 $   17,423 $   12,967
 Adjustments to reconcile net income to
 cash provided by operating activities:
  Charges to income not requiring cash
   outlays:
     Depreciation and amortization.....          9,210      7,006      4,989
     Benefit for deferred income taxes            (779)    (3,547)      (981)
     Purchase of in-process research &
     development......................           1,000         --         --
  Changes in operating assets and
   liabilities:
     Increase in accounts receivable...         (4,715)    (5,204)    (4,725)
     Decrease (increase) in inventory..          3,275     (5,351)    (1,911)
     Increase in prepaid expenses and
      other assets.....................           (402)    (1,733)      (497)
     Increase in accounts payable......          2,582      1,305      4,309
     Increase (decrease) in accrued
      expenses and otherliabilities...           4,620      5,020       (314)
                                              ---------  ---------  ---------
 Net cash provided by operating activities      40,277     14,919     13,837
                                              ---------  ---------  ---------

Cash flow from investing activities:
  Purchases of short-term investments..        (68,790)   (70,202)       ---
  Sales of short-term investments......         57,619     32,506        ---
  Capital expenditures.................         (6,811)   (16,162)    (9,912)
  Additions to capitalized software....         (1,568)    (1,103)    (1,145)
  Payments for acquisitions, net of cash
   received...............................      (1,200)        --         --
                                              ---------  ---------  ---------
Net cash used in investing activities..        (20,750)   (54,961)   (11,057)
                                              ---------  ---------  ---------

Cash flow from financing activities:
  Borrowings from long-term debt.......            ---      5,161      1,270
  Repayments of long-term debt.........         (3,017)    (1,704)    (1,341)
  Net proceeds from issuance of common
   stock under initial public offering.            ---     39,567        ---
  Net proceeds from issuances of common
   stock under employee plans..........          1,891      1,310        115
                                             ---------  ---------  ---------
Net cash (used in) provided by financing
  activities...........................         (1,126)    44,334         44
                                              ---------  ---------  ---------

Effect of translation rate changes on cash        (206)       198        259
                                              ---------  ---------  ---------

Net increase in cash and cash equivalents       18,195      4,490      3,083
  Cash and cash equivalents at beginning of
  period...............................         12,016      7,526      4,443
                                              =========  =========  =========
Cash and cash equivalents at end of period $    30,211 $   12,016 $    7,526
                                              =========  =========  =========

Cash paid for interest and income taxes (in thousands):
   Interest............................    $       904 $    1,084 $      746
                                              ========= =========   =========
   Income taxes........................    $    11,135 $   10,173 $    8,523
                                              =========  =========  =========

                                       F-5


<PAGE>



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

                                       Additional
                 Common      Stock     Paid-In     Retained
                 Shares     Amount     Capital     Earnings   Other      Total
                  ---------  --------  ---------   --------   ------   --------
Balance at
December 31,
1993...........  18,189,138  $  182    $    318    $ 26,714   $  165    $27,379
  Net income...         ---     ---         ---      12,967      ---     12,967
  Issuance of
  common stock
  under employee
  plans.........    140,718       1         114         ---      ---        115
  Foreign
  currency
  translation
  adjustment.           ---      ---         ---        ---       13         13
                  ---------  -------    --------   --------  -------    -------

Balance at
December 31,
1994...........  18,329,856      183         432      39,681     178     40,474
  Net income...         ---      ---         ---      17,423     ---     17,423
  Issuance of
  common stock
  under initial
  public
  offering.....   3,010,000       31      39,536         ---     ---     39,567
  Issuance of
  common stock
  under employee
  plans........     132,040        1       1,309         ---     ---      1,310
  Foreign
  currency
  translation
  adjustment...         ---       ---        ---         ---    (107)      (107)
  Unrealized
  gain on
  short-term
  investments....       ---       ---        ---         ---      69         69
                  ---------  --------    --------   --------  --------  --------

Balance at
December 31,
1995...........  21,471,896       215     41,277     57,104       140    98,736
  Net income...         ---       ---        ---     25,486       ---    25,486
  Issuance of
  common stock
  in connection
  with
  acquisition..      60,916         1      1,228        ---       ---     1,229
  Issuance of
  common stock
  under employee
  plans........     109,429       ---      1,891        ---       ---     1,891
  Foreign
  currency
  translation
  adjustment...        ---       ---         ---        ---      (410)     (410)
  Unrealized
  gain on
  short-term
investments....        ---       ---         ---        ---        21        21
                 ---------  --------   ---------   --------   -------  --------

Balance at
December 31,
1996..........  21,642,241   $   216   $  44,396  $  82,590  $   (249)$ 126,953
                ==========  ========   =========   ========   =======   ========






                                       F-6



<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 equally 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, 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 a separate component of stockholders' equity.  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,  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.



                                       F-7


<PAGE>

      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 thirty  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.

      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,  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
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 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  worldwide.
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.

      Accounts  receivable are net of allowances  for doubtful  accounts of $2.4
million and $1.6 million at December 31, 1996 and 1995, 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, 1996,  1995 and 1994 is $22.2 million,
$16.5 million and $14.1 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 the average rates of exchange  prevailing  during
the period.  The resultant  gains or losses from  translation  are included in a
separate  component of  stockholders'  equity.  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.

                                       F-8

<PAGE>


      Foreign currency hedging instruments

      The Company enters into foreign  currency  forward  exchange  contracts to
hedge its exposure on material  foreign currency  receivables.  The Company does
not hold or issue  financial  instruments  for  trading  purposes.  The  forward
contracts  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
these forward  contracts are netted against the related foreign currency loss or
gain and included in other income for the period.

      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

      Earnings  per share are  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 equivalent shares outstanding  relating to stock options is
computed using the treasury stock method.

      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 APB  Opinion No. 25 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.

Note 2:  Short-term investments

      Short-term  investments at December 31, 1996 and 1995, consisting of state
and municipal  securities,  were acquired at an aggregate  cost of $48.9 million
and $37.7 million,  respectively.  These  investments  were purchased with gross
unrealized  gains of $97,000 and $76,000  for 1996 and 1995,  respectively,  and
gross  unrealized  losses of $7,000  for both  1996 and  1995.  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,
                                                       ------------------
                                                        1996       1995
                                                       --------   -------
      90 days to one year ......................     $  26,218  $ 25,103
      One year through two years ...............        22,738    12,662
                                                       ========   =======
                                                     $  48,956  $ 37,765
                                                       ========   =======

                                       F-9


<PAGE>




Note 3:  Inventories

      Inventories consist of the following (in thousands):
                                                         December 31,
                                                       ------------------
                                                        1996       1995
                                                       --------   -------

      Raw materials ............................     $   5,324 $   8,101
      Work-in-process ..........................           864       719
      Finished goods ...........................         5,590     6,475
                                                       ========   =======
                                                     $  11,778 $  15,295
                                                       ========   =======


Note 4:  Property and equipment

      Property and equipment consist of the following (in thousands):
                                                         December 31,
                                                       ------------------
                                                        1996       1995
                                                       --------   -------

      Land......................................     $   4,006 $   4,006
      Buildings ................................        17,169    15,159
      Furniture and equipment...................        36,468    31,983
                                                       --------   -------
                                                        57,643    51,148
      Accumulated depreciation..................       (25,459)  (18,552)
                                                       --------   -------
                                                     $  32,184 $  32,596
                                                       ========   =======

      Depreciation expense for the years ended December 31, 1996, 1995 and 1994,
is $7.1 million, $5.8 million and $4.0 million, respectively.


Note 5:  Intangibles and other assets

      Intangibles  and  other  assets  at  December  31,  1996 and 1995  include
capitalized  software  development  costs  of $2.7  million  and  $1.8  million,
respectively, which are net of accumulated amortization of $5.6 million and $4.1
million,  respectively.  Amortization of software development costs totaled $2.1
million,  $1.2  million and $945,000  during the years ended  December 31, 1996,
1995 and 1994, respectively.


                                      F-10

<PAGE>




Note 6:  Debt

      Debt consists of the following (in thousands):              December 31,
                                                               ----------------
                                                                  1996     1995
                                                               -------   -------
      Short-term debt:  Revolving line, lender's prime
        (8.25% at December 31, 1996) less 1/2%,
        $8,000,000 commitment, June 30, 1998 ..........        $  ---   $   ---
                                                               =======   =======
      Long-term  debt:  Equipment  line of  credit,
       lender's  prime  (8.25%  at December  31,  1996),
       $7,500,000  commitment,  available  for  advances
       through June 30, 1997 ...........................       $  ---   $   366
      Equipment loan, 6.5%, due in equal quarterly
        payments of principal and interest through June
        30, 1997 ......................................           488     1,463
      Millenium loan, 6.45%, quarterly payments of
        principal and interest beginning September 30,
        1994, 14 year amortization, seven-year term             3,324     3,494
      Manufacturing facility loan, LIBOR (6.1% at
        December  31,  1996),  $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 ......................................         6,847     7,560
      Other ...........................................            33       857
                                                               -------   -------
      Total debt ......................................        10,692    13,740
         Less current portion .........................         1,517     2,137
                                                               =======   =======
      Long-term portion ...............................       $ 9,175   $11,603
                                                               =======   =======

      The terms of the Company's debt agreements include various covenants which
require,  among other things,  a minimum  tangible net worth of $65,000,000 plus
one-half of the  Company's  net income for  completed  fiscal  years after 1995.
First   security   interests   vary   among  the   notes,   but  the  loans  are
cross-collateralized by essentially all of the Company's assets.

      Long-term  debt  maturing in years 1997  through 2000 is $848,000 per year
and $3.5 million in 2001. These amounts have been adjusted to reflect the payoff
of the equipment loan and the Millenium loan which occurred in January 1997.



                                      F-11


<PAGE>



Note 7:  Income taxes

      The  components  of income  before the  provision  for income taxes are as
follows (in thousands):
                                                   Years Ended December 31,
                                                --------------------------------
                                                 1996        1995       1994
                                                --------   ---------  ----------
              Domestic ...................    $  35,108 $    22,908 $    18,452
              Foreign ....................        2,931       4,501       2,644
                                                --------   --------   ---------
                                              $  38,039 $    27,409 $    21,096
                                                ========   =========  ==========

      The  provision  for income taxes  charged to  operations is as follows (in
thousands):
                                                   Years Ended December 31,
                                                --------------------------------
                                                 1996        1995       1994
                                                --------   ---------  ----------
              Current tax expense
                  U.S. federal ...........    $  10,234 $    11,805 $     7,201
                  State ..................          985         703         770
                  Foreign ................        2,113       1,025       1,139
                                                --------   ---------  ----------
              Total current...............       13,332      13,533       9,110
                                                --------   ---------  ----------
              Deferred tax expense (benefit)
                  U.S. federal ...........         (201)     (3,914)      (530)
                  State ..................         (180)       (239)       (59)
                  Foreign ................         (398)        606       (392)
                                               ---------  ----------    --------
              Total deferred .............         (779)     (3,547)      (981)
                                                ========   =========  ==========
              Total provision ............    $  12,553 $     9,986 $     8,129
                                                ========   =========  ==========

      Deferred  tax  liabilities  (assets) at December  31, 1996 and 1995 are as
follows (in thousands):
                                                                December 31,
                                                           ---------------------
                                                              1996        1995
                                                           ---------   ---------
       Capitalized software ......................      $       708 $       632

       Depreciation ..............................               59          39
                                                            ---------  ---------
         Gross deferred tax liabilities ..........              767         671
                                                           ---------   ---------
       Operating loss carryforwards ..............             (249)       (410)
       Vacation and other accruals ...............           (1,242)       (727)
       Inventory valuation and warranty provisions           (1,666)     (1,637)
       Doubtful accounts and sales provisions ....           (1,320)       (703)
       Intercompany profit .......................             (510)     (1,033)
       Other .....................................             (429)       (233)
                                                           ---------   ---------
         Gross deferred tax assets ...............           (5,416)     (4,743)
                                                            ---------  ---------
       Valuation allowance .......................              245         429
                                                           =========   =========
       Net deferred tax asset ....................      $    (4,404)$    (3,643)
                                                           =========   =========

      The  decrease in the deferred  tax assets  valuation  allowance in 1996 of
$184,000 is  attributable  to the  utilization  of  operating  losses in foreign
jurisdictions  the benefits of which were not assured of realization at December
31, 1995.


                                      F-12


<PAGE>


      A reconciliation  of income taxes at the U.S.  federal  statutory income
tax rate to the effective tax rate follows:

                                                     Years Ended December 31,
                                                      ----------------------
                                                      1996     1995     1994
                                                     ------   ------   ------
  U.S. federal statutory tax rate ...........          35 %     35 %     35 %
  Foreign sales corporation benefit .........          (2)      (2)      (1)
  Loss from unconsolidated foreign subsidiaries ..      1       (3)       3
  Foreign income taxes in excess of U.S.  federal
  statutory rate ............................         ---        3      ---
  Foreign tax credits utilized ..............          (2)      ---     ---
  Tax exempt interest .......................          (2)      (1)     ---
  State income taxes, net of federal tax benefit .      2        2        2
  Other .....................................           1        2      ---
                                                    ------   ------   ------
          Effective tax rate......................     33 %     36 %     39 %
                                                     ======   ======   ======

      As  of  December  31,  1996,  five  of  the  Company's  subsidiaries  have
available, for income tax purposes,  foreign net operating loss carryforwards of
approximately  $963,000, of which $618,000 expire during the years 1999-2005 and
$345,000 of which may be carried forward indefinitely.

      Deferred  income taxes of $110,000 were provided in 1996 for the estimated
income  tax  liability  that  will  be  incurred  upon  the  anticipated  future
repatriation of approximately $2.3 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  $627,000 of non-U.S.  subsidiaries'
undistributed  earnings as of December  31,  1996,  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.

Note 8: Acquisitions

      On April 1, 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 60,916  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.  The Company recorded a
$1.0 million charge against  earnings  during the second quarter of 1996 for the
write-off of in-process research and development  technology  purchased from GSI
that had not reached the working model stage. The Company also recorded $920,000
of capitalized software development costs related to the acquisition,  which are
included in intangibles  and other assets and are being  amortized on a straight
line basis over 3 years.

      During  the  third  quarter  of  1996,  the  Company   purchased   imaging
acquisition software  technology.  The purchased software was amortized over the
third quarter,  resulting in a charge to earnings of $500,000. This amortization
period was utilized due to the nature of this rapidly developing  technology and
the revisions to be made to the software in the near future.

      Excluding  the  effect  of the  charge  for  the GSI  acquisition  and the
amortization of intangible assets related to the software purchases,  net income
for the year ended  December  31,  1996 would have been $27 million or $1.19 per
share.



                                      F-13


<PAGE>



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

     Stock-Based Compensation Plans

      At December 31, 1996, the Company has two active stock-based  compensation
plans and one inactive  plan. No  compensation  cost has been  recognized in the
Company's  financial  statements  for the fixed stock option plans 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,
                                                    -------------------------
                                                       1996          1995
                                                    -----------    ----------

Net income                              As reported $   25,486     $  17,423
                                          Pro forma     23,458        16,317

Earnings per share                      As reported $     1.16     $    0.83
                                          Pro forma       1.07          0.78


      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 $.08 per share),  1985 (exercisable at $.17 per share), and
1989  (exercisable  at $2.33 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,  2,700,000 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.  Shares available for grant at
December 31, 1996 were 1,415,743.



                                      F-14


<PAGE>


      Transactions under all plans are summarized as follows:
                                              Number of        Weighted
                                                shares          average
                                                under          exercise
                                                option           price
                                             -------------   --------------
      Outstanding at January 1, 1994.....         236,838      $      1.26
        Exercised........................        (140,718)             .54
        Canceled.........................               0             ----
        Granted..........................               0             ----
                                             -------------   --------------
      Outstanding at December 31, 1994...          96,120             2.33
        Exercised........................         (32,908)            2.69
        Canceled.........................         (28,982)           14.69
        Granted..........................         651,400            14.77
                                             -------------   --------------
      Outstanding at December 31, 1995...         685,630            13.61
        Exercised........................          (9,176)           15.21
        Canceled.........................         (59,317)           17.35
        Granted..........................         721,150            20.37
                                             -------------   --------------
      Outstanding at December 31, 1996...       1,338,287     $      17.08
                                             =============   ==============

      Options exercisable at December 31:
         1994............................          36,120     $       2.32
         1995............................          93,335            10.83
         1996............................         273,894            14.97

                                                                 Weighted
      Weighted average, grant date fair value                  average fair
      of options granted during:                                  value
         1994............................             ---     $        ---
         1995............................         651,400             6.87
         1996............................         721,150             9.38

                                December 31, 1996
- -------------------------------------------------------------------------------
               Options Outstanding                      Options Exercisable
- ---------------------------------------------------   -------------------------

                                          Weighted
                   Number     Weighted   average                     Weighted
                    of        average    remaining    Number of      average
  Exercise        options     exercice   contractual   options       exercise
   price        outstanding    price     life (yrs)  exercisable     price
- -------------   ----------   ---------   ----------   ----------   ------------

$ 2.33 -  2.33      64,200    $   2.33       3           28,200       $   2.33
 14.50 - 14.50     544,914       14.50       8          158,127          14.50
 18.00 - 20.50     671,623       19.92       9           86,280          19.87
 22.00 - 22.50      36,650       22.14       9            1,287          22.01
 27.25 - 31.13      20,900       29.31      10                0           0.00
- --------------   ---------                               -------
$ 2.33 - 31.13   1,338,287       17.08       9          273,894          14.97

      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 used for grants during 1996 and 1995:  dividend expense yield of 0%;
an expected life of 7.2 years;  expected  volatility  of 30.6%;  and a risk-free
interest rate of 6.3%.



                                      F-15

<PAGE>





      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 employees 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  1,420,787 shares at December 31, 1996. Shares issued under this plan
were  100,081 in 1996.  The fair  value of the  employees'  purchase  rights was
estimated using the Black-Scholes model with the following  assumptions for 1996
and 1995:  dividend expense yield of 0%; an expected life of 6 months;  expected
volatility of 60%; and risk-free interest rates of 5.22%.

      Weighted  average,   grant  date,  fair
      value of purchase  rights granted under     Number of   Weighted average
      the Employee Stock Purchase Plan:            shares        fair value
         1994............................             ----      $       ---
         1995............................          151,205             5.05
         1996............................           93,602             7.15

      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  elected to
make  matching  contributions  for 1994 equal to 25% of employee  contributions,
which were applied to a maximum of 4% of each  participant's  compensation.  For
1995-1996,  the Board of Directors 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  against income were  $686,000,  $606,000 and $171,000 in
1996, 1995 and 1994, respectively.

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 of the
Company's financial instruments, including cash and cash


                                      F-16

<PAGE>


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, 1996 and 1995 are as
follows (in thousands):
                                                December 31,
                               ------------------------------------------------
                                        1996                     1995
                               ------------------------  ----------------------
                                  Carrying                Carrying
                                   Amount   Fair Value     Amount    Fair Value
                                   ------   ----------     ------    ----------
      Short-term investments     $ 48,956   $ 48,956      $ 37,765    $ 37,765
      Long-term debt.......        (9,175)    (8,962)      (11,603)     (8,406)
      Other assets:........
       Forward contracts...           134        134           186         186

      The fair values of short-term investments were estimated based upon quotes
from brokers. Foreign exchange 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 enters into foreign  currency  forward  exchange  contracts to
hedge its exposure on material foreign currency receivables. The following table
summarizes the activity of the Company's  foreign  currency  hedging program for
the year ended December 31, 1996. The amounts  exchanged between the Company and
the  financial  institution  are derived from the  underlying  foreign  currency
amounts and the exchange rates. Accordingly,  these amounts are not a measure of
the exposure of the Company through its use of forward  contracts.  The activity
for the year  ended  December  31,  1996 is as  follows  (in local  currency  in
thousands):
                                                                      Exchange
                                                                    Rate(per US
                   Balance at                           Balance at   Dollar) at
                  December 31, Contracts Transactions/ December 31, December 31,
                      1995     Purchased  Maturities      1996         1996

                    ---------- ---------- ------------ ------------ -----------
Australian Dollar..      350        850      1,200          ---          1.26
Austrian Schilling     2,000     12,000     10,600        3,400         10.91
British Pound.....       600      2,500      2,250          850           .58
Canadian Dollar...       500      2,100      2,600          ---          1.37
Danish Kroner.....     2,000      8,000      8,000        2,000          5.92
Dutch Guilder.....      ---         650       ---           650          1.74
French Franc .....     9,000     37,000     36,500        9,500          5.19
German Deutsche
  Mark ...........     1,100      3,300      3,100        1,300          1.54
Italian Lire...... 1,900,000  7,400,000  7,350,000    1,950,000       1518.00
Japanese Yen......   340,000  1,780,000  1,645,000      475,000        115.85
Norwegian Kroner..     3,000     13,500     13,000        3,500          6.44
Singapore Dollar..       250      1,350      1,200          400          1.40
Spanish Peseta....    73,000    285,000    288,500       69,500        129.70
Swedish Krona.....       450      3,900      1,250        3,100          6.89
Swiss Franc.......       400      1,200      1,600          ---          1.34
The outstanding contracts mature on January 25, 1997.




                                      F-17

<PAGE>




      For those  currencies in which the Company has a material foreign currency
exposure,  the  following  represents  the hedged and  unhedged  portions of the
Company's  foreign  currency  receivables  at December  31, 1996  (expressed  in
thousands of U.S. dollars at the December 31, 1996 exchange rates):
                                                       Amount       Unhedged
                                        Receivable      Hedged      Exposure
                                        ----------     ----------   ----------
      Austrian Schilling..........   $        358 $          320 $         38
      British Pound...............          1,336          1,336          ---
      Danish Kroner...............            294            294          ---
      Dutch Guilder...............            224            224          ---
      French Franc................          2,023          1,851          172
      German Deutsche Mark........            760            760          ---
      Italian Lire................          1,205          1,205          ---
      Japanese Yen................          4,230          4,230          ---
      Norwegian Kroner............            630            543           87
      Singapore Dollar............            349            283           66
      Spanish Peseta..............            550            540           10
      Swedish Krona...............            881            454          427
                                        ----------     ----------   ----------
                                     $     12,840 $       12,040 $        800
                                        ==========     ==========   ==========

      In  addition  to  this  unhedged   exposure,   the  Company  has  unhedged
receivables  aggregating $2.2 million which is comprised of individual  balances
less than $500,000 (U.S. dollars) at December 31, 1996.

      Foreign  currency  forward  contracts  reduced the  Company's  net foreign
exchange  loss for  December  31, 1996 by  $674,000  and reduced the net foreign
exchange  gain for the years ended  December  31, 1995 and 1994 by $405,000  and
$146,000, respectively.


Note 12:  Geographic area information

      The Company operates in one segment across geographically diverse markets.
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,
                                         ---------------------------------
                                           1996       1995        1994
                                         ---------   --------  -----------
Net sales
North America:
  Unaffiliated customer sales..........$. 114,382 $   93,001 $     77,333
  Geographic transfers...................  26,388     36,659       29,944
                                         ---------  --------  -----------
                                          140,770    129,660      107,277
                                         ---------   --------  -----------
Europe:
  Unaffiliated customer sales............  58,108     51,145       38,505
                                         ---------   --------  -----------
Asia Pacific:
  Unaffiliated customer sales............  28,225     20,673       11,165
                                         ---------   --------  -----------
Eliminations............................. (26,388)   (36,659)     (29,944)
                                         ---------   --------  -----------

                                       $  200,715 $  164,819 $    127,003
                                         =========   ========  ===========



                                      F-18

<PAGE>




                                            Years Ended December 31,
                                       -----------------------------------
                                          1996        1995         1994
                                         --------   ----------   ---------
      Operating income:
      North America................    $  32,058 $     22,286 $    17,956
      Europe.......................        3,034        2,478       1,300
      Asia Pacific.................        2,285        1,735         586
                                         --------   ----------   ---------
                                       $  37,377 $     26,499 $    19,842
                                         ========   ==========   =========

                                                        December 31,
                                                    ----------------------
                                                      1996        1995
                                                    ----------  ----------
      Identifiable assets
      North America.......................       $    137,334 $   107,820
      Europe..............................             22,953      19,984
      Asia Pacific........................              8,938       9,298
                                                    ----------  ----------
                                                 $    169,225 $   137,102
                                                    ==========  ==========

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,  1996,  for  each  of the  next  five  years  are as  follows  (in
thousands):
            1997................................     $    1,691
            1998................................            956
            1999................................            674
            2000................................            492
            2001................................            443
            Thereafter..........................            442
                                                       ---------
                                                     $    4,698
                                                       =========

      The  Company has  entered  into firm  commitments  of  approximately  $2.5
million for design and site development of a new office building adjacent to the
recently  completed   manufacturing  facility  in  Austin,  Texas.  The  Company
estimates the total cost for the new building, including furniture, fixtures and
equipment,  will range from $30 million to $35 million  with  approximately  $27
million expected to be incurred during 1997 and the remainder in early 1998. The
Company is not committed to spend the remaining  amounts and the actual level of
spending may vary depending on a variety of factors  including site  development
issues,  progress of the Company's  third-party  contractors and availability of
resources.

      Rent expense under operating leases was approximately  $4.2 million,  $3.6
million and $2.5 million for the years ended  December 31, 1996,  1995 and 1994,
respectively.




                                      F-19

<PAGE>



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, 1996 is as follows (in  thousands,
except per share data):

                                               Three Months Ended
                                     ----------------------------------------
                                     March 31   June 30   Sept.30    Dec. 31
                                       1996      1996      1996       1996
                                     ---------  --------  --------  ---------
      Net sales.................   $   46,408 $  50,241 $  49,679 $   54,387
      Gross profit..............       35,142    37,479    37,056     41,283
      Operating income..........        8,428     8,162     8,777     12,010
      Net income................        5,483     5,405     6,358      8,240
      Earnings per share........   $     0.25 $    0.25 $    0.29 $     0.37
      Weighted average shares
        outstanding............        21,666    21,938    22,061     22,201

                                                Three Months Ended
                                     -----------------------------------------
                                     March 31   June 30   Sept. 30   Dec. 31
                                       1995      1995      1995       1995
                                     ---------  --------  --------  ----------
      Net sales.................   $   39,844 $  40,477 $  40,122 $    44,376
      Gross profit..............       30,018    30,648    31,202      33,426
      Operating income..........        6,440     5,437     6,270       8,352
      Net income................        4,194     3,942     3,839       5,448
      Earnings per share........   $     0.22 $    0.18 $    0.18 $      0.25
      Weighted average shares
       outstanding..............       18,944    21,529    21,593      21,668



                                      F-20


<PAGE>




 
                                                                    SCHEDULE II


                        NATIONAL INSTRUMENTS CORPORATION

                      VALUATION AND QUALIFYING ACCOUNTS(1)
                                 (In thousands)




Allowance for doubtful accounts
                                  Balance    Provision   Write-Offs Balance at
                                     at         for      Charged to   End of
 Year          Description        Beginning   Bad Debt   Allowances   Period
                                     of       Expense
                                  Period
- ----   -----------------------   ----------   ---------  ----------  --------
1994   Allowance for doubtful
        accounts                 $    795    $     634    $    136  $    1,293
1995   Allowance for doubtful
        accounts                    1,293          705         397       1,601
1996   Allowance for doubtful
        accounts                    1,601        1,490         671       2,420


Valuation allowances for excess and obsolete inventory
                                    Balance    Provision   Write-Offs Balance at
                                       at      Charged to  Charged to   End of
 Year          Description          Beginning   Cost of    Allowances   Period
                                       of        Sales
                                     Period
- ----   ------------------------   -----------  ---------  -----------  --------
1994   Valuation allowances for
        excess and obsolete
        inventory                  $   735     $    369   $    134    $    970
1995   Valuation allowances for
        excess and obsolete
        inventory                      970        1,419        588       1,801
1996   Valuation allowances for
        excess and obsolete
        inventory                    1,801        1,138      1,093       1,846



 ......

(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,
                                             1996        1995          1994
                                           ---------   ----------    ----------

Net Income                                 $ 25,486    $  17,423     $  12,967
                                           =========   ==========    =========

Weighted Average Shares Outstanding          21,962       20,949        18,322
                                           =========   ==========    =========

Earnings Per Share                         $   1.16     $   0.83     $    0.71

                                           =========   ==========    ==========

Calculation of Weighted Average Shares:
   Weighted Average Common Stock
Outstanding                                   21,583       20,772        18,189
   Weighted Average Common Stock Options,
    utilizing the treasury stock method          379          177           133
                                           ---------   ----------     ---------
                                              21,962       20,949        18,322
                                            =========   ==========    ==========



<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 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 Investment  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  
Travis Investments  C.V. (a limited partnership), Amsterdam


<PAGE>




                                  EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS



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 24, 1997 appearing on page F-2 of the Form 10-K.



/s/ Price Waterhouse LLP
Austin, Texas
March 18, 1997


<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, 1996 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-31-1996
<PERIOD-START>                     JAN-01-1996
<PERIOD-END>                       DEC-31-1996
<CASH>                                 30,211
<SECURITIES>                           48,956
<RECEIVABLES>                          35,862
<ALLOWANCES>                            2,420
<INVENTORY>                            11,778
<CURRENT-ASSETS>                      131,585
<PP&E>                                 57,643
<DEPRECIATION>                         25,459
<TOTAL-ASSETS>                        169,225
<CURRENT-LIABILITIES>                  32,291
<BONDS>                                     0
<PREFERRED-MANDATORY>                       0
<PREFERRED>                                 0
<COMMON>                                  216
<OTHER-SE>                            126,737
<TOTAL-LIABILITY-AND-EQUITY>          169,225
<SALES>                               200,715
<TOTAL-REVENUES>                      200,715
<CGS>                                  49,755
<TOTAL-COSTS>                          49,755
<OTHER-EXPENSES>                      113,583
<LOSS-PROVISION>                            0
<INTEREST-EXPENSE>                        844
<INCOME-PRETAX>                        38,039
<INCOME-TAX>                           12,553
<INCOME-CONTINUING>                    25,486
<DISCONTINUED>                              0
<EXTRAORDINARY>                             0
<CHANGES>                                   0
<NET-INCOME>                           25,486
<EPS-PRIMARY>                               1.16
<EPS-DILUTED>                               1.16
        


</TABLE>