UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K
(Mark One)
x    Annual Report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934
For the fiscal year ended:  December 31, 1997
                                       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)

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            Delaware                                       74-1871327 
 (State or other jurisdiction of                        (I.R.S. Employer
  incorporation or organization)                      Identification Number)
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   6504 Bridge Point Parkway Austin, Texas                    78730 
 (address of principal executive offices)                   (zip code)
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       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 February 26, 1998, was  $406,302,450  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 February 26, 1998,  registrant had  outstanding  32,743,493  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 12, 1998 (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
Regulation14A   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,  $0.01 par value,  is
quoted on the NASDAQ National Market System under the trading symbol NATI.

Industry Background

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

     Instrument  applications  can be generally  categorized  as either 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, PXI, image
acquisition,   motion   control  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,  PXI,  image
acquisition,  motion  control and  industrial  communications  products to build
customized  instrument  solutions.   The  Company's  open  product  architecture
provides a high level of  integration  between the Company's  products and other
industry standard  instrumentation  products.  This approach provides users with
the  flexibility  to mix  and  match  the  Company's  and  third-party  hardware
components when developing custom virtual instrumentation systems.

     Long-Term Compatibility Across Multiple Computer Platforms

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

                                      -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,  web browsers, and databases.  In many cases, a single computer or
workstation can serve both the  instrumentation  and general  purpose  computing
needs of scientists and engineers.

     Large User Base

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

     Lower Total Solution Cost

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

Strategy

     The   Company's   objective  is  to  be  a  leading   supplier  of  virtual
instrumentation  products and solutions to engineers 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 serial. In addition, the Company
expects to continue to create or adapt  products for computer  systems that 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 its major world  markets.  The  Company's
distribution channels include direct sales, distributors, OEMS, VARs and systems
integrators and consultants.  By using this broad range of channels, the Company
seeks to develop and maintain  relations with its customers and prospects and to
provide the levels of support,  training and  education  required by the market.
The Company devotes significant  resources to direct sales activities and, as of
December 31,  1997,  had 37 sales  offices  in the  United  States  and 34 sales
offices  located in key  international  markets.  To address  the range of sales
opportunities,  the  Company  expects to continue  to pursue  value-added  sales
hannels  through  formal  relationships  with OEMS,  VARS,  consultants or other
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  companies,
products,  and  technologies  to augment its product  offerings,  and intends to
continue  to seek  opportunities  to  satisfy  customer  needs and build  market
penetration through acquisitions of new products and technologies in the future.
In connection with these acquisitions, the Company has leveraged its established
sales channels in an effort to accelerate  the delivery of the acquired  product
to the market and build market share.

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

     Maintain High Levels of Customer Satisfaction

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

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

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

     Leverage External and Internal Technology

     Leverage Generally Available Technology. The Company leverages the research
and  development  efforts  of vendors of  desktop  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  and OPC for the IA  market.  The  Company's  ongoing
strategy is to conform its products to  established  and  emerging  standards in
both the general computer and the instrumentation industries.

Products and Technology

     The  Company  offers  an  extensive  line  of  hundreds  of  computer-based
products.  Engineers,  scientists and other users in both the T&M and IA markets
can use these  products  with  desktop  computers  and  workstations  to develop
customer-defined  virtual  instruments.  The Company's  virtual  instrumentation
products   consist   of   application   software,    which   includes   LabVIEW,
LabWindows/CVI,  ComponentWorks, Measure, BridgeVIEW, Lookout, BioBench and HiQ,
and  hardware/driver  software,  which  includes  GPIB,  VXI,  DAQ,  PXI,  image
acquisition,  motion  control,  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 software and hardware
products.  There are now several books  available on the  Company's  technology,
both in English and other languages.

                                      -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/CVI   and
ComponentWorks  are programming  environments with which users can develop GUIs,
control  instruments and acquire,  analyze and present data. With these software
products,  users can design custom virtual  instruments by creating a GUI on the
computer  screen  through  which they  operate  the actual  program  and control
selected hardware.  Users can customize front panels with knobs, buttons,  dials
and graphs to emulate  control panels of  traditional  instruments or add custom
graphics to visually  represent the control and operation of processes.  LabVIEW
and LabWindows/CVI also have ready-to-use  libraries for controlling hundreds of
programmable  instruments,  including  serial,  GPIB and VXI, 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.

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

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

     The  Company  also  offers  a class  of  software  products,  VirtualBench,
BioBench, and Measure,  which do not require any programming.  VirtualBench is a
collection  of  "turnkey"  virtual  instruments  that  mimic  the  operation  of
traditional  benchtop  instruments,  through  the use of a PC and a plug-in  DAQ
board.  Measure  is an  instrumentation  add-on  for  Microsoft  Excel that lets
engineers  and  scientists   collect   instrumentation   data  directly  into  a
spreadsheet.  BioBench  is  designed  for  physiological  data  acquisition  and
analysis in research laboratory and academic environments. BioBench is a turnkey
package for PCs and works with  existing  instruments  already  used in the life
sciences as well as with the Company's PC-based data acquisition products.

     The Company offers HiQ as a natural  companion to its application  software
products for modeling, data visualization and report generation.  HiQ is bundled
with LabVIEW in a package called LabSuite.

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

     Hardware/Driver Software

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

                                      -7-

<PAGE>

     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.  GPIB is
largely used in the T&M market.

     The Company began  selling GPIB products in 1977 and is a leading  supplier
of GPIB interface boards and driver software. The Company's diverse portfolio of
hardware and software  products for GPIB  instrument  control is available for a
wide range of desktop computers,  workstations and minicomputers.  The Company's
GPIB  product line also  includes  products  for  portable  computers  such as a
PCMCIA-GPIB  interface card and a product for controlling GPIB instruments using
the computer's standard parallel port.

     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. Like GPIB, VXI is largely used in the T&M market.

     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  VXI   instrumentation   vendors,   including
Hewlett-Packard Company, has designated the Company's LabVIEW and LabWindows/CVI
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. In 1997, the Company introduced a family of computer-based
instruments  that  deliver   stand-alone   instrument  quality  and  measurement
capabilities  with the flexibility and scalability  inherent to PC-based virtual
instrumentation   solutions.   Computer-based   instruments   deliver   features
comparable to stand-alone traditional  instruments such as oscilloscopes,  DMMs,
and function and  arbitrary  waveform  generators.  The  Company's  DAQ products
provide a range of  price/performance  options,  and include  products  for high
speed  applications  such as on-line  monitoring and control as well as products
designed for long-term  recording of slowly changing data such as  temperatures.
The Company offers DAQ  hardware/driver  software  products for numerous desktop
and  notebook  computers.  The Company  also offers  SCXI  (signal  conditioning
extensions for instrumentation)  hardware,  which expands the types and quantity
of sensors that can be connected to the Company's data acquisition boards.

                                      -8-

<PAGE>

     PXI Modular Instrumentation. The Company's PXI modular instrument platform,
which was also  introduced in 1997, is a desktop PC packaged in a small,  rugged
form factor with  expansion  slots.  It combines  mainstream PC software and PCI
hardware  with  advanced  instrumentation   capabilities  designed  in  the  VXI
architecture.  In essence, PXI is an instrumentation PC - delivering many of the
benefits of VXI in a much smaller package and at much lower prices.  The Company
has targeted its PXI products for both the T&M and IA markets.

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

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

     Industrial Communications Interfaces.

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

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

     Customer Training Courses

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

Markets and Applications

     The  Company's  products  are used across many  industries  in a variety of
applications from research and development to production  testing and industrial
control. The Company approaches both the T&M and IA markets with essentially the
same products and sales, marketing and customer support strategies.

                                      -9-

<PAGE>

Customers

     The Company has a broad customer base, with no customer accounting for more
than 3% of the Company's sales in 1997, 1996 and 1995.

Marketing

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

     The Company reaches its intended  audience through  distribution of written
and electronic  materials and demonstration  disks,  participation in tradeshows
and technical  conferences  and training and user  seminars.  An in-house  staff
develops the advertising,  publicity, and promotional materials that the Company
uses  worldwide.  The primary  marketing/sales  tool is the  Company's  catalog,
published  annually  and  distributed  worldwide.  The 1998  catalog is over 800
pages,  with  detailed  tutorial  information  that  educates  readers about the
Company's integrated product architecture and virtual  instrumentation  concept.
Short-form  versions of the catalog are typically also available in languages of
major international  markets,  including English (anglicized),  French,  German,
Spanish and Japanese. Product and technical information is also provided through
the  Company's  World  Wide Web site on the  Internet  and  through  interactive
CD-ROM.  In 1997,  the  Company  began  selling  some of its  products  over the
Internet and expects to increase efforts in this area in the future.

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

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

Sales and Distribution

     The Company distributes its software and hardware products through a direct
sales organization, independent distributors, OEMs, VARs, system integrators and
consultants.  As of December 31,  1997, the Company had 37  sales offices in the
United States,  34 sales offices  outside the United States and 30  distributors
worldwide.  International  sales accounted for approximately 41%, 43% and 44% of
the Company's revenues in 1997, 1996 and 1995 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.

                                      -10-

<PAGE>

     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, 1997,
the  Company  had 37 sales  offices  located in the United  States and 34 direct
international  sales offices  located in Australia,  Austria,  Belgium,  Brazil,
Canada,  Denmark,  Finland,  France,  Germany,  Hong Kong, India, 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 1997, 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, 1997, the Company had distributors located in 30 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.

     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, 1997, the
Company's  Alliance  Program  had  over  500  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.

                                      -11-

<PAGE>

Customer Support

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

     Customer Technical Support

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

     Upgrades

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

     Customer Education

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

Competition

     The  markets in which the Company  operates  are  characterized  by intense
competition from numerous  competitors,  and the Company expects to face further
competition  from  new  market  entrants  in the  future.  A key  competitor  is
Hewlett-Packard   Company  ("HP"),  which  has  been  the  leading  supplier  of
traditional  instrumentation  solutions for decades.  The Company believes HP is
the dominant supplier of GPIB and VXI-compatible  instruments and systems in the
T&M market.  HP is also a leading supplier of equipment used in data acquisition
and  control  applications.  Although  HP  offers  its own  line of  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.

     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.

                                      -12-

<PAGE>

     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,  1997,  the  Company  employed  373  people in product
research and development.  The Company's research and development  expenses were
$30.3  million,  $24.4  million  and  $20.0  million  for  1997,  1996 and 1995,
respectively.

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.

                                      -13-

<PAGE>

     As of December 31, 1997,  the Company held 38 United States  patents and 10
patents  in foreign  countries,  and had 95 patent  applications  pending in the
United States and foreign  countries.  Sixteen of such United States patents are
software  patents  related  to  LabVIEW,  and cover  fundamental  aspects of the
graphical  programming  approach used in LabVIEW.  The Company's  patents expire
from 2007 to 2015. 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."

                                      -14-

<PAGE>

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

     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, 1997, the Company had 1,465 employees,  including 373 in
research and development,  674 in sales and marketing and customer support,  224
in manufacturing  and 194 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 constructing a 232,000 square foot office facility,  which is located
next to the  manufacturing  facility,  to be completed in the summer of 1998. 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, 1997, 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  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

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

                                      -15-

<PAGE>


                                   PART II




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


     The Company's  Common Stock,  $0.01 par value,  began trading on the Nasdaq
National Market System under the symbol NATI effective March 13, 1995.  Prior to
that date,  there was no public market for the Common Stock. The following table
sets forth for the periods  indicated  the high and low  closing  prices for the
Common Stock, as reported by Nasdaq:

     The Company's Common Stock, $0.01 par value,  trades on The Nasdaq National
Market under the symbol NATI.  The following high and low closing prices for the
Common Stock, as reported by Nasdaq, have been retroactively restated to reflect
the  three-for-two  stock split declared by the Company's  Board of Directors on
October  15,  1997 for  holders of record as of the close of business on October
28, 1997.

                1997           High           Low

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

                1996           High           Low

       First Quarter 1996      14 1/3         11 1/6
       Second Quarter 1996     16 1/3         13 5/6
       Third Quarter 1996      19 1/2         14 1/6
       Fourth Quarter 1996     21 1/3         17 2/3


     As of February 26, 1998, there were  approximately 720 holders of record of
the Common Stock and approximately 4,100 shareholders of beneficial interest.

     The Company believes  factors such as quarterly  fluctuations in results of
operations,  announcements  by the  Company  or its  competitors,  technological
innovations, new product introductions,  governmental regulations, litigation or
changes in  earnings  estimates  by analysts  may cause the market  price of the
Common Stock to fluctuate, perhaps substantially.  In addition, stock prices for
many technology  companies fluctuate widely for reasons that may be unrelated to
their operating results.  These broad market and industry fluctuations were most
recently  noted during the fourth  quarter of 1997 when many  technology  stocks
declined in price.  There can be no assurances  that these market  concerns will
not continue in the immediate  future and may adversely  affect the market price
of the Company's Common Stock.

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

                                      -16-

<PAGE>


ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA

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

                                           Years Ended December 31,
                               -------------------------------------------------
                                 1997      1996      1995      1994       1993
                               --------  --------  --------  --------   --------
                                    (in thousands, except per share data)
Statements of Income Data:
Net sales:...............
  North America..........     $141,783  $114,382  $ 93,001  $ 77,333   $ 65,190
  Europe.................       66,318    58,108    51,145    38,505     31,631
  Asia Pacific...........       32,777    28,225    20,673    11,165      8,707
                               --------  --------  --------  --------   --------
  Consolidated net sales       240,879   200,715   164,819   127,003    105,528

Cost of sales............       55,096    49,755    39,525    30,627     25,526
                               --------  --------  --------  --------   --------
  Gross profit...........      185,783   150,960   125,294    96,376     80,002
                               --------  --------  --------  --------   --------

Operating expenses:
  Sales and marketing....       87,096    72,067    63,733    49,957     41,571
  Research and development      30,296    24,387    19,991    15,163     11,761
  General and administrative    18,508    17,129    15,071    11,414      9,370
                               --------  --------  --------  --------   --------
  Total operating expenses     135,900   113,583    98,795    76,534     62,702
                               --------  --------  --------  --------   --------

  Operating income.......       49,883    37,377    26,499    19,842     17,300

Other income (expense):
  Interest income........        3,455     2,405     1,635       240         23
  Interest expense.......         (502)     (844)     (875)     (542)      (681)
  Net foreign exchange
   (loss) gain...........       (2,649)     (899)      150     1,556       (785)
                               --------  --------  --------  --------   --------
  Income before income taxes    50,187    38,039    27,409    21,096     15,857

Provision for income taxes      16,562    12,553     9,986     8,129      5,782
                               --------  --------  --------  --------   --------

  Net income                  $ 33,625  $ 25,486  $ 17,423  $ 12,967   $ 10,075
                               ========  ========  ========  ========   ========

Basic earnings per share      $   1.03  $   0.79  $   0.56  $   0.48   $   0.37
                               ========  ========  ========  ========   ========
Weighted average shares
  outstanding-basic             32,563    32,359    31,158    27,164     27,083
                               ========  ========  ========  ========   ========

Diluted earnings per share    $   1.00  $   0.77  $   0.55  $   0.47   $   0.37
                               ========  ========  ========  ========   ========
Weighted average shares
  outstanding-diluted           33,656    32,943    31,424    27,483     27,434
                               ========  ========  ========  ========   ========

                                                  December 31,
                               -------------------------------------------------
                                 1997      1996      1995      1994       1993
                               --------  --------  --------  --------   --------
                                                 (in thousands)
Balance Sheet Data:
  Cash and cash equivalents   $ 31,943  $ 30,211  $ 12,016  $  7,526   $  4,443
  Short-term investments..      51,067    48,956    37,765       ---        ---
  Working capital.........     112,142    99,294    74,546    26,869     20,016
  Total assets............     204,490   169,225   137,102    70,751     51,275
  Long-term debt, net of
    current portion.......       5,151     9,175    11,603     9,083      9,137
  Total stockholders' equity   161,754   126,953    98,736    40,474     27,379

                                      -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.  Many of the Company's  products may be
used in  either  environment,  and  consequently,  specific  application  of the
Company's  products is determined by the  end-customer and often is not known to
the  Company at the time of sale.  The  Company  approaches  both  markets  with
essentially the same products which are used in a variety of  applications  from
research and  development  to production  testing and  industrial  control.  The
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 1997, 1996
or 1995.

     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,
                                      --------------------------------
                                        1997        1996        1995
                                      --------    --------    --------
Net Sales
  North America................         58.9%       57.0%       56.4%
  Europe.......................         27.5        29.0        31.1
  Asia Pacific.................         13.6        14.0        12.5
                                      --------    --------    --------
  Consolidated net sales.......        100.0       100.0       100.0
Cost of sales..................         22.9        24.8        24.0
                                      --------    --------    --------
  Gross profit.................         77.1        75.2        76.0
Operating expenses:
  Sales and marketing..........         36.1        35.9        38.7
  Research and development.....         12.6        12.2        12.1
  General and administrative...          7.7         8.5         9.1
                                      --------    --------    --------
   Total operating expenses....         56.4        56.6        59.9
                                      --------    --------    --------
   Operating income............         20.7        18.6        16.1
Other income (expense):
  Interest income..............          1.4         1.2         1.0
  Interest expense.............         (0.2)       (0.4)       (0.5)
  Net foreign exchange (loss)
    gain.......................         (1.1)       (0.4)        0.1
                                      --------    --------    --------
  Income before income taxes...         20.8        19.0        16.7
Provision for income taxes.....          6.9         6.3         6.1
                                      --------    --------    --------
  Net income...................         13.9%       12.7%       10.6%
                                      ========    ========    ========

                                      -18-

<PAGE>

     Net Sales.  In 1997,  a  continued  increase  in demand  for the  Company's
existing and new products  generated a 20% increase over 1996 in net sales which
follows a 23%  increase  from  1995 to 1996.  This  year  marks  the  fourteenth
consecutive year of annual sales growth of 20% or more. 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 growth in 1997 sales over 1996 is attributed
to the  synergy  of  focusing  the  domestic  and  international  efforts on the
Company's  main products and on increasing the number of tradeshows and customer
seminars.

     In constant  dollars,  net sales  increased 26%, 24%, and 25% for the years
ended December 31, 1997,  1996 and 1995,  respectively.  The  relatively  higher
constant  dollar growth rate in 1997 is  attributed  to  successful  new product
introductions.  The decrease in the 1997 U.S.  dollar  annual  growth rate,  20%
compared  to 23% in 1996,  is the  result of the  strengthening  U.S.  dollar as
discussed further in this document.

     North American  revenue was $141.7 million in 1997, an increase of 24% from
1996,  following  a 23%  increase in 1996 over 1995.  The  increase in the North
American  revenue growth is attributed to new product sales as the direct result
of the Company's  investment in research and  development.  European revenue was
$66.3  million,  an increase of 14% over 1996,  following a 14% increase in 1996
from 1995.  Asia  Pacific  revenue  grew 16% to $32.7  million,  following a 37%
increase  in 1996 over 1995  levels.  International  sales  (sales to  customers
outside  of  North  America)  accounted  for 41%,  43% and 44% of the  Company's
consolidated  net sales for 1997, 1996 and 1995,  respectively.  The decrease in
the Asia Pacific revenue growth rate, in U.S. dollars, during 1997 is attributed
to the weakening of the Japanese yen, Korean won and other Asian currencies. See
the  discussion  below for more  information  concerning  the  impact of foreign
currency  fluctuations  on sales growth.  The growth in 1996 in the Asia Pacific
region  was  driven by  increased  customer  acceptance  of  localized  Japanese
products  and  local  support  and  increased  penetration  in the  other  Asian
countries.   The  Company  intends  to  continue  to  expand  its  international
operations by increasing market presence in existing markets,  and continuing to
use  distributors  to sell its  products in  countries in which the sales volume
does not justify  direct sales  activities.  Although  international  sales as a
percent of total sales  decreased in U.S.  dollars,  the Company has  determined
that this is the effect of the  strengthening  dollar and anticipates that sales
outside of North America will  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 U.S.  dollar value of foreign
sales  requiring the Company either to increase its price in the local currency,
which could render the Company's  product  prices  noncompetitive,  or to suffer
reduced revenues and gross margins as measured in U.S.  dollars.  These dynamics
have  adversely  affected  revenue growth in  international  markets in 1997 and
1996, and they could  continue to do so. In December 1997, the Company  expanded
its foreign  currency  hedging program to include both foreign  currency forward
and  option  contracts  to reduce  the  effect of  exchange  rate  fluctuations.
However,  the hedging  program will not eliminate  all of the Company's  foreign
exchange risks. See "Foreign  Exchange  Gain/Loss" below and Note 11 of Notes to
Consolidated Financial Statements.

                                      -19-

<PAGE>

     Sales made by the Company's direct sales offices in Europe and Asia Pacific
are denominated in local currencies, and accordingly, the U.S. dollar equivalent
of these sales is affected by changes in the weighted  average value of the U.S.
dollar.  This weighted  average is calculated  as the  percentage  change in the
value of the currency  relative to the dollar,  multiplied by the  proportion of
international sales recorded in the particular  currency.  Between 1996 and 1997
this weighted  average  value of the U.S.  dollar  increased by 11%,  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 1997 had been the same
as that in 1996, the Company's  consolidated  net sales for 1997 would have been
$252.0 million  representing an increase of $51.0 million,  which represents 26%
consolidated  sales growth.  If the weighted  average value during 1997 had been
the same as that in 1996, the Company's  consolidated  operating  expenses would
have been $139.7 million,  representing an increase of $26.1 million, or 23%. If
the weighted  average  value during 1996 had been the same as that in 1995,  the
comparable sales growth factor would have been 24% growth in 1996 over 1995. The
preceding   proforma  amounts  and  percentages  are  presented  for  comparison
purposes.  If the current trend in exchange rates continue  throughout  1998, it
will have the effect of lowering the U.S.  dollar  equivalent  of  international
sales and operating expenses.

     Gross Profit. As a percentage of sales,  gross profit represented 77%, 75%,
and 76% in 1997,  1996, and 1995,  respectively.  The  relatively  high software
content of the Company's  products is demonstrated in the gross margins achieved
by the Company.  The  relatively  higher margin in 1997 is the result of reduced
direct  material  costs used in production  and the favorable  leveraging of our
production  overhead expenses against the increase in sales. The lower margin in
1996 can be attributed to increased software  duplication  outsourcing costs and
inventory  reductions.  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 adequate to meet
current needs.  The Company plans to add, if sales dictate,  a third  production
line in 1998. There can be no assurances that a delay in the  implementation  of
the third line  would not have a  material  impact on  revenues  and  results of
operations.

     Sales and Marketing. Sales and marketing expense in 1997 increased 21% from
1996,  which  followed an increase of 13% in 1996 from 1995. The increase in the
expense in absolute  amounts during 1997 and 1996 is primarily  attributable  to
programs to increase the Company's  international  presence in both the European
and Asia  Pacific  markets,  increases  in sales and  marketing  personnel  both
internationally and in North America, increased marketing for new products and a
worldwide seminar series.  Sales and marketing  personnel increased by 37 during
1997 from 272 at  December  31,  1996 to 309 at  December  31,  1997.  Sales and
marketing  expense as a percentage of revenue  remained steady at 36% of revenue
during 1997  following a decline in 1996 to 36% from 39% in 1995.  In 1996,  the
Company  benefited from reduced  promotional  costs as a result of converting to
more  electronic  media such as the  Company's  World  Wide Web server  accessed
through the Internet and an interactive CD-ROM  application,  Instrupedia(TM),
and more cost-effective demonstration disks.

     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.

                                      -20-

<PAGE>

     Research and Development.  Research and development  expense as reported in
1997  increased  24% compared to 1996  following an increase of 22% in 1996 over
1995. When adjusted for the acquisition of the products,  technology, and assets
of nuLogic  during 1997 and the  acquisition  of  Georgetown  Systems,  Inc. and
another software  acquisition during 1996, research and development expense grew
26% in 1997 following a 14% increase in 1996 over 1995.  (See Note 8 of Notes to
Consolidated   Financial   Statements   for  a  description   of  the  Company's
acquisitions.) The increase in research and development  expenditures (excluding
the acquisition  related charges in 1997 and 1996) in absolute  amounts and as a
percentage of sales in each period was primarily due to the hiring of additional
product development engineers. Research and development personnel increased from
300 at December 31, 1996 to 373 at December 31, 1997. The Company  believes that
a  significant  investment  in research  and  development  is required to remain
competitive and continue revenue growth.

     The Company  capitalizes  software  development  costs in  accordance  with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer  Software  to be Sold,  Leased,  or  Otherwise  Marketed."  The Company
amortizes  such  costs  over the  related  product's  estimated  economic  life,
generally three years,  beginning when a product  becomes  available for general
release.  Amortization  expense  totaled $1.5 million,  $2.1  million,  and $1.2
million during 1997, 1996 and 1995,  respectively.  The decrease in amortization
expense is due  primarily  to  amortization  of  $500,000 of  development  costs
capitalized  as a  result  of a  1996  imaging  acquisition  software  purchase.
Software development costs capitalized during such years were $2.1 million, $3.0
million and $793,000,  respectively.  The significant  items capitalized in 1997
include DAQ, LabVIEW 5.0,  LabWindows/CVI/CVI and purchased software development
costs related to the nuLogic acquisition.  The levels of capitalization in prior
years are  primarily a result of  completing  significant  upgrade  projects for
LabVIEW,  LabWindows/CVI/CVI,  BridgeVIEW  and  purchased  software  development
costs.

     General  and  Administrative.  General and  administrative  expense in 1997
increased 8% from 1996, which followed an increase of 14% in 1996 from 1995. The
increased spending in absolute dollars in 1997 was primarily due to the increase
in information systems personnel,  costs to train personnel,  the use of outside
consultants,  and costs to implement the new  management  information  system in
Japan.  The  increased  spending  in  absolute  dollars  from  1995 to 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  management
information  systems in North  America  and Europe.  General and  administrative
expense as a percentage of revenue  declined to 8% of revenue during 1997.  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 1997  increased 44% from
1996, which followed an increase of 47% in 1996 from 1995. The primary source of
interest  income is from the investment of proceeds from the Company's  issuance
of common  stock  under an initial  public  offering in March 1995 and cash flow
generated from  operations.  During 1997,  interest income continued to increase
due to the  investment  of cash  generated  from  operations.  Interest  expense
decreased  41% from 1996,  which  followed  a decrease  of 4% in 1996 from 1995.
Interest expense represents less than one percent of net sales and fluctuates as
a result of bank  borrowings and interest  terms thereon.  The large decrease in
interest  expense from 1996 to 1997 is attributed to repayments of the equipment
loan  and the  Millennium  loan  during  January  1997.  See  Note 6 of Notes to
Consolidated Financial Statements for a description of the Company's debt.

     Foreign Exchange  Gain/Loss.  The Company  experienced net foreign exchange
losses of $2.6 million  during 1997,  compared to losses of $899,000 in 1996 and
gains of $150,000 in 1995. 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 1997 is
attributable to the strengthening of the U.S. dollar.

     The Company utilizes foreign currency forward exchange  contracts against a
majority of its foreign currency-denominated  receivables in order to reduce its
exposure to significant  foreign currency  fluctuations.  The Company  typically
limits the duration of its foreign exchange forward contracts to 90 days.

                                      -21-

<PAGE>

     In December 1997, the Company expanded its foreign currency hedging program
to also  include  foreign  currency  option  contracts  in order to  reduce  its
exposure of future net foreign  currency cash flows. The Company's policy allows
for the purchase of 5% "out-of-the-money"  foreign currency option contracts for
up to 80% of its risk and limits the  duration of these  contracts to 12 months.
As a result,  the Company's hedging  activities only partially address its risks
in  foreign  currency  transactions,  and  there can be no  assurance  that this
strategy  will be  successful.  If the  strengthening  of the U.S.  dollar  that
occurred  throughout  1997  continues  in 1998,  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 does not currently invest in contracts for speculative purposes
nor does it intend to do so in the foreseeable  future.  See Note 11 of Notes to
Consolidated Financial Statements for a description of the Company's forward and
option contracts and hedged positions.

     Provision  for Income Taxes.  The  provision  for income taxes  reflects an
effective tax rate of 33% in 1997 and 1996 and 36% in 1995.  The decrease in the
effective tax rate from 1995 to 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.

     At December 31, 1997, six of the Company's subsidiaries had available,  for
income tax purposes,  foreign net operating loss  carryforwards of approximately
$1.1  million of which  $568,000  expire  between 2000 and 2007.  The  remaining
$503,000 of loss  carryforwards  may be carried  forward  indefinitely to offset
future taxable income in the related tax  jurisdictions.  See Note 7 of Notes to
Consolidated Financial Statements for further discussion of the Company's income
tax provision.

Liquidity and Capital Resources

     The Company is currently financing its operations and capital  expenditures
through  cash flow from  operations.  Historically,  the  Company  financed  its
capital  expenditures,  such as the new  manufacturing  facility  constructed in
1995, through borrowings from financial institutions.  At December 31, 1997, the
Company had working capital of  approximately  $112.1 million  compared to $99.3
million at December 31, 1996.

     Accounts  receivable  increased to $37.4  million at December 31, 1997 from
$33.4  million  at  December  31,  1996,  as a result  of higher  sales  levels.
Receivable  days  outstanding  of 54 days at  December  31,  1997  represent  an
improvement  over  57  days  outstanding  at  December  31,  1996.  Consolidated
inventory  balances  have  increased to $15.5  million at December 31, 1997 from
$11.8 million at December 31, 1996. Inventory turns of 4.1 per year represent an
improvement  over  turns  of 3.7 per  year at  December  31,  1996  and  reflect
improvements in inventory  management  occurring at the Company's  manufacturing
facility in Austin,  Texas as well as at the centralized  European  warehouse in
Amsterdam.

     Cash used for investing  activities in 1997 includes  $22.0 million for the
purchase  of  property  and  equipment,   including   construction  in  process,
capitalization  of software  development  costs of $2.1 million,  net short-term
investment  purchases of $2.1 million and acquisition  costs of $2.0 million for
the purchase of nuLogic during 1997.  The Company  expects to complete an office
building  located  next to its  manufacturing  facility in Austin,  Texas in the
summer of 1998.  The  Company  estimates  the total  cost for the new  building,
including  furniture,  fixtures and equipment,  will range from $35.0 million to
$40.0  million.  The  Company  has  incurred   approximately  $16.0  million  in
construction  costs as of December 31, 1997 with the remainder  becoming payable
in the first half of 1998.The  remaining  portion of the construction  costs and
costs of furniture,  fixtures and equipment will be paid out of existing working
capital and future cash flows.  Upon  completion of the new building the Company
anticipates additional quarterly operating expenses of $1.5 million.

     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 $16.5 million credit agreement with NationsBank
of Texas,  N.A. which consists of (i) an $8.0 million  revolving line of credit,
and (ii) an $8.5 million  manufacturing  facility loan. As of December 31, 1997,
the  Company had no  outstanding  balance on the line of credit and a balance of
$6.0 million on the  manufacturing  facility  loan. The revolving line of credit
expires on June 30,  1998.  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.

                                      -22-

<PAGE>

     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.

Factors Affecting the Company's Business

     Fluctuations  in  Quarterly  Results.  The  Company's  quarterly  operating
results  have  fluctuated  in the past and may  fluctuate  significantly  in the
future due to a number of  factors,  including:  changes in the mix of  products
sold; the availability and pricing of components from third parties  (especially
sole sources);  the timing of orders;  level of pricing of international  sales;
fluctuations in foreign currency  exchange rates like the recent  devaluation in
certain Asian currencies;  the difficulty in maintaining margins,  including the
higher margins  traditionally  achieved in  international  sales; and changes in
pricing policies by the Company, its competitors or suppliers.  Specifically, if
the Asian  currencies  continue to weaken  against the U.S.  dollar,  and if the
local sales prices cannot be raised, the Company will experience a deterioration
of its Asian profit  margin.  As has occurred in the past and as may be expected
to occur in the future,  new software  products of the Company or new  operating
systems  of third  parties on which the  Company's  products  are  based,  often
contain  bugs or  errors  that can  result in  reduced  sales  and/or  cause the
Company's  support  costs to  increase,  either of which  could  have a material
adverse  impact on the Company's  operating  results.  Furthermore,  the Company
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 1998 may not exceed  revenues  from the fourth  quarter of 1997.  The
Company's  results of  operations  in the third quarter of 1998 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 in accordance
with announced  release dates,  that new products will achieve market acceptance
or that  any such  acceptance  will be  sustained  for any  significant  period.
Failure of new  products to achieve or sustain  market  acceptance  could have a
material adverse effect on the Company's operating results.  Moreover, there can
be no assurance that the Company's international sales will continue at existing
levels or grow in  accordance  with the  Company's  efforts to increase  foreign
market penetration.

     Operation  in  Intensely  Competitive  Markets.  The  markets  in which the
Company  operates  are  characterized  by  intense   competition  from  numerous
competitors, and the Company expects to face further competition from new market
entrants in the future.  A key  competitor is  Hewlett-Packard  Company  ("HP"),
which has been the leading supplier of traditional instrumentation solutions for
decades.  Although HP offers its own line of 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 strong position in the instrumentation  business,  changes in its marketing
strategy  or  product  offerings  could have a  material  adverse  effect on the
Company's operating results.

                                      -23-

<PAGE>

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

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

     Risks  Associated  with  International  Operations  and Foreign  Economies.
International  sales are subject to inherent  risks,  including  fluctuations in
local  economies,  difficulties  in staffing  and managing  foreign  operations,
greater  difficulty  in  accounts  receivable  collection,  costs  and  risks of
localizing  products for foreign  countries,  unexpected  changes in  regulatory
requirements, tariffs and other trade barriers, difficulties in the repatriation
of earnings  and the burdens of complying  with a wide variety of foreign  laws.
The  regulatory  environment in some emerging  countries is very  restrictive as
their  governments  try to protect  their local economy and value of their local
currency  against the U.S.  dollar.  Sales made by the  Company's  direct  sales
offices in Europe and Asia  Pacific are  denominated  in local  currencies,  and
accordingly, the U.S. dollar equivalent of these sales is affected by changes in
the  weighted  average  value of the  U.S.  dollar.  This  weighted  average  is
calculated as the percentage change in the value of the currency relative to the
dollar,  multiplied by the  proportion of  international  sales  recorded in the
particular  currency.  Between 1996 and 1997 this weighted  average value of the
U.S. dollar increased by 11%, 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  1997 had been  the same as that in 1996,  the  Company's
consolidated  net sales for 1997 would have been $252.0 million  representing an
increase of $51.0 million,  which represents 26% consolidated  sales growth.  If
the weighted  average  value during 1997 had been the same as that in 1996,  the
Company's  consolidated  operating  expenses  would  have been  $139.7  million,
representing an increase of $26.1 million,  or 23%. If the  strengthening of the
U.S. dollar continues in the future,  it could have a materially  adverse effect
on the operating results of the Company.

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

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

                                      -24-

<PAGE>

     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.  In addition,  the
recruiting environment for engineering and other technical professionals is very
competitive.  Competition  for  qualified  software  engineers  is  particularly
intense.  The Company also recruits and employs foreign nationals to achieve its
hiring goals primarily for entry-level engineering and software positions. There
can be no guarantee that the Company will continue to be able to recruit foreign
nationals to the current  degree if  government  requirements  for temporary and
permanent  residence  becomes  increasingly  restrictive.  These factors further
intensify competition for key personnel,  and there can be no assurance that the
Company will be successful in retaining its existing key personnel or attracting
and retaining additional key personnel.

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

     Impact of Year 2000. Many computer  systems  experience  problems  handling
dates beyond the year 1999. Therefore,  some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional.

     Based on a recent  assessment,  the Company  believes that its products are
Year 2000  compliant.  While the Company is not currently aware of any Year 2000
compliance  issues with its products,  no  assurances  can be made that problems
will not arise such as customer problems with other software programs, operating
systems or hardware that disrupt their use of the Company's products.  There can
be no assurances  that such  disruption  would not  negatively  impact costs and
revenues in future years.

     The  Company  has  been  assured  by  Oracle  Corporation  that  all of the
Company's  Oracle-based   management  information  systems  ,which  include  the
manufacturing,  distribution,  finance,  and order entry systems,  are Year 2000
compliant with the exception of the management  information system in Japan. The
Company expects to upgrade the Japanese system during 1998. The Company plans to
begin  internal year 2000 testing of the major  management  information  systems
during 1998 as well as assess any  additional  year 2000 issues  worldwide.  The
Company is aware that the  current  customer  marketing  database  and  customer
support  software are not Year 2000 compliant.  However,  the Company expects to
upgrade both systems prior to year 2000 as part of on-going system upgrades.

     The Company presently believes that with modifications to existing software
and conversions to new software, the year 2000 issue can be mitigated. It is not
anticipated  that there will be a  significant  increase in costs as much of the
year 2000 activities  will be a continuation of the on-going  process to improve
all the Company's  systems.  The Company plans to complete the year 2000 project
by mid 1999. However, if such modifications and conversions are not made, or are
not completed  timely,  the year 2000 issue could have a material  impact on the
operations of the Company.  Specific  factors that might cause a material impact
include,  but are not limited to,  availability and cost of personnel trained in
this area,  the  ability to locate and  correct  all  relevant  computer  codes,
failure  by  third  parties  to  timely  convert  their  systems,   and  similar
uncertainties.



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.

                                      -25-

<PAGE>


                                     PART III

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



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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



ITEM 11.    EXECUTIVE COMPENSATION

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



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Not applicable.

                                      -26-

<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.
             10.6*** Construction Contract for Phase 2 Building between
                     National Instruments Corporation and White Construction
                     Company.
             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 28).

                  *  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.
                ***  Incorporated by reference to the Company's Quarterly
                     Report on Form 10-Q for the quarter ended June 30, 1997.

      (b)   Reports on Form 8-K.

            Not Applicable.

      (c)   Exhibits

            See Item 14(a)(2) above.

                                      -27-

<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 25, 1998                BY:  /s/ James J. Truchard
                                   Dr. James J. Truchard
                                   Chairman of the Board and President

                                POWER OF ATTORNEY

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

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

        Signature             Capacity in Which Signed              Date
                                                                               
- --------------------------------------------------------------------------------

/s/ James J. Truchard        Chairman of the Board and
Dr. James J. Truchard      President (Principal Executive     March 19, 1998
                                      Officer)
- --------------------------------------------------------------------------------

/s/ Alexander M. Davern           Chief Financial             March 19, 1998
Alexander M. Davern       Officer and Treasurer (Principal
                          Financial and Accounting Officer)
- --------------------------------------------------------------------------------

/s/ Jeffrey L. Kodosky                Director                March 19, 1998
Jeffrey L. Kodosky
- --------------------------------------------------------------------------------

/s/ William C. Nowlin, Jr.            Director                March 19, 1998
William C. Nowlin, Jr.
- --------------------------------------------------------------------------------

/s/ L. Wayne Ashby                    Director                March 19, 1998
L. Wayne Ashby
- --------------------------------------------------------------------------------

/s/ Donald M. Carlton                 Director                March 23, 1998
Dr. Donald M. Carlton
- --------------------------------------------------------------------------------

/s/ Ben G. Streetman                  Director                March 19, 1998
Ben G. Streetman
- --------------------------------------------------------------------------------

/s/ Gerald T. Olson                   Director                March 19, 1998
Gerald T. Olson
- --------------------------------------------------------------------------------

                                      -28-

<PAGE>

                        NATIONAL INSTRUMENTS CORPORATION

                          INDEX TO FINANCIAL STATEMENTS

                                                                      Page No.
Financial Statements:
Report of Independent Accountants                                       F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996            F-3
Consolidated Statements of Income for the Three Years Ended
   December 31, 1997                                                    F-4
Consolidated Statements of Cash Flows for the Three Years Ended
   December 31, 1997                                                    F-5
Consolidated Statements of Stockholders' Equity for the Three
   Years Ended December 31, 1997                                        F-6
Notes to Consolidated Financial Statements                              F-7

Financial Statement Schedules:
For the Three Years Ended December 31, 1997
     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  accompanying  consolidated  balance  sheets  and the
related  consolidated  statements  of income,  of cash  flows and  stockholders'
equity,  present fairly,  in all material  respects,  the financial  position of
National  Instruments  Corporation and its subsidiaries at December 31, 1997 and
1996,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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 26, 1998


                                      F-2

<PAGE>

                           Consolidated Balance Sheets
                        (In thousands, except share data)

                                                         December 31,
                                                     --------------------
Assets                                                 1997        1996
                                                     --------    --------
Current assets:
  Cash and cash equivalents...................      $ 31,943    $ 30,211
  Short-term investments......................        51,067      48,956
  Accounts receivable, net....................        37,411      33,442
  Inventories.................................        15,505      11,778
  Prepaid expenses and other current assets...         5,387       2,059
  Deferred income tax, net....................         7,900       5,139
                                                     --------    --------
   Total current assets.......................       149,213     131,585

Property and equipment, net...................        46,805      32,184
Intangibles and other assets..................         8,472       5,456
                                                     ========    ========
   Total assets...............................      $204,490    $169,225


Liabilities and Stockholders' Equity

Current liabilities:
  Current portion of long-term debt...........      $    851    $  1,517
  Accounts payable............................        16,946      11,430
  Accrued compensation........................         8,219       6,367
  Accrued expenses and other liabilities......         2,455       2,993
  Income taxes payable........................         4,871       6,823
  Other taxes payable.........................         3,729       3,161
                                                     --------    --------
   Total current liabilities..................        37,071      32,291
 
Long-term debt, net of current portion........         5,151       9,175
Deferred income taxes, net....................           514         806
                                                     --------    --------
   Total liabilities..........................        42,736      42,272
                                                     --------    --------
Commitments and contingencies                            ---         ---

Common stock: par value $.01; 60,000,000
  shares authorized; 32,656,473 and
  32,463,361 shares issued and outstanding,
  respectively................................           326         325
Additional paid-in capital....................        47,160      44,287
Retained earnings.............................       116,215      82,590
Other.........................................        (1,947)       (249)
                                                     --------    --------
  Total stockholders' equity..................       161,754     126,953
                                                     --------    --------
  Total liabilities and stockholders' equity..      $204,490    $169,225

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

                                      F-3

<PAGE>

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

                                         For the Years Ended December 31,
                                       ------------------------------------
                                          1997         1996         1995
                                       ----------   ----------   ----------
Net sales.......................       $ 240,879    $ 200,715    $ 164,819
Cost of sales...................          55,096       49,755       39,525
                                       ----------   ----------   ----------
  Gross profit..................         185,783      150,960      125,294
                                       ----------   ----------   ----------
 
Operating expense:
  Sales and marketing...........          87,096       72,067       63,733
  Research and development......          30,296       24,387       19,991
  General and administrative....          18,508       17,129       15,071
                                       ----------   ----------   ----------
  Total operating expenses......         135,900      113,583       98,795
                                       ----------   ----------   ----------
  Operating income..............          49,883       37,377       26,499
Other income (expense):
  Interest income...............           3,455        2,405        1,635
  Interest expense..............            (502)        (844)        (875)
  Net foreign exchange (loss) gain        (2,649)        (899)         150
                                       ----------   ----------   ----------
  Income before income taxes....          50,187       38,039       27,409
Provision for income taxes......          16,562       12,553        9,986
                                       ==========   ==========   ==========
  Net income....................       $  33,625    $  25,486    $  17,423
                                       ==========   ==========   ==========

Basic earnings per share........       $    1.03    $    0.79    $    0.56
                                       ==========   ==========   ==========

Weighted average shares                   32,563       32,359       31,158
  outstanding-basic.............       ==========   ==========   ==========

Diluted earnings per share             $    1.00    $    0.77    $    0.55
                                       ==========   ==========   ==========

Weighted average shares                   33,656       32,943       31,424
  outstanding-diluted...........       ==========   ==========   ==========

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

                                      F-4

<PAGE>

                      Consolidated Statements of Cash Flows
                                 (In thousands)

                                              For the Years Ended December 31,
                                            ----------------------------------
                                               1997        1996        1995
                                            ----------  ----------  ----------
Cash flow from operating activities:
 Net income...........................      $  33,625   $  25,486   $  17,423
 Adjustments to reconcile net income to
 cash provided by operating activities:
  Charges to income not requiring cash
   outlays:
     Depreciation and amortization....          8,715       9,210       7,006
     Benefit for deferred income taxes         (3,072)       (779)     (3,547)
     Purchase of in-process research &
     development......................          1,400       1,000         ---
  Changes in operating assets and
   liabilities:
     Increase in accounts receivable..         (4,059)     (4,715)     (5,204)
     (Increase) decrease in inventory.         (4,335)      3,275      (5,351)
     Increase in prepaid expenses and
      other assets....................         (5,753)       (402)     (1,733)
     Increase in accounts payable.....          4,741       2,582       1,305
     Increase in accrued expenses and
      other liabilities...............          1,199       4,620       5,020
                                            ----------  ----------  ----------
Net cash provided by operating activities      32,461      40,277      14,919
                                            ----------  ----------  ----------
 
Cash flow from investing activities:
  Purchases of short-term investments.        (48,408)    (68,790)    (70,202)
  Sales of short-term investments.....         46,298      57,619      32,506
  Capital expenditures................        (21,998)     (6,811)    (16,162)
  Additions to capitalized software...         (2,102)     (1,568)     (1,103)
  Payments for acquisitions, net of
   cash received......................         (2,000)     (1,200)        ---
                                            ----------  ----------  ----------
Net cash used in investing activities         (28,210)    (20,750)    (54,961)
                                            ----------  ----------  ----------

Cash flow from financing activities:
  Borrowings from long-term debt......            ---         ---       5,161
  Repayments of long-term debt........         (4,640)     (3,017)     (1,704)
  Net proceeds from issuance of common
   stock under initial public offering            ---         ---      39,567
  Net proceeds from issuances of common
   stock under employee plans.........          2,874       1,891       1,310
                                            ----------  ----------  ----------
Net cash (used in) provided by financing
  activities..........................         (1,766)     (1,126)     44,334
                                            ----------  ----------  ----------

Effect of translation rate changes on cash       (753)       (206)        198
                                            ----------  ----------  ----------

Net increase in cash and cash equivalents       1,732      18,195       4,490
  Cash and cash equivalents at beginning
  of period...........................         30,211      12,016       7,526
                                            ==========  ==========  ==========
Cash and cash equivalents at end of period  $  31,943   $  30,211   $  12,016
                                            ==========  ==========  ==========

Cash paid for interest and income taxes
  Interest............................      $     451   $     904   $   1,084
                                            ==========  ==========  ==========
  Income taxes........................      $  21,490   $  11,135   $  10,173

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

                                      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,
1994.............   27,494,784  $ 275   $    340    $ 39,681  $   178  $ 40,474
  Net income.....          ---    ---        ---      17,423      ---    17,423
  Issuance of
  common stock
  under initial
  public offering    4,515,000     45     39,522         ---      ---    39,567
  Issuance of
  common stock
  under employee
  plans..........      198,060      2      1,308         ---      ---     1,310
  Foreign currency
  translation
  adjustment.....          ---    ---        ---         ---     (107)     (107)
  Unrealized gain
  on short-term
  investments....          ---    ---        ---         ---       69        69
                    ----------  ------  ----------  --------  -------- ---------

Balance at
December 31,
1995.............   32,207,844    322     41,170      57,104      140    98,736
  Net income.....          ---    ---        ---      25,486      ---    25,486
  Issuance of
  common stock in
  connection with
  acquisition....       91,374      1      1,228         ---      ---     1,229
  Issuance of
  common stock
  under employee
  plans..........      164,143      2      1,889         ---      ---     1,891
  Foreign currency
  translation
  adjustment.....          ---    ---        ---         ---     (410)     (410)
  Unrealized gain
  on short-term
  investments....          ---    ---        ---         ---       21        21
                    ----------  ------  ----------  --------  -------- ---------

Balance at
December 31,
1996.............   32,463,361    325     44,287      82,590     (249)  126,953
  Net income.....          ---    ---        ---      33,625      ---    33,625
  Issuance of
  common stock
  under employee
  plans..........      193,112      1      2,873         ---      ---     2,874
  Foreign currency
  translation
  adjustment.....          ---    ---        ---         ---   (1,713)   (1,713)
  Unrealized gain
  on short-term
  investments....          ---    ---        ---         ---       15        15
                    ----------  ------  ----------  --------  -------- ---------

Balance at
December 31,
1997.............   32,656,473  $ 326   $ 47,160    $116,215  $(1,947) $161,754
                    ==========  ======  ==========  ========  ======== =========

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

                                      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 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,  in-bound freight costs, labor and overhead. Market, with respect
to raw materials,  is replacement cost and, with respect to work-in-process  and
finished goods, is net realizable value.

     Property and equipment

     Property and equipment are recorded at cost. Depreciation is computed using
the  straight-line  method over the estimated useful lives of the assets,  which
range  from  twenty to 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.

                                      F-7

<PAGE>

     Intangible assets

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

     Concentrations of credit risk

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

     The Company's  counterparties  in its foreign  currency  forward and option
contracts  are major  financial  institutions.  The Company does not  anticipate
nonperformance  by these  counterparties.  The Company  maintains  cash and cash
equivalents  with  various  financial  institutions  located  in many  countries
worldwide.  Company  policy  is  to  limit  exposure  in  foreign  countries  by
transferring  cash  to  the  U.S.  The  Company's  short-term   investments  are
diversified  among and  limited  to  high-quality  securities  with high  credit
ratings.  Concentration of credit risk with respect to trade accounts receivable
is limited due to the large number of customers and their dispersion across many
countries  and  industries  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 $4.0
million and $2.4 million at December 31, 1997 and 1996, 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, 1997,  1996 and 1995 is $27.1 million,
$22.2 million and $16.5 million, respectively.

     Foreign currency translation

     The functional currency for the Company's  international  operations is the
applicable  local currency.  The assets and liabilities of these  operations are
translated  at the rate of exchange in effect on the balance  sheet date;  sales
and expenses are translated at average rates. The resultant gains or losses from
translation are included in a separate component of 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  contracts to hedge its
exposure on material foreign currency receivables.  The Company does not hold or
issue financial  instruments for trading purposes.  These financial  instruments
are carried at market value, which is measured on the basis of spot rates on the
balance  sheet date.  Realized  and  unrealized  gains and losses on the forward
contracts  are netted  against the  related  foreign  currency  loss or gain and
included in other income for the period.

     In  December  1997,  the Company  expanded  its  foreign  currency  hedging
program. The Company's 1998 hedging program will also include the use of foreign
currency  purchased  option  contracts  to hedge  anticipated  transactions  for
periods not exceeding twelve months.  Realized and unrealized gains and premiums
of foreign currency purchased option contracts that are designated and effective
as hedges of anticipated  transactions  are deferred and recognized in income in
the same  period as the hedged  transaction.  The risk of loss  associated  with
purchased  options is limited to premium  amounts paid for the contracts,  which
could be significant.

     Income taxes

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

     Earnings per share

     In February 1997, the Financial  Accounting Standards Board ("FASB") issued
SFAS No. 128,  "Earnings  per Share." The new  standard,  which is effective for
financial  statements  issued  for  periods  ending  after  December  15,  1997,
establishes  standards for computing and presenting earnings per share (EPS) and
requires  restatement of all  prior-period  EPS data.  The Company  adopted this
standard in the fourth quarter of 1997. The  implementation  of the standard has
resulted in the  presentation  of a basic EPS  calculation  in the  consolidated
financial statements as well as a diluted EPS calculation. Basic EPS is computed
by  dividing  net  income  by the  weighted  average  number  of  common  shares
outstanding  during each period.  Diluted EPS is computed by dividing net income
by the weighted  average  number of common  shares and common share  equivalents
outstanding (if dilutive) during each period.  Common share equivalents  include
stock options.  The number of common share equivalents  outstanding  relating to
stock options is computed using the treasury stock method.

     The  reconciliation of the denominators used to calculate the basic EPS and
diluted EPS for the years ended December 31, 1997,  1996 and 1995,  respectively
is as follows (in thousands):

                                                       December 31,
                                            ----------------------------------
                                               1997        1996        1995
                                            ----------  ----------  ----------
Weighted average shares outstanding-basic   $   32,563  $   32,359  $   31,158

Plus: Common share equivalents
  Stock options..........................        1,093         584         266
                                            ==========  ==========  ==========
Weighted average shares outstanding-diluted $   33,656  $   32,943  $   31,424
                                            ==========  ==========  ==========
     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 "Accounting for
Stock issued to Employees"  and related  interpretations  in accounting  for its
plans.  Accordingly,  compensation  cost for stock  options is  measured  as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.

                                      F-9

<PAGE>

     Future accounting requirements

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income," which the Company will be required to adopt for fiscal year 1998.  This
statement  will require the Company to report in the  financial  statements,  in
addition to net income,  comprehensive income and its components  including,  as
applicable,  foreign currency items,  minimum pension liability  adjustments and
unrealized gains and losses on certain  investments in debt and equity services.
Upon  adoption,  the  Company  will also be  required  to  reclassify  financial
statements for earlier periods  provided for comparative  purposes.  The Company
currently  expects  that the effect of adoption of SFAS No. 130 may be primarily
from foreign  currency  translation  adjustments  and the  unrealized  gains and
losses on  certain  investments  in debt and equity  securities  and has not yet
determined the manner in which comprehensive income will be displayed.

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures about Segments of
an Enterprise  and Related  Information,"  which the Company will be required to
adopt for fiscal year 1998. This statement  establishes  standards for reporting
information about operating segments in annual financial statements and requires
selected  information  about  operating  segments in interim  financial  reports
issued to shareholders.  It also establishes  standards for related  disclosures
about products and services,  geographic areas and major  customers.  Under SFAS
No. 131,  operating  segments are to be determined  consistent with the way that
management organizes and evaluates financial  information  internally for making
operating  decisions  and  assessing  performance.  The  adoption  of  this  new
accounting   standard  is  not  expected  to  have  a  material  impact  on  the
consolidated balance sheet or statement of income.

Note 2: Short-term investments

     Short-term  investments at December 31, 1997 and 1996,  consisting of state
and municipal  securities,  were acquired at an aggregate  cost of $51.1 million
and $48.9 million, respectively. The contractual maturities of these securities,
which are  classified as  available-for-sale  and carried at fair value,  are as
follows (in thousands):
                                                         December 31,
                                                     --------------------
                                                       1997        1996
                                                     --------    --------
    90 days to one year                              $ 38,724    $ 26,218
    One year through two years                         12,343      22,738
                                                     ========    ========
                                                     $ 51,067    $ 48,956
                                                     ========    ========
Note 3: Inventories

     Inventories consist of the following (in thousands):

                                                         December 31,
                                                     --------------------
                                                       1997        1996
                                                     --------    --------
    Raw materials                                    $  6,985    $  5,324
    Work-in-process                                     1,315         864
    Finished goods                                      7,205       5,590
                                                     ========    ========
                                                     $ 15,505    $ 11,778
                                                     ========    ========

                                      F-10

<PAGE>

Note 4: Property and equipment

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

                                                         December 31,
                                                     ---------------------
                                                       1997        1996
                                                     --------    ---------
    Land                                             $  4,006    $  4,006
    Buildings                                          16,873      16,077
    Furniture and equipment                            40,839      36,468
                                                     --------    ---------
                                                       61,718      56,551
    Accumulated depreciation                          (30,922)    (25,459)
    Construction in process                            16,009       1,092
                                                     --------    ---------
                                                     $ 46,805    $ 32,184
                                                     ========    =========

     Depreciation  expense for the years ended December 31, 1997, 1996 and 1995,
is $7.1 million,  $7.1 million and $5.8 million,  respectively.  Construction in
process  represents  an office  building the Company  expects to complete in the
summer of 1998. See Note 13 for future commitments.

Note 5: Intangibles and other assets

     Intangibles  and  other  assets  at  December  31,  1997 and  1996  include
capitalized  software  development  costs  of $3.4  million  and  $2.7  million,
respectively, which are net of accumulated amortization of $7.1 million and $5.6
million,  respectively.  Amortization of software development costs totaled $1.5
million, $2.1 million and $1.2 million during the years ended December 31, 1997,
1996 and 1995, respectively.

Note 6: Debt

     Debt consists of the following (in thousands):           December 31,
                                                           ------------------
                                                             1997      1996
                                                           --------  --------
     Short-term debt: Revolving line, lender's prime
       (8.5% at December 31, 1997) less 1/2%,
       $8,000,000 commitment, June 30, 1998.........       $    ---  $    ---
                                                           ========  ========
     Long-term debt: Equipment loan, 6.5%, due in
       equal quarterly payments of principal and
       interest through June 30, 1997...............       $    ---  $    488
     Millennium loan, 6.45%, quarterly payments of
       principal and interest beginning September 30,
       1994, 14 year amortization, seven-year term..            ---     3,324
     Manufacturing facility loan, LIBOR (6.7% at
       December 31, 1997), $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..............          6,002     6,847
     Other..........................................            ---        33
                                                           --------  --------
Total debt..........................................          6,002    10,692
  Less current portion..............................            851     1,517
                                                           ========  ========
Long-term portion...................................       $  5,151  $  9,175
                                                           ========  ========

     The terms of the Company's debt agreements  include various covenants which
require,  among other things, a minimum tangible net worth of $65.0 million 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 1998 through 2000 is $848,000 per year and
$3.5 million in 2001.

                                      F-11

<PAGE>

Note 7: Income taxes

     The  components  of income  before the  provision  for income  taxes are as
follows (in thousands):
                                                        December 31,
                                                ----------------------------
                                                  1997      1996      1995
                                                --------  --------  --------
          Domestic.....................         $42,400   $35,108   $22,908
          Foreign......................           7,787     2,931     4,501
                                                --------  --------  --------
                                                $50,187   $38,039   $27,409
                                                ========  ========  ========

     The  provision  for income taxes  charged to  operations  is as follows (in
thousands):
                                                  Years Ended December 31,
                                                ----------------------------
                                                  1997      1996      1995
                                                --------  --------  --------
          Current tax expense
            U.S. federal...............         $15,140   $10,234   $11,805
            State......................           1,468       985       703
            Foreign....................           3,026     2,113     1,025
                                                --------  --------  --------
          Total current................          19,634    13,332    13,533
                                                --------  --------  --------
          Deferred tax expense (benefit)
            U.S. federal...............          (2,719)     (201)   (3,914)
            State......................            (227)     (180)     (239)
            Foreign....................            (126)     (398)      606
                                                --------  --------  --------
          Total deferred...............          (3,072)     (779)   (3,547)
                                                ========  ========  ========
          Total provision..............         $16,562   $12,553   $ 9,986
                                                ========  ========  ========

     Deferred  tax  liabilities  (assets) at  December  31, 1997 and 1996 are as
follows (in thousands):

                                                            December 31,
                                                        --------------------
                                                          1997        1996
                                                        --------    --------
     Capitalized software.........................       $   735     $   708

     Depreciation.................................           ---          59
                                                        --------    --------
       Gross deferred tax liabilities.............          735         767
                                                        --------    --------
     Depreciation and amortization................         (842)        ---
     Operating loss carryforwards.................         (272)      (249)
     Vacation and other accruals..................       (1,385)    (1,242)
     Inventory valuation and warranty provisions..       (2,225)    (1,666)
     Doubtful accounts and sales provisions.......       (1,362)    (1,320)
     Unrealized exchange loss.....................         (649)      (111)
     Intercompany profit..........................         (762)      (510)
     Undistributed earnings of foreign subsidiaries        (364)       (28)
     Other........................................         (615)      (290)
                                                        --------    --------
       Gross deferred tax assets..................       (8,476)    (5,416)
                                                        --------    --------
     Valuation allowance..........................          269         245
                                                        ========    ========
     Net deferred tax asset.......................      $(7,472)    $(4,404)
                                                        ========    ========

     The  increase in the  deferred  tax assets  valuation  allowance in 1997 of
$24,000  is  attributable  to  the  increase  in  operating  losses  in  foreign
jurisdictions  the benefits of which are not assured of  realization at December
31, 1997.

                                      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,
                                                    ------------------------
                                                     1997     1996     1995
                                                    ------   ------   ------
U.S. federal statutory tax rate...............        35 %     35 %     35 %
Foreign sales corporation benefit.............        (1)      (2)      (2)
Loss from unconsolidated foreign subsidiaries        ---        1       (3)
Foreign income taxes in excess of U.S.
federal statutory rate........................       ---      ---        3
Foreign tax credits utilized..................        (1)      (2)     ---
Tax exempt interest...........................        (2)      (2)      (1)
State income taxes, net of federal tax benefit         2        2        2
Other.........................................       ---        1        2
                                                    ------   ------   ------
  Effective tax rate..........................        33 %     33 %     36 %
                                                    ======   ======   ======

     As of December 31, 1997, six of the Company's  subsidiaries have available,
for  income  tax  purposes,   foreign  net  operating  loss   carryforwards   of
approximately $1.1 million,  of which $568,000 expire during the years 2000-2007
and $503,000 of which may be carried forward indefinitely.

     A deferred  income tax  benefit of  $336,000  was  provided in 1997 for the
estimated foreign tax credits that will be utilized upon the anticipated  future
repatriation of approximately $1.9 million of foreign undistributed  earnings in
the form of dividends.  The Company has not provided for U.S. federal income and
foreign   withholding   taxes  on   approximately   $1.1   million  of  non-U.S.
subsidiaries'  undistributed  earnings as of December  31,  1997,  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 September 30, 1997,  the Company  acquired the products,  technology and
net assets of nuLogic,  Inc. for a purchase price of approximately  $2.0 million
in cash.  The  acquisition  was  accounted  for as a  purchase.  The  results of
nuLogic's operations have been combined with those of the Company since the date
of  acquisition.  The Company  recorded a $1.4 million  pre-tax  charge  against
earnings  during  the third  quarter  of 1997 for the  write-off  of  in-process
nuLogic  research and  development  technology  that had not reached the working
model  stage.  If this charge had not been taken,  net income for the year ended
December 31, 1997 would have been $34.6 million or $1.03 per share-diluted.  The
Company also recorded $612,000 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 three years.

     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 91,374  unregistered
shares of the Company's  common stock and $764,000 in cash. The  acquisition was
accounted for as a purchase.  The results of GSI's operations have been combined
with those of the Company since the date of acquisition.  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 three years.

     During the third quarter of 1996, the Company purchased imaging acquisition
software technology. The purchased software was amortized over the third quarter
of 1996,  resulting  in an expense 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 imaging acquisition software technology purchase,  net income for
the year ended  December  31,  1996  would have been $26.5  million or $0.80 per
share-diluted.

                                      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.

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

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

     Stock-based compensation plans

     At December 31, 1997, 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,
                                              --------------------------------
                                                1997        1996        1995
                                              --------    --------    --------

Net income                    As reported     $ 33,625    $ 25,486    $ 17,423
                              Pro-forma         29,829      23,458      16,317

Basic earnings per share      As reported     $   1.03    $   0.79    $   0.56
                              Pro-forma           0.92        0.72        0.52

Diluted earnings per share    As reported     $   1.00    $   0.77    $   0.55
                              Pro-forma           0.89        0.71        0.52

     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 $.05 per share),  1985 (exercisable at $.11 per share), and 1989
(exercisable  at $1.55 per share).  This plan  terminated  on November 30, 1993.
Under the plan,  options were granted at a price not less than fair market value
on the date of grant. All options must be exercised within ten years of the date
of grant.

     The  stockholders  of the Company  approved the 1994 Incentive Stock Option
Plan on May 9, 1994. At the time of approval,  4,050,000 shares of the Company's
Common Stock were reserved for issuance  under this plan. In 1997, an additional
3,150,000  shares of the Company's common stock were reserved for issuance under
this plan.  The 1994 Plan,  administered  by the  Compensation  Committee of the
Board of  Directors,  provides for  granting of incentive  awards in the form of
stock options to directors,  executive officers and employees of the Company and
its subsidiaries.  Awards under the plan must be granted within ten years of the
effective date of the 1994 Plan.  Options granted may be either  incentive stock
options  within the  meaning  of Section  422 of the  Internal  Revenue  Code or
nonqualified options. The right to purchase shares vests over a five to ten year
period,  beginning on the date of grant.  Stock options must be exercised within
ten years from date of grant.  Stock  options are issued at market  price at the
grant date. Shares available for grant at December 31, 1997 were 4,180,124.

                                      F-14

<PAGE>

     Transactions under all plans are summarized as follows:

                                            Number of shares  Weighted average
                                              under option     exercise price
                                            ----------------  ----------------
     Outstanding at December 31, 1994....         144,180         $   1.55
       Exercised.........................         (49,362)            1.79
       Canceled..........................         (43,473)            9.79
       Granted...........................         977,100             9.85
                                            ----------------  ----------------
     Outstanding at December 31, 1995....       1,028,445             9.07
       Exercised.........................         (13,763)           10.14
       Canceled..........................         (88,976)           11.57
       Granted...........................       1,081,725            13.58
                                            ----------------  ----------------
     Outstanding at December 31, 1996....       2,007,431            11.39
       Exercised.........................         (62,754)           11.52
       Canceled..........................        (151,898)           15.47
       Granted...........................       1,245,402            22.10
                                            ----------------  ----------------
     Outstanding at December 31, 1997....       3,038,181         $  15.57
                                            ================  ================

     Options exercisable at December 31:
       1995..............................         140,003         $   7.22
       1996..............................         410,841             9.98
       1997..............................         801,970            12.07

     Weighted average, grant date fair value                  Weighted average
     of options granted during:                                  fair value
       1995..............................         977,100         $   4.58
       1996..............................       1,081,725             6.25
       1997..............................       1,245,402            10.15

                                December 31, 1997
- -------------------------------------------------------------------------------
                 Options Outstanding                      Options Exercisable
- -----------------------------------------------------  ------------------------
                                           Weighted
                               Weighted     average                 Weighted
                  Number of    average     remaining    Number of   average
   Exercise        options     exercise   contractual    options    exercise
    price        outstanding    price      life (yrs)  exercisable   price
- --------------   -----------   --------   -----------  -----------  --------
$ 1.55 -  1.55       96,300    $  1.55         2          60,300     $ 1.55
  9.67 - 13.17      793,736       9.85         7         359,491       9.83
 13.33 - 21.08      987,442      13.77         8         275,696      13.58
 21.67 - 21.67    1,042,103      21.67         9         105,999      21.67
 22.25 - 32.00      118,600      26.64        10             484      26.55
- --------------   -----------   --------   -----------  -----------  --------
$ 1.55 - 32.00    3,038,181      15.57         8         801,970      12.07

     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 1997, 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  2,001,133 shares at December 31, 1997. Shares issued under this plan
were  130,358 in 1997.  The fair  value of the  employees'  purchase  rights was
estimated using the Black-Scholes model with the following assumptions:

                                         1997        1996        1995
                                       --------    --------    --------
     Dividend expense yield........          0%          0%          0%
     Expected life.................    6 months    6 months    6 months
     Expected volatility...........         50%         60%         60%
     Risk-free interest rate.......       5.22%       5.22%       5.22%

     Weighted  average,  grant date,
     fair value of purchase rights
     granted under the Employee Stock     Number of     Weighted average
     Purchase Plan:                         shares         fair value
                                          ---------     ----------------
       1995........................        226,808          $   3.37
       1996........................        140,403              4.77
       1997........................        117,373              7.68

Stockholders' rights plan

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

Note 10: Employee retirement plan

     The Company has a defined contribution  retirement plan pursuant to Section
401(k) of the Internal Revenue Code.  Substantially all domestic  employees with
at least one year of  continuous  service are  eligible to  participate  and may
contribute up to 15% of their  compensation.  The Board of Directors has elected
to make matching contributions equal to 50% of employee contributions, which may
be  applied  to a  maximum  of 6% of each  participant's  compensation.  Company
contributions vest immediately.  Company  contributions  charged to expense were
$799,000, $686,000 and $606,000 in 1997, 1996 and 1995, respectively.

                                      F-16

<PAGE>

Note 11: Financial instruments

     Fair value of financial instruments

     The estimated fair value amounts  disclosed  below have been  determined by
the Company using  available  market  information  and  valuation  methodologies
described  below.  However,  considerable  judgment is required in  interpreting
market data to develop these estimates of fair value. Accordingly, the estimates
presented herein are not necessarily  indicative of the amounts that the company
could  realize  in a  current  market  exchange.  The  use of  different  market
assumptions  could  have a  significant  effect on the  estimates.  For  certain
financial  instruments  of the  Company,  including  cash and cash  equivalents,
accounts  receivable,  accounts  payable and accrued  liabilities,  the carrying
amount  approximates  fair  value  due  to  the  short-term  maturity  of  these
instruments.  The estimated fair values of the other assets (liabilities) of the
Company's remaining  financial  instruments at December 31, 1997 and 1996 are as
follows (in thousands):
                                                   December 31,
                                   -------------------------------------------
                                           1997                   1996
                                   --------------------   --------------------
                                   Carrying               Carrying
                                    Amount   Fair Value    Amount   Fair Value
                                   --------  ----------   --------  ----------
     Short-term investments....    $51,067   $ 51,067     $48,956   $ 48,956
     Other assets:
       Forward contracts.......        662        662         134        134
       Options.................        740        816         ---        ---
     Long-term debt............     (5,151)    (4,379)     (9,175)    (8,962)

     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.  Foreign  exchange
option contracts fair values were estimated based upon quotes from brokers as of
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, 1997. 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,  1997 is as  follows  (in local  currency  in
thousands):


<TABLE>
<CAPTION>
                                                                      Exchange
                                                                      Rate
                                                                      (per U.S.
                    Balance at                           Balance at   Dollar) at
                    December 31, Contracts Transactions/ December 31, December 31,
                    1996         Purchased Maturities    1997         1997
                    ------------ --------- ------------- ------------ ------------
<S>                 <C>          <C>       <C>           <C>          <C>
Austrian Schilling        3,400     13,600      13,600        3,400       12.63
British Pound.....          850      1,610       2,460          ---         .61
Danish Kroner.....        2,000      5,800       6,700        1,100        6.85
Dutch Guilder.....          650      1,650       2,300          ---        2.03
French Franc......        9,500     56,785      51,360       14,925        6.01
German Deutsche Mark      1,300      1,300       2,600          ---        1.80
Italian Lire......    1,950,000  8,975,000   8,750,000    2,175,000    1,768.00
Japanese Yen......      475,000  3,330,000   2,950,000      855,000      130.57
Norwegian Kroner..        3,500     14,800      14,600        3,700        7.36
Singapore Dollar..          400      1,500       1,550          350        1.68
Spanish Peseta....       69,500    198,500     268,000          ---      152.33
Swedish Krona.....        3,100      8,400      11,500          ---        7.94
Swiss Franc.......          ---      2,650       1,950          700        1.46
</TABLE>


The outstanding contracts mature on January 23, 1998.

                                      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, 1997  (expressed  in
thousands of U.S. dollars at the December 31, 1997 exchange rates):

                                                        Amount    Unhedged
                                          Receivable    Hedged    Exposure
                                          ----------   --------   --------
     Austrian Schilling............       $    346     $   274    $    72
     French Franc..................          2,488       2,488        ---
     Hong Kong Dollar..............            562         ---        562
     Italian Lire..................          1,203       1,203        ---
     Japanese Yen..................          6,853       6,853        ---
     Korean Won....................            506         ---        506
     Norwegian Kroner..............            643         520        123
     Spanish Peseta................            415         ---        415
     Swiss Franc...................            438         438        ---
     Taiwanese Dollar..............            649         ---        649
                                          ----------   --------   --------
                                          $ 14,103     $11,776    $ 2,327
                                          ==========   ========   ========

     In addition to this unhedged exposure, the Company has unhedged receivables
aggregating  $1.0 million  which is comprised of  individual  balances less than
$300,000 (U.S. dollars) at December 31, 1997.

     Foreign  currency  forward  contracts  reduced  the  Company's  net foreign
exchange  loss for  December  31, 1997 and 1996 by $2.0  million  and  $674,000,
respectively, and reduced the net foreign exchange gain by $405,000 for the year
ended December 31, 1995.
 
     In  December  1997,  the Company  expanded  its  foreign  currency  hedging
program.  In addition to  utilizing  forward  contracts  to hedge the  Company's
foreign  currency  receivables,  the Company has entered into purchased  foreign
currency option  contracts to hedge a percentage of planned net foreign currency
cash  flows.  The  maturities  on these  instruments  are 12 months or less.  At
December 31, 1997,  the amount of premiums  deferred was $740,000.  The notional
amount of the options  outstanding  at December 31, 1997 is as follows (in local
currency in thousands):

                                                          Exchange Rate
                                    Local Currency      (per U.S. Dollar)
                                    --------------      -----------------
     French Franc.............           41,700                 6.01
     German Deutsche Mark.....           16,875                 1.80
     Italian Lire.............        9,520,000             1,768.00
     Japanese Yen.............        1,641,000               130.57
     British Pound............            5,165                 0.61

                                      F-18

<PAGE>

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,
                                           -------------------------------
                                             1997       1996       1995
                                           ---------  ---------  ---------
Net sales
North America:
  Unaffiliated customer sales.........     $141,180   $114,382   $ 93,001
  Geographic transfers................       29,128     26,388     36,659
                                           ---------  ---------  ---------
                                            170,308    140,770    129,660
                                           ---------  ---------  ---------
Europe:
  Unaffiliated customer sales.........       66,318     58,108     51,145
                                           ---------  ---------  ---------
Asia Pacific:
  Unaffiliated customer sales.........       33,381     28,225     20,673
                                           ---------  ---------  ---------
Eliminations..........................      (29,128)   (26,388)   (36,659)
                                           ---------  ---------  ---------
                                           $240,879   $200,715   $164,819
                                           =========  =========  =========

                                              Years Ended December 31,
                                           -------------------------------
                                             1997       1996       1995
                                           ---------  ---------  ---------
     Operating income:
     North America...................      $ 47,452   $ 32,058   $ 22,286
     Europe..........................         1,337      3,034      2,478
     Asia Pacific....................         1,094      2,285      1,735
                                           ---------  ---------  ---------
                                           $ 49,883   $ 37,377   $ 26,499
                                           =========  =========  =========

                                                         December 31,
                                                     --------------------
                                                       1997        1996
                                                     --------    --------
     Identifiable assets:
     North America...................                $169,895    $137,334
     Europe..........................                  22,472      22,953
     Asia Pacific....................                  12,123       8,938
                                                     --------    --------
                                                     $204,490    $169,225
                                                     ========    ========

                                      F-19

<PAGE>

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,  1997,  for  each  of the  next  five  years  are as  follows  (in
thousands):

          1998............................     $  1,022
          1999............................          751
          2000............................          552
          2001............................          444
          2002............................          443
          Thereafter......................          126
                                               ---------
                                               $  3,338

     The  Company  expects to complete an office  building  located  next to its
manufacturing  facility  in  Austin,  Texas in the summer of 1998.  The  Company
estimates the total cost for the new building, including furniture, fixtures and
equipment,  will range from $35.0  million to $40.0  million.  The  Company  has
incurred  approximately  $16.0 million in construction  costs as of December 31,
1997 with the remainder becoming payable in the first half of 1998.

     Rent expense under operating leases was  approximately  $5.0 million,  $4.2
million and $3.6 million for the years ended  December 31, 1997,  1996 and 1995,
respectively.

Note 14: Quarterly Results (unaudited)

     The  following   quarterly   results  have  been  derived  from   unaudited
consolidated  financial  statements that, in the opinion of management,  reflect
all adjustments  (consisting only of normal recurring adjustments) necessary for
a fair presentation of such quarterly information. The operating results for any
quarter are not  necessarily  indicative  of the results to be expected  for any
future  period.  The unaudited  quarterly  financial  data for each of the eight
quarters in the two years ended  December 31, 1997 are as follows (in thousands,
except per share data):

                                                Three Months Ended
                                ----------------------------------------------
                                 March 31,   June 30,   Sept. 30,    Dec. 31,
                                   1997        1997        1997        1997
                                ----------  ----------  ----------  ----------
     Net sales..............    $  54,571   $  60,092   $  60,595   $   65,621
     Gross profit...........       42,278      46,083      46,381       51,041
     Operating income.......       11,569      12,401      10,717       15,196
     Net income.............        7,568       8,581       7,599        9,877
     Basic earnings per share   $    0.23   $    0.26   $    0.23   $     0.30
     Weighted average shares
      outstanding-basic.....       32,475      32,552      32,572       32,651
     Diluted earnings per share $    0.23   $    0.26   $    0.23   $     0.29
     Weighted average shares
      outstanding-diluted...       33,450      33,435      33,750       34,003

                                                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
     Basic earnings per share   $    0.17   $    0.17   $    0.20   $    0.25
     Weighted average shares
      outstanding-basic.....       32,208      32,380      32,386      32,462
     Diluted earnings per share $    0.17   $    0.16   $    0.19   $    0.25
     Weighted average shares
      outstanding-diluted...       32,499      32,907      33,092      33,302

                                      F-20

<PAGE>



 
                                                                    SCHEDULE II


                        NATIONAL INSTRUMENTS CORPORATION

                      VALUATION AND QUALIFYING ACCOUNTS(1)
                                 (In thousands)




Allowance for doubtful accounts
                                 Balance    Provision                 Balance
                                    at        for       Write-Offs      at
 Year          Description      Beginning   Bad Debt    Charged to    End of
                                of Period    Expense    Allowances    Period
- ----   ----------------------   ----------  ----------  ----------  ----------
1995   Allowance for doubtful
        accounts                $   1,293   $     705   $     397   $   1,601
1996   Allowance for doubtful
        accounts                    1,601       1,490         671       2,420
1997   Allowance for doubtful  
        accounts                    2,420       1,914         334       4,000


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




(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,
                                            ----------------------------------
                                               1997        1996        1995
                                            ----------  ----------  ----------

Net Income                                  $  33,625   $  25,486   $  17,423
                                            ==========  ==========  ==========

Basic earnings per share                    $    1.03   $    0.79   $    0.56
                                            ==========  ==========  ==========

Weighted average shares outstanding-basic      32,563      32,359      31,158
                                            ==========  ==========  ==========

Diluted earnings per share                  $    1.00   $    0.77   $    0.55
                                            ==========  ==========  ==========

Weighted average shares                        33,656      32,943      31,424
outstanding-diluted
                                            ==========  ==========  ==========


Calculation of Weighted Average Shares:
   Weighted Average Common Stock
Outstanding-basic                              32,563      32,359      31,158
   Weighted Average Common Stock Options,
    utilizing the treasury stock method         1,093         584         266
                                            ----------  ----------  ----------

Weighted average shares                        33,656      32,943      31,424
outstanding-diluted
                                            ==========  ==========  ==========


     The Company  adopted  Statement of Financial  Accounting  Standard No. 128,
"Earnings  per  Share" in the year  ended  December  31,  1997.  All  historical
earnings  per share data has been  restated  to  conform  to this  presentation.
Additionally,  all share and per share data has been  restated  to  reflect  the
three-for-two  stock  split  declared by the  Company's  Board of  Directors  on
October  15,  1997 for  holders of record as of the close of business on October
28, 1997. See Note 9: Stockholders' equity.




<PAGE>



                                                                    EXHIBIT 21.1

                           Subsidiaries of the Company


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


NI/GSI, Inc., a Texas corporation
N.I. Export (Barbados) Ltd., Barbados
National Instruments (Ireland) Limited, Ireland
National Instruments (Korea) Corporation, Korea
National Instruments Australia Corporation, a Texas corporation
National Instruments Belgium N.V., Belgium
National Instruments Brazil, Brazil
National Instruments Canada Corporation, a Texas corporation
National Instruments Corporation (UK) Limited, United Kingdom
National Instruments de Mexico, S.A. de C.V., Mexico
National Instruments Europe Corporation, a Texas corporation
National Instruments Finland Oy, Finland
National Instruments France Corporation, a Texas corporation
National Instruments Germany GmbH, Germany
National Instruments Gesellschaft m.b.H., Salzburg, Austria
National Instruments Hong Kong Limited, Hong Kong
National Instruments India Corporation, a Texas corporation
National Instruments International Distribution B.V., Netherlands
National Instruments Israel Ltd., Israel
National Instruments Italy s.r.l., Italy
National Instruments Japan Kabushiki Kaisha, Japan
National Instruments Netherlands B.V., Netherlands
National Instruments Netherlands 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
Statements on Form S-8 (No.  33-91608 and No. 33-91610) of National  Instruments
Corporation  of our report dated January 26, 1998,  appearing on page F-2 of the
Form 10-K.


/s/ Price Waterhouse LLP
Price Waterhouse LLP
Austin, TX
March 23, 1998



<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, 1997 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-31-1997
<PERIOD-START>                                 Jan-01-1997
<PERIOD-END>                                   Dec-31-1997
<CASH>                                              31,943
<SECURITIES>                                        51,067
<RECEIVABLES>                                       41,410
<ALLOWANCES>                                         3,999
<INVENTORY>                                         15,505
<CURRENT-ASSETS>                                   149,213
<PP&E>                                              77,727
<DEPRECIATION>                                      30,922
<TOTAL-ASSETS>                                     204,490
<CURRENT-LIABILITIES>                               37,071
<BONDS>                                                  0
<PREFERRED-MANDATORY>                                    0
<PREFERRED>                                              0
<COMMON>                                               326
<OTHER-SE>                                         161,428
<TOTAL-LIABILITY-AND-EQUITY>                       204,490
<SALES>                                            240,879
<TOTAL-REVENUES>                                   240,879
<CGS>                                               55,096
<TOTAL-COSTS>                                       55,096
<OTHER-EXPENSES>                                   135,900
<LOSS-PROVISION>                                         0
<INTEREST-EXPENSE>                                     502
<INCOME-PRETAX>                                     50,187
<INCOME-TAX>                                        16,562
<INCOME-CONTINUING>                                 33,625
<DISCONTINUED>                                           0
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                        33,625
<EPS-PRIMARY>                                           1.03
<EPS-DILUTED>                                         1.00
        


</TABLE>