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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
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                                    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, 2002

                                       OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

     For the transition period from _____________ to ______________

                         Commission File Number 0-25426
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                        NATIONAL INSTRUMENTS CORPORATION
             (Exact name of registrant as specified in its charter)

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

       11500 North Mopac Expressway
              Austin, Texas                                    78759
 (address of principal executive offices)                    (zip code)

               Registrant's telephone number, including area code:
                                 (512) 338-9119
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           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $0.01 par value
                                (Title of Class)
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     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 |_|

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) 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. |X|

     Indicate by check mark whether the registrant is an  acceletated  filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant at the close of business on January 22, 2003, was $935,589,198  based
upon the last sales price reported for such date on the NASDAQ National  Market.
For purposes of this disclosure, shares of Common Stock held by persons who hold
more  than 5% of the  outstanding  shares of Common  Stock  and  shares  held by
officers  and  directors  of the  registrant  as of December  31, 2002 have been
excluded in that such persons may be deemed to be affiliates. This determination
is not necessarily conclusive.

     At the close of business on January 22, 2003,  registrant  had  outstanding
51,101,102 shares of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Part III incorporates  certain information by reference from the definitive
proxy  statement for the Annual  Meeting of  Stockholders  to be held on May 13,
2003 (the "Proxy Statement").

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PART I This Form 10-K contains certain 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. These statements, including statements regarding our strategy, products, product development efforts and financial performance, are subject to risks and uncertainties. We use words such as "anticipate," "believe," "plan," "expect," "future," "intend" and similar expressions to identify forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth under the heading "Factors affecting the Company's Business" beginning on page 27, and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement. ITEM 1. BUSINESS National Instruments Corporation (the "Company" or "National Instruments") is a leading supplier of measurement and automation products that engineers and scientists use in a wide range of industries. These industries are spread across a large and diverse market for test and measurement ("T&M") and industrial automation ("IA") applications. The Company provides flexible application software and modular, multifunction hardware that users combine with industry-standard computers, networks and the Internet to create measurement and automation systems, which the Company also refers to as "virtual instruments." A virtual instrument is a user-defined measurement and automation system that consists of an industry standard computer or workstation (which may be a mainstream general-purpose computer or workstation or a version of an industry standard computer or workstation that is specially designed and packaged for harsh industrial or embedded environments), equipped with the Company's user-friendly application software, cost-effective hardware and driver software. 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 computers, networks and the Internet. Because virtual instruments exploit these computation, connectivity, and display capabilities, users can define and change the functionality of their instruments, rather than being restricted by fixed-functions imposed by traditional instrument vendors. The Company's products empower users to monitor and control traditional instruments, create innovative computer-based systems that can replace traditional instruments at a lower cost, and develop systems that integrate measurement functionality with industrial automation. The Company believes that giving users flexibility to create their own user-defined virtual instruments for an increasing number of applications in a wide variety of industries, and letting users leverage the latest technologies from computers, networking and communications shortens system development time and reduces both short- and long-term costs of developing, owning and operating measurement and automation systems, and improves efficiency and precision of applications spanning research, design, production and service. The Company is based in Austin, Texas and was incorporated under the laws of the State of Texas in May 1976 and was reincorporated in Delaware in June 1994. On March 13, 1995, the Company completed an initial public offering of shares of its Common Stock. The Company's Common Stock, $0.01 par value, is quoted on the NASDAQ National Market System under the trading symbol NATI. Industry Background Engineers and scientists have long used instruments to observe, better understand and manage the real-world phenomena, events and processes related to their industries or areas of expertise. Instruments measure and control electrical signals, such as voltage, current and power, and physical phenomena, such as temperature, pressure, speed, flow, volume, torque and vibration. Common instruments include voltmeters, signal generators, oscilloscopes, dataloggers, spectrum analyzers, cameras, 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. Instruments and systems are used to facilitate research as well as product design, production and service. In research and development settings, scientists and engineers use instruments and systems to collect and analyze experimental data and simulate manufacturing processes or techniques. In manufacturing environments, engineers use instruments and systems to test and verify the proper operation of the products being manufactured and to monitor and control the manufacturing machines and processes. In service contexts, instruments and systems are used to monitor, troubleshoot and repair products and processes. Traditional Instrument Applications for Measurement and Automation Instrument applications can be generally categorized as either T&M or IA. T&M applications generally involve testing during the design, manufacture and service of a wide variety of products. IA applications generally involve automating the machinery and processes used in the production and distribution of a wide variety of products and materials. A typical T&M instrument is a stand-alone unit that has input, output and analysis capabilities; knobs, switches and push buttons for user operation; and gauges, meters or other displays for visual data presentation. Traditionally, most T&M instruments were vendor-defined, fixed-function devices designed to address specific applications. As a result, users had limited flexibility to adapt their instruments to changing requirements. In the 1960's, vendors began to incorporate integrated circuits, including programmable microcontrollers, to increase instrument flexibility. In the mid-1970's, the General Purpose Interface Bus ("GPIB" or "IEEE 488") was developed as a standard interface to connect instruments to external computers. The first computer controllers for GPIB instruments were based on proprietary hardware architectures. In the later 1970's, some minicomputers with general purpose but complex operating systems were equipped for GPIB instrument control. In the early 1980's, personal computers with limited processing power equipped with MS-DOS, a standard, character-based operating system, began replacing minicomputers as the preferred platforms for instrument control applications. In the 1990s, personal computers with Windows operating systems and graphics-based application software grew in popularity and became the dominant platforms for instrument control applications. In the late 1990s, connectivity to the Internet and the ability for personal computers to integrate and share data throughout the enterprise further increased the popularity and use of PC-based instrumentation systems, and new web-enabled tools enabled users to begin to easily leverage the Internet for networked and distributed measurement applications. In the early 2000's, as mainstream PCs continued their dramatic increase in processor performance, memory, storage, and display capabilities at ever lower prices, improvements in PC operating systems also increased reliability, stability, and network connectivity. These improvements, combined with add-on products such as the Company's LabVIEW Real-Time Software and associated hardware, enabled industry standard PCs to be used in a wider range of T&M applications. 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, another approach became available when industrial PC-based IA systems came into use. These early PC-based systems generally ran proprietary, vendor-defined software and incorporated plug-in data acquisition boards or interfaced to PLCs. In the 1990's, Ethernet networks grew in popularity as a standard for connectivity between IA devices, instruments, and systems, and personal computers with high-speed processors running Windows based operating systems. In addition, graphics-based application software grew in popularity as platforms for supervision and control of IA systems and applications. Finally, just as in T&M applications, in the late 1990's connectivity to the Internet enabled users to leverage networked applications via the internet. In the early 2000's, industry standard PC technologies began to migrate beyond traditional desktop and laptop computer form factors into a wide variey of industrial and embedded form factors. As a result, PC technologies designed for harsh industrial environments began to replace traditional proprietary solutions in industrial and embedded applications where the computer itself resides inside industrial machines and processes to provide embedded real-time monitoring and control. Limitations of Traditional Approaches to Instrumentation Instruments and systems for both T&M and IA applications 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 IA applications 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 the 1990's they 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 and portable computers improved significantly in data and graphics processing power, storage, communication, and networking capabilities, user-friendliness and reliability. Nevertheless, users accustomed to the flexibility, efficiency, power and open architecture of these later-generation computers, and the highly evolved application software available for business computing needs, have been generally frustrated in their efforts to integrate these computers into measurement and automation solutions. Standard desktop computers were not equipped with the hardware connections required to control many types of instruments and lacked instrumentation-specific application development tools, including GUI development environments. Neither standard programming languages such as C/ C++ and Visual Basic, nor operating systems such as Windows, Linux and UNIX, are "measurement 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 computers, networks and the Internet to meet their measurement and automation requirements. The Company's Approach to Measurement and Automation The Company pioneered a new computer-based approach to measurement and automation called virtual instrumentation in 1986 when it introduced its LabVIEW application software, which is a graphical programming environment that empowers users to easily build their own computer-based instruments and systems to meet their specific measurement and automation needs. While a traditional instrument bundles the data acquisition, analysis and presentation functions in a single, stand-alone unit, a "virtual instrument" system consists of industry standard computers or workstations equipped with the Company's user-friendly application software, cost-effective hardware and driver software that together perform the functions of instruments. By unbundling the key instrumentation functions, virtual instruments represent a fundamental shift from hardware-centered instrumentation systems to software-centered systems that exploit the computational, display, productivity and connectivity capabilities of computers, networks and the Internet. The Company's application software products give users the power and flexibility to define, implement, modify and control the core data acquisition, analysis, and presentation functions of instruments with their computer. Users can mix and match their choice of the Company's DAQ, GPIB, VXI, PXI, image acquisition, motion control or industrial communications products to create virtual instrumentation systems that meet their specific instrumentation needs. The Company's products empower users to monitor and control instruments, create innovative computer-based systems that can replace instruments at a lower cost, and integrate measurement functionality with industrial automation and standard network connectivity to improve efficiency and precision of applications spanning research, design, production and service. Because much of the instrumentation functionality resides in the software, in a significant sense, the software is the instrument. User Benefits Compared with traditional solutions, the Company believes its products and computer-based, virtual instrumentation approach provide the following significant customer benefits: Performance, Ease-of-Use and Efficiency The Company's virtual instrument application software brings the power and ease-of-use of computers, networks and the Internet to instrumentation. With features such as graphical programming, automatic code generation capabilities, graphical tools libraries, ready-to-use example programs, libraries of specific instrumentation functions, and the ability to deploy their applications on platforms ranging from standard desktop and laptop computers to computers designed for harsh industrial settings and embedded "real-time" control, 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 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. In addition, the continuous improvement in performance of PCs and the Internet, which are the core platform for the Company's approach, result in direct performance benefits for virtual instrument users in the form of faster execution for software-based measurement and automation applications, resulting in shorter test times and faster automation, and higher manufacturing throughput. 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 instrument 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 measurement and automation solutions. The Company's open product architecture provides a high level of integration between the Company's products and other industry standard instrumentation products. This approach provides users with the flexibility to mix and match the Company's and third-party hardware components when developing custom virtual instrumentation systems. Long-Term Compatibility Across Multiple Computer Platforms The Company offers a variety of multi-platform software products so users can choose the platform and programming methodology that best meets their needs and skills. These software products also have portable, open architectures so users can move their applications among multiple platforms and operating systems. In addition, the Company strives to ensure long-term compatibility between its products and the latest industry-standard computers, operating systems, programming languages and tools, as well as backward compatibility with its own product offerings. Network and Integrate with Customers' Computing Environments The Company's products facilitate connectivity of measurement and automation systems with the enterprise by utilizing industry communication standards such as the Web, Ethernet and TCP/IP. The Company's products provide integrated Web support, 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 its NI.com Web site, user groups, newsletters, conferences and seminars. This large base of users stimulates the expansion of the Company's network of approximately 600 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 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 measurement and automation products and solutions to engineers, scientists and others in both T&M and IA applications. To achieve this objective, the Company is pursuing a strategy that includes the following elements: Expand Broad Customer Base Serve A Large and Diverse Market. The Company's products and services are designed to serve a broad customer base across many industries. The Company defines product features and capabilities by working closely with technically sophisticated customers and seeks to achieve high unit volumes by selling these same products to a large base of customers with diverse measurement and automation needs. Support Many Computer and Instrument Options. The Company diversifies its customer base by accommodating many popular computer platforms and a variety of instrumentation options. In addition, the Company expects to continue to create or adapt products for computer systems and instrumentation options that gain market acceptance. Customers are provided a range of price/performance options through the Company's extensive line of products. Provide Worldwide Marketing and Distribution. The Company uses multiple coordinated distribution channels in its major world markets. The Company devotes significant resources to direct sales activities in the United States and in key international markets. In addition to its direct sales channel, the Company's other distribution channels include 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. To address the range of sales opportunities, the Company expects to continue to pursue value-added sales channels through formal relationships with OEMs, VARs, consultants or other third parties when such relationships can add significant value to its products or revenues. The Company intends to expand each of these distribution networks to take advantage of market opportunities. Acquire New Technologies. The Company has in the past acquired companies, products, and technologies to augment its product offerings, and intends to continue to seek opportunities to satisfy customer needs and build market penetration through acquisitions 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. 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 Global Customer Support and Education. The Company's sales and marketing engineers have the technical expertise necessary to understand customers' 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 the NI.com Web site, electronic mail, bulletin boards, fax and telephone, newsletters, warranty service and repair, upgrade programs, free and paid seminars and technical classes. In 2002 the Company continued to invest to leverage the Web for customer support. Through the Company's NI.com Web site, customers have access to a growing range of support options to solve their own problems directly over the Web, including software downloads, upgrades and bug fixes, automated product configuration tools, knowledge databases of common questions and answers, online seminars, live product demonstrations and discussion forums. 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 personal computers and workstations, operating systems, programming languages and software development tools, and their suppliers. By integrating Web, networking and communications capabilities directly in its software and hardware products, the Company's products allow users of its virtual instrument approach to easily distribute measurement and automation capabilities throughout factories and around the world, easily integrate measurement and automation data throughout their organization and across the enterprise and 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 instrument suppliers, computer vendors and competitors. Leverage Core Technologies. The Company designs proprietary ASICs to optimize performance and reduce production costs. The Company utilizes these ASICs and its other internally developed hardware and software components in multiple products to achieve consistency and compatibility between products. Develop and Support Industry Standards. The Company actively participates in efforts to standardize key technologies by participating in industry consortia and serving on standards committees, such as IEEE 488, VXI, Compact PCI, PXI, PICmg, the Interchangeable Virtual Instrumentation Foundation, also called IVI, Foundation Fieldbus, OPC, and ASAM. 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 measurement and automation products. Engineers, scientists and other users involved in T&M and IA applications can use these products with computers, networks and the Internet to develop customer-defined virtual instrument solutions. The Company's products consist of application software, and hardware components together with related driver software. In T&M applications, the Company's products can be used to monitor and control traditional instruments or to create computer-based instruments that can replace the traditional instruments. In IA applications, the Company's products can be used in the same ways as in T&M and can also be used to integrate measurement functionality with process automation capabilities. The Company's products are designed to work either in an integrated solution or separately. The Company believes that the flexibility, functionality and ease of use of its application software promotes sales of the Company's other software and hardware products. Application Software The Company believes that application software is playing an increasingly important role in the development of computer-based instruments and systems in measurement and automation applications. The Company's application software products leverage the increasing capability of computers, networks and the Internet for data analysis, connectivity and presentation power to bring increasing efficiency and precision to measurement and automation applications. The Company's application software products include LabVIEW, DIAdem, Measurement Studio, LabWindows/CVI, TestStand, Switch Executive, Lookout, Measure, DASYLab, and VI Logger. The Company's application software products are integrated with the Company's hardware/driver software. The Company offers a variety of software products for developing measurement and automation applications to meet the different programming and computer preferences of its customers. LabVIEW, LabWindows/CVI, and Measurement Studio for Microsoft development software 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 instruments or add custom graphics to visually represent the control and operation of processes. LabVIEW, LabWindows/CVI and Measurement Studio also have ready-to-use libraries for controlling hundreds of programmable instruments, including serial, GPIB and VXI, the Company's plug-in DAQ boards and PXI/PCI computer-based instruments. 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 LabVIEW, LabWindows/CVI, and Measurement Studio 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. With LabWindows/CVI, users may program with the conventional, text-based language of C. Measurement Studio consists of application-specific ActiveX controls and C++ classes and libraries that add measurement productivity to general purpose Microsoft Visual Basic, Visual C++ and Visual Studio.NET development environments. The latest revisions of LabVIEW and Measurement Studio software packages feature enhanced capabilities to allow users to more easily integrate the Web into their computer-based instrumentation applications. Measurement Studio 6.0, a major upgrade, was introduced in 2001. LabVIEW 6.1, which was introduced in 2002, continued to build on the Internet capabilities of LabVIEW, allowing the customer to easily communicate, share and control measurement and automation systems and information with anyone on the Web. In addition, customers can use the Internet and Intranets to build distributed, networked systems throughout their enterprise. In 2002, the Company also expanded the capabilities of its LabVIEW Real Time software product to run on the new industrial Compact FieldPoint hardware platform specially designed and packaged for harsh industrial or embedded environments. This adds to the portfolio of PXI and FieldPoint real-time enabled hardware that allow users who have exceptional response requirements to reliably execute an expanded range of system-level applications even if the PC operating system crashes--solving a key objection some potential users have had in the past to using PC technology for embedded devices or for mission critical measurement and automation applications, and extending the range of applications for computer-based measurement and automation. The Company also sells a range of optional add-on products for LabVIEW and Measurement Studio, such as advanced analysis libraries, database tools and Internet integration, including the LabVIEW Datalogging and Supervisory Control Module, an add-on module for high channel count applications in research and development and manufacturing. New toolkits introduced in 2002 integrate LabVIEW software increasingly with design tools used by design engineers, including the LabVIEW Simulation Interface Toolkit and the LabVIEW DSP Test Integration Toolkit for use with Texas Instruments Code Composer Studio. The Company also offers a software product called TestStand targeted for T&M applications in a manufacturing environment. TestStand is a test management environment for organizing, controlling, and running automated production test systems on the factory floor. It also generates customized test reports and integrates product and test data across the customers' enterprise and across the Internet. TestStand manages tests that are written in LabVIEW, LabWindows/CVI, Measurement Studio, C and C++, and VisualBasic, so test engineers can easily share and re-use test code throughout their organization and from one product to the next. TestStand is a key element of the Company's strategy to broaden the reach of its application software products across the corporate enterprise. In 2001, the Company introduced TestStand 2.0, a significant upgrade of TestStand for high volume manufacturing applications. This version allows testing of multiple units in parallel on the same test system by simply adding additional measurement and automation hardware. Users can therefore easily scale their test systems to increase throughput or reduce test time without major software changes, which lowers the cost to test each unit and increases their profit margin. In 2002, the Company introduced Switch Executive application software to simplify configuration and programming of switching in manufacturing test systems. Also in 2002, the Company introduced TestStand 2.0.1 which includes enhancements for tighter integration with Switch Executive. The Company's instrumentation software products also include DASYLab and DIAdem. DASYLab is a schematic environment by which users can quickly configure simple DAQ applications using both the Company's and third-party DAQ boards. The Company introduced DASYLab 7.0 in 2002 as well as DIAdem 8.1. DIAdem is an easy to use, rapid development environment for data acquisition, monitoring, visualization, open and closed loop control, analysis, automation and documentation. DIAdem features extensive off-line analysis capabilities, including analysis functions specific to automotive test. DIAdem 8.1 integrates report generation capabilities further with LabVIEW. The Company's Lookout software product is targeted specifically for IA applications. 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. In 2001, the Company introduced VI Logger, a software product targeted specifically at Data Logging applications. VI Logger is built with LabVIEW technology, and works with a wide variety of the Company's data acquisition and signal conditioning hardware products. Hardware Products and Related Driver Software The Company's hardware and related driver software products include GPIB, VXI, DAQ, PXI, image acquisition, motion control, and industrial communications. The Company believes it can deliver significant cost/performance benefits to users and distinguish its products from competitive products by designing proprietary ASICs for use in its hardware products. Software drivers are necessary to link hardware to the operating system and the Company's application software. The high level of integration between the Company's products provides users with the flexibility to mix and match hardware components when developing custom virtual instrumentation systems. GPIB Interfaces/Driver Software. GPIB, also known as the IEEE 488 standard, has existed since 1975 and defines the protocol for transferring data between certain instruments and computers over an industry-standard cable. The computer must be equipped with a GPIB interface. Driver software controls the interface and the transfer of data between the instrument and the computer. GPIB is largely used in T&M applications. The Company began selling GPIB products in 1977 and is a leading supplier of GPIB interface boards and driver software to control traditional GPIB instruments. These traditional instruments are manufactured by a variety of third-party vendors and are used primarily in T&M applications. The Company's diverse portfolio of hardware and software products for GPIB instrument control is available for a wide range of computers, workstations and minicomputers. The Company's GPIB product line also includes products for portable computers such as a PCMCIA-GPIB interface card, and products for controlling GPIB instruments using the computer's standard parallel USB, IEEE 1394 (Firewire), Ethernet, and serial ports. Portability of GPIB application programs is provided by the Company's NI-488.2 driver software and NI-VISA driver software. The Company offers networking capabilities through its GPIB products. With these products, users can communicate with and control GPIB instruments from any point on an Ethernet-based TCP/IP network. The Company also offers a variety of GPIB support products, including converters, expanders, extenders, data buffers and GPIB system analyzers as well as cables and other accessories. VXI Modules/Driver Software. VXI is an industry standard instrumentation platform developed in 1987 through an industry consortium to reduce the size and increase the performance of instrumentation systems for automated test and measurement applications. With VXI, the physical size of multiple instrument systems can be decreased and communication between instruments and computers can be improved relative to rack of box instruments. Like GPIB, VXI is supported by a variety of traditional third-party instrument manufacturers and is largely used in military and aerospace applications. 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 military and aerospace applications. The Company is a leading supplier of VXI computer controller hardware and the accompanying NI-VXI and NI-VISA driver software. The Company also offers LabVIEW, LabWindows/CVI, Measurement Studio and TestStand software products for VXI systems. In 2002, the Company introduced two new lines of VXI controllers, the VXI 870B and VXI 770, that offer increased performance and industry standard operating system support. 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 computer-based DAQ products are typically a lower-cost solution than traditional instrumentation. The Company believes that applications suitable for automation with computer-based DAQ products are widespread throughout many industries, and that many systems currently using traditional instrumentation (either manual or computer-controlled) could be displaced by computer-based DAQ systems. The Company offers a range of computer-based DAQ products, including models for digital, analog and timing input-output, and for transferring data directly to a computer's random-access memory. The Company's DAQ products provide a range of price/performance options, and include products for high-speed applications such as on-line monitoring and control as well as products designed for long-term recording of slowly changing data such as temperatures. The Company also offers products with features comparable to stand-alone traditional instruments such as oscilloscopes, DMMs, and function and arbitrary waveform generators. 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. In 2002, the Company expanded its DAQ product line with new low-cost and high-resolution hardware, portable data acqusition solutions for laptop computers, and high-speed simultaneous sampling boards. PXI Modular Instrumentation. The Company's PXI modular instrument platform, which was introduced in 1997, is a desktop PC packaged in a small, rugged form factor with expansion slots and instrumentation extensions. It combines mainstream PC software and PCI hardware with advanced instrumentation capabilities derived from the VXI architecture. In essence, PXI is an instrumentation PC with plenty of expansion slots to enable the company to pursue complete system-level opportunities and deliver a much higher percentage of the overall system content using the company's own products. PXI delivers many of the benefits of VXI in a much smaller package with higher performance and at lower prices. The Company continues to expand its PXI product offerings with new modules, which address a wide variety of measurement and automation applications. Following the Company's 2001 introduction of a new family of embedded PXI controllers that significantly improve the price and performance of PXI, and upgrade its LabVIEW Real-Time software so that the PXI system platform can be used for embedded and real-time applications, the Company introduced two highly innovative PXI based products in the third quarter of 2002. Engineers can reduce the time it takes to make accurate measurements with National Instruments PXI-4070 FlexDMM -- a full-featured 6 1/2-digit digital multimeter (DMM) in a single-slot 3U PXI module. The National Instruments FlexDMM delivers the accuracy of a traditional 6 1/2-digit DMM along with the advanced features and throughput of higher resolution DMMs that cost thousands of dollars more. These advanced features include a 1.8 MS/s fully isolated digitizer mode, self-calibration, and offset compensated ohms measurement. In addition, the Company introduced the NI PXI-5660 2.7 GHz RF signal analyzer. Test engineers can perform RF measurements up to 200 times faster than before with the National Instruments PXI-5660 RF signal analyzer. Its software-defined measurement capabilites and integration with the PXI platform make it competitive for unique measurements in applications ranging from consumer electronics to avionics, satellite and missile testing. Additionally, in the fourth quarter of 2002, the Company introduced the LabVIEW FPGA Pioneer system, a kit that enables customers to configure the hardware logic on a reconfigurable PXI module through innovative graphical software. This kit provides an off-the-shelf solution for many real-time and embedded applications that previously required custom hardware. PXI also continues to gain acceptance, with endorsements from over 50 suppliers. The number of unique PXI modules for T&M applications grew from 600 to over 880 modules in 2002. Machine Vision/Image Acquisition. In late 1996, the Company introduced its first image acquisition hardware. With the advanced technologies in PC's and the Company's vision products, it is cost-effective for end-users to integrate vision into their measurement and automation applications. The Company's vision software is designed to work with many different software environments, including LabVIEW, LabWindows/CVI, Visual Basic, C, and Measurement Studio and hardware buses including PCI and PXI. Vision is commonly used in applications ranging from quality control of manufactured products to biomedical cell counting to security. In 2002, the Company expanded its software offering with new easy-to-use menu driven machine vision software that can run as a stand-alone vision system. The new software can also generate LabVIEW code. Users can easily modify the LabVIEW code to create custom applications. Motion Control. During 1997, the Company introduced its first 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 Measurement Studio. The Company's software tools for motion are easily integrated with the Company's other product lines, allowing motion to be combined with image acquisition, test, measurement, data acquisition and automation. The Company's computer-based motion products allow users to leverage standard hardware and software in measurement and automation applications to create robust, flexible solutions. In 2002, the Company introduced new low cost motion controllers for stepper motors, developed a program for third-party companies with complimentarary products, and released new software for interactive motion control which simplifies motion control application development. 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 four hardware and driver software product lines for communication with industrial devices--Controller Area Network (CAN), DeviceNet, 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 and Measurement Studio. Distributed I/O and Embedded Control Hardware/Software. The Company introduced its FieldPoint product for distributed I/O applications in mid-1997. FieldPoint is an intelligent, distributed, and modular I/O system that gives industrial system developers an economical solution for distributed data acquisition, monitoring and control applications. Suitable for direct connection to industrial signals, FieldPoint includes a wide array of rugged and isolated analog and digital I/O modules, terminal base options, and network modules. FieldPoint software provides seamless integration into the LabVIEW Real-Time and LabVIEW Datalogging and Supervisory Control Modules, driver libraries for support under LabVIEW, LabWindows/CVI, Measurement Studio and Lookout, and an OPC server that provides wide compatibility of FieldPoint hardware with other industrial automation software packages. The FieldPoint 2000 family of real-time network control modules, which were introduced in 2001, enable LabVIEW Real-Time users to download their LabVIEW code and easily create networked systems of intelligent, real-time nodes for embedded measurement and control. In the fourth quarter of 2002, the Company launched Compact FieldPoint, a new intelligent distributed I/O product line with 23 new measurent and automation modules. Compact FieldPoint extends NI's hardware and LabVIEW Real-time into new industrial control, process monitoring, and embedded machine applications that require intellignet I/O products with a small form factor, a wide operating temperature, and resistance to shock and vibration. Customer Training Courses The Company offers fee-based training classes and self-paced course kits for many of its software and hardware 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 following industries and applications are served worldwide by the Company: advanced research, automotive, commercial aerospace, computers and electronics, continuous process manufacturing, education, government/defense, medical research/pharmaceutical, power/energy, semiconductors, automated test equipment, telecommunications and others. Customers The Company has a broad customer base, with no customer accounting for more than 3% of the Company's sales in 2002, 2001, or 2000. 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-based instrumentation. The Company reaches its intended audience through its Web site at NI.com as well as the distribution of written and electronic materials including demonstration versions of its software products, participation in tradeshows and technical conferences and training and user seminars. An in-house staff develops the NI.com Web site, advertising, publicity, and promotional materials that the Company uses worldwide. The primary marketing/sales tool is the Company's Web site at NI.com. Throughout 2000, 2001, and 2002, the Company invested aggressively to enhance the content, performance, and features of NI.com as well as to integrate E-commerce as a core component of the Company's business model. Through NI.com, customers can view the Company's complete on-line catalog, participate in on-line seminars and demonstrations, interactively configure systems, obtain pricing in a number of currencies, place orders, track the status of orders, register products and obtain software upgrades. The Company believes its direct business model provides the opportunity to leverage the Web heavily to reach customers and improve operations. The primary printed marketing/sales tool is the Company's catalog, published annually and distributed worldwide. The catalog is approximately 800 pages, with detailed tutorial information that educates readers about the Company's integrated product architecture and virtual instrumentation concept. Short-form versions of the catalog are typically also available in languages of major international markets, including French, German, Spanish and Japanese. The Company also uses quarterly newsletters to educate current and prospective customers about its products and technologies. These newsletters include 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. These newsletters are available in print form and via email subscription. There are also many books available on virtual instrumentation products in English, German, French, Japanese and other languages. 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 primarily through a direct sales organization. The Company also uses independent distributors, OEMs, VARs, system integrators and consultants to market its products. The Company has sales offices in the United States and sales offices and distributors in key international markets. Sales outside of North America accounted for approximately 50%, 49%, and 47% of the Company's revenues in 2002, 2001, and 2000, 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. Throughout 2002, the Company continued to invest aggressively to integrate the Web as a core component of its direct sales model. The Company provides worldwide on-line pricing for products in a number of currencies, allows customers to order the complete catalog of products via the Web, provides a variety of Web-based seminars, demonstrations, and configuration tools to allow customers to more easily select and order multiple compatible products for their systems, and offers Prime Access business-to-business capabilities to allow key customers to conduct business directly with the Company through secure, private pages at NI.com. Direct Sales The Company directly markets and sells its products in the Americas, Europe and Asia. The Company has sales offices located throughout the United States and in key international markets. Many of the Company's international sales offices employ application engineering technical support specialists as well as sales, marketing and administrative personnel. The Company's international sales are subject to inherent risks, including fluctuations in local economies; difficulties in staffing and managing foreign operations; greater difficulty in accounts receivable collection; costs and risks of localizing products for foreign countries; unexpected changes in regulatory requirements, tariffs and other trade barriers, difficulties in the repatriation of earnings and burdens of complying with a wide variety of foreign laws. The Company's sales outside of North America are denominated in local currencies, and accordingly, the Company is subject to the risks associated with fluctuations in currency rates. In particular, increases in the value of the dollar against foreign currencies decrease the dollar value of foreign sales requiring the Company either to increase its price in the local currency, which could render the Company's product prices noncompetitive, or to suffer reduced revenues and gross margins as measured in US dollars. 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. Generally, the Company's indirect sales customers do not maintain significant inventory levels. OEMs The Company utilizes OEMs customers such as traditional instrument manufacturers and automatic test equipment (ATE) system suppliers who offer for sale systems, fully integrated by the OEM customer, containing embedded components of various companies, including National Instruments. 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 OEM customers 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. In late 1998, the Company introduced an elite level of its Alliance Program called Select Integrators. Select Integrators must qualify for the program based upon their level of business with the Company and beginning in 2002, new Select Integrators must pass the CSIA (Control System Integrators Association) Best Practices and Benchmarks audit. As of December 31, 2002, the Company's Alliance Program had approximately 562 members including 15 Select Integrators. The Company publishes on-line directories on its NI.com Web site 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 Company's newsletters. In addition to its relationships with third-party VAR, system integrators and consultants, the Company has a direct presence in the German systems integration market. Customer Support The Company believes the ability to provide comprehensive service and support to its customers is an important factor in its business. The Company permits customers to return products within 30 days from receipt for a refund of the purchase price less a restocking charge, and generally provides a two-year warranty on GPIB hardware products, a one-year warranty on other hardware products, and a 90-day warranty on cables and software (medium only). Customers may also purchase a one-year extended warranty on hardware products. Historically, warranty costs have not been material. Some of the key elements of the Company's service and support strategy include: Customer Technical Support The Company maintains a large staff of application engineers, all of whom are highly qualified technical professionals. 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. In 2002, the Company continued to invest heavily to leverage the Web for customer support. Through the Company's NI.com web site, customers have access to a growing range of support options to solve their own problems directly over the Web, including software downloads, upgrades and bug fixes, automated product configuration tools, knowledge databases of common questions and answers, live product demonstrations, and discussion forums. As a result of the Company's commitment to the Web, in 2002, the Company's NI.com web site was awarded one of the "Ten Best Web Support Sites" according to Association of Support Professionals for the second consecutive year and customers were able to request technical support in 12 different languages. Upgrades The Company typically offers programs in which existing customers can upgrade to the latest Company products for an upgrade fee. Application software customers have the option of purchasing a one-year renewable maintenance and support program, which entitles them to unspecified software upgrades 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, some of which are divisions of large corporations having far greater resources than the Company, and the Company expects to face further competition from new market entrants in the future. A key competitor is Agilent Technologies Inc. ("Agilent"). The Company believes Agilent is the dominant supplier of GPIB and VXI-compatible instruments and systems. Agilent is also a leading supplier of equipment used in data acquisition and control applications. Agilent offers its own line of GPIB instrument controllers, as well as hardware and software add-on products for third-party desktop computers and workstations that directly compete with the Company's products. Agilent is aggressively advertising and marketing its products and system integration services. Because of Agilent'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; success in leveraging the Web; strategic relationships with other suppliers; timing of new product introductions by the Company or 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. Research and Development The Company believes that its long-term growth and success depends 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 which depend upon third parties' commercially available technologies is substantially dependent on the third parties willingness to grant pre-release access to, and the Company's ability to develop expertise in, current and future product developments of such third parties. 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, 2002, the Company employed 791 people in product research and development. The Company's research and development expenses were $64.0 million, $60.7 million, and $56.0 million for 2002, 2001, and 2000, 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. As of December 31, 2002, the Company held 178 United States patents (173 utility patents and 5 design patents) and 8 patents in foreign countries (5 patents registered in Europe in various countries; 1 patent in Canada; and 2 patents in Japan), and had 230 patent applications pending in the United States and foreign countries. Forty of such issued 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 2020. 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 a substantial majority of its products at its facilities in Austin, Texas and Debrecen, Hungary. 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. 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. Although the Company attempts to maintain adequate safety stock of critical inventory components, 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 Company has implemented a customer focused quality system that involves all organizations. The Company's products are designed and tested in a formal development process and are controlled in manufacturing and distribution. Additionally, the Company is committed to continuous improvement of the Company's products, services and processes to assure long term customer satisfaction. During 2001, the Company completed a manufacturing facility in Hungary. The Hungarian operation is the Company's second manufacturing facility and was expanded in 2002 to add a second Surface Mount Line, a Mechanical Assembly Line and a Through-Hole Production Line. The Company estimates that in 2003 products manufactured at its Hungarian manufacturing facility will source a significant portion of the Company's global sales. Any delay in bringing this facility to maximum capacity could have a material adverse effect on the Company's results of operations. 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, transport disruptions or damage to products in manufacturing operations, could create a buildup of excess finished goods on the one hand or an inability to timely deliver product on the other. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Engineering refinements to the Company's new hardware and software products are fairly common. These changes can result in the disruption of the manufacturing operation and concurrent delays in delivery dates. Finished goods inventory at the Company's international warehouses and 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 business demand, 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. See "Managements Discussion and Analysis of Financial Condition and Results of Operations." Backlog The Company typically ships products shortly following the receipt of an order. Accordingly, the Company's backlog typically represents less than 10 days sales. Backlog should not be viewed as an indicator of future sales. Employees As of December 31, 2002, the Company had 3,008 employees, (excluding 138 part-time employees, interns and co-ops) including 791 in research and development, 1,387 in sales and marketing and customer support, 483 in manufacturing and 347 in administration and finance. None of the Company's employees are represented by a labor union and the Company has never experienced a work stoppage. The Company considers its employee relations to be good. For four consecutive years, 1999, 2000, 2001, and 2002, the Company has been named among the 100 Best Companies to Work for in America according to FORTUNE magazine. Available information Our Internet website address is http://www.ni.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. ITEM 2. PROPERTIES The Company's principal activities are conducted at three Company-owned buildings in Austin, Texas. The Company owns approximately 69 acres of land in north Austin, Texas, on which are a 232,000 square foot office facility, a 140,000 square foot manufacturing and office facility, and a newly constructed 380,000 square foot research and development facility. The Company also owns a 136,000 square foot office building in Austin, Texas which is partially leased to three tenants. The Company also owns a 148,000 square foot manufacturing facility in Debrecen, Hungary. The Company's German subsidiary, National Instruments Engineering GmbH & Co. KG owns a 25,500 square foot office building in Aachen, Germany in which a majority of its activities are conducted. National Instruments Engineering also owns another 19,375 square foot office building, which is partially leased to BMS Modern Games and Klocke Nanotech. As of December 31, 2002, the Company also leased a number of sales and support offices in the United States and overseas. The Company's facilities are currently utilized below design maximum capacity to allow for headcount growth and design/construction cycles. The Company believes existing facilities are adequate to meet its current requirements. ITEM 3. LEGAL PROCEEDINGS During 2001, the Company filed a complaint in U.S. District Court, Western District of Texas (Midland Division) for declaratory judgment arising from a controversy between the Company and General Patent Corporation, General Patent Corporation International, and Acticon Technologies, LLC ("Defendants") concerning the enforceability, validity, and infringement of certain patents in which Defendants claim an interest. Defendants claimed that the Company infringed these patents. The Company challenged the validity and enforceability of these patents and asserted that it does not infringe the claims of these patents. The Company sought a declaratory judgment of invalidity and non-infringement. Defendants sought damages in an unspecified amount, injunction of the sale of certain products of the Company and attorney's fees and costs. On April 16, 2002, the case was dismissed by stipulation of the parties. The Company has filed two complaints in the U.S. District Court, Eastern District of Texas (Marshall Division) against The MathWorks, Inc. ("Defendant") for patent infringement. In the first complaint, filed January 25, 2001, the Company claims that the Defendant infringes certain of the Company's U.S. patents. The Defendant challenges the validity and enforceability of these patents and asserts that it does not infringe the claims of these patents. Trial on the first case began January 13, 2003, and is currently pending. The Company expects a jury verdict by the end of January 2003. In the second complaint, filed October 21, 2002, the Company claims that the Defendant infringes certain other of the Company's U.S. patents. In each case, the Company seeks monetary damages and injunction of the sale of certain products of the Defendant. The Company also seeks attorney's fees and costs in the second case. For both complaints, the Company expects to incur legal expenses of approximately $2 million during the first quarter of 2003. Due to the inherent uncertainties of litigation, there may be significant changes in the amount and timing of these expected expenses. 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.

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 under the symbol NATI effective March 13, 1995. Prior to that date, there was no public market for the Common Stock. The high and low closing prices for the Common Stock, as reported by Nasdaq, are as indicated in the following table. High Low 2002 First Quarter 2002...................................... $42.62 $34.12 Second Quarter 2002..................................... 41.75 30.21 Third Quarter 2002...................................... 31.50 21.56 Fourth Quarter 2002..................................... 36.46 20.00 High Low 2001 First Quarter 2001...................................... $56.125 $31.563 Second Quarter 2001..................................... 38.14 26.688 Third Quarter 2001...................................... 38.80 26.00 Fourth Quarter 2001..................................... 39.70 25.37 At the close of business on January 16, 2003, there were approximately 637 holders of record of the Common Stock and approximately 12,679 shareholders of beneficial interest. The Company believes factors such as quarterly fluctuations in results of operations, announcements by the Company or its competitors, technological innovations, new product introductions, governmental regulations, litigation or changes in earnings estimates by analysts may cause the market price of the Common Stock to fluctuate, perhaps substantially. In addition, stock prices for many technology companies fluctuate widely for reasons that may be unrelated to their operating results. These broad market and industry fluctuations may adversely affect the market price of the Company's Common Stock. To date, the Company has not paid any cash dividends on its Common Stock. While the Company currently does not anticipate paying any cash dividends in the immediate future; the Company plans to review its dividend policy should President Bush's proposal to completely eliminate double taxation of dividends become law. See Item 12 for information regarding securities authorized for issuance under equity compensation plans. 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, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (in thousands, except per share data) Statements of Income Data: Net sales: North America.................................. $195,770 $195,842 $215,960 $175,873 $153,435 Europe......................................... 122,800 128,523 133,799 108,801 86,961 Asia Pacific................................... 72,220 60,910 60,390 44,909 33,834 -------- -------- -------- -------- -------- Consolidated net sales......................... 390,790 385,275 410,149 329,583 274,230 Cost of sales.................................... 105,086 101,297 98,326 76,040 65,187 -------- -------- -------- -------- -------- Gross profit................................... 285,704 283,978 311,823 253,543 209,043 -------- -------- -------- -------- -------- Operating expenses: Sales and marketing............................ 145,671 145,555 147,377 120,886 100,783 Research and development....................... 63,964 60,745 55,954 45,531 34,757 General and administrative..................... 35,714 29,234 32,077 24,258 20,455 -------- -------- -------- -------- -------- Total operating expenses...................... 245,349 235,534 235,408 190,675 155,995 Operating income.............................. 40,355 48,444 76,415 62,868 53,048 Other income (expense): Interest income................................ 3,295 5,837 6,390 4,759 3,439 Interest expense............................... (128) (26) (533) (404) (463) Net foreign exchange gain (loss) and other..... 96 (722) (1,159) 130 (224) -------- -------- -------- -------- -------- Income before income taxes and cumulative effect of accounting change............................. 43,618 53,533 81,113 67,353 55,800 Provision for income taxes....................... 12,213 17,131 25,956 21,553 18,414 -------- -------- -------- -------- -------- Income before cumulative effect of accounting change........................................... 31,405 36,402 55,157 45,800 37,386 Cumulative effect of accounting change, net of tax....................................... -- -- -- (552) -- -------- -------- -------- -------- -------- Net income................................... $ 31,405 $ 36,402 $ 55,157 $ 45,248 $ 37,386 ======== ======== ======== ======== ======== Basic earnings per share: Income before cumulative effect of accounting change......................................... $ 0.61 $ 0.72 $ 1.10 $ 0.92 $ 0.76 Cumulative effect of accounting change, net of tax......................................... -- -- -- (0.01) -- -------- -------- -------- -------- -------- Basic earnings per share....................... $ 0.61 $ 0.72 $ 1.10 $ 0.91 $ 0.76 ======== ======== ======== ======== ======== Diluted earnings per share: Income before cumulative effect of accounting change......................................... $ 0.59 $ 0.68 $ 1.03 $ 0.88 $ 0.73 Cumulative effect of accounting change, net of tax......................................... -- -- -- (0.01) -- -------- -------- -------- -------- -------- Diluted earnings per share..................... $ 0.59 $ 0.68 $ 1.03 $ 0.87 $ 0.73 ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic.......................................... 51,219 50,910 50,332 49,776 49,248 Diluted........................................ 53,411 53,651 53,564 52,203 51,150 December 31, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (in thousands) Balance Sheet Data: Cash and cash equivalents........................ $ 40,240 $ 49,089 $ 75,277 $ 45,309 $ 51,538 Short-term investments........................... 113,638 101,422 79,525 83,525 49,158 Working capital.................................. 211,453 209,836 220,208 173,761 133,510 Total assets..................................... 458,714 424,619 389,350 318,753 249,786 Long-term debt, net of current portion........... -- -- -- 4,301 4,379 Total stockholders' equity....................... 386,463 366,164 321,023 254,235 204,184 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "Management's Discussion and Analysis of Financial Condition and Results of Operations: contains certain forward-looking statements, including statements regarding our financial performance. These statements are subject to risks and uncertainties. We use words such as "anticipate," "believe," "plan," "expect," "future," "intend" and similar expressions to identify forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements. As a result of certain factors including those set forth under the heading "Factors affecting the Company's Business" beginning on page 27, and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement. Overview National Instruments designs, develops, manufactures and markets instrumentation and automation software and hardware for general commercial, industrial and scientific applications. The Company offers hundreds of products used to create virtual instrumentation systems for measurement and automation. The Company has identified a large and diverse market for test and measurement ("T&M") and industrial automation ("IA") applications. The Company's products are used in a variety of applications from research and development to production testing, monitoring and industrial control. In test and measurement applications, the Company's products can be used to monitor and control traditional instruments or to create computer-based instruments that can replace traditional instruments. In industrial automation applications, the Company's products can be used in the same ways as in test and measurement and can also be used to integrate measurement functionality with process automation capabilities. The Company sells to a large number of customers in a wide variety of industries. No single customer accounted for more than 3% of the Company's sales in 2002, 2001 or 2000. The Company has been profitable in every year since 1990. However, there can be no assurance that the Company's net sales will 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, 2002 2001 2000 -------- -------- -------- Net sales: North America................................ 50.1% 50.8% 52.7% Europe....................................... 31.4 33.4 32.6 Asia Pacific................................. 18.5 15.8 14.7 -------- -------- -------- Consolidated net sales....................... 100.0 100.0 100.0 Cost of sales.................................... 26.9 26.3 24.0 -------- -------- -------- Gross profit................................. 73.1 73.7 76.0 Operating expenses: Sales and marketing.......................... 37.3 37.8 35.9 Research and development..................... 16.4 15.8 13.7 General and administrative................... 9.1 7.5 7.8 -------- -------- -------- Total operating expenses.................. 62.8 61.1 57.4 -------- -------- -------- Operating income.......................... 10.3 12.6 18.6 Other income (expense): Interest income.............................. 0.8 1.5 1.5 Interest expense............................. -- -- (0.1) Net foreign exchange loss and other.......... -- (0.2) (0.3) -------- -------- -------- Income before income taxes....................... 11.1 13.9 19.7 Provision for income taxes....................... 3.1 4.5 6.3 -------- -------- -------- Net income....................................... 8.0% 9.4% 13.4% ======== ======== ======== Net Sales. In 2002, net sales for the Company's products were $390.8 million, a 1% increase from the level achieved in 2001, which followed a decrease in net sales of 6% in 2001 from the level achieved in 2000. The Company believes the increase in sales in 2002 is primarily attributable to the introduction of new and upgraded products and an increased market acceptance of the Company's products in Asia. The Company believes the decrease in sales in 2001 was primarily attributable to the approximate 25% decline in the sales of certain hardware products that are used to control traditional instruments, which resulted from the worsening of the industrial economy and the severe deterioration of sales of traditional instruments by other vendors used in test and measurement applications. North American revenue was $195.8 million in 2002, flat with 2001, following a 9% decrease in 2001 from 2000. European revenue was $122.8 million in 2002, a decrease of 4% from 2001, following a 6% decrease in 2001 from 2000. Asia Pacific revenue grew 19% to $72.2 million in 2002, which followed a 5% increase in 2001 over 2000 levels. The Company believes that approximately 80% of the decrease in revenue in Europe in 2002 is attributable to the decrease in sales of the Company's hardware products that are used to control traditional instruments, the result of the downturn in the industrial economy, and that approximately 20% of the decrease in revenue in Europe is due to the weakening of the Company's Euro exchange rate. See the discussion below for more information concerning the impact of foreign currency fluctuations on sales growth. The Company believes that approximately 50% of the increase in sales and in the revenue growth rate in Asia Pacific in 2002 is attributable to the introduction of new and upgraded products, an expanded customer base, an increased field sales force, and approximately 50% of the increase is attributable to the Company's favorable hedge position with regard to the Japanese yen. International sales (sales to customers outside of North America) accounted for 50%, 49% and 47% of the Company's consolidated net sales for 2002, 2001 and 2000, respectively. The Company intends to continue to expand its international operations by increasing its presence in existing markets, adding a market presence in some new geographical markets and continuing the use of distributors to sell its products in some countries. 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 U.S. dollar, multiplied by the proportion of international sales recorded in the particular currency. Between 2002 and 2001, this weighted average value of the U.S. dollar decreased by 2.5%, causing an equivalent increase in the U.S. dollar value of the Company's foreign currency sales and expenses. If the weighted average value of the U.S. dollar during 2002 had been the same as that in 2001, on a pro-forma basis, the Company's sales for 2002 would have been flat with sales from 2001. Pro-forma European sales for 2002 would have decreased by 4% from 2001 sales. Pro-forma Asia Pacific sales for 2002 would have increased by 10% over 2001 sales. Since most of the Company's international operating expenses are also incurred in local currencies, the change in exchange rates had the effect of increasing operating expenses $4.5 million in 2002. The preceding pro-forma amounts and percentages are not presented in accordance with generally accepted accounting principles but are presented for comparative purposes. Gross Profit. As a percentage of sales, gross profit represented 73%, 74% and 76% in 2002, 2001 and 2000, respectively. The relatively high software content of the Company's products is demonstrated in the gross margins achieved by the Company. In 2002, the lower margin is attributable to the reduced sales of certain hardware products that are used to control traditional instruments and an increase in the Company's overall manufacturing costs due to the ramp up of the Company's Hungarian production facility. There can be no assurance that the Company will maintain its historical margins. The Company believes its current manufacturing capacity is adequate to meet current needs. Sales and Marketing. Sales and marketing expense in 2002 was flat with 2001, which followed a decrease of 1% in 2001 from 2000. Sales and marketing personnel increased by 75 during 2002 from 1,312 at December 31, 2001 to 1,387 at December 31, 2002. Sales and marketing expense as a percentage of revenue was 37% in 2002, down from 38% in 2001 and up from 36% in 2000. 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 recruiting, initial marketing and advertising campaign costs associated with major new product releases and entry into new market areas, investment in web sales and marketing efforts, increasing product demonstration costs and the timing of domestic and international conferences and trade shows. Research and Development. Research and development expense in 2002 increased 5% compared to 2001 following an increase of 9% in 2001 over 2000. The increase in research and development costs in absolute amounts in each period was primarily due to increases in personnel costs from hiring of additional product development engineers. Research and development personnel increased from 720 at December 31, 2001 to 791 at December 31, 2002. The Company plans to continue making a significant investment in research and development in order to remain competitive and support revenue growth. The Company capitalizes software development costs 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." The Company amortizes such costs over the related product's estimated economic useful life, generally three years, beginning when a product becomes available for general release. Software amortization expense totaled $3.8 million, $3.1 million and $2.6 million during 2002, 2001 and 2000, respectively. Software development costs capitalized during such years were $5.8 million, $3.9 million and $5.0 million, respectively. (See Note 5 of Notes to Consolidated Financial Statements for a description of intangibles.) General and Administrative. General and administrative expenses in 2002 increased 22% from 2001, which followed a decrease of 9% in 2001 from 2000. The increase in general and administrative expenses in 2002 from 2001 is attributable to increased litigation costs of $4.7 million associated with a legal action brought by the Company against The MathWorks, Inc. in 2001 to enforce the Company's intellectual property rights, compared to a gain of approximately $1.2 million in 2001 recorded upon the settlement of a previous case with Cognex Corporation. The Company expects to continue to incur significant litigation expenses in 2003 related to patent litigation with The MathWorks. A significant amount of the decrease in general and administrative costs in 2001 was due to reduced intellectual property defense costs, the result of the net recovery of $1.2 million of intellectual property defense costs accrued in the prior year, and to operational efficiencies resulting from continued systems improvement. Implementation of information systems to support the Company's new research and development facility, upgrading its worldwide business applications suite to Oracle's latest web-based release 11i and continued investment in the Company's web presence were the main areas of focus for investment in the information systems department in 2002. General and administrative expenses as a percentage of revenue increased to 9.1% during 2002 from 7.6% during 2001. The Company expects that general and administrative costs will increase in absolute amounts and will fluctuate as a percentage of revenue as the Company continues to invest in maintaining its existing systems, protecting its intellectual property, developing the infrastructure for the new Hungarian manufacturing facility, and developing web-based commerce and management information systems. During the fourth quarter of 2002, the Company and Trilogy Software, Inc. ("Trilogy") settled a dispute regarding Trilogy's buy-out of the lease of the Company's Millenium office building which resulted in a gain of approximately $6.0 million from lease termination. As a result of additional facility lease consolidation, the Company incurred lease termination costs of approximately $2.4 million in the fourth quarter of 2002. In the fourth quarter of 2002, the Company contributed approximately $3.6 milion to the National Instruments Foundation, a 501(c)(3) charitable foundation established in 2002 for the purpose of continued promotion of scientific and engineering research and education at higher education institutions worldwide. Two of the four directors of the National Instruments Foundation are current officers of National Instruments. Interest Income and Expense. Interest income decreased 44% in 2002 from 2001, which followed a decrease of 9% in 2001 from 2000. The decrease in interest income in 2002 was primarily due to lower yields on the Company's investments. The primary source of interest income is from the investment of the Company's cash. Net cash provided by operating activities in 2002 totaled $51.0 million. Net Foreign Exchange Gain (Loss). The Company experienced net foreign exchange losses of $724,000 in 2002, compared to losses of $1.4 million in 2001 and losses of $1.5 million in 2000. These results are attributable to movements between the U.S. dollar and the local currencies in countries in which the Company's subsidiaries are located. The Company recognizes the local currency as the functional currency of its international subsidiaries. The Company utilizes foreign currency forward contracts to hedge a majority of its foreign currency denominated receivables in order to reduce its exposure to significant foreign currency fluctuations. The Company typically limits the duration of its "receivables" foreign currency forward contracts to 90 days. The Company also utilizes foreign currency forward contracts and foreign currency purchased option contracts in order to reduce its exposure to fluctuations in future foreign currency cash flows. The Company purchases these contracts for up to 100% of its forecasted cash flows in selected currencies (primarily the euro, yen and pound sterling) and limits the duration of these contracts to 40 months. The foreign currency purchased option contracts are purchased "at-the-money" or "out-of-the-money." 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. The Company does not invest in contracts for speculative purposes. (See Note 10 of Notes to Consolidated Financial Statements for a description of the Company's forward and purchased option contracts and hedged positions.) The Company's hedging strategy increased the foreign exchange loss for December 31, 2002 by $1.4 million and reduced the net foreign exchange loss for December 31, 2001 by $6.5 million. Provision for Income Taxes. The provision for income taxes reflects an effective tax rate of 28% in 2002 and 32% in 2001 and 2000. The decrease in the effective rate resulted from income tax benefits attributable to the extraterritorial income exclusion and a change in the distrubion of income among taxing jurisdictions, particularly the impact of the Company's new manufacturing facility in Hungary. The effective tax rate is lower than the U.S. federal statutory rate of 35% primarily as a result of the extraterritorial income exclusion, tax-exempt interest and reduced tax rates in certain foreign jurisdictions. Liquidity and Capital Resources The Company is currently financing its operations and capital expenditures through cash flow from operations. At December 31, 2002, the Company had working capital of approximately $211.5 million compared to $209.8 million at December 31, 2001. Accounts receivable increased to $63.0 million at December 31, 2002 from $53.6 million at December 31, 2001, as a result of higher sales levels in the fourth quarter of 2002 compared to the fourth quarter of 2001. Receivable days outstanding at December 31, 2002 increased to 54 days from 51 days at December 31, 2001. Consolidated inventory balances have increased to $39.2 million at December 31, 2002 from $32.6 million at December 31, 2001. The increase in inventory was due to the planned increase in finished goods and safety stock inventory which enabled the Company to reduce delivery time of products to customers thereby increasing customer satisfaction. Inventory turns of 2.8 per year for 2002 represent a decrease from turns of 3.1 per year for 2001. Cash used in 2002 includes $30.8 million for the purchase of property and equipment, $19.6 million for the repurchase of approximately 813,000 shares of common stock and $5.8 million for capitalization of software development costs. During 2002, the Company completed construction of, and moved into a 382,000 sq. ft. office building ("Mopac C") located on its North Austin campus. The total cost for the new building, including furniture, fixtures and equipment was approximately $57.4 million. The Company consolidated its leaseholds upon completion of its move into Mopac C during the fourth quarter of 2002. All the Company's buildings are free from lien. 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 and internally generated funds. The Company estimates that its budgeted capital expenditures over the next fiscal year will be approximately $18 million. As of December 31, 2002, the Company had no debt outstanding. The Company believes that the cash flow from operations, if any, existing cash balances and short-term investments, will be sufficient to meet its cash requirements for at least the next twelve months. Cash requirements for periods beyond the next twelve months will depend on the Company's profitability, its ability to manage working capital requirements and its rate of growth. The following summarizes the Company's contractual cash obligations as of December 31, 2002 (in thousands): Payments Due by Period ---------------------------------------------- Total 2003 2004 2005 2006 Beyond ------ ------ ------ ------ ------ ------ Long-term debt................. $ -- $ -- $ -- $ -- $ -- $ -- Capital lease obligations...... -- -- -- -- -- -- Operating leases............... 4,456 1,652 1,616 988 102 98 Other long-term obligations.... -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ Total contractual cash obligations.................... $4,456 $1,652 $1,616 $ 988 $ 102 $ 98 ====== ====== ====== ====== ====== ====== The following summarizes the Company's other commercial commitments as of December 31, 2002 (in thousands): Amount of Commitment Expiration by Period ---------------------------------------------- Total 2003 2004 2005 2006 Beyond ------ ------ ------ ------ ------ ------ Guarantees..................... $3,800 $3,800 $ -- $ -- $ -- $ -- Other commercial commitments... 4,300 4,300 -- -- -- -- ------ ------ ------ ------ ------ ------ Total commercial commitments... $8,100 $8,100 $ -- $ -- $ -- $ -- ====== ====== ====== ====== ====== ====== Financial Risk Management 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 previous years. The Company's foreign currency hedging program includes both foreign currency forward and purchased option contracts to reduce the effect of exchange rate fluctuations. However, the hedging program will not eliminate all of the Company's foreign exchange risks. (See "Net Foreign Exchange Gain (Loss)" and Note 10 of Notes to Consolidated Financial Statements.) 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 inventories 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 has no debt or off-balance sheet debt. As of December 31, 2002, the Company has non-cancelable operating lease obligations of approximately $4.5 million and contractual purchase commitments with various suppliers of general components and customized inventory components of approximately $4.3 million. As of December 31, 2002, the Company has outstanding guarantees for payment of foreign operating leases, customs and foreign grants totaling approximately $3.8 million. (See Note 12 of Notes to Consolidated Financial Statements.) At December 31, 2002, the Company did not have any relationships with any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company were engaged in such relationships. Market Risk The Company is exposed to a variety of risks, including foreign currency fluctuations and changes in the market value of its investments. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in foreign currency values and changes in the market value of its investments. Foreign Currency Hedging Activities. The Company's objective in managing its exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in such exchange rates on the Company's earnings and cash flow. Accordingly, the Company utilizes purchased foreign currency option contracts and forward contracts to hedge its exposure on anticipated transactions and firm commitments. The principal currencies hedged are the euro, British pound and Japanese yen. The Company monitors its foreign exchange exposures regularly to ensure the overall effectiveness of its foreign currency hedge positions. However, there can be no assurance the Company's foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on its results of operations and financial position. Based on the foreign exchange instruments outstanding at December 31, 2002, an adverse change (defined as 20% in the Asian currencies and 10% in all other currencies) in exchange rates would result in a decline in the aggregate fair market value of all instruments outstanding of approximately $13.7 million. However, as the Company utilizes foreign currency instruments for hedging anticipated and firmly committed transactions, management believes that a loss in fair value for those instruments will be substantially offset by increases in the value of the underlying exposure. (See Note 9 of Notes to Consolidated Financial Statements for a description of the Company's financial instruments at December 31, 2002 and 2001.) Short-term Investments. The fair value of the Company's investments in marketable securities at December 31, 2002 was $113.6 million. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company's investment policy is to manage its investment portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds. The Company diversifies the marketable securities portfolio by investing in multiple types of investment-grade securities. The Company's investment portfolio is primarily invested in short-term securities with at least an investment grade rating to minimize interest rate and credit risk as well as to provide for an immediate source of funds. Based on the Company's investment portfolio and interest rates at December 31, 2002, a 100 basis point increase or decrease in interest rates would result in a decrease or increase of approximately $570,000, respectively, in the fair value of the investment portfolio. Although changes in interest rates may affect the fair value of the investment portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments are sold. Non-Audit Services Prior to adoption of the Sarbanes-Oxley Act of 2002, the Company's Audit Committee modified its charter to require pre-approval of all non-audit services by its auditor, PricewaterhouseCoopers LLP including the following: tax research and consultations; international tax consulting; tax assistance and compliance in international locations; assistance with transfer pricing; expatriate tax services; consultations and assistance with other taxes including state and local taxes, sales and use taxes, customs and duties; review of intercompany agreements; and assistance with international manufacturing tax issues. The Company is currently monitoring the developments regarding new regulations as a result of the recent adoption of the Sarbanes-Oxley Act of 2002, and will comply with any new requirements. Recently Issued Accounting Pronouncements In May 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002. The Statement rescinds SFAS No. 4 and requires that only unusual or infrequent gains and losses from extinguishment of debt should be classified as extraordinary items, consistent with APB Opinion 30. This Statement amends SFAS No. 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends certain existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of SFAS No. 145 did not have a material effect on the Company's financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to on the date of an entity's commitment to an exit plan, which was the practice employed under EITF Issue 94-3. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. SFAS No. 146 is not expected to have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. This Statement also amends the disclosure provision of SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The adoption of SFAS No. 148 did not have a material effect on the Company's financial position or results of operations. Critical Accounting Policies The Company's critical accounting policies are as follows: o Revenue recognition Revenue from the sale and licensing of products is generally recognized on the date the product is shipped to the customer. Revenue related to the sale of maintenance contracts is deferred and amortized on a straight-line basis over the service period. o Estimating allowances, specifically sales returns, the allowance for doubtful accounts and the valuation allowance for excess and obsolete inventories The preparation of financial statements requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Specifically, the Company must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. The allowance for sales returns was $1.2 million at December 31, 2002. Material differences may result in the amount and timing of the Company's revenue for any period if management made different judgments or utilized different estimates. Similarly, our management must make estimates of the uncollectability of our accounts receivables. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. The allowance for doubtful accounts was $3.8 million at December 31, 2002. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based on assumptions on future demands and market conditions. The valuation allowance for excess and obsolete inventories was $3.5 million at December 31, 2002. If actual market conditions are less favorable than those projected by management, additional inventory write downs may be required. o Accounting for costs of computer software The Company capitalizes costs related to the development and acquisition of certain software products. 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. At each balance sheet date, the unamortized costs are reviewed by management and reduced to net realized value when necessary. As of December 31, 2002, unamortized capitalized software development costs was $9.3 million. o Valuation of long-lived and intangible assets The Company assesses the impairement of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include the following: o Significant underperformance relative to expected historical or projected future operating results; o Significant changes in the manner of the Company's use of the acquired assets or the strategy for the overall business; o Significant negative industry or economic trends; o The Company's market capitalization relative to net book value. When it is determined that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the measurement of any impairment is determined and the carrying value is reduced as appropriate. As of December 31, 2002, the Company had net goodwill of approximately $5.8 million. Factors Affecting the Company's Business U.S./Global Economic Slowdown. As occurred in 2001 and 2002, the markets in which the Company does business could again experience the negative effects of a slowdown in the U.S. and/or Global economies. The Company could also be subject to or impacted by acts of terriorism and/or the effects that a war or U.S. military action would have on the U.S. and/or global economies. The worsening of the U.S. or Global economies could result in reduced purchasing and capital spending in any of the markets served by the Company which could have a material adverse effect on the Company's operating results. Budgets. The Company has established an operating budget for 2003. The Company's spending for 2003 could exceed this budget due to a number of factors; including: additional marketing costs for conferences and tradeshows; increased costs from the over-hiring of product development engineers or other personnel; increased manufacturing costs resulting from component supply shortages and/or component price fluctuations; additional litigation expenses related to intellectual property litigation. Any future decreased demand for our products could result in decreased revenue and could require the Company to revise its budget and reduce expenditures. Exceeding the established operating budget or failing to revise its budget in response to any decrease in revenue could have a material adverse effect on the Company's operating results. Risk of Component Shortages. As has occurred in the past, and as may be expected to occur in the future, supply shortages of components used in our products, including sole source components, can result in significant additional costs and inefficiencies in manufacturing. If the Company is unsuccessful in resolving any such component shortages, it will experience a significant impact on the timing of revenue and/or an increase in manufacturing costs, either of which would have a material adverse impact on the Company's operating results. Fluctuations in Quarterly Results. The Company's quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a number of factors, including: changes in the mix of products sold; the availability and pricing of components from third parties (especially sole sources); the timing of orders; level of pricing of international sales; fluctuations in foreign currency exchange rates; the difficulty in maintaining margins, including the higher margins traditionally achieved in international sales; and changes in pricing policies by the Company, its competitors or suppliers. Specifically, if the local currencies in which the Company sells weaken against the U.S. dollar, and if the local sales prices cannot be raised, the Company will experience a deterioration of its gross and net profit margins. If the U.S. dollar strengthens in the future, it could have a material adverse effect on gross and net profit margins. As has occurred in the past and as may be expected to occur in the future, new software products of the Company or new operating systems of third parties on which the Company's products are based, often contain bugs or errors that can result in reduced sales and/or cause the Company's support costs to increase, either of which could have a material adverse impact on the Company's operating results. Furthermore, the Company has significant revenues from customers in industries such as semiconductors, automated test equipment, telecommunications, aerospace, defense and automotive which are cyclical in nature. Downturns in these industries could have a material adverse effect on the Company's operating results. In recent years, with the exception of 2001, 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. 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. In addition, total operating expenses have in the past tended to be higher in the second and third quarters of each year, due to recruiting and significantly increased intern personnel expenses. 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 domestic and 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. Risks Associated with Increased Development of Web Site. The Company has devoted significant resources in developing its Web site as a key marketing and sales tool and expects to continue to do so in the future. There can be no assurance that the Company will be successful in its attempt to leverage the Web to increase sales. The Company hosts its Web site internally. Failure to successfully maintain the Web site and to protect it from hackers could have a significant adverse impact on the Company's operating results. Operation in Intensely Competitive Markets. The markets in which the Company operates are characterized by intense competition from numerous competitors, some of which are divisions of large corporations having far greater resources than the Company, and the Company expects to face further competition from new market entrants in the future. A key competitor is Agilent Technologies Inc. ("Agilent"). Agilent offers its own line of instrument controllers, and 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. Agilent is aggressively advertising and marketing products that are competitive with the Company's products. Because of Agilent's strong position in the instrumentation business, changes in its marketing strategy or product offerings could have a material adverse effect on the Company's operating results. The Company believes its ability to compete successfully depends on a number of factors both within and outside its control, including: new product introductions by competitors; product pricing; quality and performance; success in developing new products; adequate manufacturing capacity and supply of components and materials; efficiency of manufacturing operations; effectiveness of sales and marketing resources and strategies; strategic relationships with other suppliers; timing of new product introductions by the Company; protection of the Company's products by effective use of intellectual property laws; general market and economic conditions; and government actions throughout the world. There can be no assurance that the Company will be able to compete successfully in the future. Management Information Systems. During 2002, the Company devoted significant resources to implementing information systems to support its new research and development facility on its Austin campus. The Company also devoted significant resources to upgrading its Japanese office's business applications suite to Oralcle's latest web-based release 11i, and to continued development of web offerings. In 2003, the Company will be focusing on upgrading its U.S. office's business applications suite to Oracle's latest web-based release 11i, and will continue to devote significant resources to the development of the web. Failure to successfully implement these initiatives could have a material adverse effect on the Company's operating results. The Company relies on three primary regional centers for its management information systems. As with any information system, unforeseen issues may arise that could affect management's ability to receive adequate, accurate and timely financial information, which in turn could inhibit effective and timely decisions. Furthermore, it is possible that one or more of the Company's three regional information systems could experience a complete or partial shutdown. If such a 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. 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. 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 Company must also comply with various import and export regulations. Failure to ensure compliance with these regulations could result in fines and/or termination of import and export privileges, which could have a material adverse effect on the Company's operating results. Additionally, the regulatory environment in some 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 international direct sales offices 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 2002 and 2001, the weighted average value of the U.S. dollar decreased by 2.5%, causing an equivalent increase in the U.S. dollar value of the Company's foreign currency sales and expenses. If the weighted average value during 2002 had been the same as that in 2001, on a pro-forma basis, the Company's sales for 2002 would have been flat with sales from 2001. If the weighted average value during 2002 had been the same as that in 2001, on a pro-forma basis, the Company's consolidated operating expenses would have been $240.8 million, representing a decrease of $4.5 million. If the U.S. dollar strengthens in the future, it could have a materially adverse effect on the Company's operating results. As of December 31, 2002, the Company has $1.0 million of deferred gains on yen foreign currency cash flow hedge contracts recorded in accumulated other comprehensive income that are expected to be reclassified into earnings over the next 12 months. If the yen fails to strengthen before the expiration of these contracts, and if the Company is unable to increase prices in Japan and/or globally, the Company will experience a deterioration of revenue and gross and net profit margins, which could have a material adverse effect on the Company's operating results. Expansion of Manufacturing Capacity. During 2001, the Company completed construction of a second manufacturing facility. This facility is located in Hungary and became operational in the fourth quarter of 2001. This facility sources a significant portion of the Company's sales. Currently the Company is continuing to recruit and train the local work force and is continuing to develop and implement information systems to support its operation. This facility and its operation are also subject to risks associated with a new manufacturing facility and with doing business internationally, including difficulty in managing manufacturing operations in a foreign country, difficulty in achieving or maintaining product quality, interruption to transportation flows for delivery of components to us and finished goods to our customers, and changes in the country's political or economic conditions. No assurance can be given that the Company's efforts will be successful. Accordingly, failure to deal with these factors could result in interruption in the facility's operation or delays in expanding its capacity, either of which could have a material adverse effect on the Company's operating results. Income Tax Rate. The Company established a manufacturing facility in Hungary in 2001. As a result of certain foreign investment incentives available under Hungarian law, the profit from the Company's Hungarian operation is currently exempt from income tax. These benefits may not be available in the future due to changes in Hungary's political condition and/or tax laws. The reduction or elimination of these foreign investment incentives would result in the reduction or elimination of certain tax benefits thereby increasing the Company's future effective income tax rate, which could have a material adverse effect on the Company's operating results. The Company receives a substantial income tax benefit from the extraterritorial income exemption ("ETI") under U.S. law. The ETI rules provide that a percentage of the profits from products and intangibles exported from the U.S. are exempt from U.S. tax. This benefit may not be available in the future as the ETI has been ruled an illegal export subsidy by the World Trade Organization. The repeal of the ETI would result in the elimination of this tax benefit thereby increasing the Company's future effective income tax rate, which could have a material adverse effect on the Company's operating results. Products Dependent on Certain Industries. Sales of the Company's products are dependent on customers in certain industries, particularly the telecommunications, semiconductor, automotive, automated test equipment, defense and aerospace industries. As experienced in the past, and as may be expected to occur in the future, downturns characterized by diminished product demand in any one or more of these industries could result in decreased sales, which could have a material adverse effect on the Company's operating results. Dependence on Key Suppliers. The Company's manufacturing processes use large volumes of high-quality components and subassemblies supplied by outside sources. Several of these components are available through sole or limited sources. Sole-source components purchased by the Company include custom application-specific integrated 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 the Company's revenues and operating results. Stock-based Compensation Plans. The Company has two active stock-based compensation plans and one inactive plan. The two active stock-based compensation plans are the 1994 Incentive Stock Option Plan and the Employee Stock Purchase Plan. The Company currently adheres to the disclosure only provisions of SFAS No. 123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, and as such, no compensation cost has been recognized in the Company's financial statements for the stock option plan and the stock purchase plan. The Company is currently monitoring the recent discussions related to possible new regulations regarding the accounting treatment for stock options. The Company will comply with any changes in the accounting of stock options required by the FASB. If the fair value based method of accounting for stock options established under SFAS No. 123 were adopted effective January 1, 2002, for the options granted during 2002, the Company estimates it would have recognized stock option expense of approximately $614,000. If the Company were to adopt the accounting provision of SFAS No. 123, the adoption would be prospective. Accordingly, the Company would expect stock option expense to increase in the future if additional stock options are issued. Proprietary Rights and Intellectual Property Litigation. The Company's success depends 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. The Company is currently involved in litigation in federal court alleging patent infringement by the products of a defendant. 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. There can be no assurance that this litigation and any other intellectual property litigation initiated in the future will not cause significant litigation expense, liability and a diversion of management's attention which may have a material adverse effect on the Company's operating results. Dependence on Key Management and Technical Personnel. The Company's success depends to a significant degree upon the continued contributions of its key management, sales, marketing, research and development and operational personnel, including Dr. Truchard, the Company's Chairman and Chief Executive Officer, 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 upon its ability to attract and retain additional highly skilled management, technical, marketing, research and development, and operational personnel with experience in managing large and rapidly changing companies, as well as training, motivating and supervising the employees. In addition, the recruiting environment for software engineering, sales and other technical professionals is very competitive. Competition for qualified software engineers is particularly intense and is likely to result in increased personnel costs. Failure to attract or retain qualified software engineers could have an adverse effect on the Company's operating results. The Company also recruits and employs foreign nationals to achieve its hiring goals primarily for 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. 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. Failure to attract and retain a sufficient number of technical personnel could have a material adverse effect on the Company's operationg results. Risk of Product Liability Claims. The Company's products are designed 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. ITEM 7(a). MARKET RISK Response to this item is included in "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations--Market Risk" above. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the Consolidated Financial Statements set forth on pages F-1 through F-21 and S-1 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.

PART III Certain information required by Part III is omitted from this Report in that the Registrant intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission (the "Proxy Statement") relating to its annual meeting of stockholders not later than 120 days after the end of the fiscal year covered by this Report, and such information is incorporated by reference herein. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors 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 From time to time the Company's directors, executive officers and other insiders may adopt stock trading plans pursuant to Rule 10b5-1(c) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Starting in the fourth quarter of 2000, Jeffrey L. Kodosky and James J. Truchard have made periodic sales of the Company's stock pursuant to such plans. The information required by this Item pursuant to Item 403 of Regulation S-K is incorporated by reference to the Company's Proxy Statement under the heading "Election of Directors." The information required by this Item pursuant to Item 201(d) of Regulation S-K is incorporated by reference to the Company's Proxy Statement under the heading "Equity Compensation Plans Information". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the fourth quarter of 2002, the Company contributed approximately $3.6 milion to the National Instruments Foundation, a 501(c)(3) charitable foundation established in 2002 for the purpose of continued promotion of scientific and engineering research and education at higher education institutions worldwide. Two of the four directors of the National Instruments Foundation are current officers of National Instruments. During 2001, the Company acquired a 10% minority interest in another company for $2.5 million. Because of the Company's ownership percentage and its lack of control and inability to exert influence over this entity, this investment is accounted for under the cost method. Sales to this company during 2002 and 2001 were $141,000 and $96,000, respectively.Trade receivables from this company at December 31, 2002 and 2001 were approximately $28,000 and $7,000, respectively. The Company has no other minority investments in any other entities. In addition, the information required by this item is incorporated by reference to the Company's Proxy Statement under the heading "Certain Relationships and Related Transactions." ITEM 14. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities and Exchange Act of 1934, as amended) as of a date within 90 days of the filing of this annual report (the "Evaluation Date"), have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective to ensure the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the Evaluation Date.

PART IV ITEM 15. 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-21 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 Agreement Regarding Terms of Employment. 11.0 Computation of Earnings Per Share. 21.1 Subsidiaries of the Company. 23.0 Consent of Independent Accountants. 24.0 Power of Attorney (included on page 35). 99.1 Certification of Chief Executive Officer and Chief Financial Officer * Incorporated by reference to the Company's Registration Statement on Form S-1 (Reg. No. 33-88386) declared effective March 13, 1995. ** Management Contract or Compensatory, Plan or Arrangement. (b) Reports on Form 8-K Not Applicable. (c) Exhibits See Item 15(a)(2) above.

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 January 26, 2003 BY:/s/ Dr. 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 January 26, 2003 Officer) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- /s/ Alexander M. Davern Chief Financial Officer and Alexander M. Davern Treasurer (Principal Financial January 27, 2003 and Accounting Officer) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- /s/ Jeffrey L. Kodosky Jeffrey L. Kodosky Director January 24, 2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- /s/ Dr. Donald M. Carlton Dr. Donald M. Carlton Director January 24, 2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- /s/ Ben G. Streetman Ben G. Streetman Director January 27, 2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- /s/ R. Gary Daniels R. Gary Daniels Director January 26, 2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- /s/ Charles J. Roesslein Charles J. Roesslein Director January 25, 2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- /s/ Duy-Loan T. Le Duy-Loan T. Le Director January 27, 2003 - --------------------------------------------------------------------------------

I, James Truchard, certify that: 1. I have reviewed this annual report on Form 10-K of National Instruments Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 26, 2003 /s/ James Truchard James Truchard Chief Executive Officer

I, Alexander Davern, certify that: 1. I have reviewed this annual report on Form 10-K of National Instruments Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 27, 2003 /s/ Alexander Davern Alexander Davern Chief Financial Officer

NATIONAL INSTRUMENTS CORPORATION INDEX TO FINANCIAL STATEMENTS Page No. Financial Statements: ---- Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001............... F-3 Consolidated Statements of Income for each of the Three Years Ended December 31, 2002.......................................................... F-4 Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 2002.......................................................... F-5 Consolidated Statements of Stockholders' Equity for each of the Three Years Ended December 31, 2002.................................................... F-6 Notes to Consolidated Financial Statements................................. F-7 Financial Statement Schedules: For each of the Three Years Ended December 31, 2002 Schedule II--Valuation and Qualifying Accounts......................... S-1 All other schedules are omitted because they are not applicable.

Report of Independent Accountants To the Board of Directors and Stockholders of National Instruments Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of National Instruments Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Austin, Texas January 27, 2003

NATIONAL INSTRUMENTS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2002 2001 ---------- ---------- ASSETS Current assets: Cash and cash equivalents........................... $ 40,240 $ 49,089 Short-term investments.............................. 113,638 101,422 Accounts receivable, net............................ 62,981 53,624 Inventories, net.................................... 39,247 32,607 Prepaid expenses and other current assets........... 13,756 20,608 Deferred income taxes, net.......................... 8,104 6,408 ---------- ---------- Total current assets............................. 277,966 263,758 Property and equipment, net......................... 152,133 137,360 Intangibles and other assets........................ 28,615 23,501 ---------- ---------- Total assets..................................... $ 458,714 $ 424,619 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................... $ 25,578 $ 28,958 Accrued compensation................................ 9,555 8,944 Accrued expenses and other liabilities.............. 13,507 6,819 Income taxes payable................................ 6,153 1,298 Other taxes payable................................. 11,720 7,903 ---------- ---------- Total current liabilities........................ 66,513 53,922 Deferred income taxes, net.............................. 5,738 4,533 ---------- ---------- Total liabilities................................ 72,251 58,455 ---------- ---------- Commitments and contingencies (Note 13) Stockholders' equity: Common stock: par value $0.01; 180,000,000 shares authorized;51,074,607 and 51,162,469 shares issued and outstanding, respectively....................... 511 512 Additional paid-in capital.......................... 72,063 78,261 Retained earnings................................... 321,813 290,408 Accumulated other comprehensive loss................ (7,924) (3,017) ---------- ---------- Total stockholders' equity....................... 386,463 366,164 ---------- ---------- Total liabilities and stockholders' equity....... $ 458,714 $ 424,619 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL INSTRUMENTS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) For the Years Ended December 31, 2002 2001 2000 ---------- ---------- ---------- Net sales.................................. $ 390,790 $ 385,275 $ 410,149 Cost of sales.............................. 105,086 101,297 98,326 ---------- ---------- ---------- Gross profit........................... 285,704 283,978 311,823 ---------- ---------- ---------- Operating expenses: Sales and marketing.................... 145,671 145,555 147,377 Research and development............... 63,964 60,745 55,954 General and administrative............. 35,714 29,234 32,077 ---------- ---------- ---------- Total operating expenses............ 245,349 235,534 235,408 ---------- ---------- ---------- Operating income....................... 40,355 48,444 76,415 Other income (expense): Interest income........................ 3,295 5,837 6,390 Interest expense....................... (128) (26) (533) Net foreign exchange loss.............. (724) (1,424) (1,482) Other income, net...................... 820 702 323 ---------- ---------- ---------- Income before income taxes................. 43,618 53,533 81,113 Provision for income taxes................. 12,213 17,131 25,956 Net income.......................... $ 31,405 $ 36,402 $ 55,157 ========== ========== ========== Basic earnings per share................... $ 0.61 $ 0.72 $ 1.10 ========== ========== ========== Weighted average shares outstanding - basic....................... 51,219 50,910 50,332 ========== ========== ========== Diluted earnings per share................. $ 0.59 $ 0.68 $ 1.03 ========== ========== ========== Weighted average shares outstanding - diluted..................... 53,411 53,651 53,564 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL INSTRUMENTS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Years Ended December 31, 2002 2001 2000 ---------- ---------- ---------- Cash flow from operating activities: Net income........................................ $ 31,405 $ 36,402 $ 55,157 Adjustments to reconcile net income to cash provided by operating activities: Charges to income not requiring cash outlays: Depreciation and amortization................. 20,748 16,802 16,345 Provision (benefit) for deferred income taxes. (207) 822 (832) Tax benefit from stock option plans........... 1,835 1,665 1,363 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable.... (9,357) 21,080 (16,425) Decrease (increase) in inventory.............. (6,640) 685 (7,131) Decrease (increase) in prepaid expenses and other assets............................. 1,823 (9,574) (1,655) (Decrease) increase in accounts payable....... (3,380) (1,407) 7,047 (Decrease) increase in taxes and other liabilities.................................. 12,906 (9,322) 1,127 ---------- ---------- ---------- Net cash provided by operating activities.. 49,133 57,153 54,996 ---------- ---------- ---------- Cash flow from investing activities: Capital expenditures.............................. (30,817) (65,274) (27,631) Additions to intangibles.......................... (8,750) (4,903) (6,930) Purchases of short-term investments............... (134,434) (149,505) (97,685) Sales of short-term investments................... 122,218 127,608 101,685 ---------- ---------- ---------- Net cash used in investing activities...... (51,783) (92,074) (30,561) ---------- ---------- ---------- Cash flow from financing activities: Repayments of long-term debt...................... -- -- (5,177) Proceeds from issuance of common stock............ 13,424 12,242 10,710 Repurchase of common stock........................ (19,623) (3,509) -- ---------- ---------- ---------- Net cash provided by (used in) financing activities................................ (6,199) 8,733 5,533 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents...................................... (8,849) (26,188) 29,968 Cash and cash equivalents at beginning of period.. 49,089 75,277 45,309 ---------- ---------- ---------- Cash and cash equivalents at end of period........ $ 40,240 $ 49,089 $ 75,277 ========== ========== ========== Cash paid for interest and income taxes Interest...................................... $ 128 $ 26 $ 601 Income taxes.................................. $ 5,052 $ 15,814 $ 26,776 The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL INSTRUMENTS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data) Accumulated Common Common Additional Other Total Stock Stock Paid-In Retained Comprehensive Stockholders' (Shares) Amount Capital Earnings Gain/(Loss) Equity ---------- ------ ---------- -------- ------------- ------------- Balance at December 31, 1999...................... 50,047,182 $ 500 $ 58,830 $198,849 $ (3,944) $ 254,235 Net income........................................ 55,157 55,157 Foreign currency translation adjustment (net of $1,126 tax benefit)..................... (2,090) (2,090) Unrealized gain on securities available for sale.. (net of $75 tax expense)........................ 202 202 Unrealized gain on derivative instruments (net of $1,512 tax expense)..................... 2,809 2,809 Issuance of common stock under employee plans..... 587,421 6 10,704 10,710 ---------- ------ ---------- -------- ------------- ------------- Balance at December 31, 2000...................... 50,634,603 $ 506 $ 69,534 $254,006 $ (3,023) $ 321,023 Net income........................................ 36,402 36,402 Foreign currency translation adjustment (net of $1,137 tax benefit)..................... (2,417) (2,417) Unrealized loss on securities available for sale (net of $0 tax benefit)......................... (167) (167) Unrealized gain on derivative instruments (net of $1,449 tax expense)..................... 2,590 2,590 Issuance of common stock under employee plans..... 649,666 6 12,236 12,242 Repurchase and retirement of common stock......... (121,800) (3,509) (3,509) ---------- ------ ---------- -------- ------------- ------------- Balance at December 31, 2001...................... 51,162,469 $ 512 $ 78,261 $290,408 $ (3,017) $ 366,164 Net income........................................ 31,405 31,405 Foreign currency translation adjustment (net of $1,355 tax expense)..................... 3,483 3,483 Unrealized gain on securities available for sale (net of $0 tax benefit)......................... 147 147 Unrealized loss on derivative instruments (net of $3,320 tax benefit)..................... (8,537) (8,537) Issuance of common stock under employee plans..... 725,488 7 13,417 13,424 Repurchase and retirement of common stock......... (813,350) (8) (19,615) (19,623) ---------- ------ ---------- -------- ------------- ------------- Balance at December 31, 2002...................... 51,074,607 $ 511 $ 72,063 $321,813 $ (7,924) $ 386,463 The accompanying notes are an integral part of these consolidated financial statements.

NATIONAL INSTRUMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Operations and summary of significant accounting policies National Instruments Corporation (the "Company") is a Delaware Corporation. The Company engages in the design, development, manufacture and marketing of instrumentation software and specialty computer plug-in cards and accessories that users combine with industry standard computers, networks and the Internet to create measurement and automation systems. The Company offers hundreds of products used to create virtual instrumentation systems for general, commercial, industrial and scientific applications. The Company's products may be used in different environments, and consequently, specific application of the Company's products is determined by the customer and often is not known to the Company. The Company approaches all markets with essentially the same products, which are used in a variety of applications from research and development to production testing and industrial control. The following industries and applications are served worldwide by the Company: advanced research, automotive, commercial aerospace, computers and electronics, continuous process manufacturing, education, government/defense, medical research/pharmaceutical, power/energy, semiconductors, automated test equipment, telecommunications and others. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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. Certain prior year amounts have been reclassified to conform with the 2002 presentation. Use of estimates Judgments and estimates by management are required in the preparation of financial statements to conform with U.S. 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 original maturities of three months or less at the date of acquisition. Short-term investments Short-term investments consist of corporate, state and municipal securities with readily determinable fair market values and original maturities in excess of three months. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company's investments are classified as available-for-sale and accordingly are reported at fair value, with unrealized gains and losses reported as other comprehensive income. Unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. The specific identification method is used to determine the cost of securities sold. Inventories Inventories are stated at the lower-of-cost or market. Cost is determined using standard costs, which approximate the first-in first-out (FIFO) method. Cost includes the acquisition cost of purchased components, parts and subassemblies, in-bound freight costs, labor and overhead. Market, is replacement cost with respect to raw materials and, is net realizable value with respect to work in process and finished goods. Inventory is shown net of valuation allowance for excess and obsolete inventories of $3.5 million and $2.9 million at December 31, 2002 and 2001, respectively. Property and equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from twenty to forty years for buildings, three to seven years for purchased internal use software and three to five years for equipment. Leasehold improvements are depreciated over the shorter of the life of the lease or the asset. Intangible assets The Company has capitalized costs related to the development and acquisition of certain software products. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, 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. Technological feasibility for Ntaional Instruments products is established when the product is available for beta release. 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. Patents are amortized using the straight-line method over their estimated period of benefit, generally seventeen years. At each balance sheet date, the unamortized costs for all intanbigle assets are reviewed by management and reduced to net realizable value when necessary. The excess purchase price over the fair value of assets acquired is recorded as goodwill. Beginning in 2002 with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized, but instead tested for impairment at least annually. Prior to 2002, goodwill was amortized using the straight-line method over its estimated period of benefit, ten years. 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. The Company's short-term investments are diversified among and limited to high-quality securities with high credit ratings. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across many countries and industries. The amount of sales to any individual customer did not exceed 3% of revenue for the periods presented. The amount of trade accounts receivable from any individual customer at December 31, 2002 was approximately $600,000. Revenue recognition Sales revenue is generally recognized on the date the product is shipped to the customer. Provision is made for estimated sales returns based on actual historical experience. Revenue related to the sale of maintenance contracts is deferred and amortized on a straight-line basis over the service period. Deferred revenue at December 31, 2002 and 2001 is $5.4 million and $4.2 million respectively. Accounts receivable are net of allowances for doubtful accounts of $3.8 million and $4.9 million at December 31, 2002 and 2001, 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. The warranty reserve at December 31, was as follows (in thousands): Dollar Amount of Liability ------------------ 2002 2001 -------- -------- Balance at the beginning of the period.................... $ 865 $ 715 Accruals for warranties issued during the period.......... 988 1,484 Settlements made (in cash or in kind) during the period.. (1,138) (1,334) -------- -------- Balance at the end of the period.......................... $ 715 $ 865 ======== ======== Legal defense costs The Company accrues for legal defense costs on an undiscounted basis, in accordance with SFAS No. 5, Accounting for Loss Contingencies, when such costs are considered probable of being incurred and are reasonably estimable. The Company periodically evaluates available information, both internal and external, relative to such contingencies and adjusts this accrual as necessary. Advertising expense The Company expenses its costs of advertising as incurred. Advertising expense for the years ended December 31, 2002, 2001 and 2000 is $29.6 million, $30.4 million and $35.4 million, respectively. Foreign currency translation The functional currency for the Company's international operations is the applicable local currency. The assets and liabilities of these operations are translated at the rate of exchange in effect on the balance sheet date; sales and expenses are translated at average rates. The resultant gains or losses from translation are included in a separate component of other comprehensive income. Gains and losses resulting from remeasuring monetary asset and liability accounts that are denominated in a currency other than a subsidiary's functional currency are included in determining net income. Foreign currency hedging instruments All of the Company's derivative instruments are recognized on the balance sheet at their fair value. The Company currently uses foreign currency forward and purchased option contracts to hedge its exposure to material foreign currency denominated receivables and forecasted foreign currency cash flows. On the date the derivative contract is entered into, the Company designates its derivative as either a hedge of the fair value of foreign currency denominated receivables ("fair-value" hedge) or as a hedge of the variability of foreign currency cash flows to be received ("cash flow" hedge). Changes in the fair market value of a fair-value hedge are recorded, along with the loss or gain on the re-measurement of foreign-currency-denominated receivables, in current earnings. Changes in the fair value of derivatives that are highly effective as--and that are designated and qualify as--cash flow hedges under SFAS No. 133 are recorded in other comprehensive income. These amounts are subsequently reclassified into earnings in the period during which the hedge transaction is realized. The Company does not enter into derivative contracts for speculative purposes. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used to hedge forecasted transactions are highly effective in offsetting changes in cash flows of hedged items. The Company prospectively discontinues hedge accounting if (1) it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) the derivative is de-designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) the hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative as a hedge instrument is no longer appropriate. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all other situations where hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings. Income taxes The Company accounts for income taxes under the asset and liability method as set forth in SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. Earnings per share Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding (if dilutive) during each period. Common share equivalents include stock options. The number of common share equivalents outstanding relating to stock options is computed using the treasury stock method. The reconciliation of the denominators used to calculate the basic EPS and diluted EPS for the years ended December 31, 2002, 2001 and 2000, respectively, are as follows (in thousands): Years Ended December 31, 2002 2001 2000 -------- -------- -------- Weighted average shares outstanding-basic.... 51,219 50,910 50,332 Plus: Common share equivalents Stock options............................... 2,192 2,741 3,232 -------- -------- -------- Weighted average shares outstanding-diluted.. 53,411 53,651 53,564 ======== ======== ======== Stock options to acquire 1,649,000, 1,394,000 and 990,000 shares for the years ended December 31, 2002, 2001 and 2000, respectively, were excluded from the computations of diluted earnings per share because the effect of including stock options would have been anti-dilutive. Stock-based compensation plans The Company has two active stock-based compensation plans and one inactive plan. The two active stock-based compensation plans are the 1994 Incentive Stock Option Plan and the Employee Stock Purchase Plan. The Company follows the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. As allowed by SFAS No. 123, the Company continues to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock issued to Employees and related interpretations in accounting for its plans. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. No compensation cost has been recognized in the Company's financial statements for the stock option plan and the stock purchase plan. If compensation cost for the Company's two active stock-based compensation plans were determined based on the fair value at the grant date for awards under those plans consistent with the method established by SFAS No. 123, the Company's net income and earnings per share would approximate the pro-forma amounts below (in thousands, except per share data): Year Ended Deccember 31, ---------------------------------- 2002 2001 2000 ---------- ---------- ---------- Net income, as reported................... $ 31,405 $ 36,402 $ 55,157 Stock-based compensation included in reported net income, net of related tax effects.................................. -- -- -- Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects... (14,019) (14,086) (10,850) ---------- ---------- ---------- Pro-forma net income...................... $ 17,386 $ 22,316 $ 44,307 ---------- ---------- ---------- Earnings per share: Basic - as reported....................... $ 0.61 $ 0.72 $ 1.10 Basic - pro-forma......................... $ 0.34 $ 0.44 $ 0.88 Diluted - as reported..................... $ 0.59 $ 0.68 $ 1.03 Diluted - pro-forma....................... $ 0.33 $ 0.42 $ 0.83 Comprehensive income The Company follows SFAS No. 130, Reporting Comprehensive Income, which established standards for reporting comprehensive income and its components including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. Total comprehensive income for 2002, 2001 and 2000 was $26.5 million, $36.4 million and $56.1 million, respectively. Recently issued accounting pronouncements In May 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002. The Statement rescinds SFAS No. 4 and requires that only unusual or infrequent gains and losses from extinguishment of debt should be classified as extraordinary items, consistent with APB Opinion 30. This Statement amends SFAS No. 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends certain existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted SFAS No 145 effective July 1, 2002. The adoption of SFAS No. 145 did not have a material effect on our financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to on the date of an entity's commitment to an exit plan, which was the practice employed under EITF Issue 94-3. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. SFAS No. 146 is not expected to have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. This Statement also amends the disclosure provision of SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company adopted SFAS No. 148 effective December 31, 2002. The adoption of SFAS No. 148 did not have a material effect on the Company's financial position or results of operations. Note 2: Short-term investments Short-term investments at December 31, 2002 and 2001, consisting of corporate, state and municipal securities, were acquired at an aggregate cost of $113.6 million and $101.0 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, 2002 2001 ---------- ---------- Less than 90 days............................ $ 33,237 $ 14,004 90 days to one year.......................... 40,377 36,799 One year through two years................... 38,876 23,233 Two years through three years................ 1,148 27,386 ---------- ---------- $ 113,638 $ 101,422 ========== ========== Note 3: Inventories Inventories, net consist of the following (in thousands): December 31, 2002 2001 ---------- ---------- Raw materials................................ $ 21,127 $ 15,394 Work-in-process.............................. 1,324 824 Finished goods............................... 16,796 16,389 ---------- ---------- $ 39,247 $ 32,607 ========== ========== Note 4: Property and equipment Property and equipment consist of the following (in thousands): December 31, 2002 2001 ---------- ---------- Land......................................... $ 5,850 $ 5,665 Buildings.................................... 121,320 66,819 Furniture and equipment...................... 114,166 93,608 ---------- ---------- 241,336 166,092 Accumulated depreciation..................... (89,203) (73,159) Construction-in-progress..................... -- 44,427 ---------- ---------- $ 152,133 $ 137,360 ========== ========== Depreciation expense for the years ended December 31, 2002, 2001 and 2000, was $16.0 million, $12.6 million and $12.8 million, respectively. Note 5: Intangibles and other assets Intangibles at December 31, 2002 and 2001 include capitalized software development costs of $9.3 million and $7.5 million (net of accumulated amortization of $15.6 million and $11.7 million), respectively, goodwill of $5.8 million and $4.9 million in 2002 and 2001 (net of accumulated amortization of $1.9 million and $1.6 million), respectively, and patents of $5.6 million and $4.4 million in 2002 and 2001 (net of accumulated amortization of $1.1 million and $731,000), respectively. Total amortization costs were $4.7 million, $4.2 million and $3.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. Software development costs capitalized during 2002, 2001 and 2000 were $5.8 million, $3.9 million and $5.0 million, respectively, and related amortization was $3.8 million, $3.1 million and $2.6 million, respectively. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142, discontinues amortization of acquired goodwill and instead requires annual impairment testing. The Company adopted SFAS No. 142 effective January 1, 2002. Adoption of SFAS No. 142 did not have a material impact on the Company's financial position or results of operations. Note 6: Income taxes The components of income before the provision for income taxes are as follows (in thousands): Years Ended December 31, 2002 2001 2000 -------- -------- -------- Domestic.................................... $38,517 $47,085 $68,982 Foreign..................................... 5,101 6,448 12,131 -------- -------- -------- $43,618 $53,533 $81,113 The provision for income taxes charged to operations is as follows (in thousands): Years Ended December 31, 2002 2001 2000 -------- -------- -------- Current tax expense: U.S. federal............................. $ 8,798 $12,856 $22,902 State.................................... 654 1,575 2,043 Foreign.................................. 2,968 1,878 1,843 -------- -------- -------- Total current......................... 12,420 16,309 26,788 -------- -------- -------- Deferred tax expense (benefit): U.S. federal............................. 580 1,078 (2,031) State.................................... 56 123 (12) Foreign.................................. (843) (379) 1,211 -------- -------- -------- Total deferred........................ (207) 822 (832) -------- -------- -------- Total provision....................... $12,213 $17,131 $25,956 ======== ======== ======== Deferred tax liabilities (assets) at December 31, 2002 and 2001 as follows (in thousands): December 31, 2002 2001 -------- -------- Capitalized software.................................. $ 3,246 $ 2,548 Unrealized gain on derivative instruments............. 967 2,588 Depreciation and amortization......................... 2,906 1,088 Unrealized exchange gain.............................. -- 381 Accrued legal expenses................................ 116 -- Undistributed earnings of foreign subsidiaries........ 183 114 -------- -------- Gross deferred tax liabilities....................... 7,418 6,719 -------- -------- Operating loss carryforwards.......................... (2,465) (1,180) Vacation and other accruals........................... (1,852) (1,559) Inventory valuation and warranty provisions........... (3,218) (3,611) Doubtful accounts and sales provisions................ (1,184) (1,615) Unrealized exchange loss.............................. (588) -- Intercompany profit................................... (1,911) (1,234) Accrued rent expenses................................. (818) -- Accrued legal expenses................................ -- (319) Other................................................. (473) (797) -------- -------- Gross deferred tax assets............................ (12,509) (10,315) -------- -------- Valuation allowance................................... 615 557 -------- -------- Net deferred tax asset............................... $(4,476) $(3,039) ======== ======== A reconciliation of income taxes at the U.S. federal statutory income tax rate to the effective tax rate follows: Years Ended December 31, 2002 2001 2000 ---- ---- ---- U.S. federal statutory tax rate............................ 35% 35% 35% Foreign sales corporation/ETI benefit...................... (6) (2) (2) Foreign taxes more (less) than federal statutory rate...... 2 (1) (1) Research and development tax credit........................ (2) (1) -- Tax exempt interest........................................ (2) (2) (2) State income taxes, net of federal tax benefit............. 1 3 2 ---- ---- ---- Effective tax rate......................................... 28% 32% 32% ==== ==== ==== As of December 31, 2002, fifteen of the Company's subsidiaries have available, for income tax purposes, foreign net operating loss carryforwards of approximately $15.8 million, of which $1.3 million expire during the years 2005 - - 2010 and $14.5 million of which may be carried forward indefinitely. The Company's tax valuation allowance relates to the realizability of these foreign net operating loss carryforwards. The profit from the Company's Hungarian operation is currently exempt from income tax. These benefits may not be available in the future due to changes in Hungary's political condition and/or tax laws. The Company has not provided for U.S. federal income and foreign withholding taxes on approximately $9.4 million of certain non-U.S. subsidiaries' undistributed earnings as of December 31, 2002. These earnings would become subject to taxes of approximately $2.3 million, if they were actually or deemed to be remitted to the parent company as dividends or if the Company should sell its stock in these subsidiaries. The Company currently intends to reinvest indefinitely these undistributed earnings. Note 7: Stockholders' equity Stock repurchases and retirements In 1998, the Company's Board of Directors approved the repurchase and retirement of shares of common stock to reduce the dilutive effect of the Company's stock plans. Pursuant to this repurchase program, the Company has repurchased and retired a total of 935,150 shares for approximately $23.1 million. Stock option plans The stockholders of the Company approved the 1994 Incentive Stock Option Plan on May 9, 1994. At the time of approval, 6,075,000 shares of the Company's common stock were reserved for issuance under this plan. In 1997, an additional 4,725,000 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, 2002 were 1,848,955. Transactions under all plans are summarized as follows: Weighted Number of average shares under exercise option price ------------ -------- Outstanding at December 31, 1999........................ 5,516,962 $ 14.95 Exercised........................................... (443,544) 11.56 Canceled............................................ (209,966) 24.98 Granted............................................. 1,451,062 47.92 ------------ -------- Outstanding at December 31, 2000........................ 6,314,514 $ 22.40 Exercised........................................... (388,474) 11.52 Canceled............................................ (191,940) 33.00 Granted............................................. 1,520,527 32.13 ------------ -------- Outstanding at December 31, 2001........................ 7,254,627 $ 24.74 Exercised........................................... (386,012) 11.42 Canceled............................................ (173,678) 36.07 Granted............................................. 322,463 36.25 ------------ -------- Outstanding at December 31, 2002........................ 7,017,400 $ 25.69 Options exercisable at December 31: 2000................................................ 2,964,530 $ 14.20 2001................................................ 3,683,015 17.52 2002................................................ 4,189,185 20.44 Weighted Number of average shares under fair option value ------------ -------- Weighted average, grant date fair value of options granted during: 2000................................................ 1,451,062 $ 25.17 2001................................................ 1,520,527 16.71 2002................................................ 322,463 17.65 December 31, 2002 ---------------------------------------------------------- Options Outstanding Options Exercisable ---------------------------------- ---------------------- Weighted Weighted average Weighted Number of average remaining Number of average options exercise contractual options exercise Exercise price outstanding price life (yrs) exercisable price -------------- ----------- -------- ----------- ----------- -------- $ 6.44 - $ 8.89................ 1,129,910 $ 8.09 3 1,086,710 $ 8.06 9.11 - 14.44................ 1,136,567 14.22 4 975,566 14.21 14.83 - 22.96................ 1,671,508 20.98 6 1,208,812 21.11 23.33 - 30.50................ 1,383,469 30.90 8 336,040 30.74 31.56 - 51.56................ 1,695,946 45.52 8 582,057 46.61 ----------- -------- ----------- ----------- -------- 7,017,400 $25.69 6 4,189,185 $ 20.44 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: 2002 2001 2000 -------- -------- -------- Dividend expense yield................... 0% 0% 0% Expected life............................ 5 years 5 years 5 years Expected volatility...................... 44.7% 43.1% 40.6% Risk-free interest rate.................. 4.5% 4.7% 6.8% Employee stock purchase plan The Company's employee stock purchase plan permits substantially all domestic employees and employees of designated subsidiaries to acquire the Company's common stock at a purchase price of 85% of the lower of the market price at the beginning or the end of the participation period. The semi-annual periods begin on October 1 and April 1 of each year. Employees may designate up to 15% of their compensation for the purchase of common stock. Common stock reserved for future employee purchases aggregated 1,825,328 shares at December 31, 2002. Shares issued under this plan were 357,955 in 2002. The weighted average fair value of the employees' purchase rights, as shown below was estimated using the Black-Scholes model with the following assumptions: 2002 2001 2000 -------- -------- -------- Dividend expense yield................... 0% 0% 0% Expected life............................ 6 months 6 months 6 months Expected volatility...................... 43% 41% 58% Risk-free interest rate.................. 2.3% 5.1% 5.6% Weighted average, grant date fair value of purchase rights granted under the Employee Stock Purchase Plan: Weighted Number average of shares fair value ------------- ------------- 2000..................................... 158,158 $ 14.54 2001..................................... 290,082 7.95 2002..................................... 323,265 7.76 Stockholders' rights plan During 1995, 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 $0.01 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 8: 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 thirty days 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. Employees are eligible for the Company's matching contributions after one year of continuous service. Company contributions vest immediately. The Company's policy prohibits participants from direct investment in shares of common stock of the Company. Company contributions charged to expense were $1.8 million, $1.6 million and $1.3 million in 2002, 2001 and 2000, respectively. Note 9: 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 these 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, 2002 and 2001 are as follows (in thousands): December 31, 2002 2001 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Short-term investments.................. $113,638 $113,638 $101,422 $101,422 Other assets/liabilities: Forward contracts................... (2,685) (2,685) 2,391 2,391 Purchased options................... 694 694 2,873 2,873 The fair values of short-term investments and foreign currency forward and purchased option contracts were estimated based upon quotes from brokers as of the applicable balance sheet date. Note 10: Derivative instruments and hedging activities The Company has operations in 40 countries. Approximately fifty percent of the Company's revenues are generated outside North America. The Company's activities expose it to a variety of market risks, including the effects of changes in foreign-currency exchange rates and interest rates. These financial risks are monitored and managed by the Company as an integral part of its overall risk management program. The Company maintains a foreign-currency risk management strategy that uses derivative instruments (foreign currency forward and purchased options contracts) to protect its interests from fluctuations in earnings and cash flows caused by the volatility in currency exchange rates. Movements in foreign-currency exchange rates pose a risk to the Company's operations and competitive position, since exchange rate changes may affect the profitability, cash flow, and business and/or pricing strategies of non-U.S. based competitors. Foreign currency fair value and cash flow hedges The Company's foreign sales are denominated in the customers' local currency. The Company purchases foreign currency forward and purchased options contracts as hedges of forecasted sales that are denominated in foreign currencies and as hedges of foreign currency denominated receivables. These contracts are entered into to protect against the risk that the eventual dollar-net-cash inflows resulting from such sales or firm commitments will be adversely affected by changes in exchange rates. The Company held forward contracts with notional amounts totaling $24.1 million and $31.9 million at December 31, 2002 and 2001, respectively, that were designated as foreign currency fair value hedges of the Company's foreign denominated receivables. The fair value of these contracts, which are for 90-day periods, is a liability of $1.3 million at December 31, 2002, and an asset of $289,000 at December 31, 2001. The Company recorded a net loss of $4.9 million and a net gain of $2.0 million for fair value hedges for the year ended December 31, 2002 and 2001, respectively, which was recorded in "Foreign Currency Gain(Loss)." The Company hedges up to 90% of its outstanding foreign denominated receivables. The Company held forward contracts with a notional amount of $48.1 million and $17.1 million and option contracts with notional amounts totaling $86.4 million and $54.1 million at December 31, 2002 and 2001, respectively, that were designated as foreign currency cash flow hedges related to the Company's anticipated sales transactions. The fair value of these contracts, which are for terms up to thirty-six months, is a liability of $2.8 million at December 31, 2002, and an asset of $4.2 million at December 31, 2001 and a net unrealized deferred loss of $2.8 million and net unrealized deferred gain of $4.2 million at December 31, 2002 and 2001, respectively, recorded in "Accumulated Other Comprehensive Income." The Company hedges up to 100% of anticipated foreign currency denominated cash inflows for the following 1 to 36 months. The Company recorded a net gain of $3.6 million and $4.4 million for cash flow hedges for the year ended December 31, 2002 and 2001, respectively, which was included in "Net Revenue." As of December 31, 2002, $1.0 million of deferred gains on cash flow hedges recorded in "Accumulated Other Comprehensive Income" are expected to be reclassified to earnings during the next twelve months. The actual foreign sales expected to occur over the next twelve months will necessitate the reclassifying to earnings of these derivative gains. Hedge ineffectiveness of a foreign currency option contract designated as a cash flow hedge is measured by comparing the hedging instrument's cumulative change in fair value from inception to maturity to the forecasted transaction's terminal value. No amounts were excluded from the assessment of hedge effectiveness for the year ended December 31, 2002. For the year ended December 31, 2001, the Company recognized a net loss of $89,000 (reported in the "Net Foreign Exchange Gain (Loss)" line item in the Consolidated Statement of Income), which represented the net ineffectiveness of all cash-flow hedges. Note 11: Segment information In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company determines segments using the management approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. It also requires disclosures about products and services, geographic areas and major customers. While the Company sells its products to many different industries, its management has chosen to organize the Company by geographic areas, and as a result has determined that it has one reportable segment. Substantially all of the interest income, interest expense, depreciation and amortization of intangibles is recorded in North America. Substantially all of the Company's goodwill and related amortization is recorded in Europe. 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, 2002 2001 2000 ---------- ---------- ---------- Net sales: North America: Unaffiliated customer sales........ $ 195,770 $ 195,842 $ 215,960 Geographic transfers............... 58,330 58,041 55,524 ---------- ---------- ---------- 254,100 253,883 271,484 ---------- ---------- ---------- Europe: Unaffiliated customer sales........ 122,800 128,523 136,355 Geographic transfers............... 35,027 6,981 -- ---------- ---------- ---------- 157,827 135,504 136,355 Asia Pacific: Unaffiliated customer sales........ 72,220 60,910 57,834 Eliminations.......................... (93,357) (65,022) (55,524) ---------- ---------- ---------- $ 390,790 $ 385,275 $ 410,149 ========== ========== ========== Years Ended December 31, 2002 2001 2000 ---------- ---------- ---------- Operating income: North America............................. $ 31,031 $ 40,624 $ 57,188 Europe.................................... 37,789 41,229 48,180 Asia Pacific.............................. 35,499 27,336 27,001 Unallocated: Research and development expenses......... (63,964) (60,745) (55,954) ---------- ---------- ---------- $ 40,355 $ 48,444 $ 76,415 ========== ========== ========== December 31, 2002 2001 ---------- ---------- Identifiable assets: North America............................. $ 373,066 $ 349,209 Europe.................................... 63,600 65,201 Asia Pacific.............................. 22,048 10,209 ---------- ---------- $ 458,714 $ 424,619 ========== ========== Total sales outside the United States for 2002, 2001 and 2000 were $212.7 million, $189.8 million and $217.3 million, respectively. Note 12: Commitments, contingencies and leases The Company has commitments under noncancelable operating leases primarily for office facilities and equipment. Future minimum lease payments as of December 31, 2002, for each of the next five years are as follows (in thousands): 2003................................ $1,652 2004................................ 1,616 2005................................ 988 2006................................ 102 Thereafter.......................... 98 ------ $4,456 ====== During the fourth quarter of 2002, the Company and Trilogy Software ("Trilogy") settled a dispute regarding Trilogy's buy-out of the lease of the Company's Millenium office building which resulted in a gain of approximately $6.0 million from lease termination. As a result of additional facility lease consolidation, the Company incurred lease termination costs of approximately $2.4 million in the fourth quarter of 2002. These amounts were included in general and administrative expenses. Rent expense under operating leases was approximately $6.3 million, $5.4 million and $3.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002, the Company has non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $4.3 million over the next twelve months. As of December 31, 2002, the Company has outstanding guarantees for payment of foreign operating leases, customs and foreign grants totaling approximately $3.8 million. Note 13: Litigation During 2001, the Company filed a complaint in U.S. District Court, Western District of Texas (Midland Division) for declaratory judgment arising from a controversy between the Company and General Patent Corporation, General Patent Corporation International, and Acticon Technologies, LLC ("Defendants") concerning the enforceability, validity, and infringement of certain patents in which Defendants claim an interest. Defendants claimed that the Company infringed these patents. The Company challenged the validity and enforceability of these patents and asserted that it does not infringe the claims of these patents. The Company sought a declaratory judgment of invalidity and non-infringement. Defendants sought damages in an unspecified amount, injunction of the sale of certain products of the Company and attorney's fees and costs. On April 16, 2002, the case was dismissed by stipulation of the parties. The Company has filed two complaints in the U.S. District Court, Eastern District of Texas (Marshall Division) against The MathWorks, Inc. ("Defendant") for patent infringement. In the first complaint, filed January 25, 2001, the Company claims that the Defendant infringes certain of the Company's U.S. patents. The Defendant challenges the validity and enforceability of these patents and asserts that it does not infringe the claims of these patents. The trial for this case began January 13, 2003 and is currently pending. The Company expects a jury verdict by the end of January, 2003. In the second complaint, filed October 21, 2002, the Company claims that the Defendant infringes certain other of the Company's U.S. patents. In each case, the Company seeks monetary damages and injunction of the sale of certain products of the Defendant. The Company also seeks attorney's fees and costs in the second case. For both complaints, the Company expects to incur legal expenses of approximately $2 million during the first quarter of 2003. Due to the inherent uncertainties of litigation, there may be significant changes in the amount and timing of these expenses. Note 14: Related party transactions In the fourth quarter of 2002, the Company contributed approximately $3.6 milion to the National Instruments Foundation, a 501(c)(3) charitable foundation established in 2002 for the purpose of continued promotion of scientific and engineering research and education at higher education institutions worldwide. This contribution was recorded as general and administrative expense in 2002. Two of the four directors of the National Instruments Foundation are current officers of National Instruments. During 2001, the Company acquired a 10% minority interest in another company for $2.5 million. Because of the Company's ownership percentage and its lack of control and inability to exert influence over this entity, this investment is accounted for under the cost method. Sales to this company during 2002 and 2001 were $141,000 and $96,000, respectively. Trade receivables from this company at December 31, 2002 and 2001 were approximately $28,000 and $7,000, respectively. The Company has no other minority investments in any other entities. Note 15: 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, 2002 are as follows (in thousands, except per share data): Three Months Ended Mar. 31, Jun. 30, Sep. 30, Dec. 31, 2002 2002 2002 2002 -------- -------- -------- -------- Net sales.......................... $ 94,739 $ 93,505 $ 96,020 $106,525 Gross profit....................... 69,381 66,902 70,824 78,597 Operating income................... 10,255 8,760 8,606 12,735 Net income......................... 7,367 7,388 6,685 9,965 Basic earnings per share........... $ 0.14 $ 0.14 $ 0.13 $ 0.20 Weighted average shares outstanding-basic................ 51,205 51,449 51,195 51,013 Diluted earnings per share......... $ 0.14 $ 0.14 $ 0.13 $ 0.19 Weighted average shares outstanding-diluted.............. 53,953 53,974 52,906 52,875 Three Months Ended Mar. 31, Jun. 30, Sep. 30, Dec. 31, 2001 2001 2001 2001 -------- -------- -------- -------- Net sales.......................... $108,080 $ 97,707 $ 85,062 $ 94,426 Gross profit....................... 81,207 72,079 61,774 68,918 Operating income................... 19,890 12,085 6,509 9,960 Net income......................... 13,947 9,430 5,685 7,340 Basic earnings per share........... $ 0.28 $ 0.19 $ 0.11 $ 0.14 Weighted average shares outstanding-basic................ 50,701 50,887 50,956 51,095 Diluted earnings per share......... $ 0.26 $ 0.18 $ 0.11 $ 0.14 Weighted average shares outstanding-diluted.............. 53,873 53,450 53,288 53,524

SCHEDULE II NATIONAL INSTRUMENTS CORPORATION VALUATION AND QUALIFYING ACCOUNTS (In thousands) Allowance for doubtful accounts: Balance at Provision for Write-Offs Balance at Beginning Bad Debt Charged to End of Year Description of Period Expense Allowances Period - ---- ----------- ---------- ------------- ---------- ---------- 2000... Allowance for doubtful accounts $ 4,143 $ 1,962 $ 1,589 $ 4,516 2001... Allowance for doubtful accounts 4,516 1,579 1,175 4,920 2002... Allowance for doubtful accounts 4,920 (840) 329 3,751 Valuation allowances for excess and obsolete inventories: Balance at Provision Write-Offs Balance at Beginning Charged to Charged to End of Year Description of Period Cost of Sales Allowances Period - ---- ----------- ---------- ------------- ---------- ---------- 2000... Valuation allowances for excess and obsolete inventories $ 2,354 $ 1,090 $ 978 $ 2,466 2001... Valuation allowances for excess and obsolete inventories 2,466 1,082 682 2,866 2002... Valuation allowances for excess and obsolete inventories 2,866 1,818 1,212 3,472

                                                                    EXHIBIT 10.4


                               AGREEMENT REGARDING
                               TERMS OF EMPLOYMENT

     National Instruments  Corporation (the "Company") and Mihir Ravel ("you" or
"Ravel"  ) agree on the  following  terms of  employment  as of this 18th day of
April, 2000:

1.   Position. Starting April 18, 2000, Company employs Ravel in the position of
     Vice  President,  Corporate  Development at the Company's  headquarters  in
     Austin,  Texas,  reporting to the Chief Executive Officer and Ravel accepts
     such  employment.  Company shall assign such duties as are consistent  with
     Ravel's position as a Company officer and are within the scope of duties as
     defined in Attachment B hereto.  Company  shall not reassign  Ravel without
     his express written  permission.  Ravel shall devote his full-time and best
     efforts  to  his  duties  for  the  Company;  provided,   however,  Company
     acknowledges  that Ravel is assisting as a board-member or adviser (and not
     as an officer or employee) a multimedia  technology venture  ("Venture") to
     which he will devote up to1/2of  his time until  September  1, 2000.  Ravel
     shall make the Company his priority in the event of a conflict  between his
     position with the Company and the Venture.  If Ravel,  of his own volition,
     does not relocate to Austin,  Texas, on or before September 1, 2000, unless
     the Company  grants him a written  extension  to a later  relocation  date,
     Ravel  understands  that he will not be entitled to any of the remedies for
     termination  without cause/for good reason set out in paragraph six of this
     Agreement or other compensation contingent upon employment.

2.   Compensation. Company shall pay Ravel a base salary of $15,833.34 per month
     ($190,000,  if  annualized)  ("Base  Salary").  During the time Ravel works
     part-time  for the  Company,  his  salary  will be  pro-rated  for the time
     actually  worked for the Company.  National  Instruments  reviews  salaries
     twice a year.  You will be  eligible  for  your  first  merit-based  salary
     increase  April  2001.  In the event your  salary is  increased,  your Base
     Salary shall be the increased amount.

3.   Signing  Bonus,  Profit  Share.  In  addition,  you will  receive a $20,000
     signing bonus  [$10,000 (less taxes and  withholding  paid at time of hire,
     $10,000 (less taxes and withholding paid upon move to Austin)]. You will be
     eligible  for profit  sharing  which can be up to 40% of your  annual  Base
     Salary.

4.   Stock  Options.  At  the  next  regularly  scheduled  meeting  of  National
     Instruments Board of Directors after you begin employment,  management will
     recommend  that you receive an option award to purchase  100,000  shares of
     the  Company's  common stock at its fair market value on the date of grant.
     The  option  grant is  subject to the  approval  of the Board of  Directors
     Compensation  Committee,  which  approval  the  Company  shall seek in good
     faith, and except as otherwise  stated herein,  the grant is subject to the
     terms  of the 1994  Incentive  Plan,  your  continued  employment  with the
     Company and the terms and  conditions set forth in the award  agreement.  A
     summary of the 1994 Incentive  Plan has been included for your review.  The
     above  recommendation  for a stock  option  award and  additional  monetary
     compensation is contingent upon and in  consideration  for your signing our
     Employee Confidentiality Agreement.

5.   Other Benefits.

     (A)  Moving Expenses/ Housing Subsidy. A relocation package will be paid on
          your  behalf  as  outlined  in  Attachment  A. You will also be paid a
          housing subsidy of $300 per month in years one and two, $200 per month
          in year three,  and $100 per month in year four. The Company will also
          pay the realty fee incurred by you to sell your principle residence in
          Oregon, up to a maximum of 7% of the sales price.

     (B)  Vacation.  You will accrue vacation at the rate of 10 hours per month,
          and you will be eligible to earn higher levels of vacation  consistent
          with our vacation schedule.

     (C)  Benefits. The Company also provides employee medical, dental, life and
          disability  insurance,  and you will be eligible  for profit  sharing,
          participation  in the Company's  401(k)  retirement  plan and Employee
          Stock  Purchase  Plan.  A benefit  summary has been  provided for your
          review.  You will be entitled to such  insurance and other  employment
          benefits as are available to other  executive  officers of the Company
          under the same terms and conditions applicable to such other executive
          officers.

6.   Termination.  Texas is an "At Will"  employment  state.  Accordingly,  your
     employment with National  Instruments will be "At Will", is for no specific
     time period,  and can be terminated by you or National  Instruments  at any
     time,  with or without  cause or advance  notice,  subject to the severance
     obligation,  if  any,  as  provided  in  this  Agreement.  This  "At  Will"
     employment  relationship  will  remain in effect for the  duration  of your
     employment and can only be modified by an express written contract,  signed
     by you and an authorized representative of National Instruments.

     (A)  For  Cause/Voluntary  Resignation.  The  Company  may  terminate  this
          Agreement and your employment  immediately for "Cause" as that term is
          defined here.  "Cause" means any one of the following:  (a) conviction
          of a felony;  (b) material  misappropriation  of Company  assets,  (c)
          fraud  towards  the  Company;  (d)  material  breach  of the  Employee
          Confidentiality Agreement; (e) the Employee engages in insubordination
          that continues for 30 days after Employee receives written notice from
          the   Company    specifically    stating   the   facts    constituting
          insubordination,  excessive  absenteeism  not  arising  from  illness,
          violation of any state or federal law prohibiting sexual, race, gender
          or other  harassment  of employees or  customers;  or (f) the Employee
          becomes  physically  or  mentally  disabled  and  cannot  perform  the
          essential functions of his position with reasonable  accommodation for
          a period of 90 days. In the event of  termination  for Cause or if you
          voluntarily  resign your position  without "Good Reason," as that term
          is defined  below,  the Company  will pay you your Base Salary and any
          earned bonus and profit share through the date of termination.

     (B)  Without Cause /For Good Reason. If the Company  terminates you without
          Cause or if you  resign  with Good  Reason,  as that  term is  defined
          below,  the Company shall  immediately  do the following (i) pay you a
          lump sum severance equal to one year's  then-current Base Salary, and,
          (ii) as soon as practicable after receiving  documentation,  reimburse
          you for the  reasonable  expenses you incur moving you and your family
          from  Austin  back to  Portland,  Oregon or to such other  destination
          within the Continental United States as you may specify.  In addition,
          in the event the  termination  without Cause or  resignation  for Good
          Reason occurs prior to the third  anniversary  date of this Agreement;
          (a) all  outstanding  unvested  stock  options you hold that, by their
          terms,  would  otherwise vest within the twelve (12) months  following
          the termination  date, up to a maximum of thirty-six (36) months total
          vesting  from  the  date  of  employment,  shall  vest  and  be  fully
          exercisable  as of the  termination  date and (b) Company shall change
          your  status  from  employee  to  consultant  to  the  Company  for  a
          continuous  period of three years from and after the termination date.
          During the consulting period,  you shall provide  consulting  services
          equivalent to one week per year,  compensated  at an hourly rate equal
          to twice your  applicable  Base Salary  divided by 2080 hours.  On the
          termination   date,  all  remaining   options,   that  have  not  been
          accelerated  in  accordance  with  this  paragraph,  that  are not yet
          exercisable  shall become null and void;  provided  however,  that the
          portion,  if any,  of such  options  that  are  exercisable  as of the
          termination date shall continue to be exercisable following the change
          in  status  for the  three  year  period  that you are  employed  as a
          consultant by the Company.  After the third  anniversary  date of this
          Agreement,  the  provisions  set out in (a) and (b) of this  paragraph
          shall no longer  apply.  "Good Reason" shall mean any of the following
          occurring without your prior written consent:

          (1)  A reduction  in your Base Salary or annual bonus  opportunity  or
               profit share below the amounts stated in this Agreement,

          (2)  Removal  or  reassignment  from the  position  of Vice  President
               Corporate  Development  or  the  material  diminishment  of  your
               responsibility or authority;

          (3)  A  requirement  that you be based  anywhere  other than within 25
               miles of Austin,

          (4)  Any material  breach of this Agreement by the Company  which,  if
               capable of remedy,  is not  remedied  for a period of thirty (30)
               days following written notice by you to the Company, specifically
               identifying the nature of the breach.

7.   Employment  Contingent.  This  Agreement,  and  your  employment  with  the
     Company, are contingent upon the following:

     (A)  Successful  passing of a  pre-employment  drug test.  The cost of this
          test is paid by National Instruments.

     (B)  Signing of our employee  Confidentiality  Agreement prior to beginning
          employment  with  National  Instruments.  A copy has been provided for
          your review.

     (C)  Providing proof of eligibility to work in the United States.  You have
          been provided  with a copy of the  Employment  Eligibility  Form which
          list documents which will meet this requirement.  These documents must
          be provided on your first day of employment.

8.   Miscellaneous.

     (A)  Attorneys  Fees. If any action at law, in equity or by  arbitration is
          taken  to  enforce  or  interpret  the  terms of this  Agreement,  the
          prevailing  party  shall be entitled to  reasonable  attorneys'  fees,
          costs and necessary  disbursements  in addition to any other relief to
          which such  party may be  entitled,  including  fees and  expenses  on
          appeal.

     (B)  Construction.  Wherever  possible,  each  provision of this  Agreement
          shall be interpreted in such manner as to be effective and valid under
          applicable  law,  but if any  provision  of this  Agreement  shall  be
          prohibited by or invalid under applicable law, such provision shall be
          ineffective  only to the  extent  of such  prohibition  or  invalidity
          without  invalidating the remainder of such provision or the remaining
          provisions of this Agreement.

     (C)  Waivers.  No failure on the part of either party to  exercise,  and no
          delay in exercising,  any right or remedy hereunder shall operate as a
          waiver thereof;  nor shall any single or partial exercise of any right
          or remedy hereunder  preclude any other or further exercise thereof or
          the  exercise  of any other right or remedy  granted  hereby or by any
          related document or by law.

     (D)  Successors and Assigns. This Agreement shall be binding upon and inure
          to the benefit of the  Company and its  successors  and  assigns,  and
          shall be binding upon Ravel, his administrators,  executors, legatees,
          and heirs. In that this Agreement is a personal services contract,  it
          shall not be assigned by Ravel.

     (E)  Modification.  This  Agreement may not be and shall not be modified or
          amended except by written instrument signed by the parties hereto.

     (F)  Entire Agreement.  This Agreement constitutes the entire agreement and
          understanding  between  the  parties  hereto in  reference  to all the
          matters herein agreed upon. This Agreement replaces and supersedes all
          prior  agreements  whether  written or oral or  understandings  of the
          parties hereto with respect to the subject matter hereof.

     (G)  Choice of Law.  This  Agreement  shall be governed by and construed in
          accordance  with the laws of the  State of  Texas,  and  venue for any
          lawsuit  concerning  breach and/or  enforcement  of this  Agreement or
          relating  in any way or  manner to this  Agreement  will lie in Travis
          County, Texas.

     (H)  Arbitration.  I agree that, to the fullest  extent allowed by law, any
          controversy  or claim  arising out of or  relating  to this  Agreement
          shall be finally  settled by binding  arbitration  administered by the
          American  Arbitration  Association  under its  National  Rules for the
          Resolution of Employment  Disputes.  The arbitration will be conducted
          in the city in which I am or was last employed. I understand that I am
          waiving  my  rights to trial by jury,  in  exchange  for  arbitration.
          Judgment upon any award rendered in an  arbitration  proceeding may be
          entered in any court having jurisdiction  thereof.  Any controversy or
          claim  subject to  arbitration  shall be deemed  waived,  and shall be
          forever  barred,  if arbitration is not initiated  within one (1) year
          after the date the  controversy or claim first arose,  or if statutory
          rights  are  involved,  within  the  time  limit  established  by  the
          applicable  statute  of  limitations.  In  any  arbitration  commenced
          pursuant to this  paragraph,  depositions  may be taken and  discovery
          obtained as provided in the Federal Rules of Civil Procedure,  subject
          to limitation by the arbitrator to a reasonable  amount.  Any award by
          the  arbitrator(s)  shall be accompanied by a statement of the factual
          and legal bases for the award.



     To indicate  your  acceptance  of these terms,  please sign and return this
Agreement and retain the attached  copy for your  records.  If you choose to fax
your signed National  Instruments Job Offer to us  (512-683-8775),  please bring
the  signed  original  with you on your first day of work so it may be placed in
your employee file.


NATIONAL INSTRUMENTS CORPORATION:         EMPLOYEE:
By: /s/ James J. Truchard                 Name (Printed): Mihir Ravel
Title: President                          Signature: /s/ Mihir Ravel
Date: April 18, 2000                      Date: April 18, 2000


Attachment A Reloctation Summary It is agreed that National Instruments will cover the following relocation expenses related to the movement of Mihir Ravel, (Relocatee) and his family from Portland Oregon to Austin Texas. Listed below is a summary of expenses: Movement of Household Goods. The Human Resource office will arrange for and NI will pay directly for, the movement of household goods from the former residence or temporary storage to the new place of residence. Movement included the Relocatee's and household members' household effects, furnishings and personal effects, subject to a maximum of 15,000 pounds. Movement does not include such things as pick up from two locations, split or partial shipment or delivery, and access into storage before delivery. Household goods does not normally include such items as boats (any size), campers, airplanes, frozen foods, livestock, live plants, or hazardous materials including firewood, lumber and other building materials. One vehicle may be shipped when driving one or more vehicles to the new location. Cost incurred for shipment of not included items will be charged to the Relocatee. House/Apartment Hunting trip. The Relocate and spouse may be reimbursed for reasonable expenses incurred during one house/apartment hunting trip including travel, meals, lodging and car rental. Travel if by air is coach/economy. Auto travel is reimbursed on a per mile basis at the prevailing IRS stated allowance. Lodging and meals are reimbursed on an actual basis and original receipts are required for expenses. Temporary Living. If the Relocatee and family cannot move immediately into new quarters, reimbursement may be made for lodging cost incurred at their destination for maximum of 60 days. Original receipts are required. Real Estate Sale of Current Home. Eligible Relocatees who are homeowners may be reimbursed for NORMAL, CUSTOMARY AND REASONABLE home selling and non-recurring cost including the following: -normal and customary real estate brokerage commission to a maximum of 7% (Should you sell your home without a real estate broker, NI will provide a bonus of 3% of the sales price). -attorney's fees if required or recommended by law. -title fees -mortgage prepayment penalties if they cannot be waived, not to exceed six (6) months mortgage interest. -transfer and/or documentary taxes the seller is required to pay. -inspection and recording fees normally charged to seller. -other customary fees directly related to the sale, but which have not been incurred by the choice of the seller, such as escrow fees, title fees, termite inspection, and tax service fee. Real Estate Purchase of a New Home. Eligible Relocatees who own a home at the time of the transfer may receive reimbursement for certain actual and customary purchaser's settlement expenses when a home is purchased at the new locations with in six (6) months of the effective transfer date. NI will reimburse reasonable and customary closing expenses including: -appraisal fees. -recording fees. -notary fees. -documentary stamps (state, city, county). -lender's and homeowner's title insurance. -document preparation fee. -escrow closing fee. During Move Travel Reimbursement may be made for mileage (at the per-mile IRS stated allowance) for up to two (2) vehicles, lodging, and meals. Original receipts are required for lodging and meals. Mileage is figured as the shortest highway distance between point of departure and new location,. Tax Gross-up. It is agreed that National Instruments will cover the additional taxes which are occurred as the result of the relocation. Termination - Should an employee voluntarily terminate employment within eighteen (18) months from the time he/she has relocated, he/she must remit on a prorated basis all cost relating to the move paid by NI.

Attachment B: Job Description for Mihir Ravel Title: Vice President of Corporate Development, National Instruments Supervisor: CEO & President, National Instruments Major Roles: Technical Vision |X| Match broad technology expertise to NI business strategy. |X| Define product strategies that match NI's broad-based market strategy Strategic Goals |X| Define new market and business opportunities |X| Work across the organization as a coach to capitalize on these opportunities Organization Development |X| Provide experience, technical expertise and vision to help build and position NI to achieve long term growth goals. |X| Help build and expand our current organization and processes to enhance the development of NI technical and marketing staff |X| Stimulate organization with creative ideas and out-of-the-box thinking External Development |X| Identify and lead external partnership and investment opportunities Supervision |X| Hall T. Martin, (Director of Market Development) |X| David Potter, (Product and Technology Strategist) |X| Potential new staff: technology and strategic market experts

                                                                      EXHIBIT 11

                NATIONAL INSTRUMENTS CORPORATION AND SUBSIDIARIES

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

                                                      Years Ended December 31,
                                                      2002      2001      2000
                                                    --------  --------  --------
Net income..................................        $ 31,405  $ 36,402  $ 55,157
                                                    ========  ========  ========
Basic earnings per share....................        $   0.61  $   0.72  $   1.10
                                                    ========  ========  ========
Weighted average shares outstanding-basic...          51,219    50,910    50,332
                                                    ========  ========  ========
Diluted earnings per share..................        $   0.59  $   0.68  $   1.03
                                                    ========  ========  ========
Weighted average shares outstanding-diluted.          53,411    53,651    53,564
                                                    ========  ========  ========
Calculation of weighted average shares:
    Weighted average common stock
     outstanding-basic......................          51,219    50,910    50,332
    Weighted average common stock options,
     utilizing the treasury stock method....           2,192     2,741     3,232
                                                    --------  --------  --------
Weighted average shares outstanding-diluted.          53,411    53,651    53,564
                                                    ========  ========  ========


                                                                    EXHIBIT 21.1

                           SUBSIDIARIES OF THE COMPANY

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


    DASYTEC USA, Incorporated, a New Hampshire corporation
    measX GmbH
    measX GmbH & Co., Kg
    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 China Corporation, a Texas corporation
    National Instruments (Czech Republic) s.r.o., Czech Republic
    National Instruments Corporation (UK) Limited, United Kingdom
    National Instruments de Mexico, S.A. de C.V., Mexico
    National Instruments de Mexico Servicios, S.A. de C.V., Mexico
    National Instruments Engineering GmbH, Germany
    National Instruments Engineering GmbH & Co. KG, Germany
    National Instruments Europe Corporation, a Texas corporation
    National Instruments Europe Software and Hardware Manufacturing Limited
      Liability Company Kft., Hungary
    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 Hellas Measurement and Automation Systems, E.P.E.,
      Greece
    National Instruments Hong Kong Limited, Hong Kong
    National Instruments (Ireland) Limited, Ireland
    National Instruments Instrumentacija, avtomatizacija in upravljanje procesov
      d.o.o., Slovenija
    National Instruments International Holdings B.V., Netherlands
    National Instruments Israel Ltd., Israel
    National Instruments Italy s.r.l., Italy
    National Instruments Japan Kabushiki Kaisha, Japan
    National Instruments (Korea) Corporation, Korea
    National Instruments Netherlands B.V., Netherlands
    National Instruments New Zealand Limited, New Zealand
    National Instruments Poland Sp.Zo.o, Poland
    National Instruments Portugal Unipessoal Lda, Portugal
    National Instruments Russia Corporation, a Texas corporation
    National Instruments Scandinavia Corporation, a Texas corporation
    National Instruments Services B.V., Netherlands
    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
    National Instruments Thailand Ltd.
    NI Hungary Software and Hardware Manufacturing Limited Liability Company
    NI Solutions (Proprietary) Limited, South Africa
    NI Systems (India) Private Limited, India
    N.I. Export (Barbados) Ltd.
    Shanghai NI Instruments LTD, China
    Virtual Instruments SDN BHD, Malaysia

                                                                      EXHIBIT 23

                       CONSENT OF INDEPENDENT ACCOUNTANTS



     We hereby  consent to the  incorporation  by reference in the  Registration
Statement on Form S-8 (No. 333-91671) of National Instruments Corporation of our
report  dated  January 27, 2003  relating to the  financial  statements  and the
financial statement schedule, which appears in this Form 10-K.


                                               /S/ PRICEWATERHOUSECOOPERS LLP
                                               ---------------------------------
                                               PricewaterhouseCoopers LLP

Austin, Texas
January 27, 2003

                                                                    EXHIBIT 99.1

      CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
                                   PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, James  Truchard,  certify,  pursuant to 18 U.S.C.  Section  1350,  as adopted
pursuant  to  Section  906 of the  Sarbanes-Oxley  Act of 2002,  that the Annual
Report of  National  Instruments  Corporation  on Form 10-K for the fiscal  year
ended December 31, 2002 fully complies with the requirements of Section 13(a) or
15(d) of the Securities  Exchange Act of 1934 and that information  contained in
such Form 10-K fairly presents in all material respects the financial  condition
and results of operations of National Instruments Corporation.

                                       By:     /s/ James Truchard
                                       Name:   James Truchard
                                       Title:  Chief Executive Officer

I, Alexander  Davern,  certify,  pursuant to 18 U.S.C.  Section 1350, as adopted
pursuant  to  Section  906 of the  Sarbanes-Oxley  Act of 2002,  that the Annual
Report of  National  Instruments  Corporation  on Form 10-K for the fiscal  year
ended December 31, 2002 fully complies with the requirements of Section 13(a) or
15(d) of the Securities  Exchange Act of 1934 and that information  contained in
such Form 10-K fairly presents in all material respects the financial  condition
and results of operations of National Instruments Corporation.

                                       By:     /s/ Alexander Davern
                                       Name:   Alexander Davern
                                       Title:  Chief Financial Officer