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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

T Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal quarter ended: September 30, 2009 or

£ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________________ to ________________

Commission file number: 0-25426

NATIONAL INSTRUMENTS CORPORATION

(Exact name of registrant as specified in its charter)

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

__________________________

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 T No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer T Accelerated filer £ Non-accelerated filer £ Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at October 26, 2009
Common Stock - $0.01 par value	77,727,583

NATIONAL INSTRUMENTS CORPORATION

INDEX


PART I. FINANCIAL INFORMATION		Page No.

Item 1	Financial Statements:

	Consolidated Balance Sheets
	September 30, 2009 (unaudited) and December 31, 2008	3

	Consolidated Statements of Income
	(unaudited) for the three and nine month periods ended September 30, 2009 and 2008	4

	Consolidated Statements of Cash Flows
	(unaudited) for the nine month periods ended September 30, 2009 and 2008	5

	Notes to Consolidated Financial Statements	6

Item 2	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	24

Item 3	Quantitative and Qualitative Disclosures about Market Risk	33

Item 4	Controls and Procedures	36


PART II. OTHER INFORMATION


Item 1	Legal Proceedings	37

Item 1A	Risk Factors	37

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 4	Submission of Matters to a Vote of Security Holders	44

Item 5	Other Information	44

Item 6	Exhibits	45

	Signatures and Certifications	46

PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements

NATIONAL INSTRUMENTS CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	September 30, 2009		December 31, 2008
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	232,700	$	229,400
Short-term investments		43,663		6,220
Accounts receivable, net		90,790		121,548
Inventories, net		88,726		107,358
Prepaid expenses and other current assets		40,721		43,062
Deferred income taxes, net		21,875		21,435
Total current assets		518,475		529,023
Long-term investments		1,900		10,500
Property and equipment, net		150,532		154,477
Goodwill, net		64,960		64,561
Intangible assets, net		44,980		41,915
Other long-term assets		35,684		32,115
Total assets	$	816,531	$	832,591
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	25,432	$	30,876
Accrued compensation		16,230		22,012
Deferred revenue		49,102		45,514
Accrued expenses and other liabilities		10,641		18,848
Other taxes payable		13,827		13,481
Total current liabilities		115,232		130,731
Deferred income taxes		23,599		25,157
Other long-term liabilities		12,274		12,265
Total liabilities		151,105		168,153
Commitments and contingencies
Stockholders' equity:
Preferred stock: par value $0.01; 5,000,000 shares authorized; none issued and outstanding		—		—
Common stock: par value $0.01; 180,000,000 shares authorized; 77,689,355 and 77,193,063 shares issued and outstanding, respectively		777		772
Additional paid-in capital		328,196		300,352
Retained earnings		324,785		352,831
Accumulated other comprehensive income		11,668		10,483
Total stockholders’ equity		665,426		664,438
Total liabilities and stockholders’ equity	$	816,531	$	832,591

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

NATIONAL INSTRUMENTS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009			2008

Net sales:
Product	$	152,106	$	200,871		$	435,348		$	578,222
Software maintenance		12,929		14,167			39,649			40,208
Total net sales		165,035		215,038			474,997			618,430

Cost of sales:
Product	$	40,476	$	52,957		$	119,234		$	152,487
Software maintenance		1,423		1,550			4,034			4,529
Total cost of sales		41,899		54,507			123,268			157,016

Gross profit		123,136		160,531			351,729			461,414

Operating expenses:
Sales and marketing	$	65,126	$	78,392		$	199,089		$	230,638
Research and development		35,016		37,016			99,252			105,808
General and administrative		12,306		17,177			42,838			51,122
Total operating expenses		112,448		132,585			341,179			387,568

Operating income		10,688		27,946			10,550			73,846

Other income (expense):
Interest income	$	339	$	1,374		$	1,335		$	5,025
Net foreign exchange gain (loss)		940		(3,025	)		1,301			(1,791	)
Other income, net		482		80			979			13
Income before income taxes		12,449		26,375			14,165			77,093
Provision for (benefit from) income taxes		2,518		3,216			(554	)		11,584

Net income	$	9,931	$	23,159		$	14,719		$	65,509

Basic earnings per share	$	0.13	$	0.29		$	0.19		$	0.83

Weighted average shares outstanding – basic		77,653		78,834			77,497			78,701

Diluted earnings per share	$	0.13	$	0.29		$	0.19		$	0.82

Weighted average shares outstanding – diluted		78,103		79,841			77,842			79,773

Dividends declared per share	$	0.12	$	0.11		$	0.36		$	0.33

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

NATIONAL INSTRUMENTS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2009			2008
Cash flow from operating activities:
Net income	$	14,719		$	65,509
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,536			27,901
Stock-based compensation		15,238			14,690
Provision for (benefit from) deferred income taxes		(6,802	)		3,008
Tax expense (benefit from) stock option plans		1,445			(1,243	)
Changes in operating assets and liabilities:
Accounts receivable		30,758			10,611
Inventories		18,632			(16,954	)
Prepaid expenses and other assets		3,920			(12,895	)
Accounts payable		(5,444	)		(4,791	)
Deferred revenue		3,588			5,985
Taxes and other liabilities		(14,245	)		14,138
Net cash provided by operating activities		90,345			105,959

Cash flow from investing activities:
Capital expenditures		(12,331	)		(21,115	)
Capitalization of internally developed software		(10,611	)		(8,687	)
Additions to other intangibles		(4,009	)		(2,603	)
Acquisition, net of cash received		—			(17,310	)
Purchases of short-term and long-term investments		(38,876	)		(17,315	)
Sales and maturities of short-term and long-term investments		10,034			39,080
Purchases of foreign currency option contracts		—			(2,784	)
Net cash (used by) provided by investing activities		(55,793	)		(30,734	)

Cash flow from financing activities:
Proceeds from issuance of common stock		16,351			26,628
Repurchase of common stock		(18,200	)		(58,215	)
Dividends paid		(27,958	)		(26,055	)
Tax expense (benefit from) stock option plans		(1,445	)		1,243
Net cash (used by) financing activities		(31,252	)		(56,399	)

Net change in cash and cash equivalents		3,300			18,826
Cash and cash equivalents at beginning of period		229,400			194,839
Cash and cash equivalents at end of period	$	232,700		$	213,665

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

NATIONAL INSTRUMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2008, included in our annual report on Form 10-K, filed with the Securities and Exchange Commission. In our opinion, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly our financial position at September 30, 2009 and December 31, 2008, and the results of our operations for the three and nine month periods ended September 30, 2009 and September 30, 2008 and the cash flows for the nine month periods ended September 30, 2009 and 2008. Operating results for the three-month and nine-month periods ended September 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

Certain prior year amounts have been reclassified to conform to the 2009 presentation as shown in the following tables:

	Three Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2008
	(unaudited)			(unaudited)

Cost of sales as previously reported	$	53,537		$	154,227
Technical support costs previously reported as sales and marketing (a)		970			2,789
Cost of sales adjusted for reclassification	$	54,507		$	157,016

Sales and marketing as previously reported	$	79,362		$	233,427
Technical support costs as previously reported as sales and marketing (a)		(970	)		(2,789	)
Sales and marketing adjusted for reclassification	$	78,392		$	230,638

(a)

Since December 31, 2008, we have been separately reporting software maintenance revenue and cost of software maintenance revenue in our Consolidated Statements of Income. We added this disclosure due to the increasing percentage of our revenue coming from software maintenance. As part of this expanded disclosure, some technical support costs previously reported as a component of sales and marketing expense are reported as cost of software maintenance. This change has had no impact on our operating income, net income or earnings per share.

We have historically recorded the excess of the purchase price over the par or stated value of retired shares of our common stock as a reduction of additional paid-in capital. We completed our review of this accounting policy under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 505, Equity. Based on this review, we have reclassified a portion of the excess of the purchase price over the par or stated value of retired shares of our common stock from a reduction of additional paid-in capital to a reduction of retained earnings. The effects of this adjustment on our previously reported paid-in capital and retained earnings as of December 31, 2008, are detailed in the table below. This reclassification did not have any impact on previously reported statements of income, earning per share amounts, statements of cash flows or total stockholders’ equity.

	Amounts as previously reported at December 31, 2008		Effect of reclassification			Amounts adjusted for reclassification at December 31, 2008
	(unaudited)		(unaudited)			(unaudited)
Additional paid-in capital		39,673		260,679			300,352
Retained earnings		613,510		(260,679	)		352,831

During the nine months ended September 30, 2009, we used $18.2 million to retire an additional 869,600 shares of our common stock. As a result, we reduced additional paid-in capital by $3.4 million and retained earnings by $14.8 million.

NOTE 2 – 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. The number of common share equivalents, which include stock options and restricted stock units, is computed using the treasury stock method.

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three month and nine month periods ended September 30, 2009 and 2008, respectively, are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	(unaudited)				(unaudited)
	2009		2008		2009		2008
Weighted average shares outstanding-basic		77,653		78,834		77,497		78,701
Plus: Common share equivalents
Stock options, restricted stock units		450		1,007		345		1,072
Weighted average shares outstanding-diluted		78,103		79,841		77,842		79,773

Stock options to acquire 3,509,000 shares and 2,025,000 shares for the three month periods ended September 30, 2009 and 2008, respectively, and 3,619,000 shares and 2,325,000 shares for the nine month periods ended September 30, 2009 and 2008, respectively, were excluded in the computations of diluted EPS because the effect of including the stock options would have been anti-dilutive.

NOTE 3 – Cash, Cash Equivalents, Short-Term and Long-Term Investments

Cash, cash equivalents, short-term and long-term investments consist of the following (in thousands):

	As of September 30, 2009		As of December 31, 2008
	(unaudited)
Cash and cash equivalents:
Cash	$	70,321	$	100,967
Cash equivalents:
Debt securities		—		—
Time deposits		—		73,400
Money market accounts		162,379		55,033
Total cash and cash equivalents	$	232,700	$	229,400
Short-term investments:
Debt securities	$	32,310	$	6,220
Time deposits		2,753		—
Auction rate securities		8,223		—
Auction rate securities put option		377		—
Total short-term investments		43,663		6,220
Long-term investments:
Auction rate securities		—		6,964
Auction rate securities put option		—		1,636
Other long-term investments		1,900		1,900
Total investments	$	45,563	$	16,720
Total cash, cash equivalents and investments	$	278,263	$	246,120

The following table summarizes unrealized gains and losses related to our investments designated as available-for-sale (in thousands):

	As of September 30, 2009
	(unaudited)

	Adjusted Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Debt securities	$	32,183	$	130	$	(3	)	$	32,310
Time deposits		2,753		—		—			2,753
Auction rate securities		8,600		—		(377	)		8,223
Auction rate securities put option		—		377		—			377
Other long-term investments		1,900		—		—			1,900
Total investments	$	45,436	$	507	$	(380	)	$	45,563

	As of December 31, 2008
	Adjusted Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Debt securities	$	6,199	$	28	$	(7	)	$	6,220
Auction rate securities		8,600		—		(1,636	)		6,964
Auction rate securities put option		—		1,636		—			1,636
Other long-term investments		1,900		—		—			1,900
Total investments	$	16,699	$	1,664	$	(1,643	)	$	16,720

We account for our investments in debt and equity instruments under FASB ASC 320, Investments – Debt and Equity Securities (FASB ASC 320). Our investments are classified as available-for-sale and accordingly are reported at fair value, with unrealized gains and losses reported as other comprehensive income, a component of shareholders’ equity. Unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. Investments with maturities beyond one year are 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. See Note 4 – Fair Value Measurements of Notes to Consolidated Financial Statements for further discussion regarding methods and assumptions to determine fair value.

NOTE 4 – Fair Value Measurements

FASB ASC 820, Fair Value Measurements and Disclosures (FASB ASC 820) clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements. Effective January 1, 2009, we adopted FASB ASC 820 for our nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. The adoption of FASB ASC 820 did not have a material impact on our fair value measurements as we did not have any items that were measured at fair value on a nonrecurring basis for the nine months ended September 30, 2009. In April 2009, FASB ASC 820 was updated to provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. The update also includes guidance on identifying circumstances that indicate a transaction is not orderly. We adopted the update on April 1, 2009 and it did not have a material impact on our fair value measurements.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value (in thousands).

				Fair Value Measurements at Reporting Date Using (unaudited)
Description	September 30, 2009			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets
Money Market Funds	$	162,379		$	162,379	$	—		$	—
Available for sale securities:
Short-term debt securities		43,663			35,063		—			8,600
Long-term debt securities		—			—		—			—
Derivatives		10,735			—		10,735			—
Total Assets	$	216,777		$	197,442	$	10,735		$	8,600

Liabilities
Derivatives		(2,070	)		—		(2,070	)		—
Total Liabilities	$	(2,070	)	$	—	$	(2,070	)	$	—

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Long-term investments available for sale
	(unaudited)

Beginning Balance at December 31, 2008	$	8,600
Total gains (realized/unrealized)
Included in earnings		377
Included in other comprehensive income
Total (losses) (realized/unrealized)
Included in earnings		(377	)
Included in other comprehensive income		—
Purchases, issuances and settlements		—
Transfer in and/or out of Level 3		—
Ending Balance at September 30, 2009	$	8,600

The amount of total gains or (losses) for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date		—
	$	—

Short-term debt securities available-for-sale are valued using a market approach (Level 1) based on the quoted market prices of identical instruments when available or other observable inputs such as trading prices of identical instruments in inactive markets. Short-term investments available-for-sale consist of debt securities issued by states of the U.S. and political subdivisions of the states, corporate debt securities and debt securities issued by U.S. government corporations and agencies. All short-term investments available-for-sale have contractual maturities of less than 24 months.

Derivatives include foreign currency forward and option contracts. Our foreign currency forward contracts are valued using an income approach (Level 2) based on the spot rate less the contract rate multiplied by the notional amount. Our foreign currency option contracts are valued using a market approach based on the quoted market prices which are derived from observable inputs including current and future spot rates, interest rate spreads as well as quoted market prices of identical instruments.

Short-term debt securities available-for-sale included in Level 3 are reported at their fair market value and consist of auction rate securities backed by education loan revenue bonds. One of our auction rate securities is from the Vermont Student Assistance Corporation and has a par value of $2.2 million. The other of our auction rate securities is from the New Hampshire Health and Education Facilities Authority and has a par value of $6.4 million. The ratings for these securities at September 30, 2009, were Baa3/A/AAA and Aaa/NR/AAA, respectively. We note that the bonds from the Vermont Student Assistance Corporation carried ratings of Aa3/A/AAA at December 31, 2008. Historically, we reported the fair market value of these securities at par as differences between par value and the purchase price or settlement value were historically comprised of accrued interest. Auction rate securities are variable rate debt instruments whose interest rates are typically reset approximately every 7 to 35 days. On October 2, 2009, and in prior auction periods beginning in February 2008, the auction process for these securities failed. At September 30, 2009, we reported these short-term investments at their estimated fair market value of $8.2 million.

In November 2008, we accepted the UBS Auction Rate Securities Rights (the “Rights”) agreement offered by UBS as a liquidity alternative to the failed auction process. This Rights agreement is related to the auction rates securities discussed above. The Rights agreement is a nontransferable right to sell our auction rate securities, at par value, back to UBS at any time during the period June 30, 2010, through July 2, 2012. At September 30, 2009, we reported the Rights agreement at its estimated fair market value of $0.4 million as a component of short-term debt securities available for sale.

At June 30, 2009, we classified our auction rate securities and our Rights agreement as long-term but are now reporting them as short-term. We continue to have the ability to hold our auction rate securities to their ultimate maturities which are in excess of one year and we have not made a determination as to whether we will exercise our right under the Rights agreement or if we do choose to exercise our option, at what point during the period June 30, 2010 through July 2, 2012, we would exercise our option. However, due to the fact that our Rights agreement has an initial exercise date that is less than one year from now, we are now reporting our auction rate securities and the corresponding Rights agreement as short-term. We have recorded the unrealized loss related to the auction rate securities and the unrealized gain related to the Rights agreement as a component of other income (expense), in our Consolidated Statements of Income.

The estimated fair market value of both the auction rate securities and the Rights agreement was determined using significant unobservable inputs (Level 3) as prescribed by FASB ASC 820. We considered many factors in determining the fair market value of the auction rate securities as well as our corresponding Rights agreement at September 30, 2009, including the fact that the debt instruments underlying the auction rate securities have redemption features which call for redemption at 100% of par value, current credit curves for like securities and discount factors to account for the illiquidity of the market for these securities. During the three months ended September 30, 2009, we did not make any changes to our valuation techniques or related inputs.

NOTE 5 – Derivative Instruments and Hedging Activities

FASB ASC 815, Derivatives and Hedging (FASB ASC 815), requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have operations in over 40 countries. Sales outside of the Americas as a percentage of consolidated sales were 54% and 55% in each of the three month periods ended September 30, 2009 and 2008, respectively, and 55% and 56% in each of the nine month periods ended September 30, 2009 and 2008, respectively. Our activities expose us to a variety of market risks, including the effects of changes in foreign currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.

We maintain a foreign currency risk management strategy that uses derivative instruments (foreign currency forward and purchased option contracts) to help protect our earnings and cash flows from fluctuations caused by the volatility in currency exchange rates. Movements in foreign currency exchange rates pose a risk to our operations and competitive position, since exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors.

The vast majority of our foreign sales are denominated in the customers’ local currency. We purchase foreign currency forward and option 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. We also purchase foreign currency forward contracts as hedges of forecasted expenses that are denominated in foreign currencies. These contracts are entered into to protect against the risk that the eventual dollar-net-cash outflows resulting from foreign currency operating and cost of revenue expenses will be adversely affected by changes in exchange rates.

In accordance with FASB ASC 815, we designate foreign currency forward and purchased option contracts as cash flow hedges of forecasted revenues or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts. These derivatives are not designated as hedging instruments under FASB ASC 815. None of our derivative instruments contain a credit-risk-related contingent feature.

Cash flow hedges

To protect against the reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to two years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted revenue and forecasted expenses denominated in foreign currencies with forward and purchased option contracts. For forward contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. For option contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the option contracts net of the premium paid designated as hedges. Our foreign currency purchased option contracts are purchased “at-the-money” or “out-of-the-money”. We purchase foreign currency forward and option contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, British pound sterling, South Korean won and Hungarian forint) and limit the duration of these contracts to 40 months or less.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“OCI”) and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings or expenses during the current period and are classified as a component of “net foreign exchange gain (loss)”. Hedge effectiveness of foreign currency forwards and purchased option contracts designated as cash flow hedges are measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.

We held forward contracts with a notional amount of $28.6 million dollar equivalent of Euro, $5.1 million dollar equivalent of British pound sterling, $20.7 million dollar equivalent of Japanese yen, and $22.9 million dollar equivalent of Hungarian forint at September 30, 2009. These contracts are for terms of up to 24 months. At December 31, 2008, we held forward contracts with a notional amount of $54.9 million dollar equivalent of Euro, $6.2 million dollar equivalent of British pound sterling, $18.9 million dollar equivalent of Japanese yen, $4.7 million dollar equivalent of South Korean won and $21.7 million dollar equivalent of Hungarian forint.

We held purchased option contracts with a notional amount of $60.9 million dollar equivalent of Euro at September 30, 2009. These contracts are for terms of up to 24 months. At December 31, 2008, we held purchased option contracts with a notional amount of $111.3 million dollar equivalent of Euro.

At September 30, 2009, we expect to reclassify $1.1 million of gains and $988,000 of losses on derivative instruments from accumulated other comprehensive income to net sales during the next twelve months when the hedged international sales occur. At September 30, 2009, we expect to reclassify $3.6 million of gains on derivative instruments from accumulated OCI to cost of sales and $1.8 million of gains on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged international expenses occur. Expected amounts are based on derivative valuations at September 30, 2009. Actual results may vary as a result of changes in the corresponding exchange rate subsequent to this date.

During the nine months ended September 30, 2009, hedges with a notional amount of $7.3 million were determined to be ineffective. As a result, we recorded a net gain of $657,000 related to these hedges as a component of “net foreign exchange gain (loss)” during the nine months ended September 30, 2009. We did not record any gains or losses due to the ineffectiveness of our hedges during the nine months ended September 30, 2008.

Other Derivatives

Other derivatives not designated as hedging instruments under FASB ASC 815 consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated net receivable or net payable positions to protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 90 days. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange gain (loss)”. As of September 30, 2009 and December 31, 2008, we held foreign currency forward contracts with a notional amount of $36.5 million and $67.1 million, respectively.

Effective January 1, 2009, we adopted the updated disclosure requirements of FASB ASC 815. The following table presents the fair value of derivative instruments on our Consolidated Balance Sheets and the effect of derivative instruments on our Consolidated Statements of Income.

Fair Values of Derivative Instruments (in thousands):

In thousands	Asset Derivatives
	September 30, 2009			December 31, 2008
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(unaudited)
Derivatives designated as hedging instruments under FASB ASC 815

Foreign exchange contracts – ST forwards	Prepaid expenses and other current assets	$	6,530	Prepaid expenses and other current assets	$	5,260

Foreign exchange contracts – LT forwards	Other long-term assets		1,778	Other long-term assets		2,654

Foreign exchange contracts – ST options	Prepaid expenses and other current assets		1,331	Prepaid expenses and other current assets		5,705

Foreign exchange contracts – LT options	Other long-term assets		585	Other long-term assets		3,838

Total derivatives designated as hedging instruments under FASB ASC 815		$	10,224		$	17,457

Derivatives not designated as hedging instruments under FASB ASC 815

Foreign exchange contracts – ST forwards	Prepaid expenses and other current assets	$	511	Prepaid expenses and other current assets	$	2,745

Total derivatives not designated as hedging instruments under FASB ASC 815		$	511		$	2,745

Total derivatives		$	10,735		$	20,202

	Liability Derivatives
	September 30, 2009				December 31, 2008
	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
		(unaudited)
Derivatives designated as hedging instruments under FASB ASC 815

Foreign exchange contracts – ST forwards	Accrued expenses and other liabilities	$	(399	)	Accrued expenses and other liabilities	$	(1,803	)

Foreign exchange contracts – LT forwards	Other long-term liabilities		—		Other long-term liabilities		—

Foreign exchange contracts – ST options	Accrued expenses and other liabilities		—		Accrued expenses and other liabilities		—

Foreign exchange contracts – LT options	Other long-term liabilities		—		Other long-term liabilities		—

Total derivatives designated as hedging instruments under FASB ASC 815		$	(399	)		$	(1,803	)

Derivatives not designated as hedging instruments under FASB ASC 815

Foreign exchange contracts – ST forwards	Accrued expenses and other liabilities	$	(1,671	)	Accrued expenses and other liabilities	$	(3,280	)

Total derivatives not designated as hedging instruments under FASB ASC 815		$	(1,671	)		$	(3,280	)

Total derivatives		$	(2,070	)		$	(5,083	)

The following unaudited table shows the effect of derivative instruments on our Consolidated Statements of Income for the three months ended September 30, 2009 (in thousands):

Derivatives in FASB ASC 815 Cash Flow Hedging Relationship	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) (in thousands)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (in thousands)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	2009				2009				2009
Foreign exchange contracts – forwards and options	$	(5,037	)	Net sales	$	(401	)	Net foreign exchange gain (loss)	$	181

Foreign exchange contracts – forwards and options		1,465		Cost of sales		(72	)	Net foreign exchange gain (loss)		395

Foreign exchange contracts – forwards and options		82		Operating expenses		380		Net foreign exchange gain (loss)		81

Total	$	(3,490	)		$	(93	)		$	657

Derivatives not Designated as Hedging Instruments under FASB ASC 815	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		2009
Foreign exchange contracts – forwards	Net foreign exchange gain/(loss)	$	(1,607	)

Total		$	(1,607	)

The following unaudited table shows the effect of derivative instruments on our Consolidated Statements of Income for the nine months ended September 30, 2009 (in thousands):

Derivatives in FASB ASC 815 Cash Flow Hedging Relationship	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) (in thousands)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (in thousands)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	2009				2009				2009
Foreign exchange contracts – forwards and options	$	(8,822	)	Net sales	$	2,578		Net foreign exchange gain (loss)	$	1,132

Foreign exchange contracts – forwards and options		2,776		Cost of sales		(740	)	Net foreign exchange gain (loss)		(44	)

Foreign exchange contracts – forwards and options		1,747		Operating expenses		184		Net foreign exchange gain (loss)		81

Total	$	(4,299	)		$	2,022			$	1,169

Derivatives not Designated as Hedging Instruments under FASB ASC 815	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		2009
Foreign exchange contracts – forwards	Net foreign exchange gain/(loss)	$	(1,791	)

Total		$	(1,791	)

NOTE 6 – Inventories

Inventories, net consist of the following (in thousands):

	September 30,		December 31,
	2009		2008
	(unaudited)

Raw materials	$	41,745	$	48,004
Work-in-process		2,422		4,150
Finished goods		44,559		55,204
	$	88,726	$	107,358

NOTE 7 – Intangibles

Intangibles at September 30, 2009 and December 31, 2008 are as follows:

	September 30, 2009							December 31, 2008
	(unaudited)
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Capitalized software development costs	$	36,838	$	(17,966	)	$	18,872	$	25,610	$	(11,344	)	$	14,266
Acquired technology		28,037		(19,987	)		8,050		27,503		(16,804	)		10,699
Patents		18,549		(5,145	)		13,404		16,068		(4,506	)		11,562
Leasehold equipment and other		12,451		(7,797	)		4,654		11,401		(6,013	)		5,388
	$	95,875	$	(50,895	)	$	44,980	$	80,582	$	(38,667	)	$	41,915

Software development costs capitalized during the three month periods ended September 30, 2009 and 2008, were $1.3 million and $1.1 million, respectively. Included in these capitalized costs for the three month periods ended September 30, 2009 and 2008, were costs related to stock based compensation of $71,000 and $49,000, respectively. Capitalized software amortization expense was $2.5 million and $2.9 million during the three month periods ended September 30, 2009 and 2008, respectively. During the nine month periods ended September 30, 2009 and 2008, we capitalized software development costs of $11.2 million and $8.7 million, respectively. Included in these capitalized costs for the nine month periods ended September 30, 2009 and 2008, were costs related to stock based compensation of $617,000 and $409,000, respectively. During the nine month periods ended September 30, 2009 and 2008, capitalized software amortization expense was $6.6 million and $7.8 million, respectively.

Amortization of capitalized software development costs is computed on an individual product basis for those products available for market and is 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 ten to seventeen years. Total intangible assets amortization expenses were $4.7 million and $4.4 million during the three month periods ended September 30, 2009 and 2008, respectively, and $12.2 million and $12.3 million during the nine month periods ended September 30, 2009 and 2008, respectively.

Acquired core technology and intangible assets are amortized over their useful lives, which range from three to eight years. Amortization expense for intangible assets acquired was approximately $1.0 million and $1.1 million for the three month periods ended September 30, 2009 and 2008, respectively, of which approximately $853,000 and $937,000 was recorded in cost of sales, respectively, and approximately $126,000 and $139,000 was recorded in operating expenses, respectively. For the nine month periods ended September 30, 2009 and 2008, amortization expense for intangible assets acquired was approximately $3.0 million and $3.2 million, respectively, of which approximately $2.6 million and $2.7 million was recorded in cost of sales, respectively, and approximately $378,000 and $449,000 was recorded in operating expenses, respectively.

NOTE 8 – Goodwill

The carrying amount of goodwill for 2009 is as follows:

	Amount (in thousands)
Balance as of December 31, 2008	$	64,561
Acquisitions		—
Divestitures		—
Foreign currency translation impact		399
Balance as of September 30, 2009	$	64,960

The excess purchase price over the fair value of assets acquired is recorded as goodwill. As we have one operating segment, we allocate goodwill to one reporting unit for goodwill impairment testing. In accordance with FASB ASC 350, Intangibles – Goodwill and Other (FASB ASC 350), goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach based on the market capitalization of the reporting unit. Our annual impairment test was performed as of February 28, 2009. No impairment of goodwill has been identified during the period presented. Goodwill is deductible for tax purposes in certain jurisdictions.

NOTE 9 – Income Taxes

FASB ASC 740, Income Taxes (FASB ASC 740) addresses the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. We had $8.4 million and $8.8 million of unrecognized tax benefits at September 30, 2009 and September 30, 2008, respectively, all of which would affect our effective income tax rate if recognized. We recorded a gross decrease in unrecognized tax benefits of $1.6 million for the three month period ended September 30, 2009, as a result of the lapse of the applicable statute of limitations. As of September 30, 2009, it is deemed reasonable that we will recognize tax benefits in the amount of $2.3 million in the next twelve months due to the closing of open tax years. The nature of the uncertainty is related to deductions taken on returns that have not been examined by the applicable tax authority. Our continuing policy is to recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2009, we had approximately $597,000 accrued for interest related to uncertain tax positions. The tax years 2002 through 2008 remain open to examination by the major taxing jurisdictions to which we are subject.

Our provision for income taxes reflected an effective tax rate of 20% and 12% for the three month periods ended September 30, 2009 and 2008, respectively and (4)% and 15% for the nine month periods ended September 30, 2009 and 2008, respectively. For the three and nine month periods ended September 30, 2009, our effective tax rate was lower than the U.S. federal statutory rate of 35% due to a partial release of a deferred tax asset valuation allowance, the research credit and a decrease in unrecognized tax benefits for uncertain tax positions. These benefits were partially offset by non-deductible stock-based compensation expenses, losses in foreign jurisdictions with reduced income tax rates and a valuation allowance related to a deferred tax asset for which a tax benefit was previously recognized. The non-deductible stock-based compensation expenses were a greater percentage of net income in the three and nine month periods ended September 30, 2009, than they were during the comparable periods in 2008. The increase in our effective tax rate for the three months ended September 30, 2009 compared to the same period in 2008, was due to losses in foreign jurisdictions with reduced income tax rates, changes in the valuation allowance related to a deferred tax asset for which a tax benefit was previously recognized and an increase in non-deductible stock-based compensation expense as a percentage of net income. These reductions were partially offset by benefits from the research credit and an increase in the partial release of a deferred tax asset valuation allowance as a percentage of net income. The decrease in our effective tax rate for the nine months ended September 30, 2009 compared to the same period in 2008, was due to the partial release of a deferred tax asset valuation allowance as a percentage of net income and the research credit. These benefits were partially offset by an increase in non-deductible stock-based compensation expenses as a percentage of net income, losses in foreign jurisdictions with reduced income tax rates and changes in the valuation allowance related to a deferred tax asset for which tax benefit was previously recognized. For the three and nine month periods ended September 30, 2008, our effective tax rate was lower than the U.S. federal statutory rate of 35% primarily as a result of reduced tax rates in certain foreign jurisdictions, the partial release of a deferred tax asset valuation allowance, and a decrease in unrecognized tax benefits for uncertain tax positions.

The tax position of our Hungarian operation continues to benefit from assets created by the restructuring of our operations in Hungary which was effective on January 1, 2008. Partial release of the valuation allowance on these assets resulted in income tax benefits of $1.7 million and $2.4 million for the three month periods ended September 30, 2009 and 2008, respectively, and $5.9 million and $8.5 million for the nine month periods ended September 30, 2009 and 2008, respectively. As of September 30, 2009, we had a net deferred tax asset of $19.1 million related to the tax benefit of these assets. This amount is based on estimated future earnings in Hungary that are deemed more likely than not to be realized as of September 30, 2009.

Our ability to predict our level of future profitability in Hungary is very limited due to significant and frequent changes in the corporate tax law, the unstable political environment, a restrictive labor code, the volatility of the Hungarian forint relative to the U.S. dollar and increasing labor costs. This view is also supported by the rapid and unexpected decline in the global economy in 2008 and 2009, which has made historical results of operations unreliable evidence of the magnitude of future taxable income beyond a relatively short period. While we believe our historical operations are a fair indicator that our operations in Hungary will produce some level of profit in the future, we believe that a quarterly reassessment of anticipated future taxable income is critical and that forecasting taxable income beyond two years is not viable at this point in time. We continue to reevaluate quarterly whether and to what extent we expect to generate future taxable income in Hungary as well as how far into the future we can project profitability.

We have submitted a request to the Hungarian Finance Ministry to obtain a ruling as to the application of a new tax law providing for an enhanced deduction for research and development expenses. Should we receive a favorable response to this request during the three months ended December 31, 2009, we would record a charge of approximately $15 million to income tax expense and would result in an increase in our effective income tax rate in that period. In addition, the tax benefit from assets created by the restructuring may not be available in future periods. However, we believe the increase in the rate for the periods following the period in which we record this charge, will be offset substantially by the effect of the increased benefit from the enhanced deduction for research and development expenses.

NOTE 10 – Comprehensive Income

Our comprehensive income is comprised of net income, foreign currency translation, unrealized gains and losses on forward and option contracts and securities available for sale. Comprehensive income for the three month and nine month periods ended September 30, 2009 and 2008, was as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	(unaudited)						(unaudited)
	2009			2008			2009			2008
Comprehensive income:
Net income	$	9,931		$	23,159		$	14,719		$	65,509
Foreign currency translation gains (losses), net of taxes		2,413			(7,240	)		2,908			(2,312	)
Unrealized gains (losses) on derivative instruments, net of taxes		(1,987	)		6,614			(1,838	)		5,408
Unrealized gains (losses) on available for sale securities, net of taxes		241			(182	)		115			(778	)
Total comprehensive income	$	10,598		$	22,351		$	15,904		$	67,827

NOTE 11 – Stock-Based Compensation Plans

Stock option plans

Our stockholders approved the 1994 Incentive Stock Option Plan (the “1994 Plan”) on May 9, 1994. At the time of approval, 9,112,500 shares of our common stock were reserved for issuance under this plan. In 1997, an additional 7,087,500 shares of our common stock were reserved for issuance under this plan, and an additional 750,000 shares were reserved for issuance under this plan, as amended, in 2004. The 1994 Plan terminated in May 2005, except with respect to outstanding awards previously granted thereunder. Awards under the plan were 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. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and revenue growth but shares cannot accelerate to vest over a period of less than five years. Stock options must be exercised within ten years from date of grant. Stock options were issued at the market price at the grant date. As part of the requirements of FASB ASC 718, Compensation – Stock Compensation (FASB ASC 718), we are required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

Transactions under all stock option plans are summarized as follows:

	Stock Options (unaudited)
	Number of shares under option			Weighted average Exercise price
Outstanding at December 31, 2008		4,272,567		$	25.97
Exercised		(309,486	)		14.09
Canceled		(169,422	)		26.20
Granted		—			—
Outstanding at September 30, 2009		3,793,659		$	26.83

The aggregate intrinsic value of stock options at exercise, represented in the table above, was $2 million for the nine months ended September 30, 2009. Total unrecognized stock-based compensation expense related to non-vested stock options was approximately $3 million as of September 30, 2009, related to approximately 247,000 shares with a per share weighted average fair value of $17.30. We anticipate this expense to be recognized over a weighted average period of approximately 3.7 years.

		Outstanding and Exercisable by Price Range as of September 30, 2009 (unaudited)

		Options Outstanding						Options Exercisable

Range of Exercise prices		Number outstanding as of 9/30/2009		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable as of 9/30/2009		Weighted average exercise price
	$16.08 – $21.04		1,281,991		1.96		$20.69		1,223,823		$20.71
	$21.25 – $29.85		1,294,169		4.11		$28.03		1,113,980		$27.96
	$30.51 – $34.38		1,217,499		0.66		$32.02		1,209,006		$32.02
	$16.08 – $34.38		3,793,659		2.28		$26.83		3,546,809		$26.84

The weighted average remaining contractual life of options exercisable as of September 30, 2009 was 2.2 years. The aggregate intrinsic value of options outstanding as of September 30, 2009 was $3 million. The aggregate intrinsic value of options currently exercisable as of September 30, 2009 was $3 million. No options were granted during the nine months ended September 30, 2009 as our 1994 Plan terminated in May 2005.

Restricted stock plan

Our stockholders approved our 2005 Incentive Plan on May 10, 2005. At the time of approval, 2,700,000 shares of our common stock were reserved for issuance under this plan, as well as the number of shares which had been reserved but not issued under the 1994 Plan (our incentive stock option plan which terminated in May 2005), and any shares that returned to the 1994 Plan as a result of termination of options or repurchase of shares issued under such plan. The 2005 Plan, administered by the Compensation Committee of the Board of Directors, provides for granting of incentive awards in the form of restricted stock and restricted stock units (“RSUs”) to directors, executive officers and employees of the Company and its subsidiaries. Awards vest over a three, five or ten-year period, beginning on the date of grant. Vesting of ten year awards may accelerate based on the Company’s previous year’s earnings and growth but ten year awards cannot accelerate to vest over a period of less than five years. Shares available for grant at September 30, 2009 were 2,146,227. As part of the requirements of FASB ASC 718, we are required to estimate potential forfeitures of RSUs and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

Transactions under the 2005 Incentive Plan are summarized as follows:

	RSUs (unaudited)
	Number of RSUs			Weighted Average Grant Price
Balance at December 31, 2008		2,165,228		$	26.99
Granted		537,083			20.95
Earned		(407,156	)		22.04
Canceled		(47,646	)		27.94
Balance at September 30, 2009		2,247,509		$	26.42

Total unrecognized stock-based compensation expense related to non-vested RSUs was approximately $59 million as of September 30, 2009, related to 2,247,509 shares with a per share weighted average fair value of $26.42. We anticipate this expense to be recognized over a weighted average period of approximately 6.1 years.

Employee stock purchase plan

Our employee stock purchase plan permits substantially all domestic employees and employees of designated subsidiaries to acquire our common stock at a purchase price of 85% of the lower of the market price at the beginning or the end of the purchase period. The plan has quarterly purchase periods beginning on February 1, May 1, and November 1 of each year. At our annual shareholders meeting held on May 7, 2007, our shareholders approved an additional 3 million shares of common stock to be reserved for issuance under this plan. Employees may designate up to 15% of their compensation for the purchase of common stock under this plan. Common stock reserved for future employee purchases aggregated 1,935,287 shares at September 30, 2009. Shares issued under this plan were 658,320 in the nine month period ended September 30, 2009. The weighted average fair value of the employees’ purchase rights was $18.4 and was estimated using the Black-Scholes model with the following assumptions:

	2009
Dividend expense yield		0.5%
Expected life	3 months
Expected volatility		47%
Risk-free interest rate		1.0%

For the three month and nine month periods ended September 30, 2009 and September 30, 2008, stock-based compensation recorded as a component of cost of sales, sales and marketing, research and development, and general and administrative was as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	(unaudited)						(unaudited)
	2009			2008			2009			2008
Stock-based compensation
Cost of sales	$	335		$	295		$	975		$	810
Sales and marketing		2,210			2,114			6,626			6,204
Research and development		1,929			1,867			5,349			5,160
General and administrative		728			800			2,288			2,351

Provision for income taxes		(409	)		(1,364	)		(5,288	)		(3,588	)
Total	$	4,793		$	3,712		$	9,950		$	10,937

Authorized Preferred Stock and Preferred Stock Purchase Rights Plan

We have 5,000,000 authorized shares of preferred stock. On January 21, 2004, our Board of Directors designated 750,000 of these shares as Series A Participating Preferred Stock in conjunction with its adoption of a Preferred Stock Rights Agreement (the “Rights Agreement”) and declaration of a dividend of one preferred share purchase right (a “Right”) for each share of common stock outstanding held as of May 10, 2004 or issued thereafter. Each Right will entitle its holder to purchase one one-thousandth of a share of National Instruments’ Series A Participating Preferred Stock at an exercise price of $200, subject to adjustment, under certain circumstances. The Rights Agreement was not adopted in response to any effort to acquire control of National Instruments.

The Rights only become exercisable in certain limited circumstances following the tenth day after a person or group announces acquisitions of or tender offers for 20% or more of our common stock. In addition, if an acquirer (subject to certain exclusions for certain current stockholders of National Instruments, an “Acquiring Person”) obtains 20% or more of our common stock, then each Right (other than the Rights owned by an Acquiring Person or its affiliates) will entitle the holder to purchase, for the exercise price, shares of our common stock having a value equal to two times the exercise price. Under certain circumstances, our Board of Directors may redeem the Rights, in whole, but not in part, at a purchase price of $0.01 per Right. The Rights have no voting privileges and are attached to and automatically traded with our common stock until the occurrence of specified trigger events. The Rights will expire on the earlier of May 10, 2014 or the exchange or redemption of the Rights.

NOTE 12 – Commitments and Contingencies

We offer a one-year limited warranty on most hardware products, which is included in the sales price of many of our products. Provision is made for estimated future warranty costs at the time of sale pursuant to FASB ASC 450, Contingencies (FASB ASC 450), for the estimated costs that may be incurred under the basic limited warranty. Our estimate is based on historical experience and product sales during the period.

The warranty reserve for the nine month periods ended September 30, 2009 and 2008, respectively, was as follows (in thousands):

	Nine Months Ended
	September 30,
	(unaudited)
	2009			2008
Balance at the beginning of the period	$	952		$	750
Accruals for warranties issued during the period		1,518			1,219
Settlements made (in cash or in kind) during the period		(1,551	)		(1,272	)
Balance at the end of the period	$	919		$	697

As of September 30, 2009, we have outstanding guarantees for payment of foreign operating leases, customs and foreign grants totaling approximately $5.2 million.

As of September 30, 2009, we have non-cancelable purchase commitments with various suppliers of customized inventory and inventory components totaling approximately $6.5 million over the next twelve months.

NOTE 13 – Segment Information

In accordance with FASB ASC 280, Segment Reporting (FASB ASC 280), we determine operating 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 our operating segments. It also requires disclosures about products and services, geographic areas and major customers.

We have defined our operating segment based on geographic regions. We sell our products in three geographic regions. Our sales to these regions share similar economic characteristics, similar product mix, similar customers, and similar distribution methods. Accordingly, we have elected to aggregate these three geographic regions into a single operating segment. Revenue from the sale of our products which are similar in nature and software maintenance are reflected as total net sales in our Consolidated Statements of Income.

Total net sales, operating income, interest income and long-lived assets, classified by the major geographic areas in which we operate, are as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	(unaudited)						(unaudited)
	2009			2008			2009			2008
Net sales:
Americas:
Unaffiliated customer sales	$	75,459		$	97,021		$	211,991		$	269,527
Geographic transfers		19,498			34,446			61,872			95,386
		94,957			131,467			273,863			364,913

Europe:
Unaffiliated customer sales		46,683			66,702			143,026			197,935
Geographic transfers		44,460			54,985			139,709			151,755
		91,143			121,687			282,735			349,690

Asia Pacific:
Unaffiliated customer sales		42,893			51,315			119,980			150,968
Eliminations		(63,958	)		(89,431	)		(201,581	)		(247,141	)

	$	165,035		$	215,038		$	474,997		$	618,430

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	(unaudited)						(unaudited)
	2009			2008			2009			2008
Operating income:
Americas	$	15,058		$	21,567		$	28,658		$	53,654
Europe		20,087			26,361			52,562			76,088
Asia Pacific		10,559			17,034			28,582			49,912
Unallocated:
Research and development expenses		(35,016	)		(37,016	)		(99,252	)		(105,808	)
	$	10,688		$	27,946		$	10,550		$	73,846

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	(unaudited)				(unaudited)
	2009		2008		2009		2008
Interest income:
Americas	$	165	$	503	$	685	$	2,186
Europe		145		844		581		2,761
Asia Pacific		29		27		69		78
	$	339	$	1,374	$	1,335	$	5,025

	September 30, 2009		December 31, 2008
	(unaudited)
Long-lived assets:
Americas	$	102,375	$	107,701
Europe		36,801		39,280
Asia Pacific		11,356		7,496
	$	150,532	$	154,477

Total sales outside the U.S. for the three month periods ended September 30, 2009 and 2008, were $95.4 million and $127.7 million, respectively. Total sales outside the U.S. for the nine month periods ended September 30, 2009 and 2008, were $282.5 million and $374.9 million, respectively.

NOTE 14 – Acquisitions

On February 1, 2008, we acquired all of the outstanding shares of microLEX Systems A/S, a premier provider of virtual instrumentation-based video, audio and mixed-signal test solutions. This acquisition was accounted for as a business combination. The total purchase price of the acquisition, which included legal and accounting fees, was $17.8 million in cash. The allocation of the purchase price was determined using the fair value of assets and liabilities acquired as of February 1, 2008. We funded the purchase price from existing cash balances. Our consolidated financial statements include the operating results from the date of acquisition. Pro-forma results of operations have not been presented because the effects of those operations were not material. The following table summarizes the initial allocation of the purchase price of microLEX (in thousands):

Goodwill	$	10,818
Acquired core technology		5,201
Non-competition agreements		159
Trademarks		119
Customer relationships		354
Current assets acquired		3,057
Long-term assets acquired		20
Current liabilities assumed		(486	)
Deferred tax liabilities		(1,458	)
Total equity acquired	$	17,784

Goodwill is not deductible for tax purposes. Existing technology, non-competition agreements, trademarks and customer relationships have useful lives of 5 years, 3 years, 3 years, and 5 years, respectively, and will be amortized over these periods from the date of acquisition. These assets are not deductible for tax purposes.

NOTE 15 – Recently Issued Accounting Pronouncements

In April 2009, the FASB updated FASB ASC 820 providing additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This update also includes guidance on identifying circumstances that indicate a transaction is not orderly. We adopted the update on April 1, 2009 as required and concluded it did not have a material impact on our consolidated financial position or results of operations.

In September 2009, the FASB updated FASB ASC 105, Generally Accepted Accounting Principles (FASB ASC 105). The update establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. This update is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted the update on July 1, 2009, as required and concluded it did not have a material impact on our consolidated financial position or results of operations.

In October 2009, the FASB updated FASB ASC 605, Revenue Recognition (FASB ASC 605) that amended the criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third–party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

In October 2009, the FASB updated FASB ASC 985, Software (FASB ASC 985) that changes the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in Subtopic 985-605. In addition, the amendments require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

NOTE 16 – Litigation

We filed a patent infringement action on January 25, 2001, in the U.S. District Court, Eastern District of Texas (Marshall Division) claiming that The MathWorks, Inc. ("MathWorks") infringed certain of our U.S. patents. On January 30, 2003, a jury found infringement by MathWorks of three of the patents involved and awarded us specified damages. On September 23, 2003, the District Court entered final judgment in favor of us and entered an injunction against MathWorks' sale of its Simulink and related products and stayed the injunction pending appeal. Upon appeal, the judgment and the injunction were affirmed by the U.S. Court of Appeals for the Federal Circuit (September 3, 2004). Subsequently the stay of injunction was lifted by the District Court. In November 2004, the final judgment amount of $7.4 million which had been held in escrow pending appeal was released to us.

An action was filed by MathWorks against us on September 22, 2004, in the U.S. District Court, Eastern District of Texas (Marshall Division), claiming that on that day MathWorks had released modified versions of its Simulink and related products, and seeking a declaratory judgment that the modified products do not infringe the three patents adjudged infringed in the District Court's decision of September 23, 2003 (and affirmed by the Court of Appeals on September 3, 2004). On November 2, 2004, MathWorks served the complaint on us. We filed an answer to MathWorks' declaratory judgment complaint, denying MathWorks' claims of non-infringement and alleging our own affirmative defenses. On January 5, 2005, the Court denied a contempt motion by us to enjoin the modified Simulink products under the injunction in effect from the first case. On January 7, 2005, we amended our answer to include counterclaims that MathWorks' modified products are infringing three of our patents, and requested unspecified damages and an injunction. MathWorks filed its reply to our counterclaims on February 7, 2005, denying the counterclaims and alleging affirmative defenses. On March 2, 2005, we filed a notice of appeal regarding the Court's denial of the contempt motion. On March 15, 2005, the Court stayed MathWorks’ declaratory judgment action, pending a decision on the appeal by the Court of Appeals for the Federal Circuit. On February 9, 2006, the Court of Appeals for the Federal Circuit affirmed the District Court’s January 2005 order. On November 22, 2006, the District Court lifted the stay. The case schedule has yet to be set in this action. During the fourth quarter of 2004, we accrued $4 million related to our probable loss from this contingency, which consists entirely of anticipated patent defense costs that are probable of being incurred. In the fourth quarter of 2006, we accrued an additional $600,000 related to this contingency. During the third quarter of 2009, we reduced the accrual by $2 million to reflect a decrease in the estimated costs that are probable of being incurred in this action. We charged approximately $2,000 against this accrual during the nine months ended September 30, 2009. To date, we have charged a cumulative total of $621,000 against this accrual. At September 30, 2009, the remaining accrual was $2 million.

NOTE 17 – Subsequent Event

In accordance with FASB ASC 855, Subsequent Events (FASB ASC 855), we have evaluated subsequent events through October 27, 2009, the date the financial statements were issued.

On October 21, 2009, our Board of Directors declared a quarterly cash dividend of $0.12 per common share, payable November 30, 2009, to shareholders of record on November 9, 2009.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements contained herein regarding our future financial performance or operations (including, without limitation, statements to the effect that we “believe,” "expect," "plan," "may," "will," "project," "continue," or "estimate" or other variations thereof or comparable terminology or the negative thereof) should be considered forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors, including those set forth under the heading “Risk Factors” beginning on page 37, and the discussion below. Readers are also encouraged to refer to the documents regularly filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for further discussion of our business and the risks attendant thereto.

Overview

National Instruments Corporation (“we” or “our”) is a leading supplier of measurement and automation products that engineers and scientists use in a wide range of industries. These industries comprise a large and diverse market for design, control and test applications. We provide flexible application software and modular, multifunctional hardware that users combine with industry-standard computers, networks and third party devices to create measurement, automation and embedded systems, which we also refer to as “virtual instruments”. Our approach gives customers the ability to quickly and cost-effectively design, prototype and deploy unique custom-defined solutions for their design, control and test application needs. We sell to a large number of customers in a wide variety of industries. No single customer accounted for more than 4% and 3% of our sales during the three and nine month periods ended September 30, 2009, respectively or in the years 2008, 2007 or 2006.

The key strategies that management focuses on in running our business are the following:

Expanding our broad customer base

We strive to increase our already broad customer base by serving a large market on many computer platforms, through a global marketing and distribution network. We also seek to acquire new technologies and expertise from time to time in order to open new opportunities for our existing product portfolio.

Maintaining a high level of customer satisfaction

To maintain a high level of customer satisfaction we strive to offer innovative, modular and integrated products through a global sales and support network. We strive to maintain a high degree of backwards compatibility across different platforms in order to preserve the customer’s investment in our products. In this time of intense global competition, we believe it is crucial that we continue to offer products with quality and reliability, and that these products provide cost-effective solutions for our customers.

Leveraging external and internal technology

Our product strategy is to provide superior products by leveraging generally available technology, supporting open architectures on multiple platforms and by leveraging our core technologies such as custom application specific integrated circuits (“ASICs”) across multiple products.

We sell into test and measurement (“T&M”) and industrial/embedded applications in a broad range of industries and as such are subject to the economic and industry forces which drive those markets. It has been our experience that the performance of these industries and our performance is impacted by general trends in industrial production for the global economy and by the specific performance of certain vertical markets that are intensive consumers of measurement technologies. Examples of these markets are semiconductor capital equipment, telecom, defense, aerospace, automotive and others. In assessing our business, we consider the trends in the Global Purchasing Managers Index (“PMI”) published by JP Morgan, global industrial production as well as industry reports on the specific vertical industries that we target. We believe that the global industrial economy continues to be very weak. Many economists and other experts are predicting that this weakness in the U.S. and global economies will likely continue through the remainder of 2009 and possibly beyond. We are unable to predict how long this weakness will last. We expect our business to continue to be adversely impacted by this weakness in the U.S. and global economies.

We distribute our software and hardware pro