<PAGE>
                                     EXHIBIT 13.1

                                     ENCAD, INC.
                      REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS
                     FOR THE YEAR ENDED DECEMBER 31, 1996

<PAGE>

ENCAD, Inc.
FIVE YEAR FINANCIAL
DATA
(in thousands, except per share data,
 percentages and employees)
<TABLE>
<CAPTION>
                                                1996       1995       1994       1993       1992
-----------------------------------------------------------------------------------------------------
<S>                                             <C>        <C>        <C>        <C>        <C>
RESULTS OF OPERATIONS
  Net sales                                     $ 107,437  $  65,548  $  43,653  $  23,229  $  15,000
  Cost of sales                                 $  56,021  $  36,471  $  22,917  $  12,123  $   6,990
  Gross profit                                  $  51,416  $  29,077  $  20,736  $  11,106  $   8,010
  Research and development                      $   8,794  $   5,578  $   3,265  $   1,995  $   1,397
  Operating income                              $  19,572  $  11,619  $   9,137  $   4,118  $   2,672
  Interest income (expense)                     $     183  $     307  $     270  $     (66) $     (69)
  Pretax income                                 $  19,755  $  11,926  $   9,407  $   4,052  $   2,603
  Taxes                                         $   6,902  $   4,069  $   3,392  $   1,317  $     963
  Extraordinary item                            $      --  $      --  $      --  $     463  $     738
  Net income                                    $  12,853  $   7,857  $   6,015  $   3,198  $   2,378
  Earnings per share                            $    1.08  $    0.70  $    0.55  $    0.41  $    0.31

MARGINS
  Gross profit                                        48%        44%        48%        48%        53%
  Research and development                             8%         9%         7%         9%         9%
  Operating income                                    18%        18%        21%        18%        18%
  Pretax income                                       18%        18%        22%        17%        17%
  Net income                                          12%        12%        14%        14%        16%

YEAR END FISCAL POSITION
  Cash and cash equivalents                     $   6,949  $   3,067  $     842  $   7,388  $     203
  Short-term investments                        $      --  $   6,072  $   4,902  $      --  $      --
  Accounts receivable-net                       $  19,762  $  13,029  $   8,582  $   4,177  $   2,831
  Inventories                                   $  13,630  $   8,047  $   4,628  $   2,064  $   2,478
  Property - net                                $  10,881  $   3,138  $   2,224  $   1,028  $     592
  Total current liabilities                     $  14,425  $   7,450  $   4,136  $   3,417  $   2,818
  Shareholders' equity                          $  43,042  $  28,678  $  19,948  $  12,556  $   3,498
  Working capital                               $  30,827  $  25,304  $  17,619  $  11,279  $   3,072

CAPITAL MANAGEMENT
  Depreciation expense                          $   2,726  $   1,599  $     732  $     518  $     466
  Capital expenditures                          $  10,469  $   2,513  $   1,928  $     954  $     365
  Operating return on average assets                  42%        39%        46%        36%        57%
  Return on average equity                            36%        32%        37%        40%       105%
  Long-term debt to equity                           0.0%       0.0%       0.0%       0.2%       7.5%
  Current Ratio                                       3.1        4.4        5.3        4.3        2.1
  Inventory turnover                                  5.2        5.8        6.8        5.3        4.0
  Average days receivable                              56         60         53         55         48

HUMAN RESOURCE MANAGEMENT
  Average number of employees                         355        272        197        138         83
  Average assets per employee                         132        111        102         82         57
  Sales per employee                                  303        241        222        168        141

COMMON SHARES OUTSTANDING*
  Weighted average common and common equiva-
   lent shares outstanding                         11,871     11,192     10,974      7.786      7,674
  Number of shares outstanding at year end         11,300     11,100     10,900     10,300      7,300
</TABLE>

*Adjusted for the two-for-one stock split in the form of a 100% stock dividend
 on May 31, 1996.

<PAGE>

ENCAD, Inc.
MANAGEMENT'S
DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except percentages)

CONSOLIDATED STATEMENTS OF INCOME 

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                          -------------------------------------
                                            1996            1995        1994
<S>                                         <C>             <C>         <C>
-------------------------------------------------------------------------------
Net sales                                   100%            100%         100%

Cost of sales                                52%             56%          52%
-------------------------------------------------------------------------------
Gross profit                                 48%             44%          48%

Marketing and selling                        15%             12%          12%

Research and development                      8%              9%           7%

General and administrative                    6%              6%           7%
-------------------------------------------------------------------------------
Income from operations                       18%             18%          21%

Interest income - net                         0%              0%           1%
-------------------------------------------------------------------------------
Income before income taxes                   18%             18%          22%

Provision for income taxes                    6%              6%           8%
-------------------------------------------------------------------------------
Net income                                   12%             12%          14%
-------------------------------------------------------------------------------
</TABLE>

RESULTS OF OPERATIONS

YEARS ENDED
DECEMBER 31, 1966 AND 1995

ENCAD's 1996 net sales increased 64% over 1995 net sales. This increase was
primarily due to increased unit sales of the Company's NovaJet product lines,
including sales of the NovaJet Pro and NovaJet Pro 50 which were introduced in
November 1995 and February 1996, respectively. Also contributing to the
Company's growth was the successful introduction of two new lines of ink and
media ("supplies"). In 1996, supplies sales increased 208% over 1995, and
accounted for approximately 14% of 1996 net sales versus 7% in 1995. The
Company's multiple original equipment manufacturer ("OEM") arrangements
contributed to the increase in net sales for 1996, accounting for 25% of
product sales as compared to 19% for 1995. 
   For the year ended December 31, 1996, one customer accounted for 15% of
product sales whereas  no one customer accounted for more than 10% of product
sales in 1995. International sales accounted for approximately 59% and 63% of 
the Company's product sales in 1996 and 1995, respectively.
    Cost of sales includes costs related to product shipments, including
materials, labor, overhead and other direct or allocated costs involved in the
manufacture, delivery, support and maintenance of products. Cost of sales as a
percentage of net sales decreased to 52% in 1996, from 56% in 1995, causing a
comparable increase in gross margin percentages. The decrease in the cost of
sales was due primarily to a favorable product mix including the higher margin
NovaJet products, offsetting the lower margin products - CADJET, supplies (as
a group) and accessories. The Company expects lower gross profit margins in 1997
due to higher technical support costs, possible lower average unit selling
prices and increased sales of new products and supplies, which, in general,
have lower gross margins than the NovaJet products. The Company's future
success

<PAGE>

ENCAD, Inc.
MANAGEMENT'S
DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands, except percentages)


will depend on its ability to continue to develop and manufacture competitive
products and achieve cost reductions for its existing products.
   Marketing and selling expenses were 15% of net sales compared to 12% in 1995
and grew by 104% over 1995. Most of the increase was related to costs associated
with increased staffing, the advertising of new products, increased emphasis on
promoting the Company's supplies business and increased trade show activity
compared to the same period in the prior year. Marketing and selling expenses
are expected to continue to increase over prior periods as the Company promotes
its products and supports its marketing and selling activities.
   Research and development spending grew by 58% from 1995 to 1996 and slightly
decreased as a percentage of net sales. The increase in spending was driven by
increased project costs and staffing levels related to new product development.
The Company expects to continue to invest significant resources in these
strategic programs and enhancements to existing products. The Company expects
that research and development expenses will increase in absolute dollars as
compared to prior periods.
   General and administrative expenses were 6% of net sales in 1996 and 1995.
The 72% increase in absolute dollars was due to higher staffing levels necessary
to support an increased level of business. The Company expects general and
administrative expenses will continue to increase in absolute dollars over
prior periods. Net interest income decreased to $183 in 1996 from $307 in 1995 
due to less cash available for external investment.
    The Company's effective income tax rate in 1996 was 35%, compared to 34% in
1995. The higher rate was due to the Company moving to a higher tax bracket due
to increased income.
   1996 net income increased 64% over 1995 for the reasons previously described.

YEARS ENDED 
DECEMBER 31, 1995 AND 1994
ENCAD's 1995 net sales increased 50% over 1994 net sales. This increase was
primarily due to increased unit sales of the Company's CADJET and NovaJet
product lines. The increase in unit sales, however, was partially offset by
lower average per unit selling prices. Also contributing to the Company's growth
was the successful development and delivery of new products to a broadening
marketplace. Two of these products, the CADJET 2 and the NovaJet Pro, were 
introduced in October and November of 1995, respectively. The Company's multiple
OEM arrangements contributed to the increase in net sales for 1995, accounting
for 19% of product sales as compared to 15% for 1994. 
   For the year ended December 31, 1995, no one customer accounted for more than
10% of product sales whereas one customer accounted for 11% 
of product sales in 1994. In the quarter ended December 31, 1995, one customer
accounted for 11% of product sales. International sales accounted for
approximately 63% and 57% of the Company's product sales in 1995 and 1994,
respectively.
   Cost of sales as a percentage of total net sales increased to 56% in 1995
from 52% in 1994, primarily due to a decrease in per unit selling prices. 
   Marketing and selling expenses were unchanged as a percentage of total net
sales for 1995 and 1994, remaining at 12%. In absolute dollars these expenses
increased to $8,111 in 1995 from $5,065 in 1994. 
   Research and development expenses in 1995 increased to $5,578 from $3,265 in
1994 or to 9% of total net sales in 1995 from 7% in 1994. The increase in
absolute dollars and as a percentage of net sales 

<PAGE>

was due to increased project costs and staffing levels related to new product
development. 
   General and administrative expenses were 6% and 7% of total net sales in
1995 and 1994, respectively. These expenses increased, in absolute dollars, to
$3,769 in 1995 from $3,269 in 1994. The increase in absolute dollars was due to
higher staffing levels associated with the support of higher sales volume. 
   Net interest income increased to $307 in 1995 from $270 in 1994. This change
was due to the increase of $1,170 in short-term investments resulting from a
higher level of cash provided by operating activities of $5,208.
   The Company's effective income tax rate in 1995 was 34%, compared to 36% in
1994. The lower rate reflects increased tax benefits related to the R&D tax
credits available to the Company through June of 1995.
   Net income increased 31% to $7,857 in 1995 from $6,015 in 1994 for the
reasons set forth above.

FINANCIAL CONDITION
The Company funds its operations primarily through cash flow provided from
operations. As of December 31, 1996, the Company had cash and cash equivalents
totaling $6,949, and working capital of $30,827. In comparison, the Company had
cash, cash equivalents and short-term investments totaling $9,139, and working
capital of $25,304 as of December 31, 1995. The decrease in cash, cash
equivalents and short-term investments was due primarily to the Company's
acquisition of its headquarter facilities. 
   The Company currently invests its excess cash in Certificates of Deposit,
U.S. Treasury Bills and money market accounts. The Company has established
guidelines relative to diversification and maturities to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates. The Company has not
experienced, to date, any losses on its short-term investments. During
1996, the Company invested cash in short-term investments which generated
interest income of $188.
   The Company has received and anticipates it will continue to receive the
majority of its cash from collections of accounts receivable from its
distributors and OEMs. These groups have a history of timely payments; however,
an increasing percentage of international sales can increase accounts receivable
balances due to traditionally slower payments by international customers. 
   At December 31, 1996 net accounts receivable increased by $6,733 over 1995's
year end balance of $13,029. The increase was directly related to increased
sales in 1996.
   Inventory levels increased by $5,583 at December 31, 1996 from $8,047 at the
end of 1995. This increase was primarily attributable to a general increase in
the level of business and also to increased supplies inventories to support
increased sales and to provide shorter lead times in filling customer orders.
   In the years ended December 31, 1996 and 1995, the Company had capital
expenditures of $10,469 and $2,513, respectively. 1996 expenditures include
$6,000 for the purchase of the Company's headquarter facilities. During the next
year, the Company plans to increase its capital expenditures, especially for
tooling relating to new products and computers, systems and related network
assets.
   The Company's overall level of operating expense is expected to increase due
to increased expense associated with increased sales and also with the
development and marketing of new products. Management believes that its existing
cash, cash equivalents, short-term investments, cash generated from operations,
and funds available under a bank line of credit will be sufficient to satisfy
its currently anticipated working capital needs. Actual cash requirements may
vary from planned amounts, depending on the timing of the launch and extent of
acceptance of new products. To date, inflation has not had a significant effect
on the Company's operating results.

<PAGE>

ENCAD, Inc.
INDEPENDENT
AUDITORS'
REPORT

TO THE BOARD OF DIRECTORS 
AND SHAREHOLDERS OF ENCAD, INC.

We have audited the accompanying consolidated balance sheets of ENCAD, Inc. and
its subsidiaries (collectively, the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
   In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1995 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.



                                                 DELOITTE & TOUCHE LLP 
                                                 SAN DIEGO, CALIFORNIA
                                                 FEBRUARY 4, 1997

<PAGE>

ENCAD, Inc.
CONSOLIDATED
BALANCE
SHEETS 
(in thousands)

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                               ----------------------
                                                                 1996         1995
-------------------------------------------------------------------------------------
<S>                                                            <C>          <C>
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                $  6,949    $  3,067
     Short-term investments                                         --       6,072
     Accounts receivable - net                                  19,762      13,029
     Inventories                                                13,630       8,047
     Deferred income taxes                                       4,538       2,254
     Prepaid expenses                                              373         285
-------------------------------------------------------------------------------------
         Total current assets                                   45,252      32,754



Property - net                                                  10,881       3,138
Other assets                                                     1,334         236
-------------------------------------------------------------------------------------
TOTAL                                                         $ 57,467    $ 36,128
-------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                         $  8,244    $  4,572

     Accrued expenses and other liabilities                      6,181       2,878
-------------------------------------------------------------------------------------
          Total current liabilities                             14,425       7,450
-------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
     Preferred stock - no par value; 5,000 shares authorized, 
          no shares issued and outstanding                          --          --
     Common stock - no par value; 15,000 shares authorized,
          11,300 and 11,100 shares issued and outstanding in
          1996 and 1995, respectively                           13,338      11,827
     Retained earnings                                          29,704      16,851
-------------------------------------------------------------------------------------
        Total shareholders' equity                              43,042      28,678
-------------------------------------------------------------------------------------
TOTAL                                                         $ 57,467    $ 36,128
-------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>

ENCAD, Inc.
CONSOLIDATED STATEMENTS OF
INCOME
(in thousands, except per share data)


<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                          -------------------------------------------
                                             1996            1995          1994
-------------------------------------------------------------------------------------
<S>                                       <C>             <C>            <C>
Net sales                                  $107,437       $ 65,548       $ 43,653 
Cost of sales                                56,021         36,471         22,917 
-------------------------------------------------------------------------------------
Gross profit                                 51,416         29,077         20,736 
Marketing and selling                        16,552          8,111          5,065 
Research and development                      8,794          5,578          3,265 
General and administrative                    6,498          3,769          3,269 
-------------------------------------------------------------------------------------
Operating costs and expenses                 31,844         17,458         11,599
-------------------------------------------------------------------------------------
Income from operations                       19,572         11,619          9,137 
Interest income - net                           183            307            270 
-------------------------------------------------------------------------------------
Income before income taxes                   19,755         11,926          9,407 
Provision for income taxes                    6,902          4,069          3,392 
-------------------------------------------------------------------------------------
Net income                                 $ 12,853       $  7,857       $  6,015 
-------------------------------------------------------------------------------------
Earnings per share                         $   1.08       $   0.70       $   0.55 
-------------------------------------------------------------------------------------
Weighted average common 
     and common equivalent shares            11,871         11,192         10,974 
-------------------------------------------------------------------------------------
</TABLE>


See Notes to Consolidated Financial Statements.

<PAGE>
ENCAD, Inc.
CONSOLIDATED STATEMENTS 
    OF SHAREHOLDERS'
EQUITY
(in thousands)

<TABLE>
<CAPTION>
                                                            COMMON STOCK
                                                           ----------------        RETAINED
                                                           SHARES     AMOUNT       EARNINGS       TOTAL
-------------------------------------------------------------------------------------------------------------
<S>                                                        <C>       <C>           <C>          <C>
BALANCE, JANUARY 1, 1994                                   10,280    $  9,577      $  2,979     $ 12,556
     Common stock issued under stock
          option and purchase plans, 
          including related tax benefits                      150         348            --          348
     Net proceeds from over-allotment
          option exercise                                     450       1,029            --        1,029

     Net income                                                                       6,015        6,015
-------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 1994                                 10,880      10,954         8,994       19,948
     Common stock issued under stock
          option and purchase plans, 
          including related tax benefits                      120         573            --          573
     Exercise of warrants                                     100         300            --          300
     Net income                                                                       7,857        7,857
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995                                 11,100      11,827        16,851       28,678
     Common stock issued under stock
          option and purchase plans, 
          including related tax benefits                      200       1,511            --        1,511
     Net income                                                --          --        12,853       12,853
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996                                 11,300    $ 13,338      $ 29,704     $ 43,042
-------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.

<PAGE>
ENCAD, Inc.
CONSOLIDATED STATEMENT OF
CASH FLOWS
(in thousands)


<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                              -------------------------------------------
                                                                 1996            1995          1994
---------------------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:        
     Net income                                               $ 12,853         $ 7,857       $ 6,015
     Adjustments to reconcile net income to cash provided
          by (used in) operating activities:
               Depreciation and amortization                     2,726           1,599           732
               Provision for losses on accounts receivable 
                    and inventories                              3,987           1,347         1,036
               Tax benefit from exercise of stock options          539             173           176
               Changes in assets and liabilities:
                    Accounts receivable                         (7,033)         (4,692)       (5,051)
                    Inventories                                 (9,270)         (4,521)       (2,954)
                    Deferred income taxes                       (2,284)           (501)         (896)
                    Prepaid expenses and other assets           (1,186)            632          (669)
                    Accounts payable                             3,672           2,231           358 
                    Accrued expenses and other liabilities       3,303           1,083           397 
---------------------------------------------------------------------------------------------------------
                     Cash provided by (used in) operating 
                        activities                               7,307           5,208          (856)
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of property                                     (10,469)         (2,513)       (1,928)
     Net cash from (purchases of) short-term investments         6,072          (1,170)       (4,902)
---------------------------------------------------------------------------------------------------------
                         Cash used in investing activities      (4,397)         (3,683)       (6,830)
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Exercise of common stock options and sale of stock  
          under employee stock purchase plan                       972             418           172 
     Net proceeds from issuance of common stock                     --             282         1,029 
     Payments on capital lease obligations                          --              --           (61)
---------------------------------------------------------------------------------------------------------
                         Cash provided by financing activities     972             700         1,140 
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents             3,882           2,225        (6,546)
Cash and cash equivalents at beginning of year                   3,067             842         7,388 
---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                      $  6,949         $ 3,067       $   842
---------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid during the year for income taxes               $  7,927         $ 3,551       $ 5,005 

</TABLE>


See Notes to Consolidated Financial Statements.


<PAGE>

ENCAD, Inc.

NOTES TO CONSOLIDATED 
          FINANCIAL STATEMENTS

1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY ENCAD, Inc. and its subsidiaries (collectively, the "Company")
operate in one industry segment, principally the design, development,
manufacture and sale of wide-format color inkjet printers and related supplies
for the graphic arts and computer-aided design markets.
    The Company markets and sells its products domestically and internationally
primarily through specialty distributors, dealers, value-added resellers and
original equipment manufacturers. Export sales accounted for 59%, 63% and 57% of
1996, 1995 and 1994 net sales, respectively. Receivables from export sales at 
December 31, 1996 and 1995 were approximately $11,508,000 and $7,606,000, 
respectively. In 1996, one customer accounted for 15% of sales. In 1995, no one 
customer accounted for more than 10% of sales, and in 1994, one customer 
accounted for 11% of sales.

    PRINCIPLES OF CONSOLIDATION  The accompanying consolidated financial 
statements include the accounts of the Company. All significant intercompany 
balances have been eliminated in consolidation.

    CASH AND CASH EQUIVALENTS The Company considers all highly liquid 
investments purchased with an original maturity date of three months or less 
to be cash equivalents. 

    SHORT-TERM INVESTMENTS Short-term interest bearing investments are those 
with maturities of less than one year but greater than three months when 
purchased. These investments are readily convertible to cash and are stated 
at cost, which approximates fair value.

    INVENTORIES Inventories are stated at the lower of cost (first-in, 
first-out method) or market.

    PROPERTY Property is stated at cost. Depreciation and amortization are 
computed using the straight-line method over the following estimated useful 
lives of the property: buildings and related improvements - 40 years; 
machinery, equipment, furniture and fixtures - two to five years.

    REVENUE RECOGNITION Revenue from product sales is recognized at the time 
of shipment. Price protection adjustments to customers are accrued when the 
anticipated price reduction is known.

    WARRANTY The Company warrants its products against defects, generally for 
one year. Management evaluates the Company's warranty experience and adjusts 
its warranty reserve accordingly.

    PRODUCT RETURNS In the event the Company terminates any of its 
distribution agreements, the terminated distributor may return products for a 
refund. The Company has not experienced any significant terminations or 
product returns to date.

    RESEARCH AND DEVELOPMENT Research and development costs are expensed in 
the period incurred.

    EARNINGS PER SHARE Earnings per share are computed based on the weighted 
average number of common dilutive and common equivalent shares outstanding 
during each period using the treasury stock method. Stock options are 
considered to be common stock equivalents. Fully diluted earnings per share 
have not been presented as part of the consolidated statements of income 
because the differences are not material.

    INCOME TAXES The Company adopted the Statement of Financial Accounting 
Standards No. 109, "Accounting for Income Taxes." This statement requires 
that deferred income taxes be reported in the Company's financial statements 
utilizing the asset and liability method. Under this method, deferred income 
taxes are determined based on enacted tax rates applied to the differences 
between the financial statement and tax bases of assets and liabilities.

    FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's 
foreign operations are translated into U.S. dollars at the exchange rate in 
effect at the balance sheet date, and revenue and expenses are translated at 
the average exchange rate for the year. Translation gains or losses of the 
Company's foreign subsidiaries historically have not been material. All of 
the Company's worldwide sales are conducted in U.S. dollars. Gains and losses 
on transactions in denominations other than the functional currency of the 
Company's foreign operations, while not material in amount, are included in 
the results of operations. The Company has not entered into foreign exchange 
transactions to hedge certain balance sheet exposures and intercompany 
balances against movements in foreign exchange rates as these balances have 
historically not been material.

    CONCENTRATION OF CREDIT RISK The Company sells its products primarily to 
customers in the United States, Europe and Asia. The Company maintains a 
reserve for potential credit losses and such losses, to date, have been 
minimal.

    ESTIMATES The preparation of financial statements in conformity with 
generally accepted accounting principles requires management to make 
estimates and assumptions that affect the reported amounts 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 reporting period. Actual results could differ from those estimates.

    STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 In October 1995, the 
Financial Accounting Standards Board issued Statement of Financial Accounting 
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS 
No. 123 requires expanded disclosures of stock-based compensation 
arrangements with employees and encourages (but does not require) 
compensation cost to be measured based on the fair value of the equity 
instrument awarded. Companies are permitted, however, to continue to apply 
APB Opinion No. 25, "Accounting for Stock Issued to Employees," which 
recognizes compensation cost based on the intrinsic value of the equity 
instrument awarded. The Company will continue to apply APB Opinion No. 25 to 
its stock-based compensation awards to employees and has disclosed the 
required proforma effect on the net income and earnings per share. See Note 6.

    SHAREHOLDERS' EQUITY Effective May 31, 1996, for shareholders of record 
on May 17, 1996, the Company effected a two-for-one stock split payable in 
the form of a 100% stock dividend resulting in the issuance of 5,599,007 
shares of common stock. The effects of the stock split have been 
retroactively restated in these financial statements.

    RECLASSIFICATIONS Certain items in the 1994 and 1995 financial statements 
have been reclassified to conform to the 1996 presentation. 
 
 
                                      22
<PAGE>

2. BALANCE SHEET DETAILS (in thousands) 
                                                   DECEMBER 31,
                                             -------------------------
                                               1996           1995
----------------------------------------------------------------------
ACCOUNTS RECEIVABLE:
Trade receivables                            $ 20,404       $ 13,472 
Allowance for doubtful accounts                  (642)          (443)
----------------------------------------------------------------------
Total                                        $ 19,762       $ 13,029 
----------------------------------------------------------------------
INVENTORIES:
Raw materials                                $  7,247        $ 4,601 
Work-in-process                                   253            224 
Finished goods                                  6,130          3,222 
----------------------------------------------------------------------
Total                                        $ 13,630       $  8,047 
----------------------------------------------------------------------
PROPERTY - AT COST:
Machinery and equipment                      $  7,289       $  5,027 
Buildings and improvements                      5,601             84 
Furniture and fixtures                          1,787            865 
Land                                            1,250             --
----------------------------------------------------------------------
                                               15,927          5,976 

Accumulated depreciation 
     and amortization                          (5,046)        (2,838)
----------------------------------------------------------------------
Total                                        $ 10,881       $  3,138 
----------------------------------------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES:   
Compensation and vacation pay                $  3,197       $    937 
Warranty                                        1,538          1,212 
Co-op programs                                    736            482 
Income taxes payable                              690            114 
Other                                              20            133 
----------------------------------------------------------------------
Total                                        $  6,181       $  2,878 
----------------------------------------------------------------------

3. REVOLVING LINE OF CREDIT
At December 31, 1996, the Company had available a $12 million revolving line 
of credit (the "Line") which provides for interest at the bank's prime rate 
(8.25% at December 31, 1996) or 2.25 % over the London Interbank Overnight 
Rate (5.50% at December 31, 1996) on outstanding balances. The Line requires 
the Company to maintain: (i) a minimum amount of net working capital and net 
worth, (ii) a quick ratio of 1.5 to 1.0, and (iii) a total debt to net worth 
ratio less than .6 to 1.0. No borrowings were outstanding under the Line at 
December 31, 1996. The Line expires on January 2, 1999.

4. OPERATING LEASE COMMITMENTS
During 1995 and for the first month of 1996, the Company leased its primary 
facility under an operating lease, which would have expired in December 1998. 
In February 1996, the Company acquired this facility. Rental expense under 
operating leases was approximately $298,000, $604,000 and $258,000 for the 
years ended December 31, 1996, 1995 and 1994, respectively. The Company has 
no commitments, as of December 31, 1996, under non-cancelable operating 
leases. 

5. INCOME TAXES (in thousands except for percentages) The tax effects of 
items comprising the Company's net deferred income tax asset are as follows: 

                                                   DECEMBER 31,
                                             -------------------------
                                               1996             1995
----------------------------------------------------------------------
Non deductible reserves and accruals         $ 2,817        $ 1,407 
Differences between book and tax 
     basis in inventory and property             856            349 
Accrued co-op advertising                        323            208 
State taxes                                      287            197 
Accrued commissions to foreign
     related party                               198             50 
Other                                             57             43 
----------------------------------------------------------------------
Total                                        $ 4,538        $ 2,254 
----------------------------------------------------------------------

    The components of the provision for income taxes are as follows:

                                               YEAR ENDED DECEMBER 31,
                                            ----------------------------
                                              1996      1995      1994 
------------------------------------------------------------------------
CURRENT EXPENSE:
     Federal                                $ 7,269   $ 3,524   $ 3,277 
     State                                    1,810     1,030     1,011 
     Foreign                                    106        17         - 
DEFERRED EXPENSE:
     Federal                                 (1,865)     (396)     (740)
     State                                     (418)     (106)     (156)
------------------------------------------------------------------------
Total                                       $ 6,902   $ 4,069   $ 3,392 
------------------------------------------------------------------------

    The effective rate of the provision for income taxes differs from the 
federal statutory rate because of the effect of the following items:

                                               YEAR ENDED DECEMBER 31, 
                                            ---------------------------
                                              1996      1995      1994 
-----------------------------------------------------------------------
Statutory rate                                35.0%     34.0%     34.0%
State income taxes, net of 
     Federal benefit                           6.2       6.2       6.2
Benefit of foreign sales 
     corporation, net of tax                  (4.0)     (4.2)     (4.2)
Income tax credit                             (0.8)     (1.0)      0.3
Other                                         (1.4)     (0.8)     (0.2)
------------------------------------------------------------------------
Effective rate                                35.0%     34.2%     36.1%
------------------------------------------------------------------------

6. EMPLOYEE BENEFIT PLANS (in thousands except for percentages and average 
and exercise price data) The number of shares authorized under the following 
plans, and the number of shares outstanding will be appropriately adjusted in 
the event of certain changes in the Company's capital structure, such as 
stock dividends or splits, or other recapitalizations.

    1993 EMPLOYEE STOCK PURCHASE PLAN Under this plan, for which 400 shares 
of common stock have been reserved for issuance, eligible employees may elect 
up to 10% of their cash compensation to be deducted each pay period for the 
purchase of common stock. Participants may not purchase more than 2 shares of 
common stock in any purchase period and not more than $25 worth of common 
stock in any one calendar year. On the last business day of each calendar 
quarter, shares of common stock are purchased with the employees' payroll 
deductions, at a price per share of 85% of the lesser of the closing market 
price of the common stock on the purchase date, or the closing market price 
on the first day of the period. The plan will terminate on January 1, 2003. 
In 1996, 1995 and 1994, 60, 62 and 61 shares, respectively, were issued, at 
average prices ranging from $7.44 to $8.49, $5.26 to $5.63, and $2.13 to 
$2.20, respectively. An additional 17 shares have been purchased, but not 
issued as of December 31, 1996. At December 31, 1996, 200 shares were 
available for purchase under the plan.

    1993 STOCK OPTION/STOCK ISSUANCE PLAN Under this plan, for which 1,559 
shares of common stock have been reserved for issuance, employees, officers, 
directors and consultants may be granted incentive or non-qualified stock 
options. All outstanding options under any of the Company's previous stock 
option plans were incorporated into this plan but will continue to be 
governed by the terms and conditions under which those options were granted. 
Only non-qualified stock options have been granted under this plan to date, 
at prices not less than fair market value on the date of grant. Although this 
plan allows for other terms, the options granted are generally exercisable 
quarterly over four years and expire in ten years.


                                      23
<PAGE>

    A summary of option activity follows:

                                                    OPTIONS OUTSTANDING 
                                              ----------------------------------
                               AVAILABLE                 EXERCISE     AGGREGATE
                               FOR GRANT     NUMBER       PRICES        PRICE
--------------------------------------------------------------------------------
BALANCES, 
     JANUARY 1, 1994               457        360    $ 0.07 - $ 2.81   $   421
Options granted                   (239)       239      4.13 -   7.31     1,236
Options exercised                   --        (89)     4.13 -   9.25       (33)
Options canceled                    14        (14)     0.07 -   1.17       (13)
--------------------------------------------------------------------------------
BALANCES, 
     JANUARY 1, 1995               232        496      0.07 -   7.31     1,611
Authorized                         500         --        --       --        --
Options granted                   (543)       543      7.13 -  13.75     4,827
Options exercised                   --        (57)     6.88 -  14.81      (146)
Options canceled                   271       (271)     1.17 -  12.94    (2,602)
--------------------------------------------------------------------------------
BALANCES, 
     JANUARY 1, 1996               460        711      0.07 -  13.75     3,690
Options granted                   (460)       460      8.00 -  39.88     5,201
Options exercised                   --       (140)     8.00 -  45.38      (546)
Options canceled                    89        (89)     0.07 -   8.00      (569)
--------------------------------------------------------------------------------
BALANCES, 
     DECEMBER 31, 1996              89        942    $ 0.07 - $39.88   $ 7,776
--------------------------------------------------------------------------------

    At December 31, 1996, 89 shares were available for grant under this plan. 

    The following table summarizes information about stock options 
outstanding at December 31, 1995 and 1996:

                                  WEIGHTED
                                   AVERAGE      WEIGHTED               WEIGHTED
        RANGE OF                  REMAINING     AVERAGE                 AVERAGE
        EXERCISE      NUMBER     CONTRACTUAL    EXERCISE     NUMBER    EXERCISE
        PRICES      OUTSTANDING     LIFE         PRICE     EXERCISABLE   PRICE
--------------------------------------------------------------------------------
1995
$   0.07  - $ 1.17      131          1.5        $  0.62        106       $ 0.52
    2.81  -   4.44      182          8.1           3.86         77         3.78
    7.13  -   7.25      235          9.6           7.19          8         7.23
    7.31  -   7.88       85          9.3           7.52         11         7.35
    8.44  -  13.75       78          9.9           8.68          0         0.00
-------------------------------------------------------------------------------
$   0.07  - $13.75      711          7.7        $  5.33        202       $ 2.40
-------------------------------------------------------------------------------
1996
$  0.07  - $ 1.17        66          0.94        $  0.86        59       $ 0.82
   2.81  -   4.44       132          7.14           3.64        90         3.58
   7.19  -   7.88       243          8.53           7.31        58         7.33
   8.00  -   8.50       240          8.92           8.14        39         8.19
  10.63  -  11.50       226          9.26          11.39        21        11.45
  13.75  -  21.75        12          9.17          18.23         1        16.17
  34.75  -  39.88        23          9.88          35.39         0         0.00
-------------------------------------------------------------------------------
$  0.07  - $39.88       942          8.12        $  8.36       268       $ 5.12
-------------------------------------------------------------------------------

    The Company applies Accounting Principles Board Opinion No. 25, 
"Accounting for Stock Issued to Employees," and related interpretations in 
accounting for its plans. Accordingly, no compensation expense has been 
recognized for its stock-based compensation plans. Had compensation expense 
for the Company's stock option plan and stock purchase plan been determined 
based upon the fair value at the grant date for awards under those plans 
consistent with the methodology prescribed under SFAS No. 123, "Accounting 
for Stock-Based Compensation," the Company's net income and earnings per 
share for 1996 and 1995 would have been reduced by approximately $909 and 
$279, respectively, and $0.08 per share and $0.02 per share respectively.
 
    The fair value of the options granted during 1996 and 1995 is estimated 
as $2,054 and $1,581, respectively, on the date of grant using the 
Black-Scholes option-pricing model with the following assumptions:


                                              1996        1995
----------------------------------------------------------------------
Volatility                                     65%         65%
Risk-free interest rate                         6%          6%
Forfeiture rate                                 --          --
Expected life (years)                         2.68        2.80
----------------------------------------------------------------------

7. QUARTERLY FINANCIAL INFORMATION 
(unaudited; in thousands, except per share data) Summarized quarterly 
financial information for each of the three years ended December 31, 1996, 
1995, and 1994 is as follows:

                         1ST         2ND         3RD         4TH      FISCAL
                       QUARTER     QUARTER     QUARTER     QUARTER     YEAR
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Net sales             $ 19,618    $ 24,752    $ 30,047    $ 33,020   $ 107,437 
Income from 
     operations          3,157       4,357       5,594       6,464      19,572 
Net income               2,099       2,805       3,732       4,217      12,853 
Earnings 
     per share            0.18        0.24        0.31        0.35        1.08
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
Net sales               14,666      17,524      15,606      17,752      65,548 
Income from 
     operations          3,169       3,266       2,522       2,662      11,619 
Net income               1,991       2,238       1,786       1,842       7,857 
Earnings 
     per share            0.18        0.20        0.16        0.16        0.70
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
Net sales                8,646      11,945      11,475      11,587      43,653 
Income from 
     operations          1,611       2,600       2,629       2,297       9,137 
Net income               1,007       1,593       1,703       1,712       6,015 
Earnings 
     per share            0.09        0.15        0.15        0.16        0.55
--------------------------------------------------------------------------------


                                      24
<PAGE>

ENCAD, Inc

RISKS
  AND UNCERTAINTIES

    POTENTIAL FLUCTUATION IN QUARTERLY PERFORMANCE The Company's quarterly 
operating results can fluctuate significantly depending on factors such as 
the timing of product announcements and subsequent introductions by the 
Company and its competitors, availability and cost of components, timing of 
shipments of the Company's products, mix of product families shipped, market 
acceptance of new products, seasonality, currency fluctuations, changes in 
prices by the Company and its competitors, price protection for selling price 
reductions offered to distributors and OEMs, the timing of expenditures for 
staffing and related expenditures, advertising, promotion, research and 
development and changes in general economic conditions. Any one of these 
factors could have a material adverse effect on the Company's results of 
operations. The Company may experience significant quarterly fluctuations in 
total revenues as well as operating expenses with respect to future new 
product introductions. In addition, the Company's component purchases, 
production and spending levels are based upon forecast demand for the 
Company's products. Accordingly, any inaccuracy in forecasting could 
adversely affect the Company's results of operations. Demand for the 
Company's products could be adversely affected by a slowdown in the overall 
demand for computer systems or printer products. The Company's failure to 
complete shipments during a quarter could have a material adverse effect on 
the Company's results of operations for that quarter. Quarterly results are 
not necessarily indicative of future performance for any particular period, 
and there can be no assurance that the Company can maintain the levels of 
revenue and profitability experienced over the past three years on a 
quarterly or annual basis. 

    HIGHLY COMPETITIVE INDUSTRY The markets for the Company's products, both 
printers and supplies, are highly competitive and rapidly changing and the 
Company believes that new competitors will likely enter the market. The 
Company's principal competitor is Hewlett-Packard Company 
("Hewlett-Packard"), which dominates certain wide-format inkjet markets. In 
addition to direct competition in inkjet printers and related supplies, the 
Company's products also face competition from other technologies in the 
wide-format market. Such technologies include pen, electrostatic and thermal 
methods. Some of the Company's current and prospective competitors, 
particularly Hewlett-Packard, have significantly greater financial, 
technical, manufacturing and marketing resources than the Company. The 
Company's ability to compete in the wide-format inkjet market depends on a 
number of factors within and outside its control, including the success and 
timing of product introductions by the Company and its competitors, price, 
performance, product distribution, marketing ability, and customer support. A 
key element of the Company's strategy is to provide competitively priced, 
quality products. There can be no assurance that the Company's products will 
continue to be competitively priced. The Company has reduced prices on 
certain of its products in the past and will likely continue to do so in the 
future. Price reductions, if not offset by similar reductions in cost of 
goods sold, will affect gross margins and may adversely affect the Company's 
results of operations. 

    SHORT PRODUCT LIVES AND TECHNOLOGICAL CHANGE The markets for wide-format 
printers and related supplies are characterized by rapidly evolving 
technology, frequent new product introductions and significant price 
competition. Consequently, short product life cycles and reductions in unit 
selling prices due to competitive pressures over the life of a product are 
common. The Company's future success will depend on its ability to continue 
to develop and manufacture competitive products and achieve cost reductions 
for its existing products. Advances in technology will require increased 
investment in product engineering to maintain the Company's market position. 
In addition, the Company monitors new technology developments and coordinates 
with suppliers, distributors and dealers to enhance existing products and 
lower costs. The Company's future operating results could be adversely 
affected if the Company is unable to develop and manufacture new, competitive 
products in a timely manner.

    COMPONENT AVAILABILITY AND COST; DEPENDENCE ON SINGLE SOURCES While most 
components are available locally from multiple vendors, certain components 
used in the Company's products are only available from single sources. 
Although the Company generally buys components under purchase orders and does 
not have long-term agreements with its suppliers, it expects that its 
suppliers will be able to continue to satisfy its requirements. The Company 
has developed strategic relationships with single suppliers of several of its 
components. Although alternate suppliers are readily available for many of 
these components, for some components the process of qualifying replacement 
suppliers, replacing tooling or ordering and receiving replacement components 
could take several months and cause substantial disruption to the Company's 
operations. The Company uses a material requirements planning system that is 
intended to aid in making "Just-in-Time" decisions; however, if a supplier is 
unable to meet 


                                      25
<PAGE>

the Company's needs or supplies parts which the Company finds unacceptable, the
Company may not be able to meet production demands. Certain key components of
the Company's products are supplied indirectly by its principal competitor,
Hewlett-Packard. The Company believes that Hewlett-Packard supplies these
components to many other customers. Any significant increase in component prices
or decrease in component availability could have a material adverse effect on
the Company's results of operations. 

    POSSIBILITY OF CHALLENGE TO COMPANY'S PRODUCTS OR INTELLECTUAL PROPERTY 
RIGHTS From time to time, certain competitors, including Hewlett-Packard, 
have asserted patent rights relevant to the Company's business. The Company 
expects that this will continue. The Company carefully evaluates each 
assertion relating to its products. If the Company is not successful in 
establishing that asserted rights have not been violated, the Company could 
be prohibited from marketing the products that incorporate such technology. 
The Company could also incur substantial costs to redesign its products or to 
defend any legal action taken against the Company. If the Company's products 
should be found to infringe upon the intellectual property rights of others, 
the Company could be enjoined from further infringement and be liable for any 
damages. The Company relies on a combination of trade secret, copyright, 
trademark and patent protection and non-disclosure agreements to protect its 
proprietary rights. There can be no assurance, however, that the measures 
adopted by the Company for the protection of its intellectual property will 
be adequate to protect its interests, or that the Company's competitors will 
not independently develop technologies that are substantially equivalent or 
superior to the Company's technologies.

    DEPENDENCE ON EXPORT SALES For 1996, 1995 and 1994, sales outside the 
United States represented approximately 59%, 63% and 57% of net sales, 
respectively. The Company expects export sales to continue to represent a 
significant portion of its net sales. All of the Company's products sold in 
the international markets are denominated in U.S. dollars. An increase in the 
value of the U.S. dollar relative to foreign currencies could make the 
Company's products less competitive in foreign markets. International sales 
and operations may also be subject to risks such as the imposition of 
governmental controls, export license requirements, restrictions on the 
export of critical technology, currency exchange fluctuations, political 
instability, trade restrictions, changes in tariffs, difficulties in staffing 
and managing international operations and collecting accounts receivable. In 
addition, the laws of certain countries do not protect the Company's products 
and intellectual property rights to the same extent as the laws of the United 
States. As the Company continues to expand its international business, there 
can be no assurance that these factors will not have an adverse effect on the 
Company's sales and, consequently, on the Company's results of operations. 
 
    FUTURE CAPITAL NEEDS Although the Company first achieved profitability on 
an annual basis in 1992, there can be no assurance that future profitability 
or revenue growth, if any, will continue on a quarterly or annual basis. 
Losses may occur on a quarterly or annual basis for a number of reasons 
outside the Company's control. The growth of the Company's business will 
require the commitment of substantial capital resources. If funds are not 
available from operations, the Company may need to raise additional funds. 
The Company may seek such additional funding through public and private 
financing, including equity financing. Adequate funds for these purposes, 
whether through financial markets or from other sources, may not be available 
when needed or, if available, not on terms acceptable to the Company. 
Insufficient funds may require the Company to delay, reduce or eliminate some 
or all of its planned activities. 

    RELIANCE ON INDIRECT DISTRIBUTION The Company markets and sells it 
products domestically and internationally primarily through specialty 
distributors, dealers, VARs and OEMs. The Company's sales are principally 
made through distributors which may carry competing product lines. Such 
distributors could reduce or discontinue sales of the Company's products 
which could have a material adverse effect on the Company's operating 
results. There can be no assurance that these independent distributors will 
devote the resources necessary to provide effective sales and marketing 
support of the Company's products. In addition, the Company is dependent upon 
the continued viability and financial stability of these distributors, many 
of which are small organizations with limited capital. These distributors, in 
turn, are substantially dependent on general economic conditions and other 
factors affecting the wide-format printer market. The Company believes that 
its future growth and success will continue to depend in large part upon its 
distribution channels. Although the Company believes that it provides 
adequate allowances for bad debts and, to date, has not experienced 
significant amounts of bad debts, there can be no assurance that actual bad 
debts will not exceed recorded allowances resulting in a material adverse 
effect on the Company's results of operations. To expand its distribution 
channels, the Company has entered into select OEM and private label 
arrangements that allow it to address specific market segments or geographic 
areas. In order to prevent inventory writedowns, to the extent that OEM and 
private label customers do not purchase products as anticipated, the Company 
may need to convert such products to make them salable to other customers. 

    DEPENDENCE ON KEY PERSONNEL The success of the Company is dependent, in 
part, on its ability to attract and retain qualified management and technical 
personnel. Competition for such personnel is intense, and the inability to 
attract additional key employees or the loss of one or more current key 
employees could adversely affect the Company. None of the Company's 


                                      26
<PAGE>

senior management is subject to an employment agreement with the Company,
although the Company has recently put into place severance arrangements with
this group. There can be no assurance that the Company will retain its key
personnel. In addition, as part of its research and development efforts, the
Company relies heavily on industry consultants to assist and influence design
decisions, ensure continued compatibility with software and hardware leaders,
keep abreast of technological advances, and design for manufacture. A delay in
product introduction is possible to the extent key consultants become
unavailable.

    MANAGEMENT OF GROWTH The Company has recently experienced significant 
growth as revenues from product sales have increased to $107.4 million for 
the year ended December 31, 1996, compared to $65.5 million in 1995 and $43.6 
million in 1994. Such growth has placed, and, if continued, will continue to 
place, a significant strain on the Company's management, systems and 
operations. The Company's future operating results will depend on its ability 
to broaden the Company's senior management group, attract, hire and retain 
skilled employees, and implement new and enhance existing operational 
information and financial control systems. There can be no assurance that any 
new personnel hired by the Company will be successfully integrated into the 
business. The Company's inability to manage growth effectively could have a 
material adverse effect on the Company's results of operations.

    ENTERPRISE-WIDE INFORMATION SYSTEM The Company is planning to replace its 
current management information system with a comprehensive enterprise-wide 
information system. The Company expects that this system will allow it to 
realize significant operational efficiencies and facilitate future growth, 
and it will devote significant resources to system design selection and 
testing. The Company's operations could be disrupted, however, if the 
transition to the new system is not effected smoothly or if the system does 
not perform as expected.  

    DEVELOPING WIDE-FORMAT INKJET AND SUPPLIES MARKETS AND APPLICATIONS The 
markets for wide-format color inkjet printers and related supplies are 
relatively new and are still developing. The Company believes that there has 
been growing market acceptance for inkjet printers and related supplies. 
There can be no assurance that the markets and applications for wide-format 
printers and related supplies will continue to grow. Other technologies are 
constantly improving and there can be no assurance that products based on 
these other technologies will not have a material  adverse effect on the 
markets for the Company's products.  

    ABSENCE OF DIVIDENDS No cash dividends have been paid on the Company's 
Common Stock to date and the Company does not anticipate paying cash 
dividends in the foreseeable future.  

    VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock 
has fluctuated significantly since the Company's initial public offering of 
Common Stock in December 1993. The Company believes that factors such as 
general stock market trends, announcements of developments related to the 
Company's business, fluctuations in the Company's operating results, general 
conditions in the computer peripheral market and the markets served by the 
Company or the worldwide economy, a shortfall in revenue or earnings from 
securities analysts' expectations, announcements of technological innovations 
or new inkjet products or enhancements by the Company or its competitors, 
developments in patents or other intellectual property rights and 
developments in the Company's relationships with its customers and suppliers 
could cause a further significant fluctuation in the price of the Company's 
Common Stock. In addition, in recent years the stock market in general, and 
the market for shares of technology stocks in particular, have experienced 
extreme price fluctuations, which have often been unrelated to the operating 
performance of affected companies. There can be no assurance that the market 
price of the Company's Common Stock will not experience significant 
fluctuations that are unrelated to the Company's performance. 


                                      27
<PAGE>

ENCAD, Inc.

COMMON
  STOCK
    MATTERS

The Common Stock of ENCAD is traded on the Nasdaq National Market under the 
symbol "ENCD." Prior to the initial public offering on December 16, 1993, 
there was no established published trading market for ENCAD's Common Stock. 
The following table presents quarterly information on the price range of the 
Common Stock, as adjusted for the two-for-one stock split in the form of a 
100% stock dividend on May 31, 1996. This information indicates the high and 
low sales prices as reported by Nasdaq. Such quotations represent 
inter-dealer prices without retail markup, markdown or commission and may not 
necessarily represent actual transactions.

PRICE RANGE OF COMMON STOCK   


                                1996                  1995 
                            -------------         -------------
                            High     Low          High     Low
---------------------------------------------------------------
First Quarter               12.50    7.63         18.50   11.38
Second Quarter              25.25   11.50         29.38   17.63
Third Quarter               43.75   16.75         29.88   13.63
Fourth Quarter              46.75   34.38         20.25   13.13
---------------------------------------------------------------

    The Company had 305 shareholders of record and approximately 4,500 
beneficial shareholders as of December 31, 1996. The last sales price for 
ENCAD's Common Stock as reported by Nasdaq on December 31, 1996, was $41.25.

DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and presently intends 
to continue this policy in order to retain earnings for use in its business. 
In addition, the Company's line of credit arrangement prohibits the payment 
of cash dividends without prior bank approval if amounts are outstanding 
under such line of credit. 


                                      28