ENCAD INC, 10-K, 1998-03-31

ENCAD INC
10-K, 1998-03-31
COMPUTER PERIPHERAL EQUIPMENT, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 0-23034

ENCAD, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 95-3672088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

6059 CORNERSTONE COURT WEST 92121
SAN DIEGO, CA
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (619) 452-0882

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. _____

Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed using the closing price as reported by Nasdaq for the
Company's Common Stock on February 27, 1998: $189,952,175.*

Indicate the number of shares outstanding of the registrant's Common Stock as of
the latest practicable date:

Outstanding at
Class February 27, 1998
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Common Stock, $.001 par value 11,539,400

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Definitive Proxy Statement (the "Proxy Statement")
to be filed with the Commission pursuant to Regulation 14A in connection with
the 1998 Annual Meeting are incorporated herein by reference into Part III of
this Report.

Certain Exhibits filed with the Registrant's prior registration statements
are incorporated herein by reference into Part IV of this Report .

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* Excludes 3,786,250 shares of Common Stock held by executive officers,
directors and stockholders whose ownership exceeds 5% of the Common Stock
outstanding at February 27, 1998. Exclusion of such shares should not be
construed to indicate that any such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant or that such person is controlled by or under common control
with the Registrant.

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PART I

ITEM 1: BUSINESS

THE DISCUSSION OF THE COMPANY'S BUSINESS CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K MAY CONTAIN CERTAIN PROJECTIONS, ESTIMATES AND OTHER FORWARD-LOOKING
STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED BELOW AT "RISKS AND UNCERTAINTIES." WHILE THIS OUTLOOK REPRESENTS
MANAGEMENT'S CURRENT JUDGMENT ON THE FUTURE DIRECTION OF THE BUSINESS, SUCH
RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
FUTURE PERFORMANCE SUGGESTED BELOW. THE COMPANY UNDERTAKES NO OBLIGATION TO
RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE DATE HEREOF.

GENERAL

ENCAD, Inc. ("ENCAD" or the "Company") designs, develops, manufactures and
markets wide-format (up to 60"), color inkjet printer systems designed to
increase productivity in computer applications requiring quality printed output.
ENCAD's primary products, currently, are the NovaJet-Registered Trademark-,
CADJET-Registered Trademark- , NovaCut-TM-, Croma24-TM-, and NovaJet PROe-TM-
product lines(1). Typical uses for these printers and their related accessories
and supplies are in graphic arts ("GA"), such as digital photo imaging, sign-
making, three-dimensional renderings and presentation graphics; in computer-
aided design ("CAD"), used by architects, engineers and construction designers;
and in geographic information systems ("GIS"), such as surveying and mapping.
To support its wide-format inkjet printers, ENCAD offers a variety of
accessories and supplies, including specialty ink and media. The market for
wide-format, color inkjet printers, supplies and accessories is relatively new
and is still developing as a result of technological advancements in performance
and quality and continuing improvements in price/performance ratios. ENCAD
believes these advancements will make quality wide-format inkjet output more
affordable, allowing its products to be more widely used in ENCAD's existing
markets, as well as addressing potential new market applications, such as
textiles, photography, fine art, and medical imaging.

RECENT DEVELOPMENTS

On March 16, 1998, the Company announced that lower than anticipated
product sales, coupled with accelerated competitor-driven pressure on gross
profits for its flagship products, could generate operating results ranging from
break even to a loss for the first quarter of 1998 on sales significantly lower
than the same quarter last year. Lower product sales for the first quarter of
1998 are expected to result from continued sales weakness in Asia and a severe
slowdown in purchase decisions due to customer expectations of several new
product announcements in the industry in March. First quarter 1998 net income
is anticipated to be reduced due to lower sales and profits as the Company
responds to attempts by competitors to capture market share. Due to the
anticipated results for the first quarter, the likelihood of continued sales
weakness in Asia, lower gross profit in its core business over the course of
1998, and increased marketing and selling expenses required to respond to
competitive pressures, ENCAD also expects that net income for the year will fall
well below comparable 1997 results, and that sales for full-year 1998 could be
only slightly higher or equal to 1997 sales.

MARKET

The market for wide-format, color inkjet printers emerged in the early
1990s as a result of the rapid growth in the use of high-powered personal
computers by a wide variety of technical professionals. More recently, GA
professionals have begun to take advantage of the performance and cost features
associated with wide-format inkjet printers as a result of expanded use of
sophisticated graphics interface software programs. The market for wide-format,
color inkjet printers, accessories, and supplies, such as inks, ink cartridges
and print media, currently consists of three primary segments: GA, CAD and GIS.
The Company believes that the textile and photography segments will be the next
emerging market segments.

Users in the GA segment include graphic artists, print shops, photo-labs,
sign shops and service bureaus. Applications in the GA segment include back-lit
and other signs, point-of-sale advertising, posters, pre-press proofing

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(1) NovaJet and CADJET are registered trademarks of ENCAD.

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(proofs or other quick output to demonstrate concepts for advertising or
graphics layouts), and digital photo imaging. The Company is a leader in the
GA segment. The Company's product lines are particularly well-suited to the GA
segment since they are capable of producing a full range of outputs, from
single line monochrome to full color, photorealistic images. GA users require
output in three distinct segments of the GA and design process, all of which
require performance balanced by low-cost, quickly-produced output. In the pre-
press segment, GA users require proofs or other quick output to demonstrate
concepts for advertising or graphics layouts. Pre-press output involves any
output where form, shape or color is emphasized. In the quick print segment, GA
users include print shops, service bureaus and corporate GA departments that
produce signs or posters. Quick print output includes backlit and wall-mount
signs and point-of-sale displays. In the digital photo segment, GA users include
photo labs, service bureaus and corporate GA departments that produce high
resolution digitized photographs. Digitized photo output is used when
photographic images are manipulated, including architectural images and text
overlay.

The CAD segment includes architectural, engineering and construction design
users. This is a diverse group that utilizes technical graphics applications to
automate the design process and includes architects, mechanical engineers,
electrical engineers and users involved in many aspects of building design and
construction. Historically, output for the CAD segment consisted mostly of two-
dimensional monochrome line drawings. With the introduction of wide-format
inkjet printers, CAD users are now able to create full color and three-
dimensional output. CAD and other design users often require spot color and
speed in their output and look for productivity enhancement in producing the
output. The Company's CADJET product line offers a CAD user spot color in
addition to excellent line quality and the NovaJet product line offers a full
range of color outputs.

GIS users are a more specialized group that utilizes technical graphics
applications similar to those used in the CAD segment, primarily for mapping.
GIS users include civil engineers, mining engineers and geologists working for
government agencies, utilities and natural resource companies. GIS involves a
distinct use of CAD databases to manage, analyze and present data in a three-
dimensional "mapping" format. Generally, GIS users require more color than CAD
users since GIS involves the use of color fills and varied fonts for richer
presentations. This segment, although smaller than the CAD and GA segments,
represents opportunities for the Company's product lines since GIS applications
require, in some instances, both three-dimensional renderings and color fills to
differentiate acreage, objects and topographical features.

PRINTING TECHNOLOGIES

There are a number of printing technologies, including thermal inkjet, pen,
electrostatic, light emitting diode ("LED") and thermal, that allow users to
produce wide-format output. Each of these technologies has specific qualities
that can be critical to any given application, including resolution, speed,
accuracy, color fill capability, the ability to render a three-dimensional
image, reliability and cost.

A combination of characteristics has made thermal inkjet the fastest
growing technology in the wide-format printer market. The characteristics of
wide-format inkjet printers include relatively low cost, high speed and the
ability to print high-quality color. Inkjet printers form images, lines and
other characters by placing very small dots of ink as the print head moves
horizontally, called a raster scan, while the media is scrolled vertically.
Because inkjet print heads move above the paper and never actually make contact
with the paper, there is less mechanical wear and tear than experienced by a pen
plotter. Inkjet printers can print on almost any media.

Pen plotters draw lines and make symbols and other characters by moving a
pen on the surface of the media. This creates high quality output for working
drawings, reports, presentations or archival copies. Pen plotters offer the
advantages of low-cost color output and different levels of line quality using
liquid ink, fiber tip or ball-point pens. Although cost effective, pen plotters
are relatively slow and are generally limited to eight colors.

Electrostatic printers generally are more expensive than inkjet or pen
plotters and require special plotting paper. They offer certain advantages to
users requiring enhanced color, color fills and high-speed characteristics.

Thermal printer/plotters are similar to electrostatic printers and
generally require special paper to take advantage of the thermal print head.
Thermal printers cost considerably more than inkjet printers.

LED printers are the most expensive "plain paper" technology, producing
monochrome output at high speed, but the cost is much higher than inkjet.

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Other technologies that can be adapted to wide-format use include
photographic output, electrophotographic output and dot matrix printers. Each
of these other technologies has disadvantages for the CAD, GIS and GA markets,
including relatively poor resolution or high costs when compared to inkjet
technology.

ENCAD PRODUCTS

ENCAD has designed a variety of wide-format hard copy peripherals,
including color inkjet printers and pen plotters. The Company currently sells
the second generation of the CADJET product line, the first of which was
introduced in November 1994, and the fourth and fifth generation of the
NovaJet product line, including the NovaJet family, first introduced in October
1991, NovaCut, NovaJet PROe Series and the Croma24. All of ENCAD's products
support at least one, and typically several, emulation graphics languages and
interfaces, including the industry standard, HP-GL-Registered Trademark-, HP-
GL/2-Registered Trademark-, and HP-RTL-Registered Trademark-, to provide
compatibility and utility for the end user.(1) In addition, ENCAD products
allow users to print in a variety of sizes from standard small-format to wide-
format. ENCAD's automatic media sensing feature also permits the accommodation
of some special sizes. ENCAD products have an easy-to-operate keyboard and
display, with layered menus to set printer parameters and stored pre-set
configurations.

CADJET 2

CADJET 2, first shipped in October 1995, is targeted at sophisticated low-
end pen plotter and thermal printer users, primarily in the CAD and GIS markets.
CADJET 2, which can produce drawings ranging in size from A (8-1/2" by 11") to E
(36" by 48"), offers performance benefits over existing pen plotter technology
and costs less than comparable thermal printers. The CADJET 2 has two inkjet
print heads. A black cartridge produces fast monochrome drawings and 600 dpi
can be used to produce higher quality images. A tri-chamber cyan-magenta-yellow
cartridge can be used to produce color lines and/or spot color fills. Output
can be generated on roll or cut-sheet media.

NOVAJET FAMILY

NovaJet 4 is targeted at sophisticated mid-range and high-end pen and
thermal printer users, as well as electrostatic printer users. The NovaJet 4 was
first shipped in February 1996. NovaJet 4, which can produce drawings ranging
in size from A (8-1/2" by 11") to E (36" by 48"), offers performance benefits
over existing pen plotter technology, costs less than comparable thermal and
electrostatic printers and is up to 25 times faster than existing pen plotters.
NovaJet 4 uses four ENCAD customized inkjet heads and snap-in refillable
cartridges, one filled with black ink and the remaining three filled with color
inks, and is capable of printing in either monochrome or color. It offers 256
color selections. NovaJet 4 uses standard paper, vellums and transparencies, as
well as specialized inkjet media and can generate output on roll or cut-sheet
media with vector or raster input options.

The NovaJet PRO series, which includes the NovaJet Pro (36" width) and the
NovaJet Pro 50 (50" width), is targeted at sophisticated mid-range and high-end
printer users, as well as electrostatic printer users in the GA market. NovaJet
PRO was first shipped in November 1995 and the NovaJet PRO 50 was first shipped
in March 1996. The NovaJet PRO Series has been designed specifically for the
professional graphic artist, and other short run production oriented
professional users. The NovaJet PRO series was the first wide-format color
inkjet printer to include a manufacturer designed and integrated continuous flow
ink supply. The NovaJet PRO series products use four inkjet print heads, one
for black ink and the remaining three for colored inks, and are capable of
printing in either monochrome or color. They offer a full gamut of color, up to
16 million colors, and use standard paper, vellums and transparencies, as well
as specialized inkjet media.

NOVACUT

The NovaCut family of printer/cutters was first shipped in February 1997.
The NovaCut, available in both 24" width and 54" width models, functions as both
a printer and a cutter, and thus costs less than a separate printer and cutter.
The NovaCut features a friction-feed media moving technology that provides
precision delivery of media and a "swivel" style cutting knife which assures
high-precision cutting, combined with NovaJet color printing accurate enough for
paneling. The NovaCut also features ENCAD's 500 ml continuous flow ink system
that allows for

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(1) HP-GL, HP-GL/2, and HP-RTL are registered trademarks of Hewlett-Packard
Company ("Hewlett-Packard").

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unattended operation and offers NovaJet Pro color capability. The NovaCut is
targeted to users in the graphics and signage markets.

NOVAJET PROe SERIES

The NovaJet PROe Series, first shipped in May 1997, is available in both
42" width and 60" width models. These models are ENCAD's most full-featured
inkjet printers on the market and feature a 500 ml continuous flow ink system
with dual plumbing for two ink sets, automatic feed/take-up system, and a built-
in dryer. They also include an imaging management architecture designed to
provide the user with higher quality imaging, improved ease of use, and
increased productivity. The NovaJet PROe Series is designed specifically for
users that require a faster, more productive, and even wider media solution to
their growing print-for-pay needs. It is targeted to high-volume producers of
large photorealistic prints, murals, point-of-sale displays and imposition
proofs for direct-to-plate applications.

CROMA24

The Croma24, first shipped in June 1997, is the industry's first cost-
effective, color inkjet printer which produces 24" photo-realistic images.
Expanding traditional 11" x 17" print widths by more than doubling the size, the
ENCAD Croma24 surpasses the width limitations of current desktop printers and
provides new alternatives for the creative professional or first-time wide-
format user. It is targeted to CAD users, creative professionals, small service
bureaus, photographers, sign shops, and small office/home office users. Offered
at prices believed to be affordable to these users, the Croma24 has MAC, PC, and
PostScript interfaces and advanced software drivers to enable the user to
control color calibration, ink counting, paper selection, automatic cutting and
dry time functions from the desktop. As with ENCAD's other printer models, a
full range of scientifically matched supplies is available.

ENCAD QUALITY IMAGING SUPPLIES-TM-

ENCAD's line of supplies for its family of wide-format printers, launched
in 1995, provides a comprehensive output system for ENCAD printer owners.
Because they are designed to ensure the highest quality output possible from
ENCAD printers, these supplies are branded ENCAD Quality Imaging Supplies (QIS).
Sales of supplies accounted for 22%, 14% and 7% of net sales in 1997, 1996 and
1995, respectively.

The ENCAD QIS product line consists of both outdoor and indoor solutions. The
outdoor line of products includes fade-resistant pigmented inks and a broad line
of water-resistant and durable banner and sign materials. Because outdoor
solutions are new to the inkjet printing market, ENCAD provides a guarantee for
most of its outdoor products. The outdoor line of products allows ENCAD to
better compete in the sign-making market and also provides new applications for
traditional ENCAD printer owners.

The indoor line of products includes specially-formulated dye-based inks
optimized for ENCAD printers and ENCAD's custom ink cartridges. In order to
fulfill the broad needs of the GA marketplace, ENCAD provides two ink options -
Graphic Arts Ink, for colors beyond the traditional color palette, and Graphic
Standard Ink, for colors that mirror press-quality output. While the former
tends to be used for posters and photo-realistic images, the latter is more
appropriate for color proofing.

ENCAD's broad range of QIS Media feature a proprietary inkjet coating that is
optimized for use with QIS Inks. The coatings control ink absorption for images
that are vibrantly colorful and high in print quality. The media line consists
of 16 media options, from photo-based papers to adhesive-backed vinyl, two types
of canvas and three types of film. All QIS Media are made with a recyclable,
water-based coating.

ACCESSORIES

In support of its goal of providing a comprehensive output system and to
ensure compatibility to its wide-format customers, ENCAD has developed and sells
a wide variety of software and hardware accessories. Sales of accessories
accounted for 3% of net sales in 1997 and 2% in 1996.

The ENCAD print utility and Windows drivers provide the user with the power
to control color output by providing five screening options, seven print quality
modes, user-selectable color device tables, gamma correction and

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the ability to set ink drying times. The ENCAD FastPort 3400X Micro Print
Server allows a printer or plotter to be available to users of multiple network
protocols simultaneously. In order to minimize the need for costly on-board
printer memory and increase print speed, ENCAD provides software to run on the
host computer which converts the vector output (HP-GL, HP-GL/2) of third party
application programs into raster data.

THIRD PARTY INTERFACES

Third-party PostScript-Registered Trademark- hardware and software
developers have created products that interface with the NovaJet products.
These products allow NovaJet to output color near photo-realistic images in its
enhanced mode. In addition, numerous software packages, such as AutoCAD-
Registered Trademark-, Adobe Photoshop-Registered Trademark-, VersaCAD-
Registered Trademark-, Adobe Print Shop-Registered Trademark-, Adobe
Illustrator-Registered Trademark-, Quark XPress-Registered Trademark- and
ARC/INFO-Registered Trademark-, are used with ENCAD products in Macintosh-
Registered Trademark-, DOS-Registered Trademark- and Windows-Registered
Trademark- platforms.(1)

RECENT DEVELOPMENTS

NOVAJET PRO 600e SERIES - The NovaJet PRO 600e Series, introduced in March
1998 and scheduled to ship during the second quarter of 1998, is available in
both 42" and 60" models. These models include ENCAD's imaging management
architecture, a 500 ml continuous flow ink system with dual plumbing for two ink
sets, automatic feed/take-up system, built-in dryer, and the ability to switch
between 300 dots per inch ("dpi") and 600 dpi resolution. The NovaJet PRO 600e
Series are ENCAD's fastest printers, and are designed specifically for users who
specialize in photo enlargements, signmaking and reproduction enlargements, and
need the higher 600 dpi print resolution and overall productivity this Series
provides.

DIGITAL TEXTILE SYSTEM-TM- - The Digital Textile System, consisting of the
1500 TX-TM- Printer, TXPrint-TM- color-management and image-processing software,
TX Inks and specially-coated ENCAD Textiles, was introduced in March 1998 and
scheduled to ship during the second quarter of 1998. The system is targeted to
users in the textile market. The digital textile printing market is growing at
a rapid rate, as digital imaging technology offers customers compelling
alternatives to traditional textile design and production methods. Initially,
ENCAD plans to target the sampling, personalization, and small production run
segment of the market.

The 1500 TX Printer is 60" wide and is equipped with an integrated roll
fabric feeder to guide the fabric through the printing mechanism, and a take-up
device for collecting finished fabric samples. The printer also includes a 500
ml continuous flow ink system. The software, which includes color profiles for
ENCAD Textiles, providing for easy color matching and switching between fabrics,
is formatted for both PC and Macintosh and accurately matches ink and fabric for
color quality and accuracy in printed fabric samples. The TX Inks are
scientifically formulated to penetrate ENCAD Textiles' proprietary, patent-
pending inkjet coating to dry quickly and produce vibrant, accurate, and
repeatable colors. The ENCAD Textiles, specifically designed for use with the
other components of the system, do not require pre- or post-treatment, are
available in widths up to 60", are residue-free, and are paper-backed for easy
transport through the printer. The Digital Textile System was designed
specifically for textile designers who require a faster, more productive and
more secure solution to their design and sampling needs.

RESEARCH, PRODUCT DEVELOPMENT AND ENGINEERING

ENCAD's ability to compete successfully in its target markets depends on,
among other things, anticipating and reacting to market demands and developing
appropriate products to satisfy customer requirements. ENCAD believes that the
timely development and introduction of new products is essential. In its
development of new products and enhancement of existing products, ENCAD focuses
on simplicity of design, technological advancements in performance and image
quality and continuing improvements in price/performance ratios. ENCAD is
presently developing new products that incorporate its experience and expertise
with the latest inkjet technologies. In addition, ENCAD markets hardware and
software accessories that convert industry standard PostScript data to a raster
data format which can then be directly printed at high speed without the need
for the addition of costly memory to the printer.

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(1) Windows is a registered trademark of the Microsoft Corporation. Macintosh
is a registered trademark of Apple Computer, Inc. Illustrator, Print Shop,
PostScript and Photoshop are registered trademarks of Adobe Systems, Inc.
AutoCAD and VersaCAD are registered trademarks of AutoDesk. Other product names
are trademarks or registered trademarks of their manufacturers.

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In developing new products, ENCAD has assembled design teams consisting of
engineers with expertise in hardware, firmware, software, chemistry, physics,
color science, material science, fluid mechanics, electricity, mechanics,
manufacturing and 3-D CAD design. The Company's design engineers have expertise
and experience in digital servo/motion control, inkjet technology and emulation
of HP-GL, HP-GL/2 and HP-RTL languages and interfaces.

As part of its research and development efforts, ENCAD complements its
existing resources by utilizing industry consultants and technology suppliers to
assist in and influence design and cost decisions, ensure continued
compatibility with software and hardware leaders, and advise the Company of the
latest technological advances. ENCAD has also designed custom gate arrays to
control aspects of its proprietary technology which permits a reduction in parts
and an increase in reliability at lower cost than is achievable using standard
components.

Since its founding in 1981, ENCAD has introduced numerous product families,
each of which incorporated advances in mechanical, electronic and software or
firmware technologies. Within product families, model differences are based
upon the size of the plotting area, as well as feature and performance
characteristics. ENCAD intends to develop products that reach markets or market
segments currently not served by the Company's products.

Research and development expenses were $10,544,000, $8,794,000, and
$5,578,000 in 1997, 1996, and 1995, respectively, which represent approximately
7%, 8%, and 9% of net sales in those respective periods.

MANUFACTURING AND SUPPLIERS

ENCAD's printer manufacturing operations consist of subassembly, final
assembly and testing, quality assurance, packaging and shipping. ENCAD contracts
with various outside vendors for printed circuit board fabrication and assembly,
and for fabrication of metal and plastic parts, and then performs the final
assembly of its printer products in its San Diego facility. Most materials for
printer manufacturing operations are available locally in Southern California
from multiple vendors, and the majority are produced in the United States.

For its supplies business, ENCAD partners with large multi-national
companies for the acquisition of inks and media. Inks are acquired from three
sources and the various forms of media from multiple sources. Assembly of
refill and accessory ink kits are outsourced prior to distribution.

Certain components used in ENCAD's products are available only from single
sources. Although ENCAD primarily buys components under purchase orders and
does not have long-term agreements with most of its suppliers, it anticipates
that its suppliers will be able to continue to satisfy its requirements.
Although alternative suppliers are readily available for most of these
components, for some components the process of qualifying replacement suppliers,
replacing existing tooling, or ordering and receiving replacement components
could take up to six additional months. Any difficulty in receiving components
on time could have a material adverse effect on ENCAD's financial condition and
results of operations.

Any significant increase in component prices or decrease in component
availability could also have a material adverse effect on ENCAD's financial
condition and results of operations. Certain key components of ENCAD's products
are supplied indirectly by its principal competitor, Hewlett-Packard Company
("Hewlett-Packard"), and the inkjet cartridge, used in some of the Company's
older generation products, are purchased from Hewlett-Packard resellers. The
Company believes that Hewlett-Packard supplies these components to many other
companies.

Because ENCAD places strong emphasis on product quality and customer
satisfaction, it requires that quality is designed into products, components and
the manufacturing processes. As a result, ENCAD has developed quality control
programs with its suppliers in its product development and manufacturing
operations. Suppliers are encouraged to participate in new product designs.
Suppliers' manufacturing capabilities are statistically evaluated to allow for
certification and direct shipment to the production floor. ENCAD uses a "Just-
in-Time" program for delivery of some raw materials and subassemblies to
manufacturing to minimize these types of inventories. The Company uses a
material requirements planning system that is intended to aid in making "Just-
in-Time" decisions. The Company maintains raw materials which include printer
parts for manufacturing and service, ink and media.

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MARKETING, SALES AND DISTRIBUTION

ENCAD markets and sells its products worldwide primarily through specialty
distributors, value-added resellers ("VARs"), dealers and Original Equipment
Manufacturers ("OEMs").

DISTRIBUTORS, VARS AND DEALERS

Neither the Company nor its three domestic distributors sell a material
amount of products directly to end users, reflecting ENCAD's philosophy that its
approximately 500 domestic dealers are a critical channel to deliver product to
the end user. In addition to the Company's sales and marketing headquarters
located in San Diego, California, ENCAD has field salespersons residing in
Georgia, Texas, Michigan and California. These salespersons work closely with
ENCAD's regional distributors and dealers.

Internationally, ENCAD generally utilizes one major distributor in each
market. ENCAD's approximately 90 international distributors sell to dealers,
specialized systems integrators and VARs. ENCAD's international distributor
network provides the Company with a presence in Canada, Mexico, Europe, the
Pacific Rim, the Middle East, Central and South America, South Africa, China and
India. ENCAD maintains Pacific Rim sales offices in Hong Kong, China and
Australia, and has sales subsidiaries located in France, Germany and England.
ENCAD's dependence on international sales subjects it to the risks associated
with conducting business internationally, including currency fluctuations, to
the extent they affect local office expenses and product pricing in local
markets, general international market conditions, export and import controls,
and other governmental regulations. Revenues, operating profits and
identifiable assets of the Company's foreign operations are not material.

Export sales accounted for the percentages of net sales as follows:

1997 1996 1995
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<S> <C> <C> <C>

Europe, Middle East, Africa 32% 30% 30%
Americas, excluding U.S. 8% 6% 6%
Asia Pacific 19% 22% 27%
--- --- ---
Total 59% 58% 63%

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ENCAD's agreements with its worldwide distributors generally grant each
distributor the non-exclusive right to distribute the Company's products in its
market. The Company's form of distribution agreement generally provides for
payment net 30 days after shipment, by irrevocable letter of credit or by
prepayment by wire transfer for international distributors and in the case of
domestic distributors, net 30 days upon credit approval. Any outstanding
amounts remain owing subsequent to termination of the agreements. The Company
provides price protection to some of its distributors such that, if the Company
reduces the price of its products, a distributor is entitled to a credit for the
difference between the reduced price and the price it previously paid for
products purchased within the preceding 30 days or, in some cases, 60 days, and
which remain in inventory at the time of the price reduction. As a result,
price reductions could have a material adverse effect on results of operations,
depending on distributor inventory levels at the time of such price reductions.

ENCAD supports the marketing and sales efforts of its worldwide
distributors and dealers through participation at worldwide computer industry
trade shows as well as specialized trade shows targeted at specific applications
for the Company's products. The Company believes that it maintains good
relationships with its worldwide distributors and dealers. Domestically, ENCAD
has developed an authorized dealer network through an active dealer-support
campaign consisting of advertising, lead referrals, product literature,
promotional pricing, training and telephone support. Internationally, ENCAD
assists its distributors in the larger markets through active advertising and
trade show participation. ENCAD offers its worldwide distributors a
cooperative advertising program that partially reimburses them for expenses
spent in advertising and promoting ENCAD's products. Such reimbursements are
determined based upon the distributor's sales levels.

In 1997 and in 1995, no one customer accounted for more than 10% of net
sales, and in 1996, one customer accounted for 15% of net sales.

8
<PAGE>

ORIGINAL EQUIPMENT MANUFACTURERS

To expand its distribution channels, the Company has entered into several
OEM and private label arrangements that allow it to better address specific
market segments or geographical areas. Sales from combined OEM and private
label arrangements accounted for 26%, 25% and 19% of net sales in 1997, 1996 and
1995, respectively. The Company annually assesses the success of the individual
arrangements and believes that, in the aggregate, they will continue to
represent a substantial portion of its revenue. There can be no assurance that
the Company will retain these existing arrangements or obtain additional ones.
If the Company is not able to acquire additional OEM or private label customers,
the loss of existing OEM and private label customers could adversely affect the
Company's results of operations.

CUSTOMER SUPPORT

ENCAD considers ongoing support of its products to be an essential element
of its business. The Company has established a customer service and support
organization which provides technical support and printer repair to
distributors, dealers and end-users of its printers and supplies. Customers
have telephone access to technical specialists who respond to printer, software,
supplies and applications questions. In addition, the Company has established
an electronic bulletin board or Internet access on which the Company posts notes
and software updates to provide on-line support and solutions for its customers.
The Company provides a standard one-year warranty against defects in materials
and workmanship in its products. The Company also offers third party, on-site
warranty for certain products in the United States and certain European
countries. An extended warranty for most products sold in the U.S. is also
available at additional cost. The Company's OEM suppliers do their own warranty
service. Any product sold domestically that needs to be repaired may be
returned directly to the Company for repair. International distributors repair
the Company's products with ENCAD supplying the parts to them directly. Since a
large number of ENCAD's products are the sole color inkjet printers in a
facility, the Company offers a head swap-out program for domestic purchases
during the warranty period. For certain products, during the warranty period,
the domestic end user can return the head to the Company for service and in
exchange, the Company will provide a replacement head within 24 to 48 hours.
Warranty expense has constituted less than 5% of net sales on an annual basis,
and, to date, has not had a material adverse effect on the Company's operations.

COMPETITION

In addition to the direct competition from products using inkjet
technology, ENCAD's products face competition from other technologies in the
wide-format printer market, namely pen plotters, electrostatic printers, LED
printers and thermal printers, which are offered by several companies. The
competition to sell ink, media and software products to the customer is also
intense. While the Company believes that it competes successfully against these
other technologies and products, these alternative technologies and products may
compete favorably for certain applications in which speed or cost are of key
importance. There can be no assurance that the Company will be able to compete
successfully in the future or that the competitive pressures previously
described will not have a material adverse effect on the Company's business,
profitability, financial condition and results of operations.

The Company competes in the wide-format market mainly on the basis of
performance and price. Price competition increased during 1997 and the Company
expects that competition will accelerate in the future. Historically, the
Company has reduced prices on older generation products upon introduction of the
newer generation models. The Company's most recent price reduction took effect
in March 1998. There can be no assurance that additional price reductions will
not be required in the future. Price reductions will affect gross margins, and
may adversely affect the Company's financial condition and results of
operations.

PROPRIETARY RIGHTS AND LICENSES

ENCAD relies on a combination of trade secret, copyright, trademark and
patent protection, as well as confidentiality and non-disclosure agreements, in
order to protect its proprietary rights. The Company has pursued, and intends
to continue to pursue patent protection for inventions it considers important.
The Company believes its success will also continue to be dependent upon its
reputation for unique technology, product innovation, affordability, marketing
ability and responsiveness to customers' needs. The Company currently holds 13
patents related to inkjet technology and design. In 1997, ENCAD filed nine
patent applications covering the Company's imaging technology. There can be no
assurance that the Company will be successful in protecting its proprietary
technology, or that

9
<PAGE>

ENCAD's proprietary rights will preclude competitors from developing products or
technology equivalent or superior to that of the Company.

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.

EMPLOYEES

As of February 28, 1998, the Company employed approximately 420 persons,
including 102 in sales, marketing and related activities, 127 in manufacturing
and operations, 80 in research, product development and engineering, 50 in
technical support and service, and 61 in management, administration and finance.
The Company's success is highly dependent on its ability to attract and retain
qualified employees. Competition for employees is intense in its industry.
None of the Company's employees is represented by a labor union or is the
subject of a collective bargaining agreement. The Company has never experienced
a work stoppage and believes that its employee relations are good.

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 of products 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, and
price protection for selling price reductions offered to distributors and OEMs.
In addition, the timing of expenditures for staffing and related support costs,
advertising, trade show attendance, promotion, research and development
expenditures, and, of course, changes in general economic conditions can impact
quarterly performance. 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 financial condition and results
of operations. Demand for the Company's products could be adversely affected by
a slowdown in the overall demand for computer systems, printer products or
digitally printed images. 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 several years on a quarterly or annual basis.

10
<PAGE>

HIGHLY COMPETITIVE INDUSTRY

The markets for the Company's products, both printers and supplies, is
highly competitive and rapidly changing. Several new competitors have entered
the market. The Company's principal competitor is Hewlett-Packard, which
dominates the CAD segment of the wide-format inkjet markets and is the Company's
principal competition in the GA segment. 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. The competition to
sell ink, media and software products to the customer is also intense. 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, selling prices, product 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 product costs, will affect gross margins and may adversely
affect the Company's financial condition and results of operations. See "SHORT
PRODUCT LIVES AND TECHNOLOGICAL CHANGE" and "BUSINESS - COMPETITION."

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. In addition, the Company monitors new
technology developments and coordinates with suppliers, distributors and dealers
to enhance existing products and lower costs. Advances in technology will
require increased investment to maintain the Company's market position. The
Company's financial condition and results of operations could be adversely
affected if the Company is unable to develop and manufacture new, competitive
products in a timely manner.

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
evolving and improving. There can be no assurance that products based on these
other technologies will not have a material adverse effect on the demand for
the Company's products.

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.
See "Potential Fluctuation in Quarterly Performance." The growth of the
Company's business will require the commitment of substantial capital resources.
If funds are not available from operations, the Company will need additional
funds. The Company may seek such additional funding through public and private
financing, including debt or 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.

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 key employees could adversely affect the Company. The
Company does not have employment

11
<PAGE>

agreements with senior management, nor does it maintain life insurance on
members of this group. There can be no assurance that the Company will retain
its key personnel. The Company relies heavily on industry consultants and other
specialists to assist and influence decisions, keep abreast of technological and
industry advances, and assist in other Company processes. A delay in product
introduction is possible to the extent key consultants become unavailable.

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 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 financial condition and results of
operations. SEE "BUSINESS - MANUFACTURING AND SUPPLIERS."

POSSIBILITY OF CHALLENGE TO COMPANY'S PRODUCTS OR INTELLECTUAL PROPERTY
RIGHTS

DEPENDENCE ON EXPORT SALES

In 1997, 1996, and 1995, sales outside the United States represented
approximately 59%, 58% and 63% of the Company's net sales, respectively. The
Company expects export sales to continue to represent a significant portion of
its 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 financial condition and results of operations.

RELIANCE ON INDIRECT DISTRIBUTION

The Company markets and sells its 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
financial condition and results of operations. There can be no

12
<PAGE>

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 unique 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 which may arise from sales to these customers, 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 financial condition and 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 write-downs, 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.

MANAGEMENT OF GROWTH

The Company has recently experienced significant growth as net sales have
increased to $149.0 million in 1997 compared to $107.4 million in 1996 and $65.5
million in 1995. Such growth has placed, and, if continued, will continue to
place, a significant strain on the Company's management, employees, systems and
operations. The Company's future operating results will depend on its ability
to continue 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 or that changes to the Company's systems will be effective. The
Company's inability to manage growth effectively could have a material adverse
effect on the Company's results of operations.

VOLATILITY OF STOCK PRICE

The market price of the Company's Common Stock has fluctuated significantly
since the Company's initial public offering 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 in 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 operating performance.

ENTERPRISE-WIDE INFORMATION SYSTEM

The Company is in the process of replacing its current management
information system with a comprehensive enterprise-wide information system and
is devoting significant resources to system and process design and system
testing. The Company expects that this system will allow it to realize
significant operational efficiencies and facilitate future growth. 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.

YEAR 2000 COMPLIANCE

The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The
Company's recent enterprise-wide information system implementation, the initial
phase of which is expected to be completed in 1998, should mitigate most
internal problems as the system vendors have represented that these systems are
already year 2000 compliant. In

13
<PAGE>

addition, the Company is in the process of communicating with others with whom
it does significant business to determine their year 2000 compliance readiness
and the extent to which the Company is vulnerable to any third party year 2000
issues. Management does not anticipate that the Company will incur significant
operating expenses or be required to invest heavily in other computer systems
improvements to be year 2000 compliant. The Company plans to devote the
necessary resources to resolve significant year 2000 issues in a timely manner;
however, if the Company, its customers, vendors or others with whom it does
significant business are unable to resolve external processing issues in a
timely manner, it could result in material adverse effect on certain of the
Company's operations.

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.

EFFECT OF STOCKHOLDER RIGHTS PLAN

In March 1998, the Company's Board of Directors adopted a preferred
stockholder rights plan (the "Stockholder Rights Plan") which provides for a
dividend distribution of one preferred share purchase right (a "Right") on
each outstanding share of the Common Stock. On March 19, 1998, the Company's
Board of Directors declared a dividend of one Right for each outstanding
share of Common Stock, payable on April 2, 1998 to stockholders of record on
that date. Each Right entitles stockholders to buy 1/1000th of a share of
ENCAD Series A Junior Participating Preferred Stock at an exercise price of
$80, subject to adjustment. The Rights will become exercisable on the close
of business on the first day a person or group announces an acquisition of
15% or more of the Common Stock or on the tenth day after a person or a group
commences or announces commencement of a tender offer, the consummation of
which would result in ownership by the person or group of 15% or more of the
Common Stock. The Company will be entitled to redeem the Rights at $0.01 per
Right at any time on or before the close of business on the first date of a
public announcement that a person has acquired beneficial ownership of 15% or
more of the Common Stock.

ENCAD's Certificate of Incorporation requires that any action required or
permitted to be taken by the stockholders of ENCAD must be effected at a duly
called annual meeting or special meeting of stockholders and may not be effected
by any consent in writing. In addition, special meetings of stockholders of
ENCAD may only be called by the Board of Directors, the Chairman of the Board or
the President of ENCAD or by any person or persons holding shares representing
at least 10% of the outstanding Common Stock. The Stockholder Rights Plan and
other charter provisions may discourage certain types of transactions involving
an actual or potential change in control of ENCAD, including transactions in
which the stockholders might otherwise receive a premium for their shares over
then current market prices, and may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests. In addition, the
Board of Directors has the authority to fix the rights and preferences of and
issue shares of preferred stock, which may have the effect of delaying or
preventing a change in control of ENCAD without action by the stockholders.

ITEM 2: PROPERTIES

The Company's headquarters are located in San Diego, California, in
facilities it purchased in February 1996 for $6 million. The property consists
of two buildings of approximately 51,000 and 47,000 square feet and houses the
principal administrative, research and manufacturing facility. The Company also
leases a 44,000 square foot warehouse near its headquarters. The Company
considers its facilities adequate for its current needs and believes that
additional space can be obtained in the future if necessary.

ITEM 3: LEGAL PROCEEDINGS

From time to time, ENCAD may be involved in litigation relating to claims
arising out of its operations in the usual course of business.

In September 1995, the Company filed a lawsuit against Hewlett-Packard in
the U.S. District Court for the Southern District of California, seeking to have
the court declare that the Company's products do not infringe a Hewlett-Packard
patent, as has been asserted by Hewlett-Packard, and that the patent is invalid.
Hewlett-Packard filed a counterclaim alleging that the Company did infringe the
patent. On July 29, 1997 Hewlett-Packard advised the Company that it had
abandoned all claims of the patent asserted against the Company in the pending
litigation due to a prior invention which invalidated the claims, and that it
had requested that the Court dismiss the lawsuit. Hewlett-

14
<PAGE>

Packard's claims against the Company were dismissed on August 7, 1997; however,
the Company's claim for recovery of its attorneys' fees was not dismissed, and
the Company continues to pursue recovery of its attorneys' fees.

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

No matters were submitted to a vote of the security holders during the
quarter ended December 31, 1997.

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER 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 the quarterly high and low sales prices of the Common
Stock as reported by Nasdaq. Such quotations represent inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.

1997 1996
-----------------------------------
HIGH LOW HIGH LOW
--------------------------------------------------------------------
<S> <C> <C> <C> <C>

First Quarter 41.25 27.00 12.50 7.63
Second Quarter 43.00 29.25 25.25 11.50
Third Quarter 46.25 30.50 43.75 16.75
Fourth Quarter 40.125 23.75 46.75 34.38
--------------------------------------------------------------------

</TABLE>

The Company had 200 stockholders of record and approximately 10,000
beneficial stockholders as of February 28, 1998.

DIVIDEND POLICY

The Company has not paid dividends on its Common Stock and currently
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 lines of credit.

15
<PAGE>

ITEM 6: SELECTED FINANCIAL DATA

FIVE YEAR FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA, PERCENTAGES AND EMPLOYEES)

1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

RESULTS OF OPERATIONS
Net sales . . . . . . . . . . . . . . . . . . . $149,041 $107,437 $65,548 $43,653 $23,229
Cost of sales . . . . . . . . . . . . . . . . . $ 78,259 $ 56,021 $36,471 $22,917 $12,123
Gross profit. . . . . . . . . . . . . . . . . . $ 70,782 $ 51,416 $29,077 $20,736 $11,106
Research and development. . . . . . . . . . . . $ 10,544 $ 8,794 $ 5,578 $ 3,265 $ 1,995
Operating income. . . . . . . . . . . . . . . . $ 26,493 $ 19,572 $11,619 $ 9,137 $ 4,118
Interest income (expense) . . . . . . . . . . . $ 35 $ 183 $ 307 $ 270 $ (66)
Pretax income . . . . . . . . . . . . . . . . . $ 26,528 $ 19,755 $11,926 $ 9,407 $ 4,052
Taxes . . . . . . . . . . . . . . . . . . . . . $ 9,099 $ 6,902 $ 4,069 $ 3,392 $ 1,317
Extraordinary item. . . . . . . . . . . . . . . -- -- -- -- $ 463
Net income. . . . . . . . . . . . . . . . . . . $ 17,429 $ 12,853 $ 7,857 $ 6,015 $ 3,198
Earnings per share - basic. . . . . . . . . . . $ 1.53 $ 1.15 $ 0.72 $ 0.56 $ 0.42
Earnings per share - diluted. . . . . . . . . . $ 1.45 $ 1.08 $ 0.70 $ 0.55 $ 0.41

MARGINS
Gross profit. . . . . . . . . . . . . . . . . . 47% 48% 44% 48% 48%
Research and development. . . . . . . . . . . . 7% 8% 9% 7% 9%
Operating income. . . . . . . . . . . . . . . . 18% 18% 18% 21% 18%
Pretax income . . . . . . . . . . . . . . . . . 18% 18% 18% 22% 17%
Net income. . . . . . . . . . . . . . . . . . . 12% 12% 12% 14% 14%

YEAR END FINANCIAL POSITION
Cash and cash equivalents . . . . . . . . . . . $ 1,265 $ 6,949 $ 3,067 $ 842 $ 7,388
Short-term investments. . . . . . . . . . . . . -- -- $ 6,072 $ 4,902 --
Accounts receivable - net . . . . . . . . . . . $ 36,800 $ 19,762 $13,029 $ 8,582 $ 4,177
Inventories . . . . . . . . . . . . . . . . . . $ 29,155 $ 13,630 $ 8,047 $ 4,628 $ 2,064
Property - net. . . . . . . . . . . . . . . . . $ 14,825 $ 10,881 $ 3,138 $ 2,224 $ 1,028
Total assets. . . . . . . . . . . . . . . . . . $ 90,295 $ 57,467 $36,128 $24,084 $15,998
Total current liabilities . . . . . . . . . . . $ 24,300 $ 14,246 $ 7,450 $ 4,136 $ 3,417
Stockholders' equity. . . . . . . . . . . . . . $ 64,722 $ 43,042 $28,678 $19,948 $12,556
Working capital . . . . . . . . . . . . . . . . $ 47,818 $ 30,326 $25,304 $17,619 $11,279

CAPITAL MANAGEMENT
Depreciation expense. . . . . . . . . . . . . . $ 3,709 $ 2,726 $ 1,599 $ 732 $ 518
Capital expenditures. . . . . . . . . . . . . . $ 7,653 $ 10,469 $ 2,513 $ 1,928 $ 954
Operating return on average assets. . . . . . . 36% 42% 39% 46% 36%
Return on average equity. . . . . . . . . . . . 32% 36% 32% 37% 40%
Current ratio . . . . . . . . . . . . . . . . . 3.0 3.1 4.4 5.3 4.3
Inventory turnover. . . . . . . . . . . . . . . 3.7 5.2 5.8 6.8 5.3
Average days receivable . . . . . . . . . . . . 69 56 60 53 55

HUMAN RESOURCE MANAGEMENT
Average number of employees . . . . . . . . . . 467 355 272 197 138
Average assets per employee . . . . . . . . . . 158 132 111 102 82
Sales per employee. . . . . . . . . . . . . . . 319 303 241 222 168

COMMON SHARES OUTSTANDING*
Weighted average shares - basic . . . . . . . . 11,390 11,217 10,971 10,788 7,544
Weighted average shares - diluted . . . . . . . 12,044 11,871 11,192 10,974 7,786
Number of shares outstanding at year end. . . . 11,501 11,300 11,100 10,880 10,280

</TABLE>

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

16
<PAGE>

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following table sets forth, as a percentage of net sales, certain
consolidated statements of income data for the periods indicated. Except for
percentages, all other amounts are in thousands.

CONSOLIDATED STATEMENTS OF INCOME

1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C>

NET SALES 100% 100% 100%
COST OF SALES 53% 52% 56%
-----------------------------------------------------------------------
GROSS PROFIT 47% 48% 44%
MARKETING AND SELLING 17% 15% 12%
RESEARCH AND DEVELOPMENT 7% 8% 9%
GENERAL AND ADMINISTRATIVE 6% 6% 6%
-----------------------------------------------------------------------
INCOME FROM OPERATIONS 18% 18% 18%
INTEREST INCOME - NET 0% 0% 0%
-----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 18% 18% 18%
PROVISION FOR INCOME TAXES 6% 6% 6%
-----------------------------------------------------------------------
NET INCOME 12% 12% 12%
-----------------------------------------------------------------------
-----------------------------------------------------------------------

</TABLE>

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND 1996

ENCAD's 1997 net sales increased 39% over 1996 net sales. This increase
was primarily due to sales of the Company's NovaJet product lines, including
sales of the NovaJet PROe Series which was shipped in May 1997. The supplies
business unit continued to contribute to the Company's growth with the
successful introduction of several new lines of ink and media ("supplies"). In
1997, supplies sales increased 124% over 1996, and accounted for approximately
22% of 1997 net sales versus 14% in 1996. The Company's numerous original
equipment manufacturers ("OEM") arrangements contributed to the increase in net
sales for 1997, accounting for 26% of net sales as compared to 25% for 1996.

No one customer accounted for more than 10% of product sales in 1997,
whereas in 1996, one customer accounted for 15% of product sales. International
sales accounted for approximately 59% and 58% of the Company's net sales in 1997
and 1996, respectively.

Cost of sales includes costs related to product shipments, including
materials, labor, overhead and other direct or allocated costs involved in the
manufacture, warehousing, delivery, support and maintenance of products. Cost
of sales as a percentage of net sales stood at 53% and 52% in 1997 and 1996,
respectively. This percentage remained relatively constant due primarily to the
mix of sales of higher margin NovaJet product offsetting the lower margin
products - CADJET, supplies (as a group) and accessories. The Company expects
lower gross profit margin percentages in 1998 due to lower average unit selling
prices for existing products and increased sales of supplies, which, in general,
have lower gross margins than the printer products. 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.

Marketing and selling expenses were 17% of net sales in 1997 compared to
15% in 1996 and grew by 51% over 1996. Most of the increase was related to
costs associated with increased staffing in the Company's international offices
and in the customer support organization, the advertising and promotion of
existing and new products, and

17
<PAGE>

increased trade show activity compared to 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 expenses were 7% of net sales in 1997 compared to
8% in 1996 and grew by 20% over 1996. The increase in spending was driven by
increased project costs and staffing levels related to new product development,
in particular in the area of supplies development. The Company expects to
continue to invest significant resources in its strategic programs and
enhancements to existing products. The Company expects that research and
development expenses will continue to increase in absolute dollars as compared
to prior periods.

General and administrative expenses were 6% of net sales in 1997 and 1996
and grew by 34% over 1996. The increase in absolute dollars of $2,224 was due to
higher staffing levels necessary to support an increased level of business,
higher consulting expenses, and increased legal costs. The Company expects
general and administrative expenses will continue to increase in absolute
dollars over prior periods.

Net interest income decreased to $35 in 1997 from $183 in 1996 due to less
cash available for external investment and increased borrowings under the bank
line of credit.

The Company's effective income tax rate in 1997 was 34%, compared to 35% in
1996. The slight decrease in the effective rate was due to a decreased
effective rate for state income taxes.

1997 net income was 12% of net sales for both 1997 and 1996 and increased
36% over 1996 for the reasons previously described.

YEARS ENDED DECEMBER 31, 1996 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
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
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 Pro products, offsetting the lower margin products - CADJET, supplies
(as a group) and accessories.

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.

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.

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.

Net interest income decreased to $183 in 1996 from $307 in 1995 due to less
cash available for external investment.

18
<PAGE>

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.

LIQUIDITY AND CAPITAL RESOURCES

The Company funds its operations primarily through cash flow provided from
operations. As of December 31, 1997, the Company had cash and cash equivalents
totaling $1,265, and working capital of $47,818. In comparison, the Company had
cash and cash equivalents totaling $6,949, and working capital of $30,326 as of
December 31, 1996. The decrease in cash and cash equivalents was due primarily
to an increase in accounts receivable balances and inventories from year to
year.

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 amount of international sales can increase accounts
receivable balances due to traditionally slower payments by international
customers.

At December 31, 1997, net accounts receivable increased by $17,038 over
1996's year end balance of $19,762. The increase was directly related to
increased sales in 1997 and also slower payments of amounts due, particularly
for international customers, than the Company experienced in 1996.

The Company invests its excess cash in money market accounts and 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 1997,
the Company invested cash in short-term investments which generated interest
income of $175.

Inventory levels increased by $15,525 at December 31, 1997 from $13,630 at
the end of 1996. This increase was primarily attributable to a general increase
in the level of the Company's business and also to increased inventories to
support increased sales and to provide shorter lead times in filling customer
orders.

In the years ended December 31, 1997 and 1996, the Company had capital
expenditures of $7,653 and $10,469, respectively. 1997 expenditures included
the initial software purchase of the enterprise-wide information system. 1996
expenditures included $6,000 for the purchase of the Company's headquarter
facilities. During 1998, the Company plans to increase its capital
expenditures, especially for tooling relating to new products, computers and
related systems and network assets, and costs related to the implementation of
the enterprise-wide information system.

At December 31, 1997, the Company had available a $20 million revolving
line of credit. The line requires the Company to maintain certain financial
ratios. $3,261 was outstanding under the line at December 31, 1997. The line
expires on January 2, 2000.

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, cash generated from operations, and funds
available under the 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. There can be no assurances that future cash
requirements to fund operations will not require the Company to seek additional
capital, or that such additional capital will be available when required on
terms acceptable to the Company. To date, inflation has not had a significant
effect on the Company's operating results.

19
<PAGE>

most internal problems as the system vendors have represented that these systems
are already year 2000 compliant. In addition, the Company is in the process of
communicating with others with whom it does significant business to determine
their year 2000 compliance readiness and the extent to which the Company is
vulnerable to any third party year 2000 issues. Management does not anticipate
that the Company will incur significant operating expenses or be required to
invest heavily in other computer systems improvements to be year 2000 compliant.
The Company plans to devote the necessary resources to resolve significant year
2000 issues in a timely manner; however, if the Company, its customers, vendors
or others with whom it does significant business are unable to resolve external
processing issues in a timely manner, it could result in material adverse effect
on certain of the Company's operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share" ("SFAS No. 128"). Effective for financial
statements issued after December 15, 1997, SFAS No. 128 requires dual
presentation of "Basic" and "Diluted" EPS by entities with complex capital
structures, replacing "Primary" and "Fully Diluted" EPS under APB Opinion
No. 15. Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income available to common stockholders by the weighted-
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from common stock equivalents, similar to fully
diluted EPS, but uses only the average stock price during the period as part of
the computation. As a result, the Company has changed the method used to
compute earnings per share and has restated all prior periods as required by
SFAS No. 128.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in financial statements. Comprehensive income is defined as "the change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners." SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. The Company believes that the adoption of SFAS No. 130 will not
have a material effect on the financial statements or disclosures of the
Company.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 establishes annual and interim reporting standards for
an enterprise's business segments and related disclosures about its products,
services, geographic areas, and major customers. This statement supersedes SFAS
No. 14, Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
is effective for periods beginning after December 15, 1997, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company believes that the adoption of SFAS
No. 131 will not have a material effect on the financial statements or
disclosures of the Company.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included in Part IV, Item 14(a)(1)
and (2).

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

20
<PAGE>

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information required by this item is incorporated by reference from the
Proxy Statement in the sections entitled "Election of Directors", "Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."

ITEM 11: EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Compensation of Executive Officers."

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Security Ownership of Certain
Beneficial Owners and Management."

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
Proxy Statement in the section entitled "Certain Relationships and Related
Transactions."

PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF, OR INCORPORATED BY REFERENCE
INTO, THIS ANNUAL REPORT ON FORM 10-K:

(1) FINANCIAL STATEMENTS. The following Consolidated Financial
Statements of ENCAD, Inc. and Independent Auditors' Report are included in a
separate section of this Report beginning on page F-1:

Page
Description Number
----------- ------
<S> <C>
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996. . . . . .F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . .F-7

</TABLE>

(2) FINANCIAL STATEMENT SCHEDULES Financial statement schedules have
been omitted because they are either not required, not applicable or the
information is otherwise included.

21
<PAGE>

(3) Exhibits:

Exhibit
Number Description
<S> <C>
2.1 Agreement and Plan of Merger between ENCAD Delaware and ENCAD
California dated January 5, 1998 (filed as Exhibit 2.1). (6)

3.1 Certificate of Incorporation of the Company (filed as
Exhibit 3.1). (6)

3.2 Bylaws of the Company (filed as Exhibit 3.2). (6)

4.1 Rights Agreement, dated as of March 19, 1998, between the Company
and Harris Trust Company of California, which includes the
Form of Certificate of Designation for the Series A Preferred
Stock as Exhibit A, the Form of Rights Certificate as Exhibit
B and the Summary of Rights to Purchase Shares as Exhibit C.
(7)

10.1 Form of Distributor Agreement (Domestic) (filed as
Exhibit 10.14). (1)

10.2 Form of International Distributor Agreement (filed as
Exhibit 10.15). (1)

10.3 Form of OEM Agreement (filed as Exhibit 10.16). (1)

+ 10.4 The Company's Incentive Stock Option Plan (filed as
Exhibit 10.29). (1)

+ 10.5 The Company's 1986 Non-Qualified Stock Option Plan, as amended
(filed as Exhibit 10.30). (1)

+ 10.6 Form of Incentive Stock Option Agreement (filed as
Exhibit 10.31). (1)

+ 10.7 Form of Non-Qualified Stock Option Agreement (filed as
Exhibit 10.32). (1)

+ 10.8 The Company's 1993 Stock Option/Stock Issuance Plan, as amended
(filed as Exhibit 99.1). (2)

+ 10.9 Form of Notice of Grant of Stock Option and Stock Option
Agreement (filed as Exhibit 10.34). (1)

+ 10.10 Form of Stock Issuance Agreement (filed as Exhibit 10.35). (1)

+ 10.11 1993 Employee Stock Purchase Plan, as amended (filed as
Exhibit 99.1). (4)

+ 10.12 Form of Stock Purchase Agreement (filed as Exhibit 10.37). (1)

10.13 Form of Non-Disclosure Agreement (filed as Exhibit 10.38). (1)

10.14 Form of Employee Proprietary Information Agreement (filed as
Exhibit 10.39). (1)

+ 10.15 Form of Indemnification Agreements between the Company and each
of its directors.

+ 10.16 Form of Indemnification Agreements between the Company and each
of its officers.

10.17 Agreement to Sell Real Estate dated January 31, 1996 between the
Registrant and The Chase Manhattan Bank, N.A., Real Estate
Finance. (3)

+ 10.18 Form of Severance Letter Agreements between the Company and each
of its officers. (5)

+ 10.19 Form of Senior Executive 1997 Annual Performance Bonus between
the Company and each of its officers. (5)

+ 10.20 Select Compensation, Non-Qualified Deferred Compensation Plan and
related documents. (5)

10.21 1997 Supplemental Stock Option Plan (filed as Exhibit 99.2). (2)

10.22 Form of Notice of Grant of Stock Option (filed as Exhibit 99.3).
(2)
10.23 Form of Stock Option Agreement (filed as Exhibit 99.4). (2)

+ 10.24 Form of Non-Statutory Stock Option Agreement (filed as
Exhibit 99.5). (2)

21.1 Subsidiaries.

23.1 Independent Auditors' Consent, Deloitte & Touche LLP.

22
<PAGE>

24.1 Power of Attorney. (See page 24)

27.1 Financial Data Schedule for fiscal year end 1997.

27.2 Financial Data Schedule for fiscal year end 1996 and quarters
one, two and three of 1996.

27.3 Financial Data Schedule for quarters one, two and three of 1997.

</TABLE>

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

(1) Filed as exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-70220) or amendments thereto and incorporated herein by reference.

(2) Filed as exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-44923) and incorporated herein by reference.

(3) Filed as exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.

(4) Filed as exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-45327) and incorporated herein by reference.

(5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, as amended, and incorporated herein by
reference.

(6) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
January 5, 1998 and incorporated herein by reference.

(7) Filed as an exhibit to Registrant's Current Report on Form 8-K dated
March 20, 1998 and incorporated herein by reference.

+ Management compensatory plan.

(b) REPORTS ON FORM 8-K
None

(d) FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this
Item are listed under Item 14(a)(2).

23
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

ENCAD, INC.

By /s/ David A. Purcell Date: March 30, 1998
------------------------------- ------------------
David A. Purcell
Chief Executive Officer

By /s/ Todd W. Schmidt Date: March 30, 1998
------------------------------- ------------------
Todd W. Schmidt
Chief Financial Officer

POWER OF ATTORNEY

Know all men by these presents, that each person whose signature appears below
constitutes and appoints David A. Purcell or Thomas L. Green, his attorney-in-
fact, with power of substitution in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that the
attorney-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.

SIGNATURE TITLE DATE

/s/ David A. Purcell Chairman of the Board and March 30, 1998
- ------------------------- Chief Executive Officer
(David A. Purcell) (Principal Executive Officer)

/s/ Richard A. Plante President and
- ------------------------- Chief Operating Officer March 30, 1998
(Richard A. Plante)

/s/ Robert V. Adams Director March 30, 1998
- -------------------------
(Robert V. Adams)

/s/ Craig S. Andrews Director March 30, 1998
- -------------------------
(Craig S. Andrews)

/s/ Ronald J. Hall Director March 30, 1998
- -------------------------
(Ronald J. Hall)

/s/ Howard L. Jenkins Director March 30, 1998
- -------------------------
(Howard L. Jenkins)

/s/ Charles E. Volpe Director March 30, 1998
- -------------------------
(Charles E. Volpe)

24
<PAGE>

ENCAD, INC.
INDEX TO CONSOLIDATED FINANCIAL STATMENTS

Page
----
<S> <C>
Independent Auditors Report. . . . . . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . .F-7

</TABLE>

F-1
<PAGE>

ENCAD, INC.
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of ENCAD, Inc.

We have audited the accompanying consolidated balance sheets of ENCAD, Inc.
and its subsidiaries (collectively, the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. 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,
1997 and 1996 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP
San Diego, California
January 30, 1998 (March 19, 1998 as to the last paragraph of Note 8)

F-2
<PAGE>

ENCAD, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31,
---------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 1,265 $ 6,949
Accounts receivable - net 36,800 19,762
Inventories 29,155 13,630
Deferred income taxes 3,118 3,858
Prepaid expenses 1,780 373
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 72,118 44,572

Property - net 14,825 10,881
Other assets 3,352 2,014
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $90,295 $57,467
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $12,369 $ 8,244
Accrued expenses and other liabilities 8,670 6,002
Borrowings under line of credit 3,261 --
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 24,300 14,246

OTHER LIABILITIES 1,273 179

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value and no par value in 1997 and 1996
respectively, 5,000 shares authorized, no shares issued and outstanding -- --
Common stock - $.001 par value and no par value; 60,000 and 15,000 shares
authorized; 11,501 and 11,300 shares issued and outstanding in 1997 and 1996,
respectively 12 13,338
Additional paid-in capital 17,577 --
Retained earnings 47,133 29,704
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 64,722 43,042
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $90,295 $57,467
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------

</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE>

ENCAD, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $149,041 $107,437 $65,548

Cost of sales 78,259 56,021 36,471
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 70,782 51,416 29,077
Marketing and selling 25,023 16,552 8,111
Research and development 10,544 8,794 5,578
General and administrative 8,722 6,498 3,769
- -----------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses 44,289 31,844 17,458
- -----------------------------------------------------------------------------------------------------------------------------
Income from operations 26,493 19,572 11,619
Interest income - net 35 183 307
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 26,528 19,755 11,926
Provision for income taxes 9,099 6,902 4,069
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 17,429 $ 12,853 $ 7,857
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per share - basic $ 1.53 $ 1.15 $ 0.72
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per share - diluted $ 1.45 $ 1.08 $ 0.70
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - basic 11,390 11,217 10,971
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares outstanding - diluted 12,044 11,871 11,192
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------

</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE>

ENCAD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

BALANCE, JANUARY 1, 1995 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
Conversion to $.001 par value stock (13,326) 13,326 -- --
Common stock issued under stock option and
purchase plans, including related tax benefits 201 -- 4,251 -- 4,251
Net income 17,429 17,429
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 11,501 $ 12 $17,577 $47,133 $64,722
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------

</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE>

ENCAD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,429 $ 12,853 $ 7,857
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation and amortization 3,709 2,726 1,599
Tax benefit from exercise of stock options 2,568 539 173
Changes in assets and liabilities:
Accounts receivable (17,038) (6,733) (4,447)
Inventories (15,525) (5,583) (3,419)
Deferred income taxes 154 (2,284) (501)
Prepaid expenses and other assets (2,159) (1,186) 632
Accounts payable 4,125 3,672 2,231
Accrued expenses and other liabilities 3,762 3,303 1,083
- -----------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by operating activities (2,975) 7,307 5,208

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (7,653) (10,469) (2,513)
Net cash from (purchases of) short-term investments -- 6,072 (1,170)
- -----------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (7,653) (4,397) (3,683)

CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of Common Stock options and sale of stock under
employee stock purchase plan 1,683 972 418
Net proceeds from issuance of Common Stock -- -- 282
Net borrowings under line of credit 3,261 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 4,944 972 700
- -----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (5,684) 3,882 2,225
Cash and cash equivalents at beginning of year 6,949 3,067 842
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,265 $ 6,949 $ 3,067
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 4,234 $ 7,927 $ 5,005
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------

</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<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%, 58% and 63%
of 1997, 1996 and 1995 net sales, respectively. Receivables from export sales
at December 31, 1997 and 1996 were approximately $23,200,000 and $11,500,000,
respectively. In 1997, and in 1995, no one customer accounted for more than
10% of sales. In 1996, one customer accounted for 15% 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;
computer equipment and related software, 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 for 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.

INCOME TAXES The Company adopted the Statement of Financial Accounting
Standards ("SFAS") 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

F-7
<PAGE>

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. To date, the Company has not recorded any losses on it's cash
accounts.

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.

ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). 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 Accounting Principles Board ("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 pro forma effect on the net income
and earnings per share. See Note 6.

EARNINGS PER SHARE In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"),
effective for financial statements issued after December 15, 1997. SFAS No.
128 requires dual presentation of "Basic" and "Diluted" EPS by entities with
complex capital structures, replacing "Primary" and "Fully Diluted" EPS under
APB Opinion No. 15. Basic EPS excludes dilution from common stock
equivalents and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution from common stock
equivalents, similar to fully diluted EPS, but uses only the average stock
price during the period as part of the computation. On December 31, 1997, the
Company adopted SFAS No. 128, and as a result, the Company has changed the
method used to compute earnings per share and has restated all prior periods.

The following table is a reconciliation of the basic and diluted earnings
per share computations for the years ended December 31, 1997, 1996 and 1995 (in
thousands):

1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>

Net Income $17,429 $12,853 $ 7,857
----------------------------------------------------------------------
Earnings per share - basic $ 1.53 $ 1.15 $ .72
----------------------------------------------------------------------
----------------------------------------------------------------------
Basic weighted average common
shares outstanding 11,390 11,217 10,971
Effect of dilutive securities:
Stock options 654 654 221
----------------------------------------------------------------------
Diluted weighted average common
and common equivalent shares
outstanding 12,044 11,871 11,192
----------------------------------------------------------------------
Earnings per share - diluted $ 1.45 $ 1.08 $ .70
----------------------------------------------------------------------
----------------------------------------------------------------------

</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in financial
statements. Comprehensive income is defined as "the change in equity (net
assets) of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from

F-8
<PAGE>

investments by owners and distributions to owners." SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company believes that the adoption of SFAS
No. 130 will not have a material effect on the financial statements or
disclosures of the Company.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 establishes annual and interim reporting standards for
an enterprise's business segments and related disclosures about its products,
services, geographic areas, and major customers. This statement supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 is effective for periods beginning after December 15, 1997, and requires
that comparative information from earlier years be restated to conform to the
requirements of this standard. The Company believes that the adoption of SFAS
No. 131 will not have a material effect on the financial statements or
disclosures of the Company.

STOCKHOLDERS' EQUITY Effective May 31, 1996, for stockholders of
record on May 17, 1996, the Company effected a two-for-one stock split 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 dividend have been retroactively
restated in these financial statements.

In July 1997, the Company's stockholders approved an Agreement and Plan of
Merger whereby the Company merged with and into a newly incorporated Delaware
corporation ("ENCAD, Inc.") which is the surviving corporation. In conjunction
with the merger, each share of the Company's Common Stock, no par value, and
options or rights to acquire shares of Common Stock were exchanged for one share
of ENCAD, Inc. Delaware Common Stock, par value $.001, options or rights to
acquire Common Stock. See Note 8 - Subsequent Events. The change in par value
did not affect any of the existing rights of the stockholders and has been
recorded as an adjustment to additional paid-in capital as of December 31, 1997.

In July 1997, the Company's stockholders approved an increase in the number
of shares of Common Stock authorized for issuance by the Delaware company from
15,000,000 to 60,000,000 shares, concurrently with the Company's reincorporation
in Delaware.

RECLASSIFICATIONS Certain items in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.

F-9
<PAGE>

2. BALANCE SHEET DETAILS (in thousands)

DECEMBER 31,
-----------------
1997 1996
----------------------------------------------------------------------
<S> <C> <C>

ACCOUNTS RECEIVABLE:
Trade receivables $37,400 $20,404
Allowance for doubtful accounts (600) (642)
----------------------------------------------------------------------
Total $36,800 $19,762
----------------------------------------------------------------------
----------------------------------------------------------------------

INVENTORIES:
Raw materials $11,043 $ 7,247
Work-in-process 629 253
Finished goods 17,483 6,130
----------------------------------------------------------------------
Total $29,155 $13,630
----------------------------------------------------------------------
----------------------------------------------------------------------

PROPERTY:
Computer equipment and related software $ 7,526 $ 4,022
Machinery and equipment 6,130 3,267
Buildings and improvements 5,967 5,601
Furniture and fixtures 2,383 1,787
Land 1,250 1,250
----------------------------------------------------------------------
23,256 15,927
Accumulated depreciation and amortization (8,431) (5,046)
----------------------------------------------------------------------
Total $14,825 $10,881
----------------------------------------------------------------------
----------------------------------------------------------------------

ACCRUED EXPENSES AND OTHER LIABILITIES:
Compensation and vacation pay $ 3,352 $ 3,018
Income taxes payable 2,722 690
Warranty 1,390 1,538
Co-op programs 996 736
Other 210 20
----------------------------------------------------------------------
Total $ 8,670 $ 6,002
----------------------------------------------------------------------
----------------------------------------------------------------------

</TABLE>

3. REVOLVING LINE OF CREDIT

At December 31, 1997, the Company had available a $20 million revolving
line of credit (the "Line") which provides for interest at the bank's prime rate
(8.50% at December 31, 1997) or at the Company's option, a rate based on the
London Interbank Overnight Rate (5.81% at December 31, 1997 plus 1.25 to 1.75%
based upon certain ratios) on outstanding balances. The Company pays a
commitment fee on the unused portion of the Line. The Line requires the Company
to maintain: (i) a minimum amount of tangible net worth, (ii) a current ratio of
1.85 to 1.0, (iii) a total liabilities to tangible net worth ratio less than 1.1
to 1.0 and (iv) a minimum level of cash flow. $3,261,000 was outstanding under
the Line at December 31, 1997. The Line expires on January 2, 2000.

4. OPERATING LEASE COMMITMENTS (in thousands)

The Company leases certain facilities and equipment under operating leases
which expire over the next five years. Most of these operating leases provide
the Company with the option after the initial lease term to renew its lease at
the then fair rental value of periods of one month to four years. Generally,
management expects that leases will be renewed in the normal course of business.

F-10
<PAGE>

Minimum payments for operating leases having initial or remaining
noncancelable terms of one year are as follows:

YEAR
----------------------------------------
<S> <C>
1998 $ 837
1999 721
2000 610
2001 321
2002 157
----------------------------------------
Total $2,646
----------------------------------------
</TABLE>

Total rent expense under operating leases was approximately $416, $298, and
$604 for the years ended December 31, 1997, 1996 and 1995, respectively.

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,
-----------------
1997 1996
----------------------------------------------------------------------
<S> <C> <C>
Non deductible reserves and accruals $ 2,598 $ 2,817
Differences between book and tax basis in
inventory and property 1,256 856
Accrued co-op advertising 300 323
State taxes 189 287
Other 41 255
----------------------------------------------------------------------
Net deferred tax asset $ 4,384 $ 4,538
----------------------------------------------------------------------
----------------------------------------------------------------------

</TABLE>

The Net Deferred Tax Asset is classified between current and long term
assets as follows:

<TABLE>

<S> <C> <C>
Deferred income taxes $ 3,118 $ 3,858
Other assets 1,266 680
----------------------------------------------------------------------
Net deferred tax asset $ 4,384 $ 4,538
----------------------------------------------------------------------
----------------------------------------------------------------------

</TABLE>

The components of income before income tax expense and income tax expense
attributable to foreign operations are not material. The components of the
provision for income taxes are as follows:

YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT EXPENSE:
Federal $ 7,626 $ 7,375 $ 3,541
State 1,521 1,810 1,030
DEFERRED EXPENSE:
Federal (22) (1,865) (396)
State (26) (418) (106)
----------------------------------------------------------------------
Total $ 9,099 $ 6,902 $ 4,069
----------------------------------------------------------------------
----------------------------------------------------------------------

</TABLE>

F-11
<PAGE>

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,
------------------------
1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 34.0%
State income taxes, net of Federal benefit 4.5 6.2 6.2
Benefit of foreign sales corporation, net
of tax (4.1) (4.0) (4.2)
Research and development tax credit (0.9) (0.8) (1.0)
Other (0.2) (1.4) (0.8)
----------------------------------------------------------------------
Effective rate 34.3% 35.0% 34.2%
----------------------------------------------------------------------
----------------------------------------------------------------------

</TABLE>
6. EMPLOYEE BENEFIT PLANS (in thousands except for percentages and average and
per share data)

The number of shares authorized under the following plans and the number of
shares outstanding under those plans 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 520 shares of
Common Stock have been reserved for issuance, eligible employees may elect up to
10% of their base cash compensation to be deducted each pay period for the
purchase of the Company's Common Stock. 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. Participants may not purchase more than 2
shares of Common Stock and not more than $25 worth of Common Stock in any one
calendar year. The plan will terminate on January 1, 2003. In 1997, 1996 and
1995, 45, 60, and 62 shares, respectively, were issued, at average prices
ranging from $7.44 to $35.06, $5.26 to $14.45, and $2.13 to $7.65, respectively.

1993 STOCK OPTION/STOCK ISSUANCE PLAN Under this plan, for which 1,779
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. To date,
only non-qualified stock options have been granted under this plan at prices not
less than fair market value on the date of grant. The options granted under this
plan as of December 31, 1997 are exercisable quarterly over four years and
expire in ten years.

1997 SUPPLEMENTAL STOCK OPTION PLAN On October 13, 1997, the Company's
Board of Directors adopted the 1997 Supplemental Stock Option Plan. Under this
plan, for which 140 shares of Common Stock have been reserved for issuance,
employees other than executive officers, consultants and independent advisors,
may be granted non-qualified stock options. The options granted under this plan
as of December 31, 1997 are exercisable quarterly over four years and expire in
ten years.

F-12
<PAGE>

A summary of option activity under all plans is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
AVAILABLE FOR SHARES WEIGHTED AGGREGATE
GRANT AVERAGE EXERCISE PRICE
PRICES
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995 232 496 $3.25 $1,611
Authorized 500 -- -- --
Options granted (543) 543 8.89 4,827
Options exercised -- (57) 2.58 (146)
Options canceled 271 (271) 9.22 (2,502)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 460 711 5.33 3,790
Options granted (460) 460 11.29 5,197
Options exercised -- (140) 3.90 (544)
Options canceled 89 (89) 10.17 (569)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 89 942 8.36 7,874
Authorized 380 -- -- --
Options granted (371) 371 30.42 11,297
Options exercised -- (156) 5.05 (786)
Options canceled 42 (42) 19.25 (811)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 140 1,115 $15.75 $17,574
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Exercisable at December 31, 1995 202 $2.40
Exercisable at December 31, 1996 268 $5.12
EXERCISABLE AT DECEMBER 31, 1997 378 $8.84
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------

</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1997:

WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE PRICES NUMBER REMAINING CONTRACTUAL AVERAGE EXERCISE NUMBER AVERAGE
OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE
PRICE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

$ 1.17 - $ 4.44 116 5.47 $ 3.35 109 $ 3.29
7.19 - 8.00 351 7.62 7.57 149 7.51
8.44 - 21.75 271 8.18 11.01 98 10.66
27.50 - 27.50 246 10.00 27.50 -- --
28.75 - 39.88 131 9.20 36.27 22 36.55
- -----------------------------------------------------------------------------------------------------------------------------
$ 1.17 - $39.88 1,115 8.24 $15.75 378 $ 8.84
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------

</TABLE>

The Company applies APB 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
plans 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, the Company's net income, earnings per share -
basic and earnings per share-diluted for 1997, 1996 and 1995 would have been
reduced by approximately $1,217 or $0.11 and $0.10 per share, $909 or $0.08 and
$0.08 per share and $279 or $0.03 and $0.02 per share, respectively.

The weighted-average fair value of the options granted during 1997, 1996
and 1995 is estimated as $4,999, $2,054 and $1,581, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1997, 1996 and 1995, respectively: no
dividend yield; expected

F-13
<PAGE>

volatility of 65%, 65% and 65%; risk-free interest rate of 6.1%, 6.0% and 6.0%
and expected life of 3.40, 2.68 and 2.80 years.

7. QUARTERLY FINANCIAL INFORMATION (unaudited; in thousands, except per share
data)

Summarized quarterly financial information for each of the three years
ended December 31, 1997, 1996, and 1995 is as follows :

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net sales $31,511 $37,725 $38,509 $41,296 $149,041
Gross profit 15,406 17,665 18,100 19,611 70,782
Income from operations 5,642 6,398 6,811 7,642 26,493
Net income 3,694 4,223 4,443 5,069 17,429
Earnings per share - basic 0.33 0.37 0.39 0.44 1.53
Earnings per share - diluted 0.31 0.35 0.37 0.42 1.45
------------------------------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31, 1996
Net sales 19,618 24,752 30,047 33,020 107,437
Gross profit 9,217 11,990 14,142 16,067 51,416
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 - basic 0.19 0.25 0.33 0.37 1.15
Earnings per share - diluted 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
Gross profit 6,810 7,876 6,777 7,614 29,077
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 - basic 0.18 0.20 0.16 0.17 0.72
Earnings per share - diluted 0.18 0.20 0.16 0.16 0.70
------------------------------------------------------------------------------------------------------------------------

</TABLE>

8. SUBSEQUENT EVENTS

REINCORPORATION In July 1997, the Company's stockholders approved an
Agreement and Plan of Merger whereby the Company merged with and into a newly
incorporated Delaware corporation ("ENCAD, Inc.") which is the surviving
corporation. In conjunction with the merger, each share of the Company's
Common Stock and options or rights to acquire shares of Common Stock were
exchanged for one share of ENCAD, Inc. Delaware Common Stock, options or
rights to acquire Common Stock. The reincorporation became effective in
January 1998.

STOCKHOLDER RIGHTS AGREEMENT In March 1998, the Company's Board of
Directors adopted a preferred stockholder rights plan which provides for a
dividend distribution of one preferred share purchase right (a "Right") on
each outstanding share of the Common Stock. On March 19, 1998, the Company's
Board of Directors declared a dividend of one Right for each outstanding
share of Common Stock, payable on April 2, 1998 to stockholders of record on
that date. Each Right entitles stockholders to buy 1/1000th of a share of
ENCAD Series A Junior Participating Preferred Stock at an exercise price of
$80, subject to adjustment. The Rights will become exercisable on the close
of business on the first day a person or group announces an acquisition of
15% or more of the Common Stock or on the tenth day after a person or a group
commences or announces commencement of a tender offer, the consummation of
which would result in ownership by the person or group of 15% or more of the
Common Stock. The Company will be entitled to redeem the Rights at $0.01 per
Right at any time on or before the close of business on the first date of a
public announcement that a person has acquired beneficial ownership of 15% or
more of the Common Stock.

F-14

<PAGE>

EXHIBIT 10.15

FORM OF INDEMNIFICATION AGREEMENT
BETWEEN THE COMPANY AND
ITS DIRECTORS

<PAGE>

INDEMNIFICATION AGREEMENT

THIS AGREEMENT is made and entered into this ____ day of ___________, 1998
between ENCAD, Inc., a Delaware corporation ("Corporation"), whose address is
6059 Cornerstone Court West, San Diego, California 92121 and ________________
("Director").

RECITALS:

A. WHEREAS, Director, a member of the Board of Directors of Corporation,
performs a valuable service in such capacity for Corporation; and

B. WHEREAS, the stockholders of Corporation have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors, agents
and employees of Corporation to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended (the "Law"); and

C. WHEREAS, the Bylaws and the Law, as amended and in effect from time
to time or any successor or other statutes of Delaware having similar import and
effect, currently purports to be the controlling law governing Corporation with
respect to certain aspects of corporate law, including indemnification of
directors and officers; and

D. WHEREAS, in accordance with the authorization provided by the Law,
Corporation may from time to time purchase and maintain a policy or policies of
Directors and Officers Liability Insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its directors and officers in the
performance of services as directors and officers of Corporation; and

E. WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent and overall desirability of protection afforded members of the Board of
Directors by such D & O Insurance, if any, and by statutory and bylaw
indemnification provisions; and

F. WHEREAS, in order to induce Director to continue to serve as a member
of the Board of Directors of Corporation, Corporation has determined and agreed
to enter into this contract with Director.

NOW, THEREFORE, in consideration of Director's continued service as a
director after the date hereof, the parties hereto agree as follows:

1. CERTAIN DEFINITIONS. The following terms used in this Agreement shall
have the meanings set forth below. Other terms are defined where appropriate in
this Agreement.

(a) "Disinterested Director" shall mean a director of Corporation who
is not or was not a party to the Proceeding in respect of which indemnification
is being sought by Director.

<PAGE>

(b) "Expenses" shall include all direct and indirect costs
(including, without limitation, attorneys' fees, retainers, court costs,
transcripts, fees of experts, witness fees, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery service fees,
all other disbursements or out-of-pocket expenses and reasonable compensation
for time spent by Director for which he or she is otherwise not compensated by
Corporation) actually and reasonably incurred in connection with a Proceeding or
establishing or enforcing a right to indemnification under this Agreement,
applicable law or otherwise; provided, however, that "Expenses" shall not
include any Liabilities.

(c) "Final Adverse Determination" shall mean that a determination
that Director is not entitled to indemnification shall have been made pursuant
to Section 5 hereof and either (i) a final adjudication in a Delaware court or
decision of an arbitrator pursuant to Section 13(a) hereof shall have denied
Director's right to indemnification hereunder, or (ii) Director shall have
failed to file a complaint in a Delaware court or seek an arbitrator's award
pursuant to Section 13(a) for a period of one hundred twenty (120) days after
the determination made pursuant to Section 5 hereof.

(d) "Independent Legal Counsel" shall mean a law firm or member of a
law firm selected by Corporation and approved by Director (which approval shall
not be unreasonably withheld) and that neither is presently nor in the past five
years has been retained to represent: (i) Corporation, in any material matter,
or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term "Independent
Legal Counsel" shall not include any person who, under the applicable standards
of professional conduct then prevailing, would have a conflict of interest in
representing either Corporation or Director in an action to determine Director's
right to indemnification under this Agreement.

(e) "Liabilities" shall mean liabilities of any type whatsoever
including, but not limited to, any judgments, fines, ERISA excise taxes and
penalties, penalties and amounts paid in settlement (including all interest
assessments and other charges paid or payable in connection with or in respect
of such judgments, fines, penalties or amounts paid in settlement) of any
proceeding.

(f) "Proceeding" shall mean any threatened, pending or completed
action, claim, suit, arbitration, alternative dispute resolution mechanism,
investigation, administrative hearing or any other proceeding whether civil,
criminal, administrative or investigative, including any appeal therefrom.

(g) "Change of Control" shall mean the occurrence of any of the
following events after the date of this Agreement:

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<PAGE>

affirmative votes of at least a majority of the directors who had been
directors of Corporation 24 months prior to such change and who were still in
office at the time of the election or nomination; or

(ii) Any "person" (as such term is used in section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) through the
acquisition or aggregation of securities is or becomes the beneficial owner,
directly or indirectly, of securities of Corporation representing twenty percent
(20%) or more of the combined voting power of Corporation's then outstanding
securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of directors (the "Capital
Stock"), except that any change in ownership of Corporation's securities by any
person resulting solely from a reduction in the aggregate number of outstanding
shares of Capital Stock, and any decrease thereafter in such person's ownership
of securities, shall be disregarded until such person increases in any manner,
directly or indirectly, such person's beneficial ownership of any securities of
Corporation.

2. INDEMNITY OF DIRECTOR. Corporation hereby agrees to hold harmless and
indemnify Director to the fullest extent authorized or permitted by the
provisions of the Law, as may be amended from time to time.

3. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in
Section 4 hereof, Corporation hereby further agrees to hold harmless and
indemnify Director:

(a) against any and all expenses (including attorneys' fees), witness
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by Director in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of Corporation) to which
Director is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Director is, was or at any time becomes a
director, officer, employee or agent of Corporation, or is or was serving or at
any time serves at the request of Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise; and

(b) otherwise to the fullest extent as may be provided to Director by
Corporation under the non-exclusivity provisions of the Bylaws of Corporation
and the Law.

4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section
3 hereof shall be paid by Corporation:

(a) except to the extent the aggregate of losses to be indemnified
thereunder exceeds the sum of such losses for which the Director is indemnified
pursuant to Section 2 hereof or reimbursed pursuant to any D & O Insurance
purchased and maintained by Corporation;

(b) in respect of remuneration paid to Director if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;

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<PAGE>

against Director for an accounting of profits made from the purchase or
sale by Director of securities of Corporation pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law;

(d) on account of Director's conduct which is finally adjudged to
have been knowingly fraudulent or deliberately dishonest, or to constitute
willful misconduct if such conduct has been established by a judgment or other
final adjudication adverse to Director (an "Adverse Judgment");

(e) provided there has been no Change of Control, on account of or
arising in response to any action, suit or proceeding (other than an action,
suit or proceeding referred to in Section 14(b) hereof) initiated by Director or
any of Director's affiliates against Corporation or any officer, director or
stockholder of Corporation unless such action, suit or proceeding was authorized
in the specific case by action of the Board of Directors of Corporation;

(f) if a final decision by a Court having jurisdiction in the matter
shall determine that such indemnification is not lawful; or

(g) on account of any action, suit or proceeding to the extent that
Director is a plaintiff, a counter-complainant or a cross-complainant therein
(other than an action, suit or proceeding permitted by Section 4(e) hereof).

5. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.

(a) Whenever Director believes that he or she is entitled to
indemnification pursuant to this Agreement, Director shall submit a written
request for indemnification to Corporation. Any request for indemnification
shall include sufficient documentation or information reasonably available to
Director to support his or her claim for indemnification. Director shall submit
his or her claim for indemnification within a reasonable time not to exceed five
years after any judgment, order, settlement, dismissal, arbitration award,
conviction, acceptance of a plea of nolo contendere or its equivalent, final
termination or other disposition or partial disposition of any Proceeding,
whichever is the later date for which Director requests indemnification. The
President or the Secretary or other appropriate officer shall, promptly upon
receipt of Director's request for indemnification, advise the Board of Directors
in writing that Director has made such a request. Determination of Director's
entitlement to indemnification shall be made not later than ninety (90) days
after Corporation's receipt of his or her written request for such
indemnification.

(b) The Director shall be entitled to select the forum in which
Director's request for indemnification will be heard, which selection shall be
included in the written request for indemnification required in Section 5(a).
This forum shall be any one of the following:

(i) The stockholders of Corporation;

(ii) A quorum of the Board of Directors consisting of
Disinterested

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<PAGE>

Directors;

(iii) Independent Legal Counsel, who shall make the
determination in a written opinion; or

(iv) A panel of three arbitrators, one selected by
Corporation, another by Director and the third by the first two arbitrators
selected. If for any reason three arbitrators are not selected within thirty
(30) days after the appointment of the first arbitrator, then selection of
additional arbitrators shall be made by the American Arbitration Association.
If any arbitrator resigns or is unable to serve in such capacity for any reason,
the American Arbitration Association shall select his or her replacement. The
arbitration shall be conducted pursuant to the commercial arbitration rules of
the American Arbitration Association now in effect.

If Director fails to make such designation, his or her claim
shall be determined by the forum selected by Corporation.

6. PRESUMPTION AND EFFECT OF CERTAIN PROCEEDINGS. Upon making a request
for indemnification, Director shall be presumed to be entitled to
indemnification under this Agreement and Corporation shall have the burden of
proof to overcome that presumption in reaching any contrary determination. The
termination of any Proceeding by judgment, order, settlement, arbitration award
or conviction, or upon a plea of nolo contendere or its equivalent shall not
affect this presumption or, except as may be provided in Section 4 hereof,
establish a presumption with regard to any factual matter relevant to
determining Director's rights to indemnification hereunder. If the person or
persons so empowered to make a determination pursuant to Section 5(b) hereof
shall have failed to make the requested determination within thirty (30) days
after any judgment, order, settlement, dismissal, arbitration award, conviction,
acceptance of a plea of nolo contendere or its equivalent, or other disposition
or partial disposition of any Proceeding or any other event which could enable
Corporation to determine Director's entitlement to indemnification, the
requisite determination that Director is entitled to indemnification shall be
deemed to have been made.

7. CONTRIBUTION. If the indemnification provided in Sections 2 and 3 is
unavailable and may not be paid to Director for any reason other than those set
forth in Section 4, then in respect of any threatened, pending or completed
action, suit or proceeding in which Corporation is or is alleged to be jointly
liable with Director (or would be if joined in such action, suit or proceeding),
Corporation shall contribute to the amount of expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Director in such proportion as is appropriate to
reflect (i) the relative benefits received by Corporation on the one hand and
Director on the other hand from the transaction from which such action, suit or
proceeding arose, and (ii) the relative fault of Corporation on the one hand and
of Director on the other hand in connection with the events which resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
relevant equitable considerations. The relative fault of Corporation on the one
hand and of Director on the other shall be determined by reference to, among
other things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such expenses,
judgments, fines or settlement amounts. Corporation agrees that it would not be
just and

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<PAGE>

equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable considerations.

8. INSURANCE AND FUNDING. Corporation hereby represents and warrants
that it shall purchase and maintain insurance to protect itself and/or Director
against any Expenses and Liabilities in connection with any Proceeding to the
fullest extent permitted by the Law. In the event of a Change of Control,
Corporation shall establish a letter of credit, as provided in Section 9, to
ensure the payment of such amounts as may be necessary to effect indemnification
or advancement of Expenses as provided in this Agreement.

9. LETTER OF CREDIT.

(a) In order to secure the obligations of Corporation to indemnify
and advance Expenses to Director pursuant to this Agreement, Corporation shall
obtain at the time of any Change of Control, upon request of any director, an
irrevocable standby letter of credit naming the directors of the Corporation in
office at the time of a Change of Control as joint beneficiaries (the "Letter of
Credit"). The Letter of Credit shall be in an appropriate amount not less than
two million dollars ($2,000,000), shall be issued by a commercial bank
headquartered in the United States having assets in excess of $10 billion and
capital according to its most recent published reports equal to or greater than
the then applicable minimum capital standards promulgated by such bank's primary
federal regulator and shall contain terms and conditions reasonably acceptable
to all directors. The Letter of Credit shall provide that Director may from
time to time draw certain amounts thereunder, upon written certification by
Director to the issuer of the Letter of Credit that (i) Director has made
written request upon Corporation for an amount not less than the amount he or
she is drawing under the Letter of Credit and that Corporation has failed or
refused to provide him with such amount in full within thirty (30) days after
receipt of the request, and (ii) Director believes that he or she is entitled
under the terms of this Agreement to the amount which he or she is drawing upon
under the Letter of Credit. The issuance of the Letter of Credit shall not, in
any way, diminish Corporation's obligation to indemnify Director against
Expenses and Liabilities to the full extent required by this Agreement.

(b) Once Corporation has obtained the Letter of Credit, Corporation
shall maintain and renew the Letter of Credit or substitute letter of credit
meeting the criteria of Section 9(a) during the term of this Agreement so that
the Letter of Credit shall have an initial term of five years, be renewed for
successive five-year terms, and always have at least one year of its term
remaining.

10. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Director is a
director, officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) and shall continue thereafter so long as Director shall be subject
to any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative, by reason of the fact that
Director was serving Corporation or such other entity in any capacity referred
to herein.

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<PAGE>

11. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Director
of notice of the commencement of any action, suit or proceeding, Director will,
if a claim in respect thereof is to be made against Corporation under this
Agreement, notify Corporation of the commencement thereof; but the omission so
to notify Corporation will not relieve it from any liability which it may have
to Director otherwise than under this Agreement. With respect to any such
action, suit or proceeding as to which Director notifies Corporation of the
commencement thereof:

(a) Corporation will be entitled to participate therein at its own
expense;

(b) Except as otherwise provided below, to the extent that it may
wish, Corporation jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Director. After notice from Corporation to Director of its
election to assume the defense thereof, Corporation will not be liable to
Director under this Agreement for any legal or other expenses subsequently
incurred by Director in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Director
shall have the right to employ his or her own counsel in such action, suit or
proceeding but the fees and expenses of such counsel incurred after notice from
Corporation of its assumption of the defense thereof shall be at the expense of
Director unless (i) the employment of counsel by Director has been authorized by
Corporation, (ii) Director shall have reasonably concluded that there may be a
conflict of interest between Corporation and Director in the conduct of the
defense of such action or (iii) Corporation shall not in fact have employed
counsel to assume the defense of such action, in each of which cases the fees
and expenses of Director's separate counsel shall be at the expense of
Corporation. Corporation shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of Corporation or as to which
Director shall have made the conclusion provided for in (ii) above; and

(c) Provided there has been no Change of Control, Corporation shall
not be liable to indemnify Director under this Agreement for any amounts paid in
settlement of any action or claim effected without its written consent, which
consent shall not be unreasonably withheld. Corporation shall be permitted to
settle any action except that it shall not settle any action or claim in any
manner which would impose any penalty, out-of-pocket liability, or limitation on
Director without Director's written consent.

12. ADVANCEMENT AND REPAYMENT OF EXPENSES.

(a) In the event that Director employs his or her own counsel
pursuant to Section 11(b)(i) through (iii) above, Corporation shall advance to
Director, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving copies of invoices presented to Director for such expenses.

(b) Director agrees that Director will reimburse Corporation for all
reasonable expenses paid by Corporation in defending any civil or criminal
action, suit or proceeding against Director in the event and only to the extent
it shall be ultimately determined by a final judicial

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<PAGE>

decision (from which there is no right of appeal) that Director is not
entitled, under the provisions of the Law, the Bylaws, this Agreement or
otherwise, to be indemnified by Corporation for such expenses.

13. REMEDIES OF DIRECTOR.

(a) In the event that (i) a determination pursuant to Section 5
hereof is made that Director is not entitled to indemnification, (ii) advances
of Expenses are not made pursuant to this Agreement, (iii) payment has not been
timely made following a determination of entitlement to indemnification pursuant
to this Agreement, or (iv) Director otherwise seeks enforcement of this
Agreement, Director shall be entitled to a final adjudication in an appropriate
court of his or her rights. Alternatively, Director at his or her option may
seek an award in arbitration to be conducted by a single arbitrator pursuant to
the commercial arbitration rules of the American Arbitration Association now in
effect, whose decision is to be made within ninety (90) days following the
filing of the demand for arbitration. The Corporation shall not oppose
Director's right to seek any such adjudication or arbitration award.

(b) In the event that a determination that Director is not entitled
to indemnification, in whole or in part, has been made pursuant to Section 5
hereof, the decision in the judicial proceeding or arbitration provided in
paragraph (a) of this Section 13 shall be made de novo and Director shall not be
prejudiced by reason of a determination that he or she is not entitled to
indemnification.

(c) If a determination that Director is entitled to indemnification
has been made pursuant to Section 5 hereof or otherwise pursuant to the terms of
this Agreement, Corporation shall be bound by such determination in the absence
of (i) a misrepresentation of a material fact by Director or (ii) a specific
finding (which has become final) by an appropriate court that all or any part of
such indemnification is expressly prohibited by law.

(d) In any court proceeding pursuant to this Section 13, Corporation
shall be precluded from asserting that the procedures and presumptions of this
Agreement are not valid, binding and enforceable. The Corporation shall
stipulate in any such court or before any such arbitrator that Corporation is
bound by all the provisions of this Agreement and is precluded from making any
assertion to the contrary.

(e) Expenses reasonably incurred by Director in connection with his
or her request for indemnification under this Agreement, meeting enforcement of
this Agreement or to recover damages for breach of this Agreement shall be borne
by Corporation.

(f) Corporation and Director agree herein that a monetary remedy for
breach of this Agreement, at some later date, will be inadequate, impracticable
and difficult of proof, and further agree that such breach would cause Director
irreparable harm. Accordingly, Corporation and Director agree that Director
shall be entitled to temporary and permanent injunctive relief to enforce this
Agreement without the necessity of proving actual damages or irreparable harm.
The Corporation and Director further agree that Director shall be entitled to
such injunctive relief, including temporary restraining orders, preliminary
injunctions and

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<PAGE>

permanent injunctions, without the necessity of posting bond or other
undertaking in connection therewith. Any such requirement of bond or
undertaking is hereby waived by Corporation, and Corporation acknowledges
that in the absence of such a waiver, a bond or undertaking may be required
by the court.

14. ENFORCEMENT.

(a) Corporation expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on Corporation hereby in
order to induce Director to continue as a director of Corporation, and
acknowledges that Director is relying upon this Agreement in continuing in such
capacity.

(b) In the event Director is required to bring any action to enforce
rights or to collect moneys due under this Agreement and is successful in such
action, the Corporation shall reimburse Director for all Director's reasonable
fees and expenses in bringing and pursuing such action.

15. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any or all of
the provisions hereof shall be held to be invalid or unenforceable to any extent
for any reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof, or the obligation of
the Corporation to indemnify the Director to the full extent provided by the
Bylaws or the Law, and the affected provision shall be construed and enforced so
as to effectuate the parties' intent to the maximum extent possible.

16. GOVERNING LAW. This Agreement shall be governed by and interpreted
and enforced in accordance with the internal laws of the State of Delaware.

17. CONSENT TO JURISDICTION. The Corporation and Director each
irrevocably consent to jurisdiction of the courts of the State of California for
all purposes in connection with any action or proceeding which arises out of or
relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.

18. BINDING EFFECT. This Agreement shall be binding upon Director and
upon Corporation, its successors and assigns, and shall inure to the benefit of
Director, his or her heirs, executors, administrators, personal representatives
and assigns and to the benefit of Corporation, its successors and assigns.

19. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties hereto and there are no other agreements, contracts or
understandings between the parties hereto with respect to the subject matter of
this Agreement, except as specifically referred to herein. This Agreement
supersedes any and all agreements regarding indemnification heretofore entered
into by the parties.

20. AMENDMENT AND TERMINATION. No amendment, modification, waiver,
termination or cancellation of this Agreement shall be effective for any purpose
unless set forth in writing

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<PAGE>

signed by both parties hereto.

21. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Director, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.

22. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Director by this
Agreement shall not be exclusive of any other right which Director may have or
hereafter acquire under any statute, provision of Corporation's Certificate of
Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.

23. SURVIVAL OF RIGHTS. The rights conferred on Director by this
Agreement shall continue after Director has ceased to be a director, officer,
employee or other agent of Corporation or such other entity.

24. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be addressed to Director or to
Corporation, as the case may be, at the address shown on page 1 of this
Agreement, or to such other address as may have been furnished by either party
to the other, and shall be deemed to have been duly given if (i) delivered by
hand and receipted for by the party to whom said notice or other communication
shall have been directed, or (ii) mailed by certified or registered mail with
postage prepaid, on the third business day after the date on which it is so
mailed.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.

DIRECTOR: ENCAD, INC.

By:
- ----------------------- --------------------------
(Signature)

- ----------------------- --------------------------
Print Name Print Name and Title

- -----------------------
Address

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

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<PAGE>

EXHIBIT 10.16

FORM OF INDEMNIFICATION AGREEMENT
BETWEEN THE COMPANY AND
ITS OFFICERS

<PAGE>

INDEMNIFICATION AGREEMENT

THIS AGREEMENT is made and entered into this ____ day of ___________,
1998 between ENCAD, Inc., a Delaware corporation ("Corporation"), whose
address is 6059 Cornerstone Court West, San Diego, California 92121 and
__________________ ("Officer").

RECITALS:

A. WHEREAS, Officer, an officer (but not currently a member of the
Board of Directors) of Corporation, performs a valuable service in such
capacity for Corporation; and

B. WHEREAS, the stockholders of Corporation have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
agents and employees of Corporation to the maximum extent authorized by
Section 145 of the Delaware General Corporation Law, as amended (the "Law");
and

C. WHEREAS, the Bylaws and the Law, as amended and in effect from
time to time or any successor or other statutes of Delaware having similar
import and effect, currently purports to be the controlling law governing
Corporation with respect to certain aspects of corporate law, including
indemnification of directors and officers; and

D. WHEREAS, in accordance with the authorization provided by the Law,
Corporation may from time to time purchase and maintain a policy or policies
of Directors and Officers Liability Insurance ("D & O Insurance"), covering
certain liabilities which may be incurred by its directors and officers in
the performance of services as directors and officers of Corporation; and

E. WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent and overall desirability of protection afforded officers by such D & O
Insurance, if any, and by statutory and bylaw indemnification provisions; and

F. WHEREAS, in order to induce Officer to continue to serve as an
officer of Corporation, Corporation has determined and agreed to enter into
this contract with Officer.

NOW, THEREFORE, in consideration of Officer's continued service as an
officer after the date hereof, the parties hereto agree as follows:

1. CERTAIN DEFINITIONS. The following terms used in this Agreement
shall have the meanings set forth below. Other terms are defined where
appropriate in this Agreement.

(a) "Disinterested Director" shall mean a director of Corporation
who is not or was not a party to the Proceeding in respect of which
indemnification is being sought by Officer.

<PAGE>

service fees, all other disbursements or out-of-pocket expenses and
reasonable compensation for time spent by Officer for which he or she is
otherwise not compensated by Corporation) actually and reasonably incurred in
connection with a Proceeding or establishing or enforcing a right to
indemnification under this Agreement, applicable law or otherwise; provided,
however, that "Expenses" shall not include any Liabilities.

(c) "Final Adverse Determination" shall mean that a determination
that Officer is not entitled to indemnification shall have been made pursuant to
Section 5 hereof and either (i) a final adjudication in a Delaware court or
decision of an arbitrator pursuant to Section 13(a) hereof shall have denied
Officer's right to indemnification hereunder, or (ii) Officer shall have failed
to file a complaint in a Delaware court or seek an arbitrator's award pursuant
to Section 13(a) for a period of one hundred twenty (120) days after the
determination made pursuant to Section 5 hereof.

(d) "Independent Legal Counsel" shall mean a law firm or member of a
law firm selected by Corporation and approved by Officer (which approval shall
not be unreasonably withheld) and that neither is presently nor in the past five
years has been retained to represent: (i) Corporation, in any material matter,
or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term "Independent
Legal Counsel" shall not include any person who, under the applicable standards
of professional conduct then prevailing, would have a conflict of interest in
representing either Corporation or Officer in an action to determine Officer's
right to indemnification under this Agreement.

(e) "Liabilities" shall mean liabilities of any type whatsoever
including, but not limited to, any judgments, fines, ERISA excise taxes and
penalties, and penalties and amounts paid in settlement (including all interest
assessments and other charges paid or payable in connection with or in respect
of such judgments, fines, penalties or amounts paid in settlement) of any
proceeding.

(g) "Change of Control" shall mean the occurrence of any of the
following events after the date of this Agreement:

(i) A change in the composition of the Board of Directors of
Corporation (the "Board"), as a result of which fewer than two-thirds (2/3) of
the incumbent directors are directors who either (1) had been directors of
Corporation twenty-four (24) months prior to such change or (2) were elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the directors who had been directors of Corporation 24 months prior
to such change and who were still in office at the time of the election or
nomination; or

(ii) Any "person" (as such term is used in section 13(d) and
14(d) of

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<PAGE>

the Securities Exchange Act of 1934, as amended) through the acquisition
or aggregation of securities is or becomes the beneficial owner, directly or
indirectly, of securities of Corporation representing twenty percent (20%) or
more of the combined voting power of Corporation's then outstanding
securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of directors (the
"Capital Stock"), except that any change in ownership of Corporation's
securities by any person resulting solely from a reduction in the aggregate
number of outstanding shares of Capital Stock, and any decrease thereafter in
such person's ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's beneficial
ownership of any securities of Corporation.

2. INDEMNITY OF OFFICER. Corporation hereby agrees to hold harmless and
indemnify Officer to the fullest extent authorized or permitted by the
provisions of the Law, as may be amended from time to time.

3. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in
Section 4 hereof, Corporation hereby further agrees to hold harmless and
indemnify Officer:

(a) against any and all legal expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Officer in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of Corporation) to which
Officer is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Officer is, was or at any time becomes a
director, officer, employee or agent of Corporation, or is or was serving or at
any time serves at the request of Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise; and

(b) otherwise to the fullest extent as may be provided to Officer by
Corporation under the non-exclusivity provisions of the Bylaws of Corporation
and the Law.

4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section
3 hereof shall be paid by Corporation:

(a) except to the extent the aggregate of losses to be indemnified
thereunder exceeds the sum of such losses for which Officer is indemnified
pursuant to Section 2 hereof or reimbursed pursuant to any D & O Insurance
purchased and maintained by Corporation;

(b) in respect of remuneration paid to Officer if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;

(c) on account of any action, suit or proceeding in which judgment is
rendered against Officer for an accounting of profits made from the purchase or
sale by Officer of securities of Corporation pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law;

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<PAGE>

(d) on account of Officer's conduct which is finally adjudged to have
been knowingly fraudulent or deliberately dishonest, or to constitute willful
misconduct if such conduct has been established by a judgment or other final
adjudication adverse to Officer (an "Adverse Judgment");

(e) provided there has been no Change of Control, on account of or
arising in response to any action, suit or proceeding (other than an action,
suit or proceeding referred to in Section 14(b) hereof) initiated by Officer or
any of Officer's affiliates against Corporation or any officer, director or
stockholder of Corporation unless such action, suit or proceeding was authorized
in the specific case by action of the Board of Directors of Corporation;

(f) if a final decision by a Court having jurisdiction in the matter
shall determine that such indemnification is not lawful; or

(g) on account of any action, suit or proceeding to the extent that
Officer is a plaintiff, a counter-complainant or a cross-complainant therein
(other than an action, suit or proceeding permitted by Section 4(e) hereof).

5. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.

(a) Whenever Officer believes that he or she is entitled to
indemnification pursuant to this Agreement, Officer shall submit a written
request for indemnification to Corporation. Any request for indemnification
shall include sufficient documentation or information reasonably available to
Officer to support his or her claim for indemnification. Officer shall submit
his or her claim for indemnification within a reasonable time not to exceed five
years after any judgment, order, settlement, dismissal, arbitration award,
conviction, acceptance of a plea of nolo contendere or its equivalent, final
termination or other disposition or partial disposition of any Proceeding,
whichever is the later date for which Officer requests indemnification. The
President or the Secretary or other appropriate officer shall, promptly upon
receipt of Officer's request for indemnification, advise the Board of Directors
in writing that Officer has made such a request. Determination of Officer's
entitlement to indemnification shall be made not later than ninety (90) days
after Corporation's receipt of his or her written request for such
indemnification.

(b) The Officer shall be entitled to select the forum in which
Officer's request for indemnification will be heard, which selection shall be
included in the written request for indemnification required in Section 5(a).
This forum shall be any one of the following:

(i) The stockholders of Corporation;

(ii) A quorum of the Board of Directors consisting of
Disinterested Directors;

(iii) Independent Legal Counsel, who shall make the
determination in a written opinion; or

-4-

<PAGE>

(iv) A panel of three arbitrators, one selected by
Corporation, another by Officer and the third by the first two arbitrators
selected. If for any reason three arbitrators are not selected within thirty
(30) days after the appointment of the first arbitrator, then selection of
additional arbitrators shall be made by the American Arbitration Association.
If any arbitrator resigns or is unable to serve in such capacity for any reason,
the American Arbitration Association shall select his or her replacement. The
arbitration shall be conducted pursuant to the commercial arbitration rules of
the American Arbitration Association now in effect.

If Officer fails to make such designation, his or her claim shall
be determined by the forum selected by Corporation.

6. PRESUMPTION AND EFFECT OF CERTAIN PROCEEDINGS. Upon making a request
for indemnification, Officer shall be presumed to be entitled to indemnification
under this Agreement and Corporation shall have the burden of proof to overcome
that presumption in reaching any contrary determination. The termination of any
Proceeding by judgment, order, settlement, arbitration award or conviction, or
upon a plea of nolo contendere or its equivalent shall not affect this
presumption or, except as may be provided in Section 4 hereof, establish a
presumption with regard to any factual matter relevant to determining Officer's
rights to indemnification hereunder. If the person or persons so empowered to
make a determination pursuant to Section 5(b) hereof shall have failed to make
the requested determination within thirty (30) days after any judgment, order,
settlement, dismissal, arbitration award, conviction, acceptance of a plea of
nolo contendere or its equivalent, or other disposition or partial disposition
of any Proceeding or any other event which could enable Corporation to determine
Officer's entitlement to indemnification, the requisite determination that
Officer is entitled to indemnification shall be deemed to have been made.

7. CONTRIBUTION. If the indemnification provided in Sections 2 and 3 is
unavailable and may not be paid to Officer for any reason other than those set
forth in Section 4, then in respect of any threatened, pending or completed
action, suit or proceeding in which Corporation is or is alleged to be jointly
liable with Officer (or would be if joined in such action, suit or proceeding),
Corporation shall contribute to the amount of expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Officer in such proportion as is appropriate to
reflect (i) the relative benefits received by Corporation on the one hand and
Officer on the other hand from the transaction from which such action, suit or
proceeding arose, and (ii) the relative fault of Corporation on the one hand and
of Officer on the other hand in connection with the events which resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
relevant equitable considerations. The relative fault of Corporation on the one
hand and of Officer on the other shall be determined by reference to, among
other things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such expenses,
judgments, fines or settlement amounts. Corporation agrees that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable considerations.

8. INSURANCE AND FUNDING. Corporation hereby represents and warrants
that it shall purchase and maintain insurance to protect itself and/or Officer
against any Expenses and

-5-

<PAGE>

Liabilities in connection with any Proceeding to the fullest extent permitted
by the Law. In the event of a Change of Control, Corporation shall establish
a letter of credit, as provided in Section 9, to ensure the payment of such
amounts as may be necessary to effect indemnification or advancement of
Expenses as provided in this Agreement.

9. LETTER OF CREDIT.

(a) In order to secure the obligations of Corporation to indemnify
and advance Expenses to Officer pursuant to this Agreement, Corporation shall
obtain at the time of any Change of Control, upon request of any officer, an
irrevocable standby letter of credit naming the officers of the Corporation in
office at the time of a Change of Control as joint beneficiaries (the "Letter of
Credit"). The Letter of Credit shall be in an appropriate amount not less than
one million dollars ($1,000,000), shall be issued by a commercial bank
headquartered in the United States having assets in excess of $10 billion and
capital according to its most recent published reports equal to or greater than
the then applicable minimum capital standards promulgated by such bank's primary
federal regulator and shall contain terms and conditions reasonably acceptable
to all directors. The Letter of Credit shall provide that Officer may from time
to time draw certain amounts thereunder, upon written certification by Officer
to the issuer of the Letter of Credit that (i) Officer has made written request
upon Corporation for an amount not less than the amount he or she is drawing
under the Letter of Credit and that Corporation has failed or refused to provide
him with such amount in full within thirty (30) days after receipt of the
request, and (ii) Officer believes that he or she is entitled under the terms of
this Agreement to the amount which he or she is drawing upon under the Letter of
Credit. The issuance of the Letter of Credit shall not, in any way, diminish
Corporation's obligation to indemnify Officer against Expenses and Liabilities
to the full extent required by this Agreement.

10. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Officer is a
director, officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) and shall continue thereafter so long as Officer shall be subject to
any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal or investigative, by reason of the fact that
Officer was serving Corporation or such other entity in any capacity referred to
herein.

11. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Officer
of notice of the commencement of any action, suit or proceeding, Officer will,
if a claim in respect thereof is to be made against Corporation under this
Agreement, notify Corporation of the commencement thereof; but the omission so
to notify Corporation will not relieve it from any liability which it may have
to Officer otherwise than under this Agreement. With respect to any such action,
suit

-6-

<PAGE>

or proceeding as to which Officer notifies Corporation of the commencement
thereof:

(a) Corporation will be entitled to participate therein at its own
expense;

(b) Except as otherwise provided below, to the extent that it may
wish, Corporation jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Officer. After notice from Corporation to Officer of its
election to assume the defense thereof, Corporation will not be liable to
Officer under this Agreement for any legal or other expenses subsequently
incurred by Officer in connection with the defense thereof other than reasonable
costs of investigation or as otherwise provided below. Officer shall have the
right to employ his or her own counsel in such action, suit or proceeding but
the fees and expenses of such counsel incurred after notice from Corporation of
its assumption of the defense thereof shall be at the expense of Officer unless
(i) the employment of counsel by Officer has been authorized by Corporation,
(ii) Officer shall have reasonably concluded that there may be a conflict of
interest between Corporation and Officer in the conduct of the defense of such
action or (iii) Corporation shall not in fact have employed counsel to assume
the defense of such action, in each of which cases the fees and expenses of
Officer's separate counsel shall be at the expense of Corporation. Corporation
shall not be entitled to assume the defense of any action, suit or proceeding
brought by or on behalf of Corporation or as to which Officer shall have made
the conclusion provided for in (ii) above; and

(c) Provided there has been no Change of Control, Corporation shall
not be liable to indemnify Officer under this Agreement for any amounts paid in
settlement of any action or claim effected without its written consent, which
consent shall not be unreasonably withheld. Corporation shall be permitted to
settle any action except that it shall not settle any action or claim in any
manner which would impose any penalty, out-of-pocket liability, or limitation on
Officer without Officer's written consent.

12. ADVANCEMENT AND REPAYMENT OF EXPENSES.

(a) In the event that Officer employs his or her own counsel pursuant
to Section 11(b)(i) through (iii) above, Corporation shall advance to Officer,
prior to any final disposition of any threatened or pending action, suit or
proceeding, whether civil, criminal, administrative or investigative, any and
all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving copies of invoices presented to Officer for such expenses.

(b) Officer agrees that Officer will reimburse Corporation for all
reasonable expenses paid by Corporation in defending any civil or criminal
action, suit or proceeding against Officer in the event and only to the extent
it shall be ultimately determined by a final judicial decision (from which there
is no right of appeal) that Officer is not entitled, under the provisions of the
Law, the Bylaws, this Agreement or otherwise, to be indemnified by Corporation
for such expenses.

13. REMEDIES OF OFFICER.

-7-

<PAGE>

(a) In the event that (i) a determination pursuant to Section 5
hereof is made that Officer is not entitled to indemnification, (ii) advances of
Expenses are not made pursuant to this Agreement, (iii) payment has not been
timely made following a determination of entitlement to indemnification pursuant
to this Agreement, or (iv) Officer otherwise seeks enforcement of this
Agreement, Officer shall be entitled to a final adjudication in an appropriate
court of his or her rights. Alternatively, Officer at his or her option may
seek an award in arbitration to be conducted by a single arbitrator pursuant to
the commercial arbitration rules of the American Arbitration Association now in
effect, whose decision is to be made within ninety (90) days following the
filing of the demand for arbitration. The Corporation shall not oppose
Officer's right to seek any such adjudication or arbitration award.

(b) In the event that a determination that Officer is not entitled to
indemnification, in whole or in part, has been made pursuant to Section 5
hereof, the decision in the judicial proceeding or arbitration provided in
paragraph (a) of this Section 13 shall be made de novo and Officer shall not be
prejudiced by reason of a determination that he or she is not entitled to
indemnification.

(c) If a determination that Officer is entitled to indemnification
has been made pursuant to Section 5 hereof or otherwise pursuant to the terms of
this Agreement, Corporation shall be bound by such determination in the absence
of (i) a misrepresentation of a material fact by Officer or (ii) a specific
finding (which has become final) by an appropriate court that all or any part of
such indemnification is expressly prohibited by law.

(e) Expenses reasonably incurred by Officer in connection with his or
her request for indemnification under this Agreement, meeting enforcement of
this Agreement or to recover damages for breach of this Agreement shall be borne
by Corporation.

(f) Corporation and Officer agree herein that a monetary remedy for
breach of this Agreement, at some later date, will be inadequate, impracticable
and difficult of proof, and further agree that such breach would cause Officer
irreparable harm. Accordingly, Corporation and Officer agree that Officer shall
be entitled to temporary and permanent injunctive relief to enforce this
Agreement without the necessity of proving actual damages or irreparable harm.
The Corporation and Officer further agree that Officer shall be entitled to such
injunctive relief, including temporary restraining orders, preliminary
injunctions and permanent injunctions, without the necessity of posting bond or
other undertaking in connection therewith. Any such requirement of bond or
undertaking is hereby waived by Corporation, and Corporation acknowledges that
in the absence of such a waiver, a bond or undertaking may be required by the
court.

14. ENFORCEMENT.

-8-

<PAGE>

(a) Corporation expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on Corporation hereby in
order to induce Officer to continue as an officer of Corporation, and
acknowledges that Officer is relying upon this Agreement in continuing in such
capacity.

(b) In the event Officer is required to bring any action to enforce
rights or to collect moneys due under this Agreement and is successful in such
action, the Corporation shall reimburse Officer for all of Officer's reasonable
fees and expenses in bringing and pursuing such action.

15. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any or all of
the provisions hereof shall be held to be invalid or unenforceable to any extent
for any reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof, or the obligation of
the Corporation to indemnify the Officer to the full extent provided by the
Bylaws or the Law, and the affected provision shall be construed and enforced so
as to effectuate the parties' intent to the maximum extent possible.

16. GOVERNING LAW. This Agreement shall be governed by and interpreted
and enforced in accordance with the internal laws of the State of Delaware.

17. CONSENT TO JURISDICTION. The Corporation and Officer each irrevocably
consent to jurisdiction of the courts of the State of California for all
purposes in connection with any action or proceeding which arises out of or
relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California.

18. BINDING EFFECT. This Agreement shall be binding upon Officer and upon
Corporation, its successors and assigns, and shall inure to the benefit of
Officer, his or her heirs, executors, administrators, personal representatives
and assigns and to the benefit of Corporation, its successors and assigns.

20. AMENDMENT AND TERMINATION. No amendment, modification, waiver,
termination or cancellation of this Agreement shall be effective for any purpose
unless set forth in writing signed by both parties hereto.

21. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Officer, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.

-9-

<PAGE>

22. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Officer by this
Agreement shall not be exclusive of any other right which Officer may have or
hereafter acquire under any statute, provision of Corporation's Certificate of
Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.

23. SURVIVAL OF RIGHTS. The rights conferred on Officer by this Agreement
shall continue after Officer has ceased to be a director, officer, employee or
other agent of Corporation or such other entity.

24. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be addressed to Officer or to
Corporation, as the case may be, at the address shown on page 1 of this
Agreement, or to such other address as may have been furnished by either party
to the other, and shall be deemed to have been duly given if (i) delivered by
hand and receipted for by the party to whom said notice or other communication
shall have been directed, or (ii) mailed by certified or registered mail with
postage prepaid, on the third business day after the date on which it is so
mailed.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.

Officer: ENCAD, INC.

By:
- ------------------- ------------------------
(Signature) (Signature)

- ------------------- ------------------------
Print Name Print Name and Title

- -------------------
Address

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

-10-

<PAGE>

EXHIBIT 21.1

SUBSIDIARIES

ENCAD INTERNATIONAL INCORPORATED
(FOREIGN SALES CORPORATION IN U.S. VIRGIN ISLANDS)

ENCAD EUROPE, S.A.
(SALES OFFICE)

ENCAD Ltd.
(SALES OFFICE)

ENCAD GmbH
(SALES OFFICE)

<PAGE>

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

To the Board of Directors and Stockholders of ENCAD, Inc.

We consent to the incorporation by reference in Registration Statements No.
333-24965, No. 333-44923 and No. 333-45327 of ENCAD, Inc. on Form S-8 of our
report dated January 30, 1998 (March 19, 1998 as to the last paragraph of
Note 8), incorporated by reference in this Annual report on Form 10-K of
ENCAD, Inc. for the year ended December 31, 1997.

DELOITTE & TOUCHE LLP
San Diego, California
March 26, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ENCAD,
INC. DECEMBER 31, 1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,265
<SECURITIES> 0
<RECEIVABLES> 36,800
<ALLOWANCES> 0
<INVENTORY> 29,155
<CURRENT-ASSETS> 72,118
<PP&E> 23,256
<DEPRECIATION> 8,431
<TOTAL-ASSETS> 90,295
<CURRENT-LIABILITIES> 24,300
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 17,577
<TOTAL-LIABILITY-AND-EQUITY> 90,295
<SALES> 149,041
<TOTAL-REVENUES> 149,041
<CGS> 78,259
<TOTAL-COSTS> 78,259
<OTHER-EXPENSES> 44,289
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,528
<INCOME-TAX> 9,099
<INCOME-CONTINUING> 17,429
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,429
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.45

</TABLE>

<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-30-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 1,536 2,064 3,265 6,949
<SECURITIES> 800 0 0 0
<RECEIVABLES> 15,519 16,072 17,041 19,762
<ALLOWANCES> 0 0 0 0
<INVENTORY> 9,363 13,396 15,660 13,630
<CURRENT-ASSETS> 29,963 34,871 40,582 44,572
<PP&E> 12,906 13,467 14,612 15,927
<DEPRECIATION> 3,160 3,680 4,454 5,046
<TOTAL-ASSETS> 39,877 44,721 51,274 57,467
<CURRENT-LIABILITIES> 8,756 10,581 13,076 14,246
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 12,171 12,388 12,714 13,338
<OTHER-SE> 0 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 39,877 44,721 51,274 57,467
<SALES> 19,618 44,370 74,417 107,437
<TOTAL-REVENUES> 19,618 44,370 74,417 107,437
<CGS> 10,401 23,163 39,068 56,021
<TOTAL-COSTS> 10,401 23,163 39,068 56,021
<OTHER-EXPENSES> 6,060 13,693 22,241 31,844
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 3,227 7,608 13,235 19,755
<INCOME-TAX> 1,128 2,704 4,599 6,902
<INCOME-CONTINUING> 2,099 4,904 8,636 12,853
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,099 4,904 8,636 12,853
<EPS-PRIMARY> .19 .44 .77 1.15
<EPS-DILUTED> .18 .42 .73 1.08

</TABLE>

<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 5,695 3,357 1,252
<SECURITIES> 0 0 0
<RECEIVABLES> 23,404 30,809 35,035
<ALLOWANCES> 0 0 0
<INVENTORY> 13,890 16,936 20,388
<CURRENT-ASSETS> 48,561 57,114 62,676
<PP&E> 17,919 19,861 21,858
<DEPRECIATION> 5,620 6,427 7,339
<TOTAL-ASSETS> 62,388 71,474 78,420
<CURRENT-LIABILITIES> 14,417 18,320 19,423
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 13,854 14,679 15,879
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 62,388 71,474 78,420
<SALES> 31,341 68,839 107,221
<TOTAL-REVENUES> 31,511 69,236 107,745
<CGS> 16,105 36,165 56,574
<TOTAL-COSTS> 16,105 36,165 56,574
<OTHER-EXPENSES> 9,764 21,031 32,320
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 5,706 12,182 18,954
<INCOME-TAX> 2,012 4,265 6,594
<INCOME-CONTINUING> 3,694 7,917 12,360
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,694 7,917 12,360
<EPS-PRIMARY> .33 .70 1.09
<EPS-DILUTED> .31 .66 1.03

</TABLE>