ENCAD INC, 10-K, 1999-03-30

ENCAD INC
10-K, 1999-03-30
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, 1998
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
SAN DIEGO, CA
(Address of principal executive office) 92121
(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 28, 1999: $41,559,570.*

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

Outstanding at
Class February 28, 1999
----- ------------------
Common Stock, $.001 par value 11,636,254

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 1999 Annual Meeting are incorporated herein by reference into Part III of
this Report.

Certain Exhibits filed with the Registrant's prior registration statements and
Forms 10-K and 10-Q are incorporated herein by reference into Part IV of this
Report.

_____________________
* Excludes 2,650,401 shares of Common Stock held by executive officers,
directors and stockholders whose ownership exceeds 5% of the Common Stock
outstanding at February 28, 1999. 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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ENCAD, INC
FORM 10-K

TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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PART I
ITEM 1: BUSINESS......................................................1
ITEM 2: PROPERTIES...................................................13
ITEM 3: LEGAL PROCEEDINGS............................................13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........14

PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS..................................14
ITEM 6: SELECTED FINANCIAL DATA......................................15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................16
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................20
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................20
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................20

PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..............20
ITEM 11: EXECUTIVE COMPENSATION.......................................20
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...............................................21
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............21

PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K..................................................21

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................F-1
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PART I

ITEM 1: BUSINESS

THE DISCUSSION OF OUR 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 OUR 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. WE UNDERTAKE NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
ARISING AFTER THE DATE OF THIS ANNUAL REPORT.

GENERAL

We design, develop, manufacture and market wide-format (up to 60"), color
inkjet printer systems designed to increase productivity in computer
applications requiring quality printed output. Our current printer product line
consists of the CADJET-Registered Trademark-, Croma24-TM-, NovaJet-Registered
Trademark-, NovaJet PROe, NovaJet PRO600e, and 1500 TX-TM-(1). Typical uses
for these printers and their related accessories and supplies are in:

- graphic arts, such as sign-making, digital photo imaging,
three-dimensional renderings and presentation graphics;
- computer-aided design, also known as CAD, used by architects,
engineers and construction designers;
- geographic information systems, also known as GIS, such as surveying
and mapping; and
- textiles, such as sampling, personalization and short run
manufacturing.

To support our wide-format inkjet printers, we offer 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. We believe
these advancements will make quality wide-format inkjet output more affordable,
allowing our products to be more widely used in our existing markets, as well as
addressing potential new market applications, such as, photography, fine art and
medical imaging.

Our business is organized into two segments - the Digital Imaging Solutions
business unit, which includes graphic arts, CAD, GIS and the Textile business
unit. Due to the similarity of production processes, distribution methods,
customers, and products, we have aggregated these two segments into one for
financial reporting purposes.

Market

The market for wide-format, color inkjet printers emerged early this decade
as a result of the rapid growth in the use of high-powered personal computers by
a wide variety of technical professionals. More recently, graphic arts
professionals have begun to take advantage of the improved 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 four primary categories:
graphic arts, CAD, GIS and textiles.

Users in the graphic arts category include graphic artists, print shops,
photo-labs, sign shops and service bureaus. Applications in the graphic arts
category include backlit and other signs, point-of-sale advertising, posters,
pre-press proofing (proofs or other quick output to demonstrate concepts for
advertising or graphics layouts) and digital photo imaging. We are a leader in
this category. Our product lines are particularly well-suited to the graphic
arts category since they are capable of producing a full range of outputs, from
single line monochrome to full color, photorealistic images. Graphic arts users
require output in three distinct areas of the graphic arts and design process,
all of which require performance balanced by low-cost, quickly-produced output.
In the pre-press area, graphic arts users require proofs or other quick output
to demonstrate concepts for advertising or graphics layouts. Pre-press

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

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output involves any output where form, shape or color is emphasized. In the
quick print area, graphic arts users include print shops, service bureaus and
corporate graphic arts departments that produce signs or posters. Quick
print output includes backlit and wall-mount signs and point-of-sale
displays. In the digital photo category, digitized photo output is used when
photographic images are manipulated. Users include photo labs, service
bureaus and corporate graphic arts departments that produce high resolution
digitized photographs.

The CAD category 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 category 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 NovaJet product line offers a full range of color outputs and our
CADJET product line offers a CAD user spot color in addition to excellent line
quality.

GIS users are a more specialized group that utilizes technical graphics
applications similar to those used in the CAD category, 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, these users require more color
than CAD users since their output involves the use of color fills and varied
fonts for richer presentations. This category, although smaller than the other
markets we serve, represents opportunities for our product lines since these
applications require, in some instances, both three-dimensional renderings and
color fills to differentiate acreage, objects and topographical features.

We entered the textile market in the sampling segment of the market in 1998
with the introduction of the 1500 TX Digital Textile System-TM-. With this
product designers are able to print their designs directly to fabric, make quick
changes and have the fabric cut and sewn into a sample immediately. This
provides the benefit of significant time and cost savings, as well as in-house
control of proprietary designs. We moved toward the short run production market
in early 1999 with the addition of jointly developed specialty inks and fabric
treatments combined with our 1500 TX Digital Textile System. The fabric
treatments simplify the post-processing required after printing and make the
inks washable.

We believe that there are several factors which will drive potential market
demand for digital textile printing. They include a shift from volume
purchasing of fabrics for the lowest possible cost to timely purchasing. The
desire to reduce inventory, risk and response time from design to delivery will
result in shorter runs with rapid turnaround, which should favor digital textile
printing. In addition, digital textile printing is expected to benefit from a
trend among designers and retailers toward customizing their output to the image
and programs of their individual customers.

PRINTING TECHNOLOGIES

There are a number of printing technologies, including thermal inkjet,
electrostatic, thermal, and piezo inkjet, 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 free of
banding or striping, reliability and cost.

A combination of characteristics has made thermal inkjet the fastest
growing technology in the wide-format printer market over the past decade.
These characteristics include relatively low cost, high speed and the ability to
print high-quality color images. Inkjet printers form images, lines and other
characters by placing very small dots of heated 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
displaced technologies such as pen plotters. Inkjet printers can print on a
wide variety of media.

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Electrostatic printers operate by creating a dot pattern of electric
charges on special paper or other media. The colors are attracted to the media
as it passes across the color fountains. Although this technology offers
certain advantages to users requiring enhanced color, color fills and high-speed
characteristics, it is generally more expensive than inkjet printers.
Electrostatic printers are considered production machines and typically used for
larger runs. The current market for this technology is small in size.

Thermal transfer machines use wax- or resin-coated ribbons instead of inks
and generally require special media to take advantage of the thermal print head.
Thermal printers cost considerably more than inkjet printers.

Piezo inkjet technology forces small droplets of ink on to the media
through the use of a crystal that contracts the walls of the ink-holding chamber
when electricity is applied. This technology is becoming more important and
there is likely to be substantial growth in this sector as the technology
matures. The reasons are, potentially faster printer performance and easier
compatibility with pigmented inks.

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

OUR PRODUCTS

We have designed a variety of wide-format hard copy peripherals,
including color inkjet printers and pen plotters. We currently sell the
second generation of the CADJET product line, the first of which was
introduced in November 1994, three series of the NovaJet product line,
including the NovaJet family, first introduced in October 1991, NovaJet PROe
Series, and NovaJet PRO600e Series, the Croma24, and the Digital Textile
System. During 1998, we discontinued selling the NovaCut product line. All
of our 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, our products allow users to print in a variety of
sizes from standard small-format to wide-format. Our automatic media sensing
feature also permits the accommodation of some special sizes. Our products
have an easy-to-operate keyboard and display, with drop-down 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 at
600 dots per inch, also known as dpi, can be used to produce higher quality
images. A three 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 plotter
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 of our 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 media and can generate output on roll or
cut-sheet media.

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

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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 graphic arts
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.

NOVAJET PROE SERIES

The NovaJet PROe Series, first shipped in May 1997, is available in both
42" width and 60" width models. These models, at 300 dpi, 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. The NovaJet PROe Series is designed
specifically for print-for-pay users that require a high quality faster, more
productive and even wider media solution to their growing 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.

NOVAJET PRO 600E SERIES

The NovaJet PRO 600e Series, first shipped in May 1998, is available in
both 42" and 60" models. These models include all of the features found on the
NovaJet PROe Series, plus the ability to switch between 300 dpi and 600 dpi
resolution. The NovaJet PRO 600e Series are our fastest printers. They 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 these models provide.

CROMA24

The Croma24, first shipped in June 1997, is the industry's first cost-effective,
color inkjet printer which produces 24" photo-realistic images. More than
doubling traditional 11" x 17" print widths, the 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. The Croma24 has Macintosh, 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 our other printer models, a full range of
scientifically matched supplies is available. Because Croma24 sales have not
met our expectations, we wrote off all non-inventory assets associated with this
product line and fully reserved all remaining inventory in 1998. We are
assessing alternative cost effective selling methods and pricing for the product
line.

1500 TX DIGITAL TEXTILE SYSTEM

The 1500 TX Digital Textile System, consisting of the 1500 TX-TM- Printer,
TXPrint-TM- color-management and image-processing software, TX Inks and
specially treated ENCAD Textiles, first shipped in March 1998. The system is
targeted to textile designers who require a faster, more productive and more
secure solution to their design and sampling needs. 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, we have targeted the sampling, personalization, and small
production run areas 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. ENCAD Textiles, specifically designed for use with the other
components of the system, do not

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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 Company recently introduced a new line of high performance, production
quality, ink and fabric treatments that simplify the post-processing required
after printing and makes inks colorfast. Designers are thus able to print
designs directly on a variety of fabrics immediately upon completion of the
initial design concept.

ENCAD QUALITY IMAGING SUPPLIES-TM-

Our line of supplies, launched in 1995, provides a comprehensive output
system for our printer owners. Because they are designed to ensure the highest
quality output possible from our printers, these supplies are branded ENCAD
Quality Imaging Supplies. Sales of supplies accounted for 36%, 22% and 14% of
net sales in 1998, 1997 and 1996, respectively.

The ENCAD Quality Imaging Supplies 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, we
provide a guarantee for most of our outdoor products. The outdoor line of
products allows us to better compete in the sign-making market and also provides
new applications for traditional printer owners.

The indoor line of products includes specially formulated dye-based inks
optimized for our printers and our custom ink cartridges. In order to fulfill
the broad needs of our marketplace, we provide 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.

Our broad range of Quality Imaging Supplies media feature a proprietary
inkjet coating that is optimized for use with our inks. The coatings control ink
absorption for images that are vibrantly colorful and high in print quality.
The media line consists of numerous media options, from photo-based papers to
adhesive-backed vinyl, two types of canvas and three types of film. All Quality
Imaging Supplies media are made with a recyclable, water-based coating.

ACCESSORIES

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

We introduced our first hardware raster image processor, also known as RIP,
the ENCAD Fiery-Registered Trademark- LX-W Color Server, in 1998. The Fiery
LX-W, manufactured by Electronics For Imaging, Inc., is a productivity-oriented,
plug and play, network-ready, wide-format RIP, ideal for corporate designers,
production facilities and print-for-pay businesses.

THIRD PARTY INTERFACES

Third-party PostScript-Registered Trademark- hardware and software
developers have created products that interface with our NovaJet product
line. These products allow the various NovaJet products to output near
photo-realistic color 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 our products in Macintosh-Registered Trademark-, DOS-Registered
Trademark- and Windows-Registered Trademark- platforms.(1)

(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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RESEARCH, PRODUCT DEVELOPMENT AND ENGINEERING

Since our founding in 1981, we have been an industry leader in delivering
innovation to the wide-format printing marketplace. We have focused our
research and development efforts on printers based on thermal inkjet printing
technology. Inkjet printers have been the fastest growing segment of the
wide-format printing market due to the ability to form high quality color images
at relatively low cost and high performance. We pioneered wide-format inkjet
photo realistic printing, extended ink delivery systems and light fast inks for
outdoor signage. In 1998, we extended our leadership position with the
introduction of the 1500 TX Digital Textile Printing System and the NovaJet
Pro600e 42" and 60", 600 dpi printers.

We believe timely development and introduction of new products which
satisfy customer requirements are critical to our success. We strive to
anticipate and respond to user demands in selected wide-format printing markets
and to provide solutions with distinct competitive advantages for those
customers. We focus our research and development efforts on solutions
emphasizing superior performance, outstanding image quality, simplicity of
design, system productivity and low total cost of ownership for the end user.
We develop wide format inkjet printers, inks, media, RIPs, and software.

We maintain a research and development staff with expertise in design of
mechanical systems, electronics, control systems, firmware, software, chemistry,
physics, fluid dynamics and color science. We have developed a significant
patent portfolio in inkjet printing. We have also been able to consistently
deliver innovative new products to the market place while spending less on
product development than some of our key competitors.

We augment our development staff through strategic partnerships with
industry leaders for the development of components and subsystems. In some
cases, we elect to outsource the development of complete products to these
partners. Additionally, we employ industry consultants and contract engineering
firms when specific expertise or additional resources are required.

Research and development expenses were $10,894,000, $10,544,000 and
$8,794,000 in 1998, 1997 and 1996, respectively, which represent approximately
10%, 7% and 8% of net sales in those respective periods.

MANUFACTURING AND SUPPLIERS

Our printer manufacturing operations consist of subassembly, final assembly
and testing, quality assurance, packaging and shipping. We contract with various
outside vendors for printed circuit board fabrication and assembly and for
fabrication of metal and plastic parts. We then perform the final assembly of
our printer products in our 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 our supplies business, we partner 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 our products are available only from single
sources. Although we primarily buy components under purchase orders and do not
have long-term agreements with most of our suppliers, we anticipate that our
suppliers will be able to continue to satisfy our 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 our 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 our financial
condition and results of operations. Certain key components of our products are
supplied indirectly by our principal competitor, Hewlett-Packard Company, and
the inkjet cartridge, used in some of

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our older generation products, are purchased from Hewlett-Packard resellers.
We believe that Hewlett-Packard supplies these components to many other
companies.

Because we place strong emphasis on product quality and customer
satisfaction, we design our quality into products, components and the
manufacturing processes. As a result, we have developed quality control
programs with our suppliers in our product development and manufacturing
operations. Suppliers are encouraged to participate in new product designs.
Many of our suppliers' manufacturing capabilities are statistically evaluated to
allow for certification and direct shipment to the production floor. We use a
"Just-in-Time" program for delivery of some raw materials and subassemblies to
manufacturing to minimize these types of inventories. We also use a material
requirements planning system that is intended to aid in making "Just-in-Time"
decisions. We maintain raw materials which include printer parts for
manufacturing and service, ink and media.

MARKETING, SALES AND DISTRIBUTION

We market and sell our products throughout the world primarily through
specialty distributors, value-added resellers, also known as VARs, dealers and
Original Equipment Manufacturers, also known as OEMs.

DISTRIBUTORS, VARS AND DEALERS

Our approximately 500 domestic dealers are a critical channel to deliver
product to the end user. As a result, neither we nor our three domestic
distributors sell a material amount of products directly to end users. In
addition to our sales and marketing headquarters located in San Diego,
California, we have field salespersons residing in Illinois, Texas, New York and
California. These salespersons work closely with our regional distributors and
dealers.

Internationally, we generally utilize one major distributor in each
market. Our approximately 90 international distributors sell to dealers,
specialized systems integrators and VARs. Our international distributor
network provides us with a presence in Canada, Mexico, Europe, the Pacific
Rim, the Middle East, Central and South America, South Africa, China and
India. We maintain Pacific Rim sales offices in Hong Kong, China and
Australia. We also have subsidiaries located in France, Germany and England
to which we pay commissions for sales to customers that they identify. Their
revenues, operating profits and identifiable assets are not material. Our
dependence on international sales subjects us 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.

All export sales accounted for the percentages of net sales as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Europe, Middle East, Africa 39% 32% 30%
Americas, excluding United States 9 8 6
Asia Pacific 15 19 22
------- ------- -------
Total 63% 59% 58%
</TABLE>

Our agreements with our worldwide distributors generally grant each
distributor the non-exclusive right to distribute our products in its market.
Our international distribution agreement generally provides for payment net 45
days after shipment, by irrevocable letter of credit or by prepayment by wire
transfer for international distributors. In the case of domestic distributors,
payment generally is net 30 days upon credit approval, unless otherwise agreed
to by us. Any outstanding amounts remain owing subsequent to termination of the
agreement. We provide price protection to some of our distributors so that if
we reduce the price of our 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 60 days, and which remain in inventory
at the time of the price reduction. As a result, price reductions of our
products could have a material adverse effect on results of operations,
depending on distributor inventory levels at the time of such price reductions.

7
<PAGE>

We support the marketing and sales efforts of our worldwide distributors
and dealers through participation at worldwide computer industry trade shows as
well as specialized trade shows targeted at specific applications for our
products. We believe that we maintain good relationships with our worldwide
distributors and dealers. Domestically, we have 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, we assist our distributors in the larger markets
through active advertising and trade show participation. We offer our
distributors a cooperative advertising program that partially reimburses them
for expenses spent in advertising and promoting our products. Such
reimbursements are determined based upon the distributor's sales levels.

In 1998 and in 1997, no one customer accounted for more than 10% of net
sales, and in 1996, one customer accounted for 15% of net sales.

OEMs

To expand our distribution channels, we have entered into several OEM and
private label arrangements that allow us to better address specific market
applications or geographical areas. Sales from combined OEM and private label
arrangements accounted for 18%, 26% and 25% of net sales in 1998, 1997 and 1996,
respectively. We annually assess the success of the individual arrangements and
believe that, in the aggregate, they will continue to represent a substantial
portion of our revenue. We may not be able to retain these existing
arrangements or to obtain additional ones. If we are not able to acquire
additional OEM or private label customers, the loss of existing OEM and private
label customers could adversely affect our financial condition and results of
operations.

CUSTOMER SUPPORT

We consider ongoing support of our products to be an essential element
of our business. We have established a customer service and support
organization which provides technical support and printer repair to our
distributors, dealers and end-users. Customers have telephone access to
technical specialists who respond to printer, software, supplies and
applications questions. In addition, we have established an electronic
bulletin board or Internet access on which we post notes and software updates
to provide on-line support and solutions for our customers. We provide a
standard one-year warranty against defects in materials and workmanship in
our products. We also offer 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 United States is also available at
additional cost. Our OEM suppliers do their own warranty service. Any
product sold domestically that needs to be repaired may be returned directly
to us for repair. International distributors repair our products with us
supplying the parts to them directly. Since a large number of our products
are the sole color inkjet printers in a facility, we offer a print 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 print head to us for service and, in exchange, we 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 our financial condition or results of operation.

COMPETITION

In addition to the direct competition from products using inkjet
technology, our products face competition from other technologies which are
offered by several companies. The competition to sell ink, media and
software products to the customer is also intense. While we believe that we
compete successfully against these other technologies and products, they may
compete favorably for certain applications in which speed or cost are of key
importance. We may not be able to compete successfully in the future and
competitive pressures may have a material adverse effect on our financial
condition and results of operations.

We compete in the wide-format market mainly on the basis of performance and
price. Price competition became intensive during 1998, and we expect that
competition will accelerate in the future. Historically, we have reduced prices
on older generation products upon introduction of the newer generation models
and in response to other competitive pressures. Our most recent price reduction
took effect in October 1998, and additional price reductions will be required in
the future. Price reductions will affect gross margins, and may adversely
affect our financial condition and results of operations.

8
<PAGE>

PROPRIETARY RIGHTS AND LICENSES

We rely on a combination of trade secret, copyright, trademark and patent
protection, as well as confidentiality and non-disclosure agreements, in order
to protect our proprietary rights. We have pursued, and intend to continue to
pursue patent protection for inventions we consider important. We believe our
success will also continue to be dependent upon our reputation for unique
technology, product innovation, affordability, marketing ability and
responsiveness to customers' needs. We currently hold 14 patents related to
inkjet technology and design. In 1998, we filed 11 patent applications covering
our imaging technology. We may not be successful in protecting our proprietary
technology. Our proprietary rights may not preclude competitors from developing
products or technology equivalent or superior to ours.

From time to time, certain competitors, including Hewlett-Packard, have
asserted patent rights relevant to our business. We expect that this will
continue. We carefully evaluate each assertion relating to our products. If
our competitors are successful in establishing that asserted rights have been
violated, we could be prohibited from marketing the products that incorporate
such rights. We could also incur substantial costs to redesign our products or
to defend any legal action taken against us. If our products should be found to
infringe upon the intellectual property rights of others, we could be enjoined
from further infringement and be liable for any damages. The measures adopted
by us for the protection of our intellectual property may not be adequate to
protect our interests. In addition, our competitors may independently develop
technologies that are substantially equivalent or superior to our technologies.

EMPLOYEES

As of February 28, 1999, we employed approximately 396 persons,
including 97 in sales, marketing and related activities, 122 in manufacturing
and operations, 69 in research, product development and engineering, 50 in
technical support and service, and 58 in management, administration and
finance. Our success is highly dependent on our ability to attract and
retain qualified employees. Competition for employees is intense in our
industry and our locale. None of our employees is represented by a labor
union or is the subject of a collective bargaining agreement. We have never
experienced a work stoppage and believe that our employee relations are good.

RISKS AND UNCERTAINTIES

OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE SIGNIFICANTLY DEPENDING ON
FACTORS OUTSIDE OUR CONTROL.

Our quarterly operating results can fluctuate significantly depending on a
number of factors. Any one of these factors could have a material adverse
effect on our financial condition or results of operations. These factors
include:

- the timing of product announcements and subsequent introductions of
products by us and our competitors;
- availability and cost of components;
- timing of shipments of our products, including the mix of product
families shipped;
- market acceptance of new products;
- seasonality;
- currency fluctuations;
- changes in prices by us and our competitors; and
- price protection for selling price reductions offered to customers.

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. We may experience significant quarterly fluctuations in
net sales as well as operating expenses with respect to future new product
introductions. In addition, our component purchases, production and spending
levels are based upon forecast demand for our products. Accordingly, any
inaccuracy in forecasting could adversely affect our financial condition and
results of operations. Demand for our products could be adversely affected by a
slowdown in the overall demand for computer systems, printer products or
digitally printed images. Failure to complete shipments during a quarter also
could have a material adverse effect on our financial condition or results of
operations. Quarterly results are not necessarily indicative of future
performance for any particular period.

9
<PAGE>

We may not be able to maintain the levels of sales and profitability
experienced over the past several years on a quarterly or annual basis.

THE MARKETS FOR OUR PRODUCTS ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING
AND WE MAY NOT BE SUCCESSFUL IN COMPETING IN THIS MARKET.

The markets for our printers and supplies are highly competitive and
rapidly changing. Several new competitors have entered the market. Our
principal competitor is Hewlett-Packard, which dominates the CAD category of the
wide-format inkjet markets and is our principal competition in the graphic arts
category. In addition to direct competition in inkjet printers and related
supplies, our products also face competition from other technologies in the
wide-format market. The competition to sell ink, media and software products to
the customer is also intense. Some of our current and prospective competitors,
particularly Hewlett-Packard, have significantly greater financial, technical,
manufacturing and marketing resources than us. Our ability to compete in the
wide-format inkjet market depends on a number of factors within and outside our
control, including:

- the success and timing of product introductions by us and our
competitors;
- selling prices;
- product performance;
- product distribution;
- marketing ability; and
- customer support.

A key element of our strategy is to provide competitively priced, quality
products, yet we may not be able to do so. We reduced prices on many of our
products in 1998 and will likely continue to do so in the future. Price
reductions, while partially offset by similar reductions in product costs, have
affected gross margins and likely will continue to affect gross margins and may
adversely affect our financial condition and results of operations in the
future.

THE MARKETS IN WHICH WE COMPETE ARE CHARACTERIZED BY SHORT PRODUCT LIFE
CYCLES AND REDUCTIONS IN UNIT SELLING PRICES WHICH MAY HAVE AN ADVERSE
EFFECT ON OUR BUSINESS.

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. Our future success will depend on our ability to develop
and manufacture competitive products and achieve cost reductions for our
existing products. Advances in technology will require increased investment to
maintain our market position. Our financial condition and results of operations
could be adversely affected if we are unable to develop and manufacture new,
competitive products in a timely manner.

THE GROWTH OF OUR BUSINESS WILL REQUIRE SUBSTANTIAL CAPITAL RESOURCES THAT
MAY NOT BE AVAILABLE WHEN NEEDED.

The growth of our business will require the commitment of substantial
capital resources. If funds are not available from operations, we will need
additional funds. Such additional funds may not be available when required on
terms acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.

OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED
EMPLOYEES AND CONSULTANTS.

Our success is dependent, in part, on our ability to attract and retain
qualified management and technical employees. Competition for such personnel is
intense. The inability to attract additional key employees or the loss of one
or more key employees could adversely affect us. We do not have employment
agreements with or life insurance on members of senior management. We may not
be able to retain our key personnel. We rely heavily on industry consultants
and other specialists to assist and influence decisions, keep abreast of
technological and industry advances, and assist in other processes. A delay in
product introduction is possible to the extent key consultants are not
available.

10
<PAGE>

MANY OF OUR COMPONENTS ARE SUPPLIED BY SINGLE-SOURCE SUPPLIERS THAT MAY NOT
BE ABLE TO BE REPLACED WITHOUT DISRUPTING OUR OPERATIONS.

Certain components used in our products are only available from single
sources. We generally do not have long-term agreements with our suppliers.
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 our operations. If a supplier is
unable to meet our needs or supplies parts which we find unacceptable, we may
not be able to meet production demands. Certain key components of our products
are supplied indirectly by our principal competitor, Hewlett-Packard. Any
significant increase in component prices or decrease in component availability
could have a material adverse effect on our business.

IF OUR COMPETITORS ARE SUCCESSFUL IN ESTABLISHING THEIR INTELLECTUAL
PROPERTY RIGHTS ARE VIOLATED BY OUR PRODUCTS, OUR BUSINESS WOULD BE
ADVERSELY AFFECTED.

A SIGNIFICANT PORTION OF OUR NET SALES IS DERIVED FROM SALES TO COUNTRIES
OUTSIDE THE UNITED STATES AND FACTORS OUTSIDE OUR CONTROL COULD ADVERSELY
AFFECT OUR SALES IN THOSE COUNTRIES.

For the years ended December 31, 1998 and 1997, sales outside the United
States represented approximately 63% and 59% of our net sales, respectively.
Even with the recent decline in our business in Asia, we expect export sales to
continue to represent a significant portion of our sales. All of our products
sold in international markets are denominated in U.S. dollars. An increase in
the value of the U.S. dollar relative to foreign currencies could make our
products less competitive in these 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 our products and
intellectual property rights to the same extent as the laws of the United
States. As we continue to pursue our international business, these factors may
have an adverse effect on our sales and, consequently, on our business.

WE ARE DEPENDENT ON OUR DISTRIBUTORS AND OEMS TO SELL AND MARKET OUR
PRODUCTS AND THEY MANY NOT DEVOTE SUFFICIENT RESOURCES TO THIS TASK TO
ENSURE OUR SUCCESS.

Our sales are principally made through independent distributors, which may
carry competing product lines. Such distributors could reduce or discontinue
sales of our products, which could have a material adverse effect on our
business. These distributors may not devote the resources necessary to provide
effective sales, service and marketing support of our products. In addition, we
are dependent upon the continued viability and financial stability of these
distributors, many of which are organizations with limited capital. These
distributors, in turn, are substantially

11
<PAGE>

dependent upon their dealers, general economic conditions and other unique
factors affecting the wide-format printer market. We believe that our future
growth and success will continue to depend in large part upon our
distribution channels. Actual bad debts may in the future exceed recorded
allowances resulting in a material adverse effect on our business. In order
to prevent inventory write-downs, to the extent that OEM and private label
customers do not purchase products as anticipated, we may need to convert
such products to make them salable to other customers. Such a conversion
would increase product costs and would likely result in a delay in selling
such products.

MANAGEMENT OF THE GROWTH OF OUR BUSINESS MAY PLACE STRAINS ON OUR
OPERATIONS.

We have experienced growth in the past which placed, and, if continued,
will continue to place, a significant strain on our management, employees,
systems and operations. Our future operating results will depend on our ability
to continue to broaden our senior management group, attract, hire and retain
skilled employees and enhance or replace existing operational information and
financial control systems. We may encounter difficulties in successfully
integrating new personnel into the organization, and changes to our information
and financial control systems may not be effective. Our inability to manage
growth effectively could have a material adverse effect on our business.

AS THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE IN THE PAST AND
MAY CONTINUE TO DO SO IN THE FUTURE, AN INVESTMENT IN OUR COMMON STOCK MAY
YIELD UNCERTAIN RESULTS.

The market price of our common stock has fluctuated significantly since our
initial public offering in December 1993. We believe factors such as the
following could cause further significant volatility in the price of the common
stock:

- general stock market trends;
- announcements of developments related to our business;
- fluctuations in our operating results;
- general conditions in the computer peripheral market and the markets
we serve or in the worldwide economy;
- shortfalls in sales or earnings from securities analysts'
expectations;
- announcements of technological innovations or new inkjet products or
enhancements by us or our competitors;
- developments in patents or other intellectual property rights; and
- developments in our relationships with our customers or suppliers.

In addition, in recent years the stock market in general, and the market
for shares of technology stocks in particular, have experienced extreme
volatility, which have often been unrelated to the operating performance of
affected companies. The market price of the common stock may continue to
experience significant fluctuations that are unrelated to our operating
performance.

WE HAVE NOT COMPLETED OUR SURVEY OF OUR VENDORS OR CUSTOMERS OR OUR TESTING
OF THE SYSTEMS USED IN OUR BUSINESS TO DETERMINE IF THEY ARE YEAR 2000
COMPLIANT; FAILURE TO BE YEAR 2000 COMPLIANT COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS.

All year 2000 remediation processes may not be completed and properly
tested before the year 2000. Any contingency plans we develop may not
sufficiently mitigate the risk of a year 2000 readiness problem. An interruption
of our ability to conduct our business due to a year 2000 readiness problem
could have a material adverse effect on us.

Due to the recent implementation of the enterprise-wide information system,
we estimate that the additional aggregate costs of our year 2000 project will
not be material; however, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.

We are in the process of communicating with our significant suppliers,
customers and critical business partners to determine the extent to which we may
be vulnerable if those parties fail to properly remediate their own year 2000
issues. The Company has taken steps to monitor the progress made by those
parties, and to the extent possible, plans to test critical system interfaces,
as the year 2000 approaches. There can be no guarantee that the systems of
third-

12
<PAGE>

parties on which we rely will be converted in a timely manner, or that a
failure to properly convert by another company would not have a material
adverse effect on us. For a more complete description of our year 2000
initiative, you should read "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Compliance."

WE DO NOT PAY DIVIDENDS ON THE COMMON STOCK AND YOU WILL HAVE TO RELY ON
INCREASES IN ITS PRICE TO GET A RETURN ON YOUR INVESTMENT.

We have not paid dividends on the common stock. We currently intend to
continue this policy to retain earnings, if any, for use in our business. In
addition, our line of credit arrangement prohibits the payment of cash dividends
without prior bank approval if amounts are outstanding under such line of
credit.

OUR CHARTER DOCUMENTS AND RIGHTS PLAN MAY PREVENT A CHANGE OF CONTROL WHICH
IS IN YOUR BEST INTERESTS.

The stockholder rights plan and certain charter provisions may discourage
certain types of transactions involving an actual or potential change in control
of your company, including transactions in which you might otherwise receive a
premium for your shares over then-current market prices. These provisions may
limit your ability to approve transactions that you deem to be in your best
interests.

ITEM 2: PROPERTIES

Our headquarters are located in San Diego, California, in facilities we
purchased in February 1996 for $6,000,000. The property consists of two
buildings of approximately 51,000 and 47,000 square feet and houses the
principal administrative, research and manufacturing facility. We also lease a
44,000 square foot warehouse near our headquarters. We consider our facilities
adequate for our current needs and believe that additional space can be obtained
in the future if necessary.

ITEM 3: LEGAL PROCEEDINGS

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

In February 1998, Hewlett-Packard filed a lawsuit against us in the U.S.
District Court for the District of Idaho, alleging that certain of our products
infringed two of Hewlett-Packard's patents. Hewlett-Packard has since filed an
amended complaint, seeking to have the court also declare that certain
Hewlett-Packard products do not infringe two of our patents, as allegedly
asserted by us. We have filed a counter-claim, alleging that our products do not
infringe the Hewlett-Packard patents, and that the Hewlett-Packard patents are
invalid. The outcome of this lawsuit cannot be determined; however, we believe
that Hewlett-Packard's claims are without merit. We intend to vigorously defend
such claims. No amounts have been reported in the financial statements for any
losses that may result from this lawsuit.

In October 1998, a shareholders class-action lawsuit was filed against us
and our directors in the Delaware State Court, alleging that the "Continuing
Director" provisions of our shareholders rights plan constituted a breach of the
directors' fiduciary duties. Plaintiffs were seeking injunctive relief to
invalidate the plan, and damages to shareholders who allegedly sold stock at
depressed prices while the continuing director provisions were in effect. We
have since reached a settlement in principal regarding this matter subject to
documentation and court approval, if necessary requiring a payment of $80,000 to
the class of plaintiffs in this action.

In November 1998, a class action lawsuit was filed against us in the U.S.
District Court for the District of Colorado, alleging antitrust violations
pertaining to our sales of a certain printer product. The outcome of this
lawsuit cannot be determined; however, we believe that the plaintiffs' claims
are without merit. We intend to vigorously defend against such claims. No
amounts have been reported in the financial statements for any losses that may
result from this lawsuit.

13
<PAGE>

In January 1999, we filed a lawsuit against the Hewlett-Packard in the
California Superior Court for the County of San Francisco, alleging sales of
competitive products below cost and as loss leaders, in violation of the
California Unfair Trade Practices Act. We are seeking injunctive relief and
treble damages.

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, 1998.

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Shares of common stock are traded on the Nasdaq National Market under the
symbol "ENCD." 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.

1998 1997
---------------------------------------------------------
HIGH LOW HIGH LOW
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 28.50 $ 12.438 $ 41.25 $ 27.00
Second Quarter $ 15.375 $ 8.688 $ 43.00 $ 29.25
Third Quarter $ 15.125 $ 6.219 $ 46.25 $ 30.50
Fourth Quarter $ 6.50 $ 1.875 $ 40.125 $ 23.75
---------------------------------------------------------------------------------
</TABLE>

We had 240 stockholders of record and approximately 10,000 beneficial
stockholders as of February 28, 1999.

Dividend Policy

Please see "Risks and Uncertainties - We do not pay dividends on the common
stock and you will have to rely on increases in its price to get a return on
your investment" for a discussion of our dividend policy.

14
<PAGE>

ITEM 6: SELECTED FINANCIAL DATA

Five Year Financial Data
(in thousands, except per share data, percentages and employees)

1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales . . . . . . . . . . . . . . . . . . . . $ 110,055 $ 149,041 $ 107,437 $ 65,548 $ 43,653
Cost of sales . . . . . . . . . . . . . . . . . . 80,646 78,259 56,021 36,471 22,917
Gross profit. . . . . . . . . . . . . . . . . . . 29,409 70,782 51,416 29,077 20,736
Research and development. . . . . . . . . . . . . 10,894 10,544 8,794 5,578 3,265
Operating (loss) income . . . . . . . . . . . . . (23,668) 26,493 19,572 11,619 9,137
Interest (expense) income . . . . . . . . . . . . (412) 35 183 307 270
Pretax (loss) income. . . . . . . . . . . . . . . (23,081) 26,528 19,755 11,926 9,407
Tax provision . . . . . . . . . . . . . . . . . . (4,775) 9,099 6,902 4,069 3,392
Net (loss) income . . . . . . . . . . . . . . . . (18,306) 17,429 12,853 7,857 6,015
(Loss) earnings per share - basic . . . . . . . . $ (1.58) $ 1.53 $ 1.15 $ 0.72 $ 0.56
(Loss) earnings per share - diluted . . . . . . . $ (1.58) $ 1.45 $ 1.08 $ 0.70 $ 0.55

MARGINS
Gross profit. . . . . . . . . . . . . . . . . . . 27% 47% 48% 44% 48%
Research and development. . . . . . . . . . . . . 10 7 8 9 7
Operating income. . . . . . . . . . . . . . . . . (22) 18 18 18 21
Pretax income . . . . . . . . . . . . . . . . . . (21) 18 18 18 22
Net income. . . . . . . . . . . . . . . . . . . . (17) 12 12 12 14

YEAR END FINANCIAL POSITION
Cash and cash equivalents . . . . . . . . . . . . $ 586 $ 1,265 $ 6,949 $ 3,067 $ 842
Short-term investments. . . . . . . . . . . . . . - - - 6,072 4,902
Accounts receivable - net . . . . . . . . . . . . 29,603 36,800 19,762 13,029 8,582
Inventories . . . . . . . . . . . . . . . . . . . 16,205 29,155 13,630 8,047 4,628
Property - net. . . . . . . . . . . . . . . . . . 15,604 14,825 10,881 3,138 2,224
Total assets. . . . . . . . . . . . . . . . . . . 72,143 90,295 57,467 36,128 24,084
Total current liabilities . . . . . . . . . . . . 23,787 24,300 14,246 7,450 4,136
Stockholders' equity. . . . . . . . . . . . . . . 47,543 64,722 43,042 28,678 19,948
Working capital . . . . . . . . . . . . . . . . . 31,320 47,818 30,326 25,304 17,619

CAPITAL MANAGEMENT
Depreciation expense. . . . . . . . . . . . . . . $ 4,093 $ 3,709 $ 2,726 $ 1,599 $ 732
Capital expenditures. . . . . . . . . . . . . . . $ 4,872 $ 7,653 $ 10,469 $ 2,513 $ 1,928
Operating return on average assets. . . . . . . . (29%) 36% 42% 39% 46%
Return on average equity. . . . . . . . . . . . . (33%) 32% 36% 32% 37%
Current ratio . . . . . . . . . . . . . . . . . . 2.3 3.0 3.1 4.4 5.3
Inventory turnover. . . . . . . . . . . . . . . . 3.6 3.7 5.2 5.8 6.8
Average days receivable . . . . . . . . . . . . . 109 69 56 60 53

HUMAN RESOURCE MANAGEMENT
Average number of employees . . . . . . . . . . . 427 467 355 272 197
Average assets per employee . . . . . . . . . . . 190 158 132 111 102
Sales per employee. . . . . . . . . . . . . . . . 258 319 303 241 222

COMMON SHARES OUTSTANDING*
Weighted average shares - basic . . . . . . . . . 11,572 11,390 11,217 10,971 10,788
Weighted average shares - diluted . . . . . . . . 11,572 12,044 11,871 11,192 10,974
Number of shares outstanding at year end. . . . . 11,636 11,501 11,300 11,100 10,880

</TABLE>

* Common shares outstanding are adjusted for the two-for-one stock split in the
form of a 100% stock dividend which occurred on May 31, 1996.

15
<PAGE>

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in thousands, except percentages)

This discussion may contain forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risks and
Uncertainties". We undertake 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.

The following table sets forth, as a percentage of net sales, certain
consolidated statements of income data for the periods indicated.

CONSOLIDATED STATEMENTS OF INCOME

1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES 100% 100% 100%
COST OF SALES 73 53 52
------------------------------------------------------------------------
GROSS PROFIT 27 47 48
MARKETING AND SELLING 23 17 15
RESEARCH AND DEVELOPMENT 10 7 8
GENERAL AND ADMINISTRATIVE 12 6 6
RESTRUCTURING CHARGES 3 - -
------------------------------------------------------------------------
(LOSS) INCOME FROM OPERATIONS (22) 18 18
OTHER INCOME 1 - -
INTEREST INCOME - NET - - -
------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (21) 8 18
PROVISION FOR INCOME TAXES (4) 6 6
------------------------------------------------------------------------
NET (LOSS) INCOME (17%) 12% 12%
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998 AND 1997

Our 1998 net sales decreased 26% from 1997 net sales. This decrease was
primarily due to decreased unit sales and average selling prices across all
printer product lines, with the exception of the NovaJet-Registered Trademark-
Pro 600e which was introduced in May 1998. Also contributing to the decline was
the introduction of various rebate programs which were required to match
competitive offerings. In 1998, supplies sales increased 19% over 1997, and
accounted for approximately 36% of 1998 net sales versus 22% in 1997. A
shortfall in OEM performance also contributed to the decrease in net sales for
1998, accounting for 18% of product sales as compared to 26% for 1997.

No one customer accounted for 10% of product sales in either 1998 or 1997.
International sales accounted for approximately 63% and 59% of our product sales
in 1998 and 1997, respectively.

Cost of sales includes standard costs related to product shipments,
including materials, labor and overhead, inventory reserves and manufacturing
variances, 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 increased to 73% in 1998, from 53% in 1997, causing a comparable
decrease in gross margin percentages. The increase in the cost of sales was due
to a large increase to inventory reserves related to certain unprofitable media
product lines, Croma24, and products which are reaching end-of-life status,
unfavorable manufacturing overhead variances, and the write-off of

16
<PAGE>

various Croma24 assets. Also contributing to the increased cost of sales
percentage were the decrease in average selling price and the implementation
of rebate programs previously discussed. We expect improved gross profit
margin percentages in 1999 due to the actions taken in 1998 to increase
inventory reserves, write-off unusable assets, and focus on more profitable
product lines. Our future success will depend on our ability to continue to
develop and manufacture competitive higher margin products and achieve cost
reductions for our existing products.

Marketing and selling expenses were 23% of net sales compared to 17% in
1997 and grew by 3% in absolute dollars over 1997. Most of the increase was
related to costs associated with increased staffing, primarily in the supplies
and textiles areas, offset by decreases in advertising and trade show activity
compared to 1997. Marketing and selling expenses in 1999 are expected to decline
from prior periods as we intend to promote our products and support our
marketing and selling activities in a more cost effective manner as a result of
the fourth quarter consolidation of our printer and supplies business units and
our transition to a niche market strategy.

1998 research and development spending grew by 3% in absolute dollars over
1997 and increased as a percentage of net sales from 7% in 1997 to 10% in 1998.
The increase in spending was driven by new product development. We expect to
continue to invest significant resources in our strategic programs and
enhancements to existing products and consequently expects that research and
development expenses will continue to increase in absolute dollars in 1999.

General and administrative expenses were 12% of net sales in 1998 compared
to 6% in 1997. The 55% increase in absolute dollars was due in large part to the
increase in the allowance for doubtful accounts. We increased the allowance to
reflect the worsening accounts receivable balances of a few specific customers,
the gradual worsening condition of balances of some Asian and European
customers, and our adoption of a more conservative method in assessing the
creditworthiness of our smaller customers.

In the fourth quarter of 1998 we recorded a $2,934 restructuring charge to
cover the planned cost of our reorganization and related workforce reduction.
These charges reflect steps we took to consolidate business units, focus on
niche markets, and improve future growth and profitability.

Other income for the year ended December 31, 1998 included payments
received under a product development and manufacturing license agreement signed
during the first quarter of 1998. Under this agreement, we are assisting in the
development of a wide-format color inkjet product targeted for markets outside
of our focus. We received additional reimbursements for engineering expenses
and will receive royalties on future product sales, if any.

Interest expense in 1998 totaled $437 compared to $140 in 1997. Increased
borrowings under our line of credit arrangement caused the increase in interest
expense. Interest income in 1998 totaled $25 compared to $175 in 1997.

As of December, 1998, we had gross deferred tax assets of approximately
$9,625. We have determined, based upon history of prior operating earnings, our
ability to carry back net operating losses to prior years and our expectations
for future years, that it would be prudent to record a $3,600 valuation
allowance for the benefits of future tax deductions that may not be realized.
The effective income tax rate in 1998 was 21%, compared to 34% in 1997. The
lower rate was due primarily to the recording of the deferred tax asset
allowance previously described.

The previously described elements caused 1998 net loss to stand at $18,306
compared to a 1997 net income of $17,429.

YEARS ENDED DECEMBER 31, 1997 AND 1996

Our 1997 net sales increased 39% over 1996 net sales. This increase was
primarily due to sales of our 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. In 1997, supplies sales increased 124%
over 1996, and accounted for approximately 22% of 1997 net sales versus 14% in
1996. Our numerous OEM arrangements contributed to the increase in net sales
for 1997, accounting for 26% of net sales as compared to 25% for 1996.

17
<PAGE>

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 our net sales in 1997 and 1996,
respectively.

Cost of sales includes standard costs related to product shipments,
including materials, labor, and overhead, inventory reserves and manufacturing
variances, 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.

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 our international offices and in the
customer support organization, the advertising and promotion of existing and new
products, and increased trade show activity compared to the prior year.

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.

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.

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.

Our 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.

LIQUIDITY AND CAPITAL RESOURCES

We fund our operations primarily through cash flow provided from
operations. As of December 31, 1998, we had cash and cash equivalents totaling
$586, and working capital of $31,320. In comparison, we had cash and cash
equivalents totaling $1,265, and working capital of $47,818 as of December 31,
1997. The decrease in cash and cash equivalents was due primarily to the
operating loss we sustained in 1998.

We have received and anticipate we will continue to receive the majority
of our cash from collections of accounts receivable from our distributors and
OEMs. These groups in general have a history of timely payments; however, an
increasing percentage of international sales can increase accounts receivable
balances due to traditionally slower payments by international customers.

At December 31, 1998, net accounts receivable decreased by $7,737 over
1997's year end balance of $36,800. The decrease was directly related to
decreased sales in 1998 and a substantial increase to the allowance for doubtful
accounts. This decrease was somewhat offset by slower payments of amounts due,
particularly for international customers, than we experienced in 1997.

We invest our excess cash in money market accounts and have 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. We have not experienced, to
date, any losses on our short-term investments. During 1998, we invested cash
in short-term investments which generated interest income of $25.

18
<PAGE>

Inventory levels decreased by $12,950 at December 31, 1998 from $29,155 at
the end of 1997. This decrease was primarily attributable to the increase in
inventory reserves, mainly for Croma24, excess and obsolete media products, and
for products which are reaching end of life. Inventory levels were also reduced
due to an overall decrease in sales.

In the years ended December 31, 1998 and 1997, we made capital expenditures
of $4,872 and $7,653, respectively. 1997 expenditures included the initial
software purchase of the enterprise-wide information system. 1998 expenditures
included consulting and other expenses related to the initial implementation of
that system. During 1999, we plan to increase our capital expenditures,
especially for tooling relating to new products, computers and related systems
and network assets.

At December 31, 1998, the Company had available a $20,000 revolving line of
credit which expires in January 2000. $6,000 was outstanding under the line of
credit at December 31, 1998 and $3,261 at December 31, 1997. The line requires
the Company to maintain certain financial ratios. At December 31, 1998, the
Company was not in compliance with one financial covenant which was subsequently
waived by the bank. The Company is currently renegotiating the credit agreement
with the bank, including lowering the available amount to $15,000. The new line
would be secured by certain assets of the Company with a borrowing base limited
to eligible accounts receivable and inventory and would redefine the financial
covenants. During this process, the bank has permitted the Company to continue
to make withdrawals from the line.

We believe that our existing cash, cash equivalents, cash generated from
operations, funds available from various financing alternatives involving our
owned headquarter facilities, and funds available under the bank line of credit
will be sufficient to satisfy our 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 us
to seek additional capital, or that such additional capital will be available
when required on terms acceptable to us. To date, inflation has not had a
significant effect on our operating results.

YEAR 2000 COMPLIANCE

We utilize computer technologies throughout our business to conduct our
day-to-day operations. Computer technologies include both information technology
in the form of hardware and software, as well as embedded technology in our
facilities systems and equipment. We must determine whether our products and
systems are capable of recognizing and processing date sensitive information
properly as the year 2000 approaches. To do so, we are using a multi-phased
concurrent approach. Specific project phases include: awareness, assessment,
remediation, validation and implementation. We have completed the awareness
phase of this project. Furthermore, we have nearly completed the assessment
phase and are well into the remediation phase.

All of our current products are year 2000 compliant. Our recent
enterprise-wide information system implementation should mitigate most internal
problems as the system vendors have represented that these systems are year 2000
compliant. We are actively correcting and replacing those other systems which
are not year 2000 ready. We currently intend to substantially complete the
remediation, validation and implementation phases of the year 2000 project prior
to July 31, 1999. This process includes the testing of critical systems to
ensure that year 2000 readiness has been accomplished. If we determine that we
may be unable to remediate and properly test affected systems on a timely basis,
we intend to develop appropriate contingency plans for any such mission-critical
systems at the time such determination is made. While we are not presently aware
of any significant exposure that our systems will not be properly remediated on
a timely basis, there can be no assurances that all year 2000 remediation
processes will be completed and properly tested before the year 2000, or that
contingency plans will sufficiently mitigate the risk of a year 2000 readiness
problem. An interruption of our ability to conduct our business due to a year
2000 readiness problem could have a material adverse effect on us.

Due to the recent implementation of the enterprise-wide information system,
we estimate that the additional aggregate costs of our year 2000 project will
not be material. A portion of these costs, primarily those not related to the
implementation of the enterprise-wide information system, is not likely to be
incremental costs, but rather will

19
<PAGE>

represent the redeployment of existing resources. This reallocation of
resources is not expected to have a significant impact on our day-to-day
operations. The anticipated impact and costs of the project, as well as the
date on which we expect to complete the project, are based on our best
estimates using information currently available and numerous assumptions
about future events. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Based on our current estimates and information currently available, we do not
anticipate that the costs associated with this project will have a material
adverse effect on our consolidated financial position, results of operations
or cash flows in future periods.

We are in the process of communicating with our significant suppliers,
customers and critical business partners to determine the extent to which we may
be vulnerable in the event that those parties fail to properly remediate their
own year 2000 issues. We have taken steps to monitor the progress made by those
parties, and to the extent possible, plans to test critical system interfaces,
as the year 2000 approaches. We will develop appropriate contingency plans in
the event that a significant exposure is identified relative to the dependencies
on third-party systems. While we are not presently aware of any such significant
exposure, there can be no guarantee that the systems of third-parties on which
we rely will be converted in a timely manner, or that a failure to properly
convert by another company would not have a material adverse effect on us.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our only financial instruments with market risk exposure are revolving line
of credit borrowings, which totaled $6,000,000 at December 31, 1998. The amount
of variable rate debt fluctuates during the year based upon our cash
requirements. Maximum borrowings at any fiscal quarter end during fiscal 1998
were $6,000,000. Based on the outstanding balance at December 31, 1998, an
adverse 10% change in the interest rate underlying these borrowings would result
in a $38,000 annual change in our pre-tax earnings and cash flow.

These instruments are non-trading in nature and carry interest at the
bank's prime rate (7.75% at December 31, 1998) or at our option, a rate based on
the London Interbank Overnight Rate (5.08% at December 31, 1998 plus 1.25 to
1.75% based upon certain ratios). Our objective in maintaining these variable
rate borrowings is the flexibility obtained regarding early repayment without
penalties and lower overall cost as compared with fixed rate borrowings.

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.

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."

20
<PAGE>

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, 1998 and 1997.................................F-3

Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996...F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996.............................................................................F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996...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.

(3) Exhibits:

Exhibit
Number Description
------- ------------

2.1 Agreement and Plan of Merger between ENCAD Delaware and ENCAD
California dated January 5,1998 (filed as Exhibit 2.1). (1)

3.1 Certificate of Incorporation of the Company (filed as Exhibit
3.1). (1)

3.2 Bylaws of the Company (filed as Exhibit 3.2). (1)

3.3 Certificate of Designation for Series A Junior Participating
Preferred Stock (filed as Exhibit 3.2).(2)

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. (2)

21
<PAGE>

4.2 First Amendment to the Company's Rights Plan.(3)

10.1 Form of Distributor Agreement (Domestic) (filed as Exhibit
10.14). (4)

10.2 Form of International Distributor Agreement (filed as Exhibit
10.15). (4)

10.3 Form of OEM Agreement (filed as Exhibit 10.16). (4)

+ 10.8 The Company's 1993 Stock Option/Stock Issuance Plan, as amended
(filed as Exhibit 99.1). (5)

+ 10.9 Form of Notice of Grant of Stock Option and Stock Option
Agreement (filed as Exhibit 10.34). (4)

+ 10.10 Form of Stock Issuance Agreement (filed as Exhibit 10.35). (4)

+ 10.11 1993 Employee Stock Purchase Plan, as amended (filed as Exhibit
99.1). (6)

+ 10.12 Form of Stock Purchase Agreement (filed as Exhibit 10.37). (4)

10.13 Form of Non-Disclosure Agreement (filed as Exhibit 10.38). (4)

10.14 Form of Employee Proprietary Information Agreement (filed as
Exhibit 10.39). (4)

+ 10.15 Form of Indemnification Agreements between the Company and each
of its directors. (7)

+ 10.16 Form of Indemnification Agreements between the Company and each
of its officers. (7)

+ 10.17 Form of Severance Letter Agreements between the Company and each
of its officers. (8)

+ 10.18 Form of Senior Executive 1998 Annual Performance Bonus between
the Company and each of its officers.

+ 10.19 Select Compensation, Non-Qualified Deferred Compensation Plan and
related documents. (8)

+ 10.20 Non-Statutory Stock Option Agreement between the Company and
Richard L. Diamond (filed as Exhibit 99.5). (5)

+ 10.21 1998 Stock Option Plan (filed as Exhibit 99.1).(9)

+ 10.22 Form of Notice of Grant of Stock Option (filed as Exhibit
99.2).(9)

+ 10.23 Form of Stock Option Agreement (filed as Exhibit 99.3).(9)

+ 10.24 Non-Statutory Stock Option Agreement between the Company and
Michael J.T. Steep (filed as Exhibit 99.5).(9)

+ 10.25 Form of Senior Executive 1999 Annual Performance Bonus between
the Company and each of its Officers.

21.1 Subsidiaries.

23.1 Independent Auditors' Consent, Deloitte & Touche LLP.

24.1 Power of Attorney. (See page 24)

27.1 Financial Data Schedule for fiscal year end 1998.

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

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

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

(3) Filed as exhibit to the Registrant's Registration Statement on Form
8-A12G/A (No. 000-23034) and incorporated herein by reference.

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

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

22
<PAGE>

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

(7) Filed as exhibit to the Registrant's annual report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.

(8) 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.

(9) Filed as exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-59779) 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 March 30, 1999
-----------------------------
David A. Purcell
Chief Executive Officer

By /s/ T.W. Schmidt March 30, 1999
-----------------------------
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, President March 30, 1999
- ----------------------- and Chief Executive Officer
(David A. Purcell) (Principal Executive Officer)

/s/ Robert V. Adams Director March 30, 1999
- -----------------------
(Robert V. Adams)

/s/ Craig S. Andrews Director March 30, 1999
- -----------------------
(Craig S. Andrews)

/s/ Ronald J. Hall Director March 30, 1999
- ----------------------
(Ronald J. Hall)

/s/ Howard L. Jenkins Director March 30, 1999
- ----------------------
(Howard L. Jenkins)

/s/ Charles E. Volpe Director March 30, 1999
- -----------------------
(Charles E. Volpe)

24
<PAGE>

ENCAD, INC.
INDEX TO CONSOLIDATED FINANCIAL STATMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................................F-2

Consolidated Balance Sheets.................................................F-3

Consolidated Statements of Operations.......................................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, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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,
1998 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
SAN DIEGO, CALIFORNIA
FEBRUARY 12, 1999

F-2
<PAGE>

ENCAD, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 586 $ 1,265
Accounts receivable - net 29,063 36,800
Income taxes receivable 2,403 -
Inventories 16,205 29,155
Deferred income taxes 6,025 3,118
Prepaid expenses 825 1,780
- -------------------------------------------------------------------------------------------------------------
Total current assets 55,107 72,118
Property - net 15,604 14,825
Other assets 1,432 3,352
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 72,143 $ 90,295
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,785 $ 12,369
Accrued expenses and other liabilities 6,002 8,670
Borrowings under line of credit 6,000 3,261
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 23,787 24,300
OTHER LIABILITIES 813 1,273
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value, 5,000 shares authorized: Series A
Junior Participating Preferred Stock - no shares issued
and outstanding - -
Common stock - $.001 par value, 60,000 shares authorized, 11,636 and
11,501 shares issued and outstanding in 1998 and 1997 respectively 12 12
Additional paid-in capital 18,704 17,577
Retained earnings 28,827 47,133
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 47,543 64,722
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,143 $ 90,295
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 110,055 $ 149,041 $ 107,437
Cost of sales 80,646 78,259 56,021
- ----------------------------------------------------------------------------------------------------------------
Gross profit 29,409 70,782 51,416
- ----------------------------------------------------------------------------------------------------------------
Marketing and selling 25,745 25,023 16,552
Research and development 10,894 10,544 8,794
General and administrative 13,504 8,722 6,498
Restructuring charges 2,934 - -
- ----------------------------------------------------------------------------------------------------------------
Operating costs and expenses 53,077 44,289 31,844
- ----------------------------------------------------------------------------------------------------------------
(Loss) income from operations (23,668) 26,493 19,572
Other income 999 - -
Interest (expense) income - net (412) 35 183
- ----------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (23,081) 26,528 19,755
Provision for income taxes (4,775) 9,099 6,902
- ----------------------------------------------------------------------------------------------------------------
Net (loss) income $ (18,306) $ 17,429 $ 12,853
- ----------------------------------------------------------------------------------------------------------------
(Loss) earnings per share - basic $ (1.58) $ 1.53 $ 1.15
- ----------------------------------------------------------------------------------------------------------------
(Loss) earnings per share - diluted $ (1.58) $ 1.45 $ 1.08
- ----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - basic 11,572 11,390 11,217
- ----------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares outstanding
- - diluted 11,572 12,044 11,871
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE>

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

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

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
Common stock issued under stock
option and purchase plans,
including related tax benefits 135 - 1,127 - 1,127
Net loss (18,306) (18,306)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 11,636 $ 12 $ 18,704 $ 28,827 $ 47,543
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</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,
------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (18,306) $ 17,429 $ 12,853
Adjustments to reconcile net (loss) income to cash provided by
(used in) operating activities:
Depreciation and amortization 4,093 3,709 2,726
Provision for losses on accounts receivable and inventories 12,479 198 3,987
Tax benefit from exercise of stock options 267 2,568 539
Changes in assets and liabilities:
Accounts receivable 4,208 (17,546) (7,033)
Income taxes receivable (2,403) - -
Inventories 4,000 (15,215) (9,270)
Deferred income taxes (1,641) 154 (2,284)
Prepaid expenses and other assets 1,609 (2,159) (1,186)
Accounts payable (584) 4,125 3,672
Accrued expenses and other liabilities (3,128) 3,762 3,303
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 594 (2,975) 7,307
- ------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property (4,872) (7,653) (10,469)
Cash from sale of short-term investments - - 6,072
- ------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (4,872) (7,653) (4,397)
- ------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and sale of stock under
employee stock purchase plan 860 1,683 972
Net borrowings under line of credit 2,739 3,261 -
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 3,599 4,944 972
- ------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (679) (5,684) 3,882
Cash and cash equivalents at beginning of year 1,265 6,949 3,067
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 586 $ 1,265 $ 6,949
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 1,426 $ 4,234 $ 7,927
Cash paid during the year for interest 379 140 -
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</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") is engaged principally in the design, development, manufacture and
sale of wide-format color inkjet printers and related supplies for the
graphic arts, computer-aided design, geographic information systems and
textile markets. The Company markets and sells its products domestically and
internationally primarily through specialty distributors, dealers,
value-added resellers and original equipment manufacturers.

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.

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, 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.

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 transacted in U.S. dollars. Gains and losses on
transactions in denominations other than the functional currency of the
Company's foreign operations, while not material in amount, are included in the
results of operations. The Company has not entered into foreign exchange
transactions to hedge certain balance sheet exposures and intercompany balances
against movements in foreign exchange rates as these balances have historically
not been material.

CONCENTRATION OF CREDIT RISK The Company sells its products primarily
to customers in the United States, Europe and Asia. The Company maintains a
reserve for potential credit losses and such actual losses, to date, have been
minimal. To date, the Company has not recorded any losses on its cash accounts.

F-7
<PAGE>

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 consolidated
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 SFAS No. 123, "Accounting for
Stock-Based Compensation" 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 7.

EARNINGS PER SHARE Basic earnings per share are computed by dividing
net income by the weighted average number of shares outstanding during the
year. Diluted earnings per share are calculated to give effect to all
potentially dilutive common shares that were outstanding during the year.

The following table is a reconciliation of the basic and diluted earnings
per share computations for the years ended December 31, 1998, 1997 and 1996 (in
thousands):

1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) income $ (18,306) $ 17,429 $ 12,853
-----------------------------------------------------------------------------------------
(Loss) earnings per share basic $ (1.58) $ 1.53 $ 1.15
-----------------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 11,572 11,390 11,217
Effect of dilutive securities:
Stock options - 654 654
-----------------------------------------------------------------------------------------
Diluted weighted average common and
common equivalent shares outstanding 11,572 12,044 11,871
-----------------------------------------------------------------------------------------
(Loss) earnings per share - diluted $ (1.58) $ 1.45 $ 1.08
-----------------------------------------------------------------------------------------
</TABLE>

ACCOUNTING CHANGES Effective January 1, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income". 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." There are no material current differences between net
income and comprehensive income and, accordingly, no amounts have been reflected
in the accompanying consolidated financial statements.

Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal reporting that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or the
financial position of the Company but did affect the disclosure of segment
information. See Note 8.

Effective January 1, 1998, the Company adopted AICPA Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP No. 98-1 requires certain costs in connection
with developing or obtaining internally used software to be capitalized that
would have been expensed as incurred. The adoption of SOP No. 98-1 did not have
a material impact on the Company's results of operations, financial position or
cash flows.

F-8
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS In April, 1998, the AICPA issued SOP
98-5, "Reporting on the Costs of Start-Up Activities." The statement requires
costs of start-up activities and organization costs to be expensed as incurred.
The Company is required to adopt SOP 98-5 for the year ended December 31, 1999.
The adoption of SOP 98-5 is not expected to have a material impact on the
Company's consolidated financial statements.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company does not expect that
the adoption of SFAS No. 133 will have a material impact on its consolidated
financial statements.

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 was 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. 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.

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.

RECLASSIFICATIONS Certain items in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 presentation.

F-9
<PAGE>

2. BALANCE SHEET DETAILS (in thousands)

DECEMBER 31,
----------------------------
1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Trade receivables $ 29,928 $ 36,941
Allowance for doubtful accounts (4,092) (600)
-----------------------------------------------------------------------------
Net trade accounts receivable 25,836 36,341
Receivables from vendors 2,770 100
Other accounts receivable 457 359
-----------------------------------------------------------------------------
Total $ 29,063 $ 36,800
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------

INVENTORIES:
Raw materials $ 5,061 $ 11,043
Work-in-process 269 629
Finished goods 10,875 17,483
-----------------------------------------------------------------------------
Total $ 16,205 $ 29,155
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------

PROPERTY:
Computer equipment and software $ 11,623 $ 7,723
Machinery and equipment 6,619 6,130
Buildings and improvements 6,028 5,967
Furniture and fixtures 2,385 2,186
Land 1,250 1,250
-----------------------------------------------------------------------------
27,905 23,256
Accumulated depreciation and amortization (12,301) (8,431)
-----------------------------------------------------------------------------
Total $ 15,604 $ 14,825
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------

ACCRUED EXPENSES AND OTHER LIABILITIES:
Restructuring charges $ 2,097 $ -
Compensation and vacation pay 1,864 3,352
Warranty 1,225 1,390
Co-op programs 739 996
Other 29 210
Income taxes payable 48 2,722
-----------------------------------------------------------------------------
Total $ 6,002 $ 8,670
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>

3. REVOLVING LINE OF CREDIT (in thousands)

F-10
<PAGE>

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 ranging from one month to four years.
Generally, management expects that leases will be renewed in the normal course
of business.

Minimum payments for operating leases having initial or remaining
noncancelable terms of one year are as follows: 1999 - $911; 2000 - $693;
2001 - $364; 2002 - $194; 2003 - $13; Total - $2,175.

Total rent expense under operating leases was approximately $982, $416 and
$298 for the years ended December 31, 1998, 1997 and 1996, respectively.

5. RESTRUCTURING COSTS (in thousands)

On October 26, 1998, the Company's Board of Directors agreed to a plan of
reorganization and the restructuring of its printer and supplies business units
into one business unit, the Digital Imaging Systems business unit. In the
quarter ended December 31, 1998, the Company estimated and recorded a
restructuring charge of $2,934. The plan of reorganization and restructuring,
which was deemed necessary to facilitate the Company's strategy of developing
and delivering value-added digital imaging solutions directed at niche vertical
market applications, included costs of workforce reductions, including the
elimination of senior management positions, of approximately 60 people and the
consolidation of excess sales facilities. The employee groups affected by the
reduction in force were primarily sales and marketing; however, engineering and
administration were also affected.

As of December 31, 1998, the restructuring was substantially completed. The
following table summarizes the Company's reorganization and restructuring
activity for the year ended December 31, 1998:

<TABLE>
<CAPTION>
Employee Lease and
Related Facility Other Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Restructuring charges $ 2,741 $ 81 $ 112 $ 2,934
Cash paid during the period (796) - (41) (837)
-----------------------------------------------------------
Reserve balance, December 31, 1998 $ 1,945 $ 81 $ 71 $ 2,097
-----------------------------------------------------------
</TABLE>

F-11
<PAGE>

6. INCOME TAXES (in thousands except for percentages)

The tax effects of items comprising the Company's net deferred income tax
asset are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C>
Non deductible reserves and accruals $ 7,261 $ 2,598
Restructuring accrual 739 -
Differences between book and tax basis in inventory and 1,403 1,256
property
Accrued co-op advertising 301 300
State taxes (650) 189
Tax losses and credits 459 -
Other 112 41
-------------------------------------------------------------------------------------------
Total deferred tax asset 9,625 4,384
Valuation allowance (3,600) -
-------------------------------------------------------------------------------------------
Net deferred tax asset $ 6,025 $ 4,384
-------------------------------------------------------------------------------------------

The net deferred tax asset is classified between current and
long-term assets as follows:

Deferred income taxes $ 6,025 $ 3,118
Other assets - 1,266
-------------------------------------------------------------------------------------------

Net deferred tax asset $ 6,025 $ 4,384
-------------------------------------------------------------------------------------------
</TABLE>

As of December 1998, the Company had a state operating loss carry forward
of approximately $2,934 which expires in 2003.

Deferred income taxes are provided to reflect the future tax consequences
of differences between the book and tax basis of assets and liabilities. The
Company's deferred tax asset consists primarily of book and tax differences in
accruals and reserves. Under SFAS No. 109, "Accounting for Income Taxes", the
Company is required to place a valuation reserve if it is more likely than not
that a portion of the deferred tax asset will not be realized. As of December
31, 1998 a valuation allowance of $3,600 was recorded against the deferred tax
asset for the benefits of future tax deductions that may not be realized. The
valuation allowance is principally composed of future tax benefits that are not
expected to be available for a carry back to offset the taxable income in 1996
and 1997. Since future taxable income is dependent on new products, the Company
believed it would not be prudent to rely on the related future income for the
realization of deferred tax benefits and accordingly recorded the allowance.

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:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT (BENEFIT) EXPENSE:
Federal $ (3,314) $ 7,626 $ 7,375
State 180 1,521 1,810
DEFERRED BENEFIT:
Federal (1,272) (22) (1,865)
State (369) (26) (418)
------------------------------------------------------------------------------------------

Total $ (4,775) $ 9,099 $ 6,902
------------------------------------------------------------------------------------------
</TABLE>

F-12
<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.3 4.5 6.2
Benefit of foreign sales corporation,
net of tax - (4.1) (4.0)
Research and development tax credit - (0.9) (0.8)
Valuation allowance (15.6) - -
Other (1.0) (0.2) (1.4)
-------------------------------------------------------------------------------------------

Effective rate 20.7% 34.3% 35.0%
-------------------------------------------------------------------------------------------
</TABLE>

7. 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 1998, 1997 and 1996, 80, 45, and 62 shares, respectively, were
issued, at average prices ranging from $3.08 to $11.05, $7.44 to $35.06, and
$5.26 to $14.45, respectively.

1993 STOCK OPTION/STOCK ISSUANCE PLAN Under this plan, for which 1,799
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, 1998 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 255 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, 1998 are exercisable quarterly over four years and expire in
ten years.

1998 STOCK OPTION PLAN On June 9, 1998, the Company's stockholders
approved the 1998 Stock Option Plan. Under this plan, for which 575 shares of
common stock have been reserved for issuance, employees, including officers,
consultants, independent advisors and directors of the corporation, may be
granted incentive or non-qualified stock options. The options granted under
this plan as of December 31, 1998 are exercisable quarterly over four years
and expire in ten years.

NON-PLAN OPTIONS On January 26, 1998 and July 24, 1998 the Company filed
S-8 registration statements, pursuant to which options were granted to the
Company's Chief Information Officer and the General Manager, Digital Imaging
Solutions, respectively. The Chief Information Officer was granted 30 shares at
an exercise price of $26.13, the fair market value on the date of the grant, of
which 24 shares were subsequently canceled subject to his termination of
employment with the Company. The General Manager, Digital Imaging Solutions
business unit, was

F-13
<PAGE>

granted 75 shares at an exercise price of $13.88, the fair value on the date
of the grant. The options granted under both of these agreements are
exercisable quarterly over four years and expire in ten years.

RE-GRANTING OF STOCK OPTIONS On May 12, 1998, the Stock Option
Committee of the Board of Directors approved a stock option re-granting
program pursuant to which employees, excluding officers, of the Company could
elect to cancel certain unexercised stock options in exchange for new stock
options with an exercise price equal to the closing price of the Company's
common stock on May 22, 1998. Approximately 200 shares were eligible for
repricing, of which 198 were repriced at an exercise price of $10.56. The new
options vested quarterly over four years from the date of re-grant and expire
in ten years and would have become fully vested on May 22, 2002. These
options were subsequently canceled because on November 13, 1998, the Stock
Option Committee of the Board of Directors approved a stock option
re-granting program pursuant to which employees could elect to cancel certain
unexercised stock options in exchange for new stock options with an exercise
price equal to the closing price of the Company's common stock on November 30,
1998. Approximately 1,046 shares were eligible for repricing, of which
820 were repriced at an exercise price of $5.75. The new options vest
quarterly over four years from the date of re-grant and expire in ten years.
The options issued under the re-grant program will become fully vested on
November 30, 2002. Certain executive officers that participated in the
re-grant program were required to forfeit a portion of stock options
previously granted.

A summary of option activity under all the Company's stock option plans and
non-plan option grants is as follows:

OPTIONS OUTSTANDING
--------------------------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICES AGGREGATE PRICE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Authorized 771 - - -
Options granted (1,857) 1,857 9.38 17,702
Options exercised - (55) 5.95 (327)
Options canceled 1,471 (1,471) 16.75 (24,572)
---------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 519 1,446 $ 6.81 $ 9,729

Exercisable at December 31, 1996 268 $ 5.12
Exercisable at December 31, 1997 378 $ 8.84
EXERCISABLE AT DECEMBER 31, 1998 422 $ 8.50
---------------------------------------------------------------------------------------------------
</TABLE>

F-14
<PAGE>

The following table summarizes outstanding stock option information at
December 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER REMAINING AVERAGE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.81 - $ 5.57 195 7.40 $ 4.27 102 $ 3.65
$ 5.58 - $ 7.18 862 9.89 $ 5.75 - $ -
$ 7.19 - $ 13.75 364 6.87 $ 8.56 300 $ 8.47
$ 13.76 - $ 39.50 25 8.22 $ 33.56 20 $ 33.70
-----------------------------------------------------------------------------------------------------------
$ 2.81 - $ 39.50 1,446 8.76 $ 6.73 422 $ 8.50
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</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 loss, loss per share - basic
and loss per share -diluted for 1998 would have been increased by
approximately $1,875, $0.16 and $0.16 per share, respectively. The Company's
net income, earnings per share - basic and earnings per share - diluted for
1997 and 1996 would have been reduced by approximately $1,217 or $0.11 and
$0.10 per share and $909 or $0.08 and $0.08 per share, respectively.

The weighted-average fair value of the options granted during 1998, 1997
and 1996 is estimated as $8,800, $4,999 and $2,054, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively: no dividend yield; expected volatility of 77%, 65% and 65%;
risk-free interest rate of 6.0%, 6.1% and 6.0% and expected life of 3.41, 3.40
and 2.68 years

8. SEGMENT AND GEOGRAPHIC INFORMATION (in thousands)

The Company's business is organized, managed, and internally reported as
two segments: the Digital Imaging Solutions business unit and the Textile
business unit. Due to the similarity of production processes, distribution
methods, customer and products, the segment information for the Digital Imaging
Solutions and Textile business unit has been aggregated into one segment.

The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to the Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on operating
profits or losses. Operating profit or loss for each segment includes research
and development, sales, marketing and administrative charges directly
attributable to the segment together with the allocation of certain corporate
overhead and administrative charges. Costs excluded from segment operating
profit or loss primarily consist of unallocated corporate expenses, including
other income, interest income and expense and income taxes, as well as
non-recurring charges including the 1998 restructuring charges. The Company does
not include inter-segment transfers for the internal purposes. Segment assets
include accounts receivable-net, inventory, property - net, and other
miscellaneous assets. Corporate and unallocated assets include cash and cash
equivalents, duties and taxes receivable, income taxes receivable, deferred
income taxes, certain other assets, certain unallocated property - net and other
miscellaneous assets.

F-15
<PAGE>

Summary information by segment as of December 31, 1998 and 1997 and for the
years ended December 31, 1998, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
DIGITAL IMAGING
SOLUTIONS CORPORATE AND TOTAL
AND TEXTILE UNALLOCATED COMPANY
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES 1998 $ 110,055 $ - $ 110,055
1997 149,041 - 149,041
1996 107,437 - 107,437

OPERATING INCOME 1998 (20,734) (2,934) (23,668)
1997 26,493 - 26,493
1996 19,572 - 19,572

ASSETS 1998 48,264 23,880 72,143
1997 72,105 18,190 90,295

DEPRECIATION AND AMORTIZATION 1998 4,093 - 4,093
1997 3,709 - 3,709
1996 2,726 - 2,726

PROVISION FOR LOSSES ON ACCOUNTS RECEIVABLE 1998 12,479 - 12,479
AND INVENTORIES 1997 198 - 198
1996 3,987 - 3,987
</TABLE>

Additional information regarding revenue by products and service groups for
the years ended December 31, 1998, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Printers and accessories $ 65,070 $ 111,033 $ 89,411
Ink and media 39,243 32,737 15,051
Service, royalties and contracts 5,742 5,271 2,975
---------------------------------------------------
Total $ 110,055 $ 149,041 $ 107,437
---------------------------------------------------
---------------------------------------------------
</TABLE>

In 1998 and 1997 no one customer accounted for more than 10% of net sales,
and in 1996, one customer accounted for 15% of net sales.

The Company has subsidiaries located in France, Germany and England to
which it pays commissions for sales to customers that they identify. The
revenues, operating profits and identifiable assets of these European
subsidiaries are not material.

Net sales from principal geographic areas were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Europe, Middle East and Africa $ 42,770 $ 46,948 $ 32,151
Asia Pacific 16,026 28,412 23,215
Americas, excluding United States 10,328 12,011 9,669
---------------------------------------------------
Export sales 69,124 87,371 65,035
Domestic 40,931 61,670 42,386
---------------------------------------------------
Total net sales $ 110,055 $ 149,041 $ 107,421
---------------------------------------------------
---------------------------------------------------
</TABLE>

F-16
<PAGE>

Receivables from export sales at December 31, 1998 and 1997 were
approximately $15,479 and $23,200 respectively.

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

Summarized quarterly financial information for each of the three years
ended December 31, 1998, 1997, and 1996 is as follows:

<TABLE>
<CAPTION>
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4 YEAR
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net sales $ 23,517 $ 34,695 $ 24,201 $ 27,642 $ 110,055
Gross profit 8,898 14,109 5,716 686 29,409
(Loss) income from operations (2,060) 2,215 (5,972) (17,851) (23,668)
Net (loss) income (726) 1,374 (3,918) (15,036) (18,306)
(Loss) earnings per share - basic $ (0.06) $ 0.12 $ (0.34) $ (1.30) $ (1.58)
(Loss) earnings per share - diluted $ (0.06) $ 0.12 $ (0.34) $ (1.30) $ (1.58)
------------------------------------------------------------------------------------------------------------

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
------------------------------------------------------------------------------------------------------------
</TABLE>

F-17

<PAGE>

EXHIBIT 10.18

ENCAD, INC.

FORM OF SENIOR EXECUTIVE 1998 ANNUAL PERFORMANCE BONUS
BETWEEN THE COMPANY AND EACH OF ITS OFFICERS

<PAGE>

ENCAD, INC.
EXECUTIVE BONUS PLAN
1998

EXECUTIVE:

BONUS ELEMENTS CRITERIA WEIGHTING

Operating Profit - $ million %

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ANNUAL BONUS TARGET TABLE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonus Element % 100% Target %
- ------------------------------------- ----------- --------------- -----------
Operating Profit $ $ $
Pay out as a % of salary % % %
- ------------------------------------- ----------- --------------- -----------
</TABLE>

The establishment of the size of your total bonus award target will be
interpolated on a linear basis between performance levels. The Company must
achieve minimum Operating Profit of $_________ to receive any pay out.

Once Company performance determines the size of your bonus award target, the
actual award paid consists of 3 bonus elements:

1. Financial performance - % of the payout
2. Individual performance against MBOs - %
3. Subjective assessment - %

ADMINISTRATION AND GUIDELINES

Incentive awards are paid in the following plan year for performance in the
current year. Payouts will be based on your base salary at the beginning of the
plan year and will occur within the first quarter after the close of the plan
year.

Payroll taxes will be withheld from your incentive award as required by law.

Unless a participant in the Executive Deferred Compensation Plan, any incentive
amounts you receive will be taxable income to you in the year in which they are
paid. Therefore, the bonus payment for the 1998 plan year, paid in 1999, is part
of your total income for your 1999 tax year.

INTEGRATION WITH BENEFIT PROGRAMS

Any incentive amounts you receive do not count as compensation for purposes of
life insurance, disability, or other benefit plans, with the exception of our
401(k) plan. 401(k) contributions will be deducted from incentive compensation.

PLAN ADMINISTRATION

The President and Compensation Committee will make decisions about the plan.
This includes final determination of eligibility, performance measurements,
payout amounts, and Company revenue and income achievement.

<PAGE>

The Company reserves the right to terminate or make adjustments to the plan at
any time, including in the middle of the plan year. There is no guarantee of any
payments under this plan to any participant.

Participants in the Executive Bonus Plan are not eligible to participate in
ENCAD's annual profit sharing plan.

INTERRUPTION OF EMPLOYMENT

No award is payable under the incentive plan if you terminate employment during
the plan period for any reason, except for the following:

* Active duty military service during the incentive period
* Retirement during the incentive period while meeting all standard
Company retirement requirements
* Death; or
* Qualifying disability.

In each of these exceptions, you will receive a prorated portion of the
incentive award assessed to the nearest plan year month. This prorated amount
will be determined after the end of the plan year. The prorated award will be
paid at the same time as awards that are paid to active participants.

If your employment ends between the last day of the plan year and the award
payment date (and if termination is for any reason other than poor performance,
a dismissible offense or as a result of voluntarily resigning your employment),
you will receive the full award earned.

If your employment ends (1) during the plan year or (2) after the last day of
the plan year and before the award payment date for any dismissible offense,
performance issues, or as a result of voluntarily resigning your employment you
will not be paid an award.

LIMITATIONS AND/OR ADJUSTMENTS

The incentive plan continues from year to year at the discretion of ENCAD. The
Company reviews the plan annually and considers changes and improvements that
support the objectives of the plan and are in the best interest of ENCAD. Human
Resources will coordinate with the President and Compensation Committee any
formal decisions to amend, suspend, and/or terminate the incentive calculation
formulas or other aspects of the incentive plan. Changes will be based on a
determination of proven business need but do not require prior notification or
explanation.

Participation in this plan is not intended and shall not be construed to give
the right to employment by ENCAD.

<PAGE>

EXHIBIT 10.25

ENCAD, INC.

FORM OF SENIOR EXECUTIVE 1999 ANNUAL PERFORMANCE BONUS
BETWEEN THE COMPANY AND EACH OF ITS OFFICERS

<PAGE>

ENCAD, INC.
EXECUTIVE BONUS PLAN
1999

EXECUTIVE:

BONUS ELEMENTS CRITERIA WEIGHTING

Operating Profit - $ million %
Revenue - $ million %

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
ANNUAL BONUS TARGET TABLE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Bonus Element % 100% Target %
- ------------------------------------------------------------------------
Operating Profit $ $ $
- ------------------------------------------------------------------------
Pay out as a % of salary % % %
- ------------------------------------------------------------------------
Revenue $ $ $
- ------------------------------------------------------------------------
Pay out as a % of salary % % %
- ------------------------------------------------------------------------
Total award as a % of salary % % %
- ------------------------------------------------------------------------
</TABLE>

Once Company performance determines the size of your bonus award target, the
actual award paid consists of 3 bonus elements:

1. Financial performance - % of the payout
2. Individual performance against MBOs - %
3. Subjective assessment - %

ADMINISTRATION AND GUIDELINES

Payroll taxes will be withheld from your incentive award as required by law.

Unless a participant in the Executive Deferred Compensation Plan, any incentive
amounts you receive will be taxable income to you in the year in which they are
paid. Therefore, the bonus payment for the 1999 plan year, paid in 2000, is part
of your total income for your 2000 tax year.

INTEGRATION WITH BENEFIT PROGRAMS

<PAGE>

PLAN ADMINISTRATION

Participants in the Executive Bonus Plan are not eligible to participate in
ENCAD's annual profit sharing plan.

INTERRUPTION OF EMPLOYMENT

No award is payable under the incentive plan if you terminate employment during
the plan period for any reason, except for the following:

* Active duty military service during the incentive period
* Retirement during the incentive period while meeting all standard
Company retirement requirements
* Death; or
* Qualifying disability.

LIMITATIONS AND/OR ADJUSTMENTS

Participation in this plan is not intended and shall not be construed to give
the right to employment by ENCAD

<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, No. 333-45327 and No. 333-59779 of ENCAD, Inc. on Form
S-8 of our report dated February 12, 1999, appearing in this Annual report on
Form 10-K of ENCAD, Inc. for the year ended December 31, 1998.

/s/ Deloitte & Touche LLP

San Diego, California
March 30, 1999

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ENCAD,
INC. DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 586
<SECURITIES> 0
<RECEIVABLES> 29,063
<ALLOWANCES> 0
<INVENTORY> 16,205
<CURRENT-ASSETS> 55,107
<PP&E> 27,905
<DEPRECIATION> 12,301
<TOTAL-ASSETS> 72,143
<CURRENT-LIABILITIES> 23,787
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 47,531
<TOTAL-LIABILITY-AND-EQUITY> 72,143
<SALES> 110,055
<TOTAL-REVENUES> 110,055
<CGS> 80,646
<TOTAL-COSTS> 80,646
<OTHER-EXPENSES> 53,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 412
<INCOME-PRETAX> (23,081)
<INCOME-TAX> (4,775)
<INCOME-CONTINUING> (18,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,306)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> (1.58)

</TABLE>