<PAGE>
 
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                  FORM 10-Q/A

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998.

                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.

                        Commission file number 0-20933

================================================================================

                             RASTER GRAPHICS, INC.
                                        
            (Exact name of Registrant as specified in its charter)

          DELAWARE                                    94-3046090
(State of Incorporation)                 (I.R.S. Employer Identification Number)

                             3025 ORCHARD PARKWAY
                              SAN JOSE, CA  95134
                    (Address of principal executive office)
                                        
                                (408) 232-4000
                        (Registrant's telephone number)

================================================================================

  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 [_]


   As of February 9, there were 9,599,525 shares of Common Stock outstanding.

                                       1
<PAGE>
 
                                     INDEX
                                     -----
<TABLE> 
<CAPTION> 
                                                                            Page
                                                                            ----

PART I.    FINANCIAL INFORMATION
<S>                                                                        <C> 
  Item 1.    Condensed Consolidated Balance Sheets as of
             September 30, 1998, and December 31, 1997                       3

             Condensed Consolidated Statements of Operations
             for the nine month periods ended September 30, 1998,
             and September 30, 1997                                          4

             Condensed Consolidated Statements of Cash Flows
             for the nine month periods ended September 30, 1998,
             and September 30, 1997                                          5

             Notes to Condensed Consolidated Financial Statements            6

  Item 2.    Management's Discussion and Analysis of Financial
             Condition and Results of Operations                            11
 
 
PART II.   OTHER INFORMATION
 
  Item 1.    Legal Proceedings                                              18
 
  Item 2.    Changes in Securities                                          18
 
  Item 3.    Defaults upon Senior Securities                                19
 
  Item 4.    Submission of Matters to a Vote of Security Holders            19
 
  Item 5.    Other Items                                                    19
 
  Item 6.    Exhibits and Reports on Form 8-K                               19

SIGNATURE                                                                   20
</TABLE> 

                                       2
<PAGE>
 
PART I.    FINANCIAL INFORMATION

ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                             RASTER GRAPHICS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                September 30,           December 31,
                                                    1998                    1997
                                              ----------------        ----------------
                        ASSETS
 
Current assets:
<S>                                                <C>                     <C>         
    Cash and cash equivalents                      $ 1,971                 $ 3,727     
    Short-term investments                              --                   1,600     
    Accounts receivable, net of allowance for                                          
     doubtful accounts of $4,668 in 1997 and         4,705                   8,050     
     $4,441 in 1998                                                                    
                                                                                       
    Inventories                                      4,740                   6,640     
    Prepaid expenses                                   335                     523     
                                                   -------                 -------     
                                                                                       
Total current assets                                11,751                  20,540     
                                                                                       
Property and equipment, net                          3,295                   4,443     
Deposits and other assets                              269                     575     
                                                   -------                 -------     
                                                                                       
Total assets                                       $15,315                 $25,558     
                                                   -------                 -------     
                                                                                       
     LIABILITIES AND STOCKHOLDERS' EQUITY                             
                                                                                       
Current liabilities:                                                                   
    Accounts payable                               $ 5,680                 $ 8,711     
    Accrued payroll and related expenses             1,209                   1,000     
    Accrued warranty                                   597                     670     
    Other accrued liabilities                        4,016                   5,122     
    Deferred revenue                                 2,474                   1,361     
    Current portion of long-term debt                  610                     225     
                                                   -------                 -------     
                                                                                       
Total current liabilities                           14,586                  17,089     
                                                                                       
Long-term debt                                         134                     164     
                                                                                       
Stockholders' equity:                                                                  
    Common Stock                                        10                      10     
    Additional paid in capital                      43,285                  43,279     
    Accumulated deficit                            (42,141)                (34,382)    
    Deferred compensation                             (209)                   (287)    
    Cumulative translation adjustment                 (350)                   (315)    
                                                   -------                 -------     
                                                                                       
Total stockholders' equity                             595                   8,305     
                                                   -------                 -------     
                                                                                       
Total liabilities and stockholders' equity         $15,315                 $25,558      
                                                   -------                 -------      
</TABLE> 
        
        
        
See accompanying notes to unaudited condensed consolidated financial statements.

                                       3
<PAGE>
 
                             RASTER GRAPHICS, INC.
        
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATE)
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
        
            
                                           Three Months Ended     Nine Months Ended
                                              September 30,         September 30,
                                          -------------------    -------------------
                                            1998       1997       1998       1997
                                          -------     -------    -------    -------
                                                     (Restated)            (Restated)
 
<S>                                     <C>           <C>        <C>        <C>
Net revenues                              $ 9,955     $12,790    $33,102    $35,507
 
Cost of revenues                            7,195       9,705     23,313     27,856
                                          -------     -------    -------    -------
 
Gross profit                                2,760       3,085      9,789      7,651
                                          -------     -------    -------    -------
 
Operating expenses:
   Research and development                 1,327       1,524      4,679      4,269
   Sales and marketing                      2,381       2,543      7,630      7,157
   General and administrative               1,278       1,175      5,036      3,012
   Merger expenses                             --          --         --        139
                                          -------     -------    -------    -------
 
Total operating expenses                    4,986       5,242     17,345     14,577
                                          -------     -------    -------    -------

Operating (loss)                           (2,226)     (2,157)    (7,556)    (6,926)

Other income (expense), net                    (2)         93          2        358
                                          -------     -------    -------    -------

(Loss) before provision for income taxes   (2,228)     (2,064)    (7,554)    (6,568)

Provision for income taxes                     53          40        205        127
                                          -------     -------    -------    -------

Net (loss)                                $(2,281)    $(2,104)   $(7,759)   $(6,695)
                                          -------     -------    -------    -------

Net (loss) per share - basic              $ (0.24)    $ (0.22)   $ (0.81)   $ (0.71)
                                          -------     -------    -------    -------

Shares used in computing net (loss) per
   share - basic                            9,600       9,490      9,597      9,384
                                          -------     -------    -------    -------

Net (loss) per share - diluted            $ (0.24)    $ (0.22)   $ (0.81)   $ (0.71)
                                          -------     -------    -------    -------

Shares used in computing net (loss) per
   share - diluted                          9,600       9,490      9,597      9,384
                                          -------     -------    -------    -------
</TABLE> 

See accompanying notes to unaudited condensed consolidated financial statements

                                       4
<PAGE>
 
                             RASTER GRAPHICS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                               Nine Months Ended
                                                                 September 30,
                                                             ---------------------
                                                                1998        1997
                                                             --------     --------
                                                                         (Restated)
<S>                                                          <C>         <C> 
OPERATING ACTIVITIES
Net (loss)                                                    $(7,759)    $(6,695)
Adjustments to reconcile net (loss) to net cash used in
  operating activities:
  Depreciation and amortization                                 1,480         968
  Amortization of deferred compensation                            78          79
  Changes in operating assets and liabilities:
    Accounts receivable                                         3,345      (2,447)
    Inventories                                                 1,900      (1,152)
    Prepaid expenses and other assets                             494          96
    Accounts payable                                           (3,031)        374
    Accrued payroll and related expenses                          209         (87)
    Deferred revenue                                            1,113         108
    Warranty and other accrued liabilities                     (1,173)      1,265
                                                              -------     -------
 
Net cash (used in) operating activities                        (3,344)     (7,491)
 
INVESTING ACTIVITIES
Capital retirements                                               686          --
Capital expenditures                                           (1,018)     (2,232)
Decrease in short-term investments                              1,600       8,419
Datagraph Acquisition, net of cash acquired                        --          (8)
                                                              -------     -------
 
Net cash provided by investing activities                       1,268       6,179
 
FINANCING ACTIVITIES
Proceeds from loan                                                500          --
Proceeds from line of credit                                       --       2,000
Repayment of note                                                (145)       (263)
Repayment of note from shareholders                                --          20
Proceeds from issuance of common stock                             --         435
                                                              -------     -------
 
Net cash provided by financing activities                         355       2,192
                                                              -------     -------
 
Effect of exchange rate changes on cash                           (35)       (267)
Net increase (decrease) in cash and cash equivalents           (1,756)        613
Cash and cash equivalents at beginning of period                3,727       2,963
                                                              -------     -------
 
Cash and cash equivalents at end of period                    $ 1,971     $ 3,576
                                                              -------     -------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
    Cash paid for interest                                    $   204     $    69
    Cash paid for taxes                                       $   248     $    84
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                       5
<PAGE>
 
                             RASTER GRAPHICS, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

  1.    BASIS OF PRESENTATION

  The accompanying unaudited condensed consolidated financial statements have
been prepared by Raster Graphics, Inc. (the "Company" or "Raster Graphics")
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting.  Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the audited financial statements included in the Company's Annual Report
and Form 10-K for the fiscal year ended December 31, 1997.

  In the opinion of management the accompanying unaudited condensed consolidated
financial statements have been prepared on the same basis as the audited
financial statements and include all recurring adjustments necessary for a fair
presentation of the interim periods presented.  The operating results for the
three and nine months ended September 30, 1998, are not necessarily indicative
of the results for any other interim period or the full fiscal year ending
December 31, 1998.

  The unaudited condensed consolidated financial statements also include
adjustments that eliminated all significant intercompany transactions and
balances between the Company and ColourPass, which was merged into the Company's
wholly owned subsidiary, Raster Graphics Systems Limited effective March 18,
1997.  All periods presented reflect the merger which has been accounted for as
a pooling of interests.

  On February 26, 1998, the Company announced its financial results for the year
ended December 31, 1997. The Company reported revenue of $54.7 million, gross
profit of $19.5 million, operating expenses of $20.6 million and a net loss of
$1.2 million for fiscal 1997. On April 1, 1998 the Company announced that it
would revise its 1997 financial results.

  In March 1998, after consultation with its independent accountants, the Board
of Directors of the Company performed a review of the Company's accounting and
business practices. By mid-April the Board of Directors became aware of
pervasive errors and irregularities that ultimately affected the dollar amount
and timing of reported revenues in 1997. The Board of Directors instructed that
an analysis be conducted on these matters.

  The irregularities took numerous forms and were primarily the result of a lack
of compliance with the Company's procedures and controls. The Company has
concluded that the earnings process for a significant number of printer sales
were not complete at the time of shipment. Further, the Company has determined
that arrangements with a number of resellers resulted in significant concessions
or allowances that were not accounted for when the revenue was originally
reported as earned.

  In addition, the Company determined that its allowances for doubtful accounts
receivable balances and excess and obsolete inventory, and the realizable value
of inventory and the goodwill recorded on the acquisition of Datagraph had been
incorrectly estimated.

  As a result, for the year ended December 31, 1997, the Company reversed
recorded revenues of $5.8 million, recorded additional cost of revenue of $7.6

                                       6
<PAGE>
 
million, and additional operating expenses of $4.6 million. In addition, the
Company has restated its previously reported results for each interim period in
the nine months ended September 30, 1997.  The 10-Q/A's for each interim period
were filed October 7, 1998.

  The Company has also restated the net assets purchased on the acquisition of
Datagraph, a distributor of large format digital printer (LFDP) systems in
France. The original figures were based on an estimate, which has since been
revised to reflect actual values. In particular, an intangible asset of
$1,420,000 was initially recorded and was revised to $1,211,000. This intangible
asset was written off in the fourth quarter of 1997 following a revision to the
Company's sales forecasts. In addition, Datagraph has commenced bankruptcy
proceedings in the fourth quarter of 1998 and will cease operations.

The Company's policy for recognizing revenue is as follows:

    Revenue from product sales is recognized upon the later of shipment,
 acceptance of the product by the customer, or when payment from the customer is
 assured. In particular, where the Company has made arrangements with customers,
 such as resellers, that have resulted in contingencies or allowances after the
 product has shipped, revenue is recognized once the contingency has been
 removed and cash collection is assured.

    Further, where a customer has obtained financing through a third party
 broker, revenue is not recognized until the finance agreement is in place and
 the product has been accepted by the customer.

    Revenue under maintenance contracts is recognized ratably over the term of
 the related contract, generally twelve months.

  The Company believes its existing capital resources will be insufficient to
satisfy its working capital requirements through the end of 1998. The Company
will need to raise additional capital to fund operations during 1998 and beyond.
The Report of Independent Auditors on the Company's financial statements for the
year ended December 31, 1997, contains an explanatory paragraph regarding the
Company's need for additional financing and indicates substantial doubt about
the Company's ability to continue as a going concern. There can be no assurances
that such capital will be available on acceptable terms, if at all, and such
terms may be dilutive to existing stockholders.   The Company has entered into a
Loan and Pledge Agreement with Gretag Imaging Group, Inc. providing for a loan
facility secured by 100% of the issued stock of Onyx Graphics Corporation (see
Note 10 regarding subsequent events). The Company's inability to secure any
additional necessary funding would have a material adverse affect on the
Company's financial condition and results of operations. The Company's actual
working capital needs will depend upon numerous factors, including the extent
and timing of acceptance of the Company's products in the market, the Company's
operating results, the progress of the Company's research and development
activities, the cost of increasing the Company's sales and marketing activities
and the status of competitive products, none of which can be predicted with
certainty. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of assets and liabilities that may result from
the outcome of this uncertainty.  See Note 10 regarding subsequent events.


  2.    USE OF ESTIMATES

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These assumptions affect the reported amounts of assets and

                                       7
<PAGE>
 
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.


  3.    CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

  For financial statement purposes, the Company considers all highly liquid debt
instruments with original maturities of ninety days or less and with
insignificant interest rate risk to be cash equivalents.

  The Company classifies all of its investments as "available-for-sale" in
accordance with the provisions of Financial Accounting Standards Board Statement
No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, the Company states its investments at estimated fair value, with
material unrealized gains and losses reported in stockholders' equity.  The cost
of securities sold is based on the specific identification method.  Such
securities are anticipated to be used for current operations and are, therefore,
classified as current assets, even though maturities may extend beyond one year.


  4.    INVENTORIES

  Inventories are stated at the lower of cost (first in, first out) or fair
market value and consist of the following (in thousands):
<TABLE>
<CAPTION>
 
                                                              September 30,                      December 31,       
                                                                  1998                              1997            
                                                            ---------------                     -------------  
<S>                                                                <C>                     <C>                  
                                                                                                                  
  Raw materials                                                    $ 2,909                         $ 2,934             
  Work-in-progress                                                   1,741                             958             
  Finished goods                                                        90                           2,748             
                                                                   -------                         -------             
                                                                                                                  
                                                                   $ 4,740                         $ 6,640              
                                                                   -------                         -------             
</TABLE> 
 
 
   5.   NET LOSS PER SHARE

<TABLE> 
<CAPTION> 
                                                                 Three months ended                      Nine months ended
                                                                     September 30,                          September 30,
                                                                ---------------------------------------------------------
                                                                           in thousands, except per share data
                                                                ---------------------------------------------------------
                                                                     1998        1997                1998       1997
                                                                   -------     -------              -------    -------
                                                                              (Restated)                     (Restated)
<S>                                                              <C>          <C>                  <C>       <C>  
Numerator for basic and diluted earnings per share                 $(2,281)    $(2,104)             $(7,759)   $(6,695)
                                                                   =======     =======              =======    =======
 
Denominator for basic earnings per share:
Convertible preferred stock                                          9,600       9,490                9,597      9,384
Shares used in computing basic earnings per share                    9,600       9,490                9,597      9,384
                                                                   =======     =======              =======    =======
 
Basic loss per share                                               $ (0.24)    $ (0.22)             $ (0.81)   $ (0.71)
                                                                   =======     =======              =======    =======
 
Denominator for diluted loss per share:
 Weighted average common shares                                      9,600       9,490                9,597      9,384
 Convertible preferred stock                                            --          --                   --         --
 Stock options and warrants                                             --          --                   --         --
Shares used in computing diluted loss per share                      9,600       9,490                9,597      9,384
                                                                   =======     =======              =======    =======

Diluted loss per share                                             $ (0.24)    $ (0.22)             $ (0.81)   $ (0.71)
                                                                   =======     =======              =======    =======
</TABLE> 


  6.    REPORTING OF COMPREHENSIVE INCOME

  In June 1997, the Financial Accounting Standards Board issued Statement Number
130, "Reporting of Comprehensive Income."  This Statement requires that all
items that are to be required to be recognized under accounting standards as

                                       8
<PAGE>
 
components of comprehensive income be reported in annual financial statements
with the same prominence as other financial statements.  Total Comprehensive
Income (loss) for the periods ending September 30, 1998, and September 30, 1997,
were ($6,962,000) and ($7,794,000) respectively.


  7.    IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

  In June 1997, the Financial Accounting Standards Board issued Statement Number
131, "Disclosures About Segments of an Enterprise and Related Information."
This Statement replaces Statement Number 14 and changes the way public companies
report segment information.  This Statement is effective for fiscal years
beginning after December 15, 1997, and will be included in the annual financial
statements for the Company for the year ended December 31, 1998.

  In June 1998, the Financial Accounting Standards Board issued Statement Number
133, "Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
inducing certain derivative instruments embedded in other contracts
(collectively referred to as derivative) and for hedging activities.  This
statement is effective for fiscal years beginning after September 30, 1999, and
will be adopted by the Company for the year ended December 31, 2000.


  8.    PENDING LITIGATION

  Commencing in March 1998, several class action lawsuits have been filed in
both state and federal courts on purported behalf of shareholders who purchased
the Company's stock during various periods in 1997 through early 1998.  The
complaints name as defendants the Company and its Chairman, Chief Executive
Officer and President, and certain other officers and directors.  The complaints
allege, among other things, violation of federal securities laws and that
defendants made false and misleading statements in press releases, SEC filings
and/or other public statements and seek unspecified damages.  The litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations.  In October 1998, the Company
entered into a Memorandum of Understanding (MoU) with the securities litigation
plaintiffs.  This MoU contains the essential terms of settlement for the above
referenced securities litigation.  In consideration for a mutually agreed
release, the plaintiffs will receive $4.5 million.  Of this amount, the Company
has accrued $850,000 as of March 31, 1998, and subsequently paid such amount
directly into an escrow account and the balance is an obligation of the
Company's insurance carrier. The settlement is conditioned upon receiving final
judicial approval. There can be no assurances such approval will be obtained.

  The Company is a party to a number of legal claims arising in the ordinary
course of business.  The Company believes the ultimate resolution of the claims
will not have a material adverse effect on its financial position, results of
operation, or cash flow.


  9.    RESTRUCTURING

  During the first quarter of 1998, the Company implemented a plan of internal
restructuring of its operations.  The plan was initiated to reduce operating
expenses and improve the Company's financial condition.  The plan resulted in a
reduction in headcount of approximately 28 and included several

                                       9
<PAGE>
 
officers of the Company. The costs associated with this restructuring totaled
approximately $300,000, and has been accrued as of March 31, 1998.


  10.   SUBSEQUENT EVENTS

  The Company has entered into an Agreement and Plan of Merger with Gretag
Imaging Group, Inc. ("Gretag") for the acquisition of the Company for
approximately $1.30 per share (the "Merger").  The Company has also entered into
a Loan and Pledge Agreement and Asset and Subsidiary Stock Option Agreement and
certain of its stockholders have entered into a Stockholders Agreement with
Gretag.  Pursuant to the Loan and Pledge Agreement, Gretag is providing the
Company a loan facility secured by 100% of the issued stock of Onyx, a wholly
owned subsidiary of the Company.  The Company may draw down amounts together
with accrued interest of up to $5,000,000.  Installments of $500,000 each were
received by the Company on September 23, October 7, October 21, and November 4,
1998. In addition, Gretag has the option to purchase up to $5,000,000 of the
Company's Common Stock in exchange for forgiving the loan and paying the balance
in cash.  Pursuant to the Asset and Subsidiary Stock Option Agreement (i) if the
Agreement and Plan of Merger is terminated, Gretag has the option to acquire
Onyx for $5,000,000 less the amount drawn down under the loan facility, or (ii)
if the Company's stock holders do not vote in favor of the Merger, if the
Company accepts a superior offer to sell the Company or upon certain other
events, Gretag has the option to acquire the Company's inkjet technology for
$6,000,000 less the amount drawn down under the loan facility.  Pursuant to the
terms of the Stockholders Agreement, stockholders of the Company holding
approximately 20% of the Company's outstanding Common Stock have agreed to vote
in favor of the Merger and against any other proposal to acquire the Company.
The Merger and the Agreement and Plan of Merger requires stockholder approval
and consummation of the Merger is conditioned upon settlement of the class
action lawsuits against the Company.  The Company also borrowed $850,000 on
October 14, 1998 which was directly placed in an escrow account for the
potential settlement of the pending securities litigation.  See Note 11
regarding bonuses payable upon change of control.


  11.   RELATED PARTY TRANSACTIONS

  The Company entered into an employment agreement with its Chief Executive
Officer on July 3, 1991, which provides for a six-month severance payment in the
event of termination of employment. On August 21, 1998, the Compensation
Committee approved the grant of a $300,000 retention bonus payable to the Chief
Executive Officer upon change of control of the Company. On August 21, 1998 the
Company entered into a mutual release agreement with Marc Willard, an officer of
the Company. In consideration for Mr. Willard's full release relating to the
Company's acquisition of ColourPass (of which Mr. Willard was an 80% partner),
the parties agreed to a cash bonus of $70,000, a cash payment of $200,000 upon
the acquisition of the Company, and a stock option grant of 175,000 shares. In
addition, the Company entered into a consulting agreement on May 14, 1998, with
The Brenner Group LLC pursuant to which the Company has retained the services of
its Acting Chief Financial Officer. Under the terms of the consulting agreement,
the Company is obligated to pay The Brenner Group LLC a fee of $155 per hour and
a bonus and additional fees of $85,000 up to a maximum of $200,000 upon change
of control or recapitalization which occurs within six months of the expiration
of the agreement or any extensions thereto.

  In November 1997, the Company issued an irrevocable standby letter of credit
in favor of Barclays' Bank on behalf of Mr. Willard for an unsecured personal
line of credit in the amount of $175,000. This letter of credit expired May 31,
1998.

                                       10
<PAGE>
 
  The Company has entered into an indemnification agreement with each of its
executive officers and directors that may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or services as director or officer and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.

  The Company believes that all of the transactions set forth above were made on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested directors on the Board of Directors, and
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

  The following should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Part I -- Item 1
of this Quarterly Report and the audited financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report and Form 10-K for the fiscal
year ended December 31, 1997.


OVERVIEW

  Raster Graphics was established in 1987 initially to develop low-cost
electrostatic raster printers for the computer-aided design ("CAD") market.
Raster Graphics commenced shipments of its first printer, a 22-inch printer, in
1989, followed by a 24-inch printer in 1990 and a 36-inch printer in 1992.

  In 1993, the Company identified the on-demand production large format digital
printing ("LFDP") market as a new opportunity to develop a product based on its
proprietary high-speed printhead technology.  As a result, in 1993 the Company
shifted its product focus and began to develop the DCS 5400 specifically for the
LFDP market.  The Company began shipping the DCS 5400 in July 1994. Since the
Company began commercial production of the DCS 5442 in January 1996 as a second
generation to the DCS 5400, this line has represented an increasing percentage
of the Company's product shipments and, by September 1996, substantially
replaced the DCS 5400.  In December 1996, the Company introduced the
PiezoPrint(TM) 1000, an inkjet printer manufactured by a third party, that is
targeted at the lower priced entry level production market. In March 1997, the
Company introduced the PiezoPrint(TM) 5000 as a mid-range, price/performance
product to complement the affordable PiezoPrint(TM) 1000 inkjet printer and the
high volume DCS 5442. Although the Company has no current plans to replace any
printer in its current line of products, the future success of the Company will
likely depend on its ability to develop and market new products that offer
different levels of performance for the production segment of the LFDP market.

  In order to provide a complete digital printing solution to its customers, the
Company began shipping Onyx's image processing software with its digital
printers in July 1994.  Onyx develops and markets image processing software for
the Company's digital printers as well as printers manufactured by companies
such as CalComp, Encad, Hewlett-Packard, and ColorgrafX. In August 1995, the
Company acquired Onyx. Onyx supplies its software to Raster Graphics and also

                                       11
<PAGE>
 
sells its software products to OEMs, VARs, systems integrators and other printer
manufacturers. Onyx's current image processing software product, PosterShop, was
introduced in April 1996 as a replacement for Onyx's Imagez image processing
software product, which Onyx had been shipping since May 1991. Although the
Company has no current plans to replace its PosterShop product, the Company will
likely introduce new versions of its image processing software in the future.

  Raster Graphics also sells related consumables, including specialized inks and
papers that it acquires from third party suppliers and resells under the Raster
Graphics name for use in the Company's digital printers.  The sale of
consumables generates recurring revenues, which the Company believes will
continue to increase to the extent that the installed base of printing systems
expands.  As the Company develops new printers, it may need to develop new
consumables to be used by its new printer products.

  In the United States, Raster Graphics also derives revenues from maintenance
contracts of installed systems and printers, including the Company's installed
base of 22-inch, 24-inch and 36-inch printers. Revenue is also generated from
the sale of spare parts.

  Raster Graphics' end user customers, OEMs, VARs, and international
distributors submit purchase orders that generally require product shipment
within two to eight weeks from receipt of order.  Accordingly, the Company does
not use order backlog as a primary basis for management planning for longer
periods.  Revenues are not recognized until products have been shipped and all
contingencies have been removed.

  Cost of revenues includes materials, labor, overhead and software royalties.
Cost of revenues as a percentage of revenue varies depending upon the revenue
mix generated through end user, OEM, VAR and distributor sales, and the revenue
mix generated from Onyx software license fees, printing systems sales,
consumables sales and service fees.

  Raster Graphics expenses research and development costs as incurred. Research
and development expenses have increased from year to year.  Raster Graphics
believes that research and development expenses will continue to increase in
absolute dollar amounts and may increase as a percentage of revenues.

  Raster Graphics' sales and marketing expenses and general and administrative
expenses have also increased to support the revenue growth of the Company.  The
Company's strategy is to distribute its products through a direct sales force
and independent representatives in selected markets, as well as through OEMs,
VARs and distributors.  Raster Graphics also incurs sales and marketing expenses
in connection with product promotional activities.  The Company intends to
continue to develop its domestic and international sales and marketing
organizations.  As a result, the Company believes that sales and marketing
expenses will continue to increase in absolute dollar amounts and may increase
as a percentage of revenues.

  The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based.  The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets.  To address these risks, the
Company must, among other things, respond to competitive developments, attract,
retain and motivate qualified persons, and continue to upgrade its technologies
and commercialize products and services incorporating such technologies. There
can be no assurance that the Company will be successful in addressing these
risks.  As of September 30, 1998, the Company had an accumulated deficit of

                                       12
<PAGE>
 
$42.1 million.  Although the Company was marginally profitable in 1996 and
incurred losses in 1997, there can be no assurance that the Company will return
to profitability in the future.

                                       13
<PAGE>
 
RESULTS OF OPERATIONS

  ColourPass merged into Raster Graphics Systems Limited, a wholly owned
subsidiary of the Company, on March 18, 1997.  The merger has been accounted for
as a pooling of interests, and accordingly, the financial results presented
include ColourPass.

  The following table sets forth certain consolidated statements of operation
data as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
 
 
                                          Three Months Ended     Nine Months Ended
                                             September 30,         September 30,
                                          ------------------    ------------------
<S>                                      <C>           <C>      <C>      <C>
                                            1998     1997          1998     1997
                                            -----    -----        -----    -----
                                                   (Restated)            (Restated)
                                                             
Net revenues                                100.0%   100.0%       100.0%   100.0%
Cost of revenues                             72.3     75.9         70.4     78.5
                                            -----    -----        -----    -----
                                                             
Gross profit                                 27.7     24.1         29.6     21.5
                                            -----    -----        -----    -----
                                                             
Operating expenses:                                          
   Research and development                  13.3     11.9         14.1     12.0
   Sales and marketing                       23.9     19.9         23.0     20.2
   General and administrative                12.9      9.2         15.3      8.5
   Merger expenses                              -        -            -      0.4
                                            -----    -----        -----    -----
                                                             
Total operating expenses                     50.1     41.0         52.4     41.1
                                            -----    -----        -----    -----
                                                             
Operating (loss)                            (22.4)   (16.9)       (22.8)   (19.6)
Other income, net                             0.0      0.7          0.0      1.1
                                            -----    -----        -----    -----
                                                             
(Loss) before provision for income taxes    (22.4)   (16.2)       (22.8)   (18.5)
Provision for income taxes                    0.5      0.3          0.6      0.4
                                            -----    -----        -----    -----
 
Net (loss)                                  (22.9)%  (16.5)%  (23.4)%  (18.9)%
                                            -----    -----    -----    -----
 
</TABLE>

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

  Net Revenues.  Net revenues for the three and nine months ended September 30,
1998, were $10.0 million and $33.1 million, respectively, a decrease of 22.2%
and 6.8%, respectively, over the comparable periods of fiscal 1997. The decrease
is primarily attributable to a decrease in sales of printer systems and sales of
consumables.

  Future revenue growth will depend on a number of factors, including the
Company's ability to develop, manufacture, market and sell innovative and
reliable new products, customer satisfaction, market growth, competitive
developments, product mix, vendor performance and the Company's ability to
manage growth, if any.

  International sales, which include export sales and direct sales of the
Company's German, United Kingdom and French operations, were $5.5 million and
$16.4 million for the three and nine months ended September 30, 1998,
respectively. These sales represented 55.0% and 49.4% of net revenue for the
three and nine months ended September 30, 1998. International sales were $7.0
million and $20.0 million for the three and nine months ended September 30,
1997, respectively. These sales represent 55.1% and 56.3% of net revenue for
three and nine months ended September 30, 1997. The Company's German, French,
and United Kingdom subsidiaries experienced a reduction in sales of consumables
and printer systems during the three and nine months ended September 30, 1998,
which contributed to the decrease in international sales as a percentage of net

                                       14
<PAGE>
 
revenues. Sales made by the Company's German, United Kingdom and French
subsidiaries are denominated in local currencies. The Company is subject to
transaction exposure that arises from foreign exchange movements between the
dates foreign currency sales are recorded and the dates cash is received. To
date, the Company has not found it appropriate to hedge the risks of foreign
sales subject to fluctuations in exchange rates. All international sales made by
the Company's domestic operations are denominated in United States Dollars and
are not subject to foreign exchange movements.

  Future international revenues will depend on the factors set forth above, and
will be subject to unexpected changes in regulatory requirements and tariffs,
longer customer payment cycles, fluctuation in currency exchange rates, seasonal
factors and risks associated with managing business operations in geographically
distant locations. No assurance can be given that international revenues will
continue to grow at current rates, or at all.

  Gross Profit.  The Company's gross profit for the three and nine months ended
September 30, 1998 was $2.8 million and $9.8 million, respectively, a decrease
of 10.5% for the three months ended September 30, 1998, as compared to the three
months ended September 30, 1997, and an increase of 27.9% for the nine months
ended September 30, 1998, over the comparable period in fiscal 1997. The
fluctuations in gross profit for the three and nine months ended September 30,
1998, and 1997, were primarily the result of excess and obsolete inventory
reserve adjustments following a revision on the Company's estimate of future
printer sales. Gross profit represented 27.7% and 24.1% of net revenues for the
three months ended September 30, 1998, and 1997, respectively. For the nine
months ended September 30, 1998, and 1997, respectively, gross profit
represented 29.6% and 21.5% of net revenues.

  The Company's future level of gross profit will depend on a number of factors,
including its ability to manage product mix, control variable expenses relative
to revenue levels, maintain a revenue base over which to allocate fixed costs,
and continue to develop, manufacture, market and sell innovative and reliable
new products.

  Research and Development.  Research and development expenses for the three
months ended September 30, 1998 were $1.3 million, a decrease of 12.9% in
comparison to the three months ended September 30, 1997. Research and
development expenses for the nine months ended September 30, 1998, were $4.7
million, an increase of 9.6% in comparison to the nine months ended September
30, 1997. This increase is attributable to an increase in staffing and related
benefits.  The Company intends to continue to dedicate substantial resources to
research and development activities to maintain its leadership in the LFDP
market. The Company intends to expand its product lines, including printers, to
achieve faster speed and higher image quality, and to enhance its PosterShop
image processing software.

  Sales and Marketing.  Sales and marketing expenses for the three months ended
September 30, 1998, were $2.4 million, a decrease of 6.4% in comparison to the
three months ended September 30, 1997. Sales and marketing expenses for the nine
months ended September 30, 1998, were $7.6 million, an increase of 6.6% in
comparison to the nine months ended September 30, 1997. The increase in sales
and marketing expenses was primarily a result of increased staffing and related
benefits, and tradeshow expenses. The Company expects to continue to increase
its sales and marketing expenses in an effort to expand domestic and
international markets, introduce new products, and establish and expand new
distribution channels.

  General and Administrative.  General and administrative expenses for the three
months ended September 30, 1998, were $1.3 million, an increase of 8.8% in

                                       15
<PAGE>
 
comparison to the three months ended September 30, 1997. General and
administrative expenses for the nine months ended September 30, 1998, were $5.0
million, an increase of 67.2% in comparison to the nine months ended September
30, 1997. The increase in general and administrative expenses was primarily the
result of increased consulting and legal expenses. In the first quarter of 1998,
the Company accrued $850,000 for settlement of the security litigation. The
Company believes that its general and administrative expenses may increase as
the Company continues to build its infrastructure.

  Merger Expenses. On March 18, 1997, the Company completed a merger with
ColourPass, a business in the United Kingdom.  Approximately $139,000 of expense
was incurred in connection with this transaction.

  On September 30, 1997, Raster Graphics acquired Datagraph, a French-based
distributor of large-format digital imaging systems.  In exchange for the
outstanding stock of Datagraph, the Company agreed to pay approximately
$1,100,000 in a series of payments through September 30, 1998.  The acquisition
was accounted for as a purchase.  Including acquisition costs, the transaction
resulted in an intangible asset of $1,211,000, which following a revision of the
Company's sales forecasts was written off during the fourth quarter of 1997. The
operating results of Datagraph prior to the acquisition are not material in
relation to the Company.  In addition, Datagraph has commenced bankruptcy
proceedings.

  Provision for Income Taxes.  The Company's effective tax rate on the
consolidated pretax loss for the three and nine month periods ended September
30, 1998, is (2.4%), and (2.7%) respectively, compared to an effective rate of
(2%) on consolidated pretax loss for the three and nine month periods ended
September 30, 1997.  The tax provision for the three and nine month peroids
ended September 30, 1997, and September 30, 1998, result from taxes on foreign
jurisdictions and federal and state minimum taxes despite an overall loss.


LIQUIDITY AND CAPITAL RESOURCES

  Since inception, the Company has financed its operations primarily through
private sales of preferred stock and common stock, its initial public offering
of common stock, issuance of convertible debt, bank loans, and equipment lease
financing and private loans.

  For the nine months ended September 30, 1998, $3.3 million of cash was used in
operations as compared to $7.5 million of cash used from operations for the same
period in 1997. A major factor in the change in cash position was the initial
cash flows and investments associated with two new product launches.  In
December 1996, the Company introduced the PiezoPrint(TM) 1000 printing system.
Accordingly, during the first quarter of 1997, cash was used to purchase base
line levels of consumables inventory and finished goods units in anticipation of
sales. In March 1997, the Company launched the PiezoPrint(TM) 5000 printing
system. The Company purchased $1,018,000 and $2,232,000 of capital equipment
during the nine months ended September 30, 1998, and 1997, respectively.

  To finance the working capital needs and the purchase of capital equipment,
the Company reduced its short-term investments. Other financing activities
principally consisted of repayment of notes payable in the amount of $145,000
and $263,000 for the nine months ended September 30, 1998, and 1997,
respectively, and cash received from loan proceeds of $500,000.

  At September 30, 1998, the Company had $2.0 million of cash, cash equivalents
and short-term investments.  The Company also had available a $4.1 million bank
line of credit that was to expire on December 31, 1998, which was

                                       16
<PAGE>
 
secured by the tangible assets of the Company. There were no borrowings under
the line of credit as September 30, 1998. The bank line of credit was terminated
November 17, 1998.

  The Company may require additional funds to support its working capital
requirements or for other purposes and may seek to raise such additional funds
through bank borrowings and public or private sales of its securities, including
equity and debt securities. The Company has entered into a Loan and Pledge
Agreement with Gretag Imaging Group, Inc. providing for a loan facility secured
by 100% of the issued stock of Onyx Graphics Corporation (see Note 10 regarding
subsequent events). The Company's future capital requirements, however, depend
on numerous factors, including, without limitation, the success of marketing,
sales and distribution efforts; the progress of its research and development
programs; the costs involved in preparing, filing, prosecuting, defending and
enforcing intellectual property rights; competition; competing technological and
market developments; and the effectiveness of product commercialization
activities and arrangements.  There can be no assurance that additional funds,
if required, will be available to the Company on favorable terms or at all.


YEAR 2000 COMPLIANCE

  The "Year 2000 issue" arises because many computer systems and programs were
designed to handle only a two-digit year, not a four-digit year. These computers
may interpret "00" as the year 1900 and could either stop processing date-
related computations or could process them incorrectly.

  The Company has examined the potential impact of the Year 2000 issue on its
printer and image processing software products and believes that its products
are Year 2000 compliant, meaning that the use or occurrence of dates on or after
January 1, 2000 will not materially affect the performance of Company products
to correctly create, store, process and output information related to such
dates. The Company's printer system products are not effected by the Year 2000
issue because the custom operating systems designed into the DCS and PiezoPrint
systems are insensitive to year code. The Company's PosterShop image processing
software product utilizes more than a 2-digit year code, and therefore will not
be effected by the change to the year 2000.

  The Company has determined that with an upgrade to its current information
systems, those systems will be able to process the Year 2000 accurately and
accordingly does not anticipate any Year 2000 issues from its own information
systems, databases or programs as long as it can successfully complete this
upgrade.  The Company expects that the costs of this upgrade will not exceed
$50,000.  However, the Company could be adversely impacted by Year 2000 issues
faced by major distributors, suppliers, customers, vendors, and financial
service organizations with which the Company interacts.  The Company is in the
process of developing a plan to determine the impact that third parties which
are not Year 2000 compliant may have on the operations of the Company.  While
approaches to reducing risks of interruption due to supplier failures will vary
by business and facility, options include identification of alternate suppliers
and accumulation of inventory to assure production capability where feasible or
warranted. These activities are intended to provide a means of managing risk,
but cannot eliminate the potential for disruption due to third party failure.
The Company is also dependent upon customers for sales and cash flow. Year 2000
interruptions in customers' operations could result in reduced sales, increased
inventory or receivable levels and cash flow reductions. The Company will,
however, take steps to monitor the status of customers as a means of determining
risks and alternatives.

                                       17
<PAGE>
 
  The Company's Year 2000 plan is expected to significantly reduce the level of
uncertainty about the potential Year 2000 problem and, in particular about the
Year 2000 compliance and readiness of the Company's suppliers, resellers and
distributors.  The Company believes that, with completion of the Year 2000 plan,
the possibility of significant interruptions of normal operations should be
reduced. However, due to the uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition.


FORWARD LOOKING STATEMENTS

  The Company notes that certain of the foregoing statements in this report are
forward-looking, the accuracy of which is necessarily subject to risks and
uncertainties.  Actual results may differ materially from the statements made
due to a variety of factors including, but not limited to, (i) fluctuations in
quarterly results, (ii) unforeseen operational problems in the PiezoPrint or DCS
5442 products, (iii) unforeseen reduced sales of the DCS 5442 products because
of the introduction of the PiezoPrint(TM) 5000, (iv) dependence on third party
relationships, (v) risks associated with international operations, (vi)
competitive products and technologies, and (vii) other risk factors described in
the Company's Annual Report and Form 10-K as currently filed with the Securities
and Exchange Commission.


PART II.   OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

  Commencing in March 1998, several class action lawsuits have been filed in
both state and federal courts on purported behalf of shareholders who purchased
the Company's stock during various periods in 1997 through early 1998. The
complaints name as defendants the Company and its Chairman, Chief Executive
Officer and President, and certain other officers and directors. The complaints
allege, among other things, violation of federal securities laws and that
defendants made false and misleading statements in press releases, SEC filings
and/or other public statements and seek unspecified damages. The litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In October 1998, the Company
entered into a Memorandum of Understanding (MoU) with the securities litigation
plaintiffs. This MoU contains the essential terms of settlement for the above
referenced securities litigation. In consideration for a mutually agreed
release, the plaintiffs will receive $4.5 million, $850,000 of which will be
paid by the Company and the balance of which will be paid by the Company's
insurance carrier. Such sums have been placed in escrow pending final approval
of the settlement.  The settlement is conditioned upon receiving final judicial
approval. Although the United States District Court for the Northern District of
California granted preliminary approval of the settlement on December 11, 1998,
there can be no assurances such approval will be obtained.

  The Company is a party to a number of legal claims arising in the ordinary
course of business.  The Company believes the ultimate resolution of the claims
will not have a material adverse effect on its financial position, results of
operation, or cash flow.


ITEM 2.    CHANGES IN SECURITIES

                                       18
<PAGE>
 
           Not applicable


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

           Not applicable


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

           Not applicable


ITEM 5.    OTHER ITEMS

           Not applicable


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

           (a)  Exhibits 27.1 Financial Data Statement

           (b)  Reports on Form 8-K:  None

                                       19
<PAGE>
 
                                   SIGNATURE

  Pursuant to the requirements 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.

                              RASTER GRAPHICS, INC.


                              By: /s/ Kathy J. Bagby
                                 ------------------------------
                                 Kathy J. Bagby
                                 Acting Chief Financial Officer


Date:  February 12, 1999

                                       20
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

 EXHIBITS                                            PAGE NUMBER
 --------                                            -----------

  27.1         Financial Data Statement             Filed via Edgar