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

                                   FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTER ENDED JUNE 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[_]   No[X]*

*  Registrant has not filed its Quarterly Report on Form 10-Q for the Quarter
                 ended March 31, 1998, and September 30, 1998.

      As of November 2, 1998, there were 9,599,525 shares of Common Stock
                                 outstanding.

                                       1
<PAGE>
 
                                     INDEX
                                     -----
                                                                            Page
                                                                            ----

PART I.    FINANCIAL INFORMATION
 
      Item 1.    Condensed Consolidated Balance Sheets as of
                 June 30, 1998, and December 31, 1997                      3
 
                 Condensed Consolidated Statements of Operations
                 for the six month periods ended June 30, 1998, 
                 and June 30, 1997                                         4
                             
                 Condensed Consolidated Statements of Cash Flows
                 for the six month periods ended June 30, 1998, 
                 and June 30, 1997                                         5
 
                 Notes to Condensed Consolidated Financial Statements      6
 
      Item 2.    Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                       10
 
 
PART II.   OTHER INFORMATION
 
      Item 1.    Legal Proceedings                                         15  
                                                                              
      Item 2.    Changes in Securities                                     15  
                                                                              
      Item 3.    Defaults upon Senior Securities                           15  
                                                                              
      Item 4.    Submission of Matters to a Vote of Security Holders       15  
                                                                              
      Item 5.    Other Items                                               16  
                                                                              
      Item 6.    Exhibits and Reports on Form 8-K                          16   
 
SIGNATURE                                                                  17

 

                                       2
<PAGE>
 
PART I.  FINANCIAL INFORMATION

Item 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                   June 30,                     December 31,
                                                                     1998                           1997
                                                             ------------------            -------------------
 
                                    ASSETS
<S>                                                            <C>                           <C>
Current assets:
 Cash and cash equivalents                                             $  4,156                       $  3,727
 Short-term investments                                                      --                          1,600
 Accounts receivable, net of allowance for
   doubtful accounts of $4,668 in 1997 and                                7,630                          8,050
   $4,635 in 1998
 
 Inventories                                                              4,918                          6,640
 Prepaid expenses                                                           318                            523
                                                             ------------------            -------------------
Total current assets                                                     17,022                         20,540
 
Property and equipment, net                                               3,466                          4,443
Deposits and other assets                                                   294                            575
                                                             ------------------            -------------------
 
Total assets                                                           $ 20,782                       $ 25,558
                                                             ==================            ===================
 
                     LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
 Accounts payable                                                      $  6,118                       $  8,711
 Accrued payroll and related expenses                                     1,431                          1,000
 Accrued warranty                                                           549                            670
 Other accrued liabilities                                                4,314                          5,122
 Deferred revenue                                                         2,216                          1,361
 Notes payable                                                            3,200                             --
 Current portion of long-term debt                                          157                            225
                                                             ------------------            -------------------
Total current liabilities                                                17,985                         17,089
 
Long-term debt                                                              146                            164
 
Stockholders' equity:
 Common stock                                                                10                             10
 Additional paid in capital                                              43,285                         43,279
 Accumulated deficit                                                    (39,860)                       (34,382)
 Deferred compensation                                                     (235)                          (287)
 Cumulative translation adjustment                                         (549)                          (315)
                                                             ------------------            -------------------
Total stockholders' equity                                                2,651                          8,305
                                                             ------------------            -------------------
 
Total liabilities and stockholders' equity                             $ 20,782                       $ 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 DATA)
                                  (UNAUDITED)

                                        
<TABLE>
<CAPTION>
                                                                Three Months Ended     Six Months Ended
                                                                     June 30,              June 30,
                                                               --------------------  --------------------
                                                                 1998       1997       1998       1997
                                                               --------  ----------  --------  ----------
                                                                         (Restated)            (Restated)
 
<S>                                                            <C>       <C>         <C>       <C>
Net revenues                                                   $12,754    $ 11,152    23,147     $22,717
 
Cost of revenues                                                 7,885      10,710    16,118      18,151
                                                               -------    --------   -------     -------
 
Gross profit                                                     4,869         442     7,029       4,566
                                                               -------    --------   -------     -------
 
Operating Expenses:
 Research and development                                        1,692       1,181     3,352       2,745
 Sales and marketing                                             2,492       2,595     5,249       4,614
 General and administrative                                      1,488         895     3,758       1,837
 Merger expenses                                                    --          --        --         139
                                                               -------    --------   -------     -------
 
Total operating expenses                                         5,672       4,671    12,359       9,335
                                                               -------    --------   -------     -------
 
Operating (loss)                                                  (803)     (4,229)   (5,330)     (4,769)
 
Other income, net                                                   42         108         4         265
                                                               -------    --------   -------     -------
 
(Loss) before provision for income taxes                          (761)     (4,121)   (5,326)     (4,504)
 
Provision for income taxes                                          73          81       152          87
                                                               -------    --------   -------     -------
 
Net (loss)                                                     $ ( 834)   $( 4,202)   (5,478)    $(4,591)
                                                               =======    ========   =======     =======
 
 Net (loss) per share - basic                                  $ (0.09)   $  (0.45)  $ (0.57)    $ (0.49)
                                                               =======    ========   =======     =======
 
 Shares used in computing net (loss) per share - basic           9,598       9,392     9,595       9,338
                                                               =======    ========   =======     =======
 
 Net (loss) per share - diluted                                $ (0.09)   $ ( 0.45)  $ (0.57)    $ (0.49)
                                                               =======    ========   =======     =======
 
 Shares used in computing net (loss) income per
  share - diluted                                                9,598       9,392     9,595       9,388
                                                               =======    ========   =======     =======
</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>
                                                                           Six Months Ended
                                                                               June 30,
                                                              ----------------------------------------
                                                                      1998                   1997
                                                              -----------------      -----------------
<S>                                                             <C>                    <C>
                                                                                         (Restated)
OPERATING ACTIVITIES
Net (loss) income                                                       $(5,478)               $(4,591)
Adjustments to reconcile net (loss) to net cash used in
 operating activities:
 Depreciation and amortization                                              996                    602
 Amortization of deferred compensation                                       52                     52
 Changes in operating assets and liabilities:
  Accounts receivable                                                       420                 (1,450)
  Inventories                                                             1,722                 (1,817)
  Prepaid expenses and other assets                                         486                     35
  Accounts payable                                                       (2,593)                 1,228
  Accrued payroll and related expenses                                      431                   (501)
  Deferred revenue                                                          855                    154
  Warranty and other accrued liabilities                                   (925)                   982
                                                              -----------------      ----------------- 
Net cash (used in) provided by operating activities                      (4,034)                (5,306)
 
INVESTING ACTIVITIES
Capital retirements                                                         681                   --
Capital expenditures                                                       (700)                (1,436)
Decrease in short-term investments                                        1,600                  6,075
                                                              -----------------      -----------------
Net cash provided by investing activities                                 1,581                  4,639
 
FINANCING ACTIVITIES
Proceeds from line of credit                                              3,200                   --
Repayment of note                                                           (84)                  (184)
Repayment of note from shareholders                                        --                       20
Proceeds from issuance of common stock                                     --                      319
                                                              -----------------      -----------------
Net cash provided by financing activities                                 3,116                    155
                                                              -----------------      -----------------
 
Effect of exchange rate changes on cash                                    (234)                  (240)
Net (decrease) in cash and cash equivalents                                 429                   (752)
Cash and cash equivalents at beginning of period                          3,727                  2,963
                                                              -----------------      ----------------- 
Cash and cash equivalents at end of period                              $ 4,156                $ 2,211
                                                              =================      =================
 
 
 SUPPLEMENTAL DISCLOSURES OF  CASH FLOW INFORMATION
    Cash paid for interest                                              $   135                $    56
    Cash paid for taxes                                                 $    64                $    67
</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 six months ended June 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
million, and additional operating expenses of $4.6 million. In addition, the
Company 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.

                                       6
<PAGE>
 
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
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):

                                       7
<PAGE>
 
                                  June 30,              December 31,
                                    1998                    1997
                                ---------------         --------------
                                                        
     Raw materials                  $3,037                 $2,934
     Work-in-progress                1,485                    958
     Finished goods                    396                  2,748
                                ---------------         --------------
                                    $4,918                 $6,640
                                ===============         ==============

     5.  NET LOSS PER SHARE


<TABLE>
<CAPTION>
                                                                        Three months ended     Six months ended
                                                                             June 30,              June 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                      $ (834)    $(4,202)   $(5,478)    $(4,591)
                                                                     ============================================
 Denominator for basic earnings per share:
  Weighted average common stock                                          9,598       9,392      9,595       9,338
  Convertible preferred stock                                               --          --         --          --
                                                                     --------------------------------------------
Shares used in computing basic earnings per share                        9,598       9,392      9,595       9,338
                                                                     ============================================
Basic earnings per share                                                $(0.09)    $ (0.45)   $ (0.57)    $ (0.49)
                                                                     ============================================
 Denominator for diluted earnings per share:
  Weighted average common shares                                         9,598       9,392      9,595       9,338
  Convertible preferred stock                                               --          --         --          --
  Stock options and warrants                                                --          --         --          --
                                                                     -------------------------------------------- 
Shares used in computing diluted earnings per share                      9,958       9,392      9,595       9,338
                                                                     ============================================
Diluted earnings per share                                              $(0.09)    $ (0.45)   $ (0.57)    $ (0.49)
                                                                     ============================================
</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
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 June 30, 1998, and June 30, 1997, were
($4,831,000) and ($5,712,000) 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, 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,
including certain derivative instruments embedded in other contracts
(collectively referred to as 

                                       8
<PAGE>
 
derivative) and for hedging activities. This statement is effective for fiscal
years beginning after June 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 was paid by 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
officers of the Company.  The costs associated with this restructuring totaled
approximately $300,000, and have 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

                                       9
<PAGE>
 
     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.

     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 

                                       10
<PAGE>
 
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 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 June 30, 1998, the Company had an accumulated deficit of $39.9
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.

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.

                                       11
<PAGE>
 
     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    Six Months Ended
                                                                         June 30,             June 30,
                                                                   --------------------  -------------------
                                                                    1998       1997       1998       1997
                                                                   -------  -----------  -------  ----------
                                                                            (Restated)            (Restated)
                                                               
<S>                                                                <C>      <C>          <C>      <C>
Net revenues                                                        100.0%       100.0%   100.0%      100.0%
Cost of revenues                                                     61.8         96.0     69.6        79.9
                                                                    -----       ------   ------      ------
Gross profit                                                         38.2          4.0     30.4        20.1
                                                                    -----       ------   ------      ------
                                                               
Operating expenses:                                            
 Research and development                                            13.3         10.6     14.5        12.1
 Sales and marketing                                                 19.5         23.3     22.7        20.3
 General and administrative                                          11.7          8.0     16.2         8.1
 Merger expenses                                                      -            -        -            .6
                                                                    -----       ------   ------      ------
Total operating expenses                                             44.5         41.9     53.4        41.1
                                                                    -----       ------   ------      ------
                                                               
Operating (loss)                                                     (6.3)       (37.9)   (23.0)      (21.0)
Other income, net                                                     0.3          0.9      0.0         1.2
                                                                    -----       ------   ------      ------
                                                               
(Loss) before provision for income taxes                             (6.0)       (37.0)   (23.0)      (19.8)
Provision for income taxes                                            0.6          0.7      0.7         0.4
                                                                    -----       ------   ------      ------
Net (loss)                                                          (6.6)%      (37.7)%  (23.7)%     (20.2)%
                                                                    =====       ======   ======      ======
</TABLE>
                                                                                
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997

     Net Revenues.  Net revenues for the three and six month periods ended June
30, 1998, were $12.8 million and $23.1 million, respectively, an increase of
14.4% and 1.9% respectively, over the comparable periods of fiscal 1997.  The
increase was primarily due to increased sales of the PP5000 and the increase in
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
handle growth, if any.

     International sales, which include export sales and direct sales of the
Company's German, French and United Kingdom operations, were $4.5 million and
$10.9 million for the three and six months ended June 30, 1998, respectively.
These sales represented 35.3% and 47.1% of net revenues in the respective
periods. International sales, were $6.0 million and $13.0 million for the three
and six months ended June 30, 1997, respectively.  These sales represented 53.6%
and 57.3% of net revenue for the three and six months ended June 30, 1997,
respectively.   Sales made by the Company's German, French and United Kingdom
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.

     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 six months ended
June 30, 1998, was $4.9 million and $7.0 million, respectively, an increase of
1001.6% and 53.9% over the comparable periods of fiscal 1997. The increase in
gross profit for the three and six months ended June 30, 1998, as compared to
the same period in 1997 was primarily the result of fluctuations of inventory
reserves due to restatements made in 1997. Gross profit 

                                       12
<PAGE>
 
represented 38.2% and 30.4% of net revenue for the three and six months ended
June 30, 1998, respectively, increasing from 4.0% and 20.1% for the comparable
periods of fiscal 1997, respectively.

     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 June 30, 1998, were $1.7 million, an increase of 43.3% in
comparison to the three months ended June 30, 1997.  These increases in research
and development expenses were primarily due to increased payroll and related
expenses.  Research and development expenses for the six months ended June 30,
1998, were $3.4 million, an increase of 22.1% in comparison to the six months
ended June 30, 1997.  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 lower price points and higher image quality, and to enhance
its PosterShop image processing software. Accordingly, the Company believes that
research and development expenses will continue to increase in the future.

     Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 1998, were $2.5 million, a decrease of 4.0% in comparison to the
three months ended June 30, 1997. Sales and marketing expenses for the six
months ended June 30, 1998, were $5.2 million, an increase of 13.8% in
comparison to the six months ended June 30, 1997. As a percentage of net
revenues, sales and marketing expenses were 19.5% and 22.7% for the three and
six months ended June 30, 1998, respectively, as compared to 23.3% and 20.3% for
the comparable period of fiscal 1997. The increase in sales and marketing
expenses for the periods ended June 30, 1998, was primarily the result of
tradeshow expenses and expenses associated with international sales. The Company
expects to continue to increase its sales and marketing expenses in an effort to
expand markets, introduce new products, and establish and expand new
distribution channels.

     General and Administrative. General and administrative expenses for the
three months ended June 30, 1998 were $1.5 million, an increase of 66.3% in
comparison to the three months ended June 30, 1997. General and administrative
expenses for the six months ended June 30, 1998, were $3.8 million, an increase
of 104.6% in comparison to the six months ended June 30, 1997. As a percentage
of net revenues, general and administrative expenses were 11.7% and 16.2% for
the three and six months ended June 30, 1998, respectively, as compared to 8.0%
and 8.1% for the three and six months ended June 30, 1997. The increase in
absolute dollars reflected the increased cost of operating as a public company,
an increased reserve for bad debt, and an increase in staffing, and professional
services.  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.

     Provision for Income Taxes. The Company's effective tax rate on the
consolidated pretax loss for the three and six month periods ended June 30,
1998, is (10%) and (3%) respectively, compared to an effective rate of (2%) on
consolidated pretax loss for the three and six month periods ended June 30,
1997. The tax provision for the three and six months ended June 30, 1998, and
June 30, 1997, results from taxes on income in 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 six months ended June 30, 1998, $4.0 million of cash was used in
operations as compared to $5.3 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 

                                       13
<PAGE>
 
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 $700,000 and $1,436,000 of capital equipment during
the six months ended June 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 $84,000 and
$184,000 for the six months ended June 30, 1998, and 1997, respectively, and net
cash received of $3,200,000 from its line of credit.

     At June 30, 1998, the Company had $4.2 million of cash, cash equivalents
and short-term investments.  The Company also had available a $4.1 million bank
line of credit, of which $3.2 million was outstanding at June 30, 1998. The line
of credit was to expire on December 31, 1998 and was secured by the tangible
assets of the Company.  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 to the
financial statements 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.

                                       14
<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.  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 was paid by 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.

ITEM 2.  CHANGES IN SECURITIES

         Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable

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

         Not applicable

                                       15
<PAGE>
 
ITEM 5.  OTHER ITEMS

         Not applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

          (a) Exhibits:  See exhibit index on page 18

          (b)  Reports on Form 8-K:  None

                                       16
<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:  November 19, 1998

                                       17
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

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

27.1  Financial Data Statement                                  Filed via Edgar

                                       18