<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-Q
 
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
   ACT OF 1934
 
                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
 
                                      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 0-23422
 
                               ----------------
 
                              DRYPERS CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
              DELAWARE                                 76-0344044
   (STATE OR OTHER JURISDICTION OF        (IRS EMPLOYER IDENTIFICATION NUMBER)
   INCORPORATION OR ORGANIZATION)
 
 
 
        1415 WEST LOOP NORTH                              77055
           HOUSTON, TEXAS                              (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE
              OFFICES)
 
    REGISTRANT'S TELEPHONE NUMBER, INCLUDING THE AREA CODE: (713) 682-6848
 
  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.
 
                                 [X] Yes[_] No
 
  Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
 
<TABLE>
<CAPTION>
                 (CLASS)             (OUTSTANDING AT APRIL 21, 1997)
                 -------             -------------------------------
      <S>                            <C>
      Common Stock, $.001 Par Value             8,348,874
</TABLE>
 
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<PAGE>
 
PART I.FINANCIAL INFORMATION
 
ITEM 1.UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
    The following information required by Rule 10-01 of Regulation S-X is
    provided herein for Drypers Corporation:
 
<TABLE>
     <S>                                                                   <C>
     Consolidated Balance Sheets--December 31, 1996 and March 31, 1997.
     Consolidated Statements of Earnings for the Three Months Ended March
      31, 1996 and 1997.
     Consolidated Statement of Stockholders' Equity for the Three Months
      Ended March 31, 1997.
     Consolidated Statements of Cash Flows for the Three Months Ended
      March 31, 1996 and 1997.
     Notes to Consolidated Financial Statements.
</TABLE>
 
                                       i
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31,  MARCH 31,
                        ASSETS                             1996        1997
                        ------                         ------------ -----------
                                                                    (UNAUDITED)
<S>                                                    <C>          <C>
CURRENT ASSETS:
  Cash................................................   $  4,923    $  3,682
  Accounts receivable, net of allowance for doubtful
   accounts of $1,160 and $1,615, respectively........     30,631      35,175
  Inventories.........................................     11,616      14,136
  Prepaid expenses and other..........................      4,410       5,461
                                                         --------    --------
    Total current assets..............................     51,580      58,454
PROPERTY AND EQUIPMENT, net of depreciation and
 amortization of $14,157 and $15,313, respectively....     35,154      37,405
INTANGIBLE AND OTHER ASSETS, net of amortization of
 $10,185 and $10,994, respectively....................     63,821      67,386
                                                         --------    --------
                                                         $150,555    $163,245
                                                         ========    ========
<CAPTION>
         LIABILITIES AND STOCKHOLDERS' EQUITY
         ------------------------------------
<S>                                                    <C>          <C>
CURRENT LIABILITIES:
  Short-term borrowings...............................   $ 15,622    $ 14,435
  Current portion of long-term debt...................        945         994
  Accounts payable....................................     16,958      23,137
  Accrued liabilities.................................      9,348      10,813
                                                         --------    --------
    Total current liabilities.........................     42,873      49,379
LONG-TERM DEBT........................................      2,125       1,970
SENIOR TERM NOTES.....................................     44,122      44,165
SUBORDINATED DEBT TO RELATED PARTIES..................      2,400       2,400
OTHER LONG-TERM LIABILITIES...........................      5,427       5,696
                                                         --------    --------
                                                           96,947     103,610
PUTTABLE COMMON STOCK, 0 and 1,000,000 shares issued
 and outstanding, respectively........................         --       4,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value, 5,000,000 shares
   authorized, 90,000 shares issued and outstanding...          1           1
  Common stock, $.001 par value, 20,000,000 shares
   authorized, 7,179,230 and 7,316,950 shares issued
   and outstanding, respectively......................          7           7
  Additional paid-in capital..........................     68,823      69,045
  Warrants............................................      1,395       1,395
  Retained deficit....................................    (16,618)    (14,813)
                                                         --------    --------
    Total stockholders' equity........................     53,608      55,635
                                                         --------    --------
                                                         $150,555    $163,245
                                                         ========    ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       1
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED 
                                                            MARCH 31
                                                      ---------------------
                                                        1996        1997
                                                      ---------  ----------
                                                          (UNAUDITED)
<S>                                                   <C>        <C>        
NET SALES............................................ $  45,042  $   60,161
COST OF GOODS SOLD...................................    28,813      36,756
                                                      ---------  ----------
    Gross profit.....................................    16,229      23,405
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.........    17,109      18,961
                                                      ---------  ----------
    Operating income (loss)..........................      (880)      4,444
RELATED-PARTY INTEREST EXPENSE.......................        88          88
OTHER INTEREST EXPENSE, net..........................     1,892       2,110
OTHER EXPENSE .......................................        --         123
                                                      ---------  ----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION............    (2,860)      2,123
INCOME TAX PROVISION.................................        55         150
                                                      ---------  ----------
NET INCOME (LOSS)....................................    (2,915)      1,973
PREFERRED STOCK DIVIDEND.............................        55         168
                                                      ---------  ----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
 STOCKHOLDERS........................................ $  (2,970) $    1,805
                                                      =========  ==========
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING...... 6,621,353  18,606,068
                                                      =========  ==========
NET INCOME (LOSS) PER COMMON SHARE................... $    (.45) $      .11
                                                      =========  ==========
</TABLE>
 
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       2
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                          PREFERRED    COMMON
                           SHARES      SHARES                     ADDITIONAL
                         ISSUED AND  ISSUED AND  PREFERRED COMMON  PAID-IN            RETAINED
                         OUTSTANDING OUTSTANDING   STOCK   STOCK   CAPITAL   WARRANTS DEFICIT
                         ----------- ----------- --------- ------ ---------- -------- --------
<S>                      <C>         <C>         <C>       <C>    <C>        <C>      <C>
BALANCE, December 31,
 1996...................   90,000     7,179,230     $ 1     $ 7    $68,823    $1,395  $(16,618)
 Issuance of common
  stock in connection
  with acquisition
  (unaudited)...........       --        46,872      --      --         --        --        --
 Preferred stock
  dividends ($1.87 per
  share) (unaudited)....       --            --      --      --         --        --      (168)
 Exercise of stock
  options (unaudited)...       --        90,848      --      --        222        --        --
 Net income (unaudited).       --            --      --      --         --        --     1,973
                           ------     ---------     ---     ---    -------    ------  --------
BALANCE, March 31, 1997
 (unaudited)............   90,000     7,316,950     $ 1     $ 7    $69,045    $1,395  $(14,813)
                           ======     =========     ===     ===    =======    ======  ========
</TABLE>
 
 
 
 
   The accompanying notes are an integral part of this consolidated financial
                                  statements.
 
                                       3
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS
                                                              ENDED MARCH 31
                                                              ----------------
                                                               1996     1997
                                                              -------  -------
                                                                (UNAUDITED)
<S>                                                           <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)........................................... $(2,915) $ 1,973
 Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities--
   Depreciation and amortization.............................   1,803    2,041
   Other.....................................................    (177)     (43)
   Changes in operating assets and liabilities--
     (Increase) decrease in--
      Accounts receivable....................................   1,377   (4,544)
      Inventories............................................  (1,604)  (2,520)
      Prepaid expenses and other.............................     443   (1,051)
     Increase (decrease) in--
      Accounts payable.......................................  (3,072)   6,179
      Accrued and other liabilities..........................  (2,492)   1,691
                                                              -------  -------
       Net cash provided by (used in) operating activities...  (6,637)   3,726
                                                              -------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment..........................    (647)  (3,440)
 Investment in other noncurrent assets.......................     (28)    (374)
 Payments under noncompete agreements........................     (63)     (63)
                                                              -------  -------
       Net cash used in investing activities.................    (738)  (3,877)
                                                              -------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Borrowings under revolvers..................................  33,613   40,756
 Payments on revolvers....................................... (34,588) (41,943)
 Payments on term loan.......................................    (250)    (125)
 Financing related costs.....................................    (492)      --
 Proceeds from issuance of preferred stock...................   8,773       --
 Proceeds from exercise of stock options.....................      --      222
                                                              -------  -------
       Net cash provided by (used in) financing activities...   7,056   (1,090)
                                                              -------  -------
NET DECREASE IN CASH.........................................    (319)  (1,241)
CASH AT BEGINNING OF YEAR....................................   2,236    4,923
                                                              -------  -------
CASH AT END OF YEAR.......................................... $ 1,917  $ 3,682
                                                              =======  =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       4
<PAGE>
 
                              DRYPERS CORPORATION
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                                  (UNAUDITED)
 
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
  The consolidated financial statements included herein have been prepared by
Drypers Corporation (the "Company"), without audit, in accordance with Rule
10-01 of Regulation S-X for interim financial statements required to be filed
with the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures are adequate to make the information presented not misleading. The
financial statements included herein should be reviewed in conjunction with
the December 31, 1996 financial statements and related notes thereto.
Accounting measurements at interim dates inherently involve greater reliance
on estimates than at year end. The results of operations for the three months
ended March 31, 1997, are not necessarily indicative of the results that will
be realized for the fiscal year ending December 31, 1997.
 
  The unaudited consolidated financial information as of and for the three-
month periods ended March 31, 1996 and 1997, has not been audited by
independent accountants, but in the opinion of management of the Company, all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the consolidated balance sheets, statements of earnings,
statement of stockholders' equity and statements of cash flows at the date and
for the interim periods indicated have been made.
 
  The disposable diaper industry is characterized by substantial price
competition, which is affected through price changes, product count changes
and promotions. Typically, because of their large market share, one of the
Company's larger branded competitors initiates such pricing changes. The
Company typically responds to such pricing changes with changes to its own
prices, product counts or promotional programs. The process of implementing
such changes may require a number of months, and the Company's operating
results may be adversely affected. The Company competes with a number of
companies, some of which are larger than the Company, have greater financial
resources and offer broader product lines.
 
  The Company markets its products in various foreign countries and is,
therefore, subject to currency and other economic fluctuations in these
countries. Changes in the value of the U.S. dollar against these currencies
will affect the Company's results of operations and financial position.
 
  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
statement establishes new standards for computing and presenting earnings per
share requiring the presentation of "basic" and "diluted" earnings per share
as compared to "primary" and "fully diluted" earnings per share. The Company
is required to adopt SFAS No. 128 in the first quarter of fiscal 1998. Earlier
adoption is not permitted and restatement of all prior period earnings per
share data is required. The Company believes the "diluted" disclosure required
under SFAS No. 128 will not differ materially from the historical primary
earnings per share amounts for the periods presented.
 
2. INVENTORIES
 
  Inventories consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                        DECEMBER 31,  MARCH 31,
                                                            1996        1997
                                                        ------------ -----------
                                                                     (UNAUDITED)
      <S>                                               <C>          <C>
      Raw Materials....................................   $ 4,659      $ 4,907
      Finished Goods...................................     6,957        9,229
                                                          -------      -------
                                                          $11,616      $14,136
                                                          =======      =======
</TABLE>
 
                                       5
<PAGE>
 
                              DRYPERS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                                  (UNAUDITED)
 
  Inventories are stated at the lower of cost (first-in, first-out) or market
value. Finished goods inventories include the cost of materials, labor and
overhead.
 
3. ACQUISITION
 
  In February 1997, the Company entered into a series of transactions related
to the establishment of a 51% owned venture in Brazil, acquisition of certain
intangible assets and rights from Chansommes do Brasil Ind. E Com. Ltda.
("Chansommes") and the purchase of diaper production of Chansommes.
Consideration paid in connection with the transactions totaled approximately
$6,400,000, including $4,000,000 of common stock of the Company (1.0 million
shares), cancellation of an outstanding receivable from Chansommes of
$2,200,000 and $200,000 of transaction related costs. Under the terms of the
agreement, the 1,000,000 shares of common stock were held in escrow by the
Company through May 5, 1994 at which time the owners elected to receive
$4,000,000 in cash in lieu of the shares. As of March 31, 1997, the 1,000,000
shares of puttable common stock were presented outside of stockholders'
equity. In connection with the transactions, the Company also obtained a fair
value option to purchase the remaining 49% interest in the venture in Brazil.
 
4. DEBT
 
 Short-term Borrowings
 
  As of December 31, 1996 and March 31, 1997, the Company had borrowings
outstanding of $15,622,000 and $14,435,000, respectively, under revolving
credit facilities, at weighted average interest rates of 10.0% and 10.1%,
respectively.
 
  On February 29, 1996, the Company entered into a three-year revolving credit
facility with a borrowing base of up to $21,000,000. Availability under the
revolving credit facility and a portion of the proceeds from the sale of
preferred stock were used to repay the previously existing credit facility.
Borrowings outstanding under the previous revolving credit facility bore
interest at prime plus 3% from January 1, 1996 through February 29, 1996.
Borrowings under the current revolving credit facility accrue interest at a
rate of prime plus 1 3/4% per annum. Borrowing availability under this
facility is a function of advance rates based on eligible accounts receivable,
finished goods inventory and raw materials inventory. Borrowings are
collateralized by accounts receivable, inventory, trademarks and trade names,
stock of certain subsidiaries and other intangibles. As of December 31, 1996
and March 31, 1997, the Company had borrowings outstanding of $15,622,000 and
$13,835,000, respectively, under this facility.
 
  The revolving credit facility, as amended, requires the Company, among other
things, to maintain consolidated working capital, as defined, which excludes
borrowings under the revolving credit facility, of at least $18,000,000 during
fiscal 1997, of at least $23,000,000 during fiscal 1998, and of at least
$25,000,000 during fiscal 1999 and thereafter, and adjusted net worth, as
defined, of at least $50,500,000 from December 31, 1996, through December 30,
1997, of at least $52,500,000 from December 31, 1997, through December 30,
1998, and of at least $54,500,000 from December 31, 1998, and thereafter. The
Company was in compliance with the terms of the revolving credit facility as
of March 31, 1997.
 
  Short term borrowings for international operations were not material as of
December 31, 1996 or March 31, 1997.
 
                                       6
<PAGE>
 
                              DRYPERS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                                  (UNAUDITED)
 
 Long-term Debt
 
  Long-term debt consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31,  MARCH 31,
                                                           1996        1997
                                                       ------------ -----------
                                                                    (UNAUDITED)
<S>                                                    <C>          <C>
Term loan with a bank, interest at prime plus 2%,
 secured by a diaper production line..................    $1,125      $1,000
Note payable due 1997.................................       446         465
Note payable to Mexico Bank, due 2006, interest at
 LIBOR plus 10%.......................................       510         510
Note payable to Mexico Bank, due 2003, interest at
 12%, partially secured by diaper production line.....       989         989
                                                          ------      ------
                                                           3,070       2,964
  Less: current maturities............................      (945)       (994)
                                                          ------      ------
                                                          $2,125      $1,970
                                                          ======      ======
</TABLE>
 
 Senior Term Notes
 
  Long-term debt under senior term notes consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                        DECEMBER 31,  MARCH 31,
                                                            1996        1997
                                                        ------------ -----------
                                                                     (UNAUDITED)
<S>                                                     <C>          <C>
12 1/2% Senior Notes, interest due semiannually on May
 1 and November 1, principal due November 1, 2002, net
 of unamortized debt discount of $878 and $835,
 respectively.........................................    $44,122      $44,165
                                                          =======      =======
</TABLE>
 
  The notes contain certain covenants that, among other things, limit the
Company's ability to incur additional indebtedness; pay dividends; purchase
capital stock; make certain other distributions, loans and investments; sell
assets; enter into transactions with related persons; and merge, consolidate
or transfer substantially all of its assets. The 12 1/2% Senior Notes also
contain provisions for acceleration of payment of principal upon a change in
control, as defined.
 
 Long-Term Subordinated Debt
 
  Long-term subordinated debt to stockholders and/or warrant holders consisted
of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31,  MARCH 31,
                                                           1996        1997
                                                       ------------ -----------
                                                                    (UNAUDITED)
<S>                                                    <C>          <C>
Junior subordinated notes, bearing interest at 12%,
 interest payable quarterly...........................    $2,400      $2,400
                                                          ======      ======
</TABLE>
 
                                       7
<PAGE>
 
                              DRYPERS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                                  (UNAUDITED)
 
  The 12 1/2% Senior Notes place certain restrictions on the payment of
principal and interest on the junior subordinated debt. Under these
provisions, the Company is currently restricted from making any principal or
interest payments on this debt and has classified such balance as long-term as
of December 31, 1996 and March 31, 1997.
 
5. COMMITMENTS AND CONTINGENCIES
 
  In March 1997, the Company entered into a six year operating lease with a
lease financing company for a diaper production line, which is scheduled for
delivery in the fourth quarter of 1997.
 
  The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any
resulting from the ultimate resolution of these matters will not have a
material adverse effect on the financial position or results of operation of
the Company.
 
6. SUBSEQUENT EVENT
 
  On April 24, 1997, the Company entered into a Note Purchase Agreement with a
financial institution, whereby the Company obtained $10,000,000 in working
capital financing. This financing was provided through the issuance of two
$5,000,000 promissory notes (the "Working Capital Facility"), bearing interest
at 12% per annum payable semiannually and due on May 1, 1999. The Working
Capital Facility is unsecured and may be prepaid by the Company, subject to a
3% premium if prepaid on or before January 2, 1998, and subject to a 1%
premium thereafter. In addition, the Working Capital Facility must be prepaid
in the event the Company completes an equity or debt offering in excess of
$30,000,000. In connection with the issuance of the Working Capital Facility,
the Company issued warrants to purchase shares of the Company's common stock
to the financial institution subject to vesting. One warrant to purchase
100,000 shares of the Company's common stock vested on April 24, 1997. The
remaining warrants consisting of two warrants to purchase 200,000 shares of
the Company's common stock and a warrant to purchase 250,000 shares of the
Company's common stock will vest, to the extent the Working Capital Facility
is not sooner prepaid, on July 1, 1997, October 1, 1997 and January 1, 1998,
respectively.
 
                                       8
<PAGE>
 
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
  The following discussion and analysis, together with the accompanying
consolidated financial statements and related notes is intended to aid in
understanding the Company's results of operations as well as its financial
position, cash flows, indebtedness and other key financial information.
 
  This Quarterly Report on Form 10-Q contains, in addition to historical
information, forward-looking statements that involve assumptions and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not
limited to, competitive and economic factors, price changes by competitors,
increases in costs of raw materials, timing of technological advances by the
Company and its competitors, lack of acceptance by consumers of new products,
and other factors discussed below and elsewhere herein. See Item 5. "Other
Information--Cautionary Statements" below.
 
OVERVIEW
 
  Drypers is a leading manufacturer and marketer of premium quality, value-
priced disposable baby diapers and training pants sold under the Drypers brand
name in the United States and under the Drypers and other brand names
internationally. The Company also manufactures and sells lower-priced diapers
under other brand names in the United States and internationally, as well as
private label diapers and training pants and pre-moistened baby wipes. During
1995, the Company successfully integrated its four regional brands under the
Drypers brand name which it believes has increased the awareness of the
Company's products with retailers and consumers while generating operating
efficiencies. The Company currently sells its products principally to
approximately 600 U.S. grocery retailers with an estimated 18,000 retail
outlets. The Company continually seeks to expand its U.S. grocery store
distribution network while increasing its limited penetration of the mass
merchant and drugstore chain markets. In 1996, sales of branded products
represented 86.3% of the Company's net sales in the United States and sales of
private label and other products represented 13.7% of net sales in the United
States.
 
  The Company's domestic operations include sales in the United States, Puerto
Rico and exports from these manufacturing operations. The following table sets
forth the Company's domestic and international net sales for the three-month
periods ended March 31, 1996 and 1997.
 
<TABLE>
<CAPTION>
                                                            THREE MONTHS
                                                           ENDED MARCH 31
                                                       ------------------------
                                                          1996         1997
                                                       -----------  -----------
                                                        (DOLLARS IN MILLIONS)
   <S>                                                 <C>   <C>    <C>   <C>
   Domestic..........................................  $40.1  89.0% $45.6  75.8%
   International.....................................    4.9  11.0   14.6  24.2
                                                       ----- -----  ----- -----
    Total net sales..................................  $45.0 100.0% $60.2 100.0%
                                                       ===== =====  ===== =====
</TABLE>
 
  Among the factors that have a direct bearing on the Company's results of
operations are price and product changes and promotional activity by
competitors, increases in costs of raw materials, timing of technological
advances by the Company and its competitors, lack of acceptance by consumers
of new replacement products, foreign governmental monetary and policy changes
and other factors discussed herein.
 
  Gross profit margins vary significantly across the Company's product lines,
as do the levels of promotional and marketing support. Accordingly, gross
profit margins fluctuate with changes in the relative sales mix of the
Company's various product lines. Since the differences in gross profit margins
are generally offset by differences in promotional spending levels, changes in
sales mix do not necessarily cause significant fluctuations in operating
margins.
 
  During 1995, a confluence of unusual events adversely impacted the Company's
financial performance. The December 1994 devaluation of the Mexican peso
reduced the Company's 1995 export sales by an estimated $10 million. Beginning
in the first quarter of 1995, The Procter & Gamble Company ("Procter &
Gamble"), which manufactures Pampers and Luvs, and Kimberly-Clark Corporation
("Kimberly-Clark"), which manufactures
 
                                       9
<PAGE>
 
Huggies and which together with Procter & Gamble accounted for an estimated
78.1% of dollar sales in the total U.S. diaper market in 1996, increased their
rates of promotional spending more aggressively than the Company. In addition,
Procter & Gamble repositioned Luvs, its national value-priced brand, with a
reduction in the number of diapers per package and a reduction in price per
package. The Company responded with a repositioning of its own, lowering
package counts and prices per package. Throughout 1995, the industry
experienced substantial price increases in pulp, a major component of the
total cost to produce diapers and training pants. Due to the competitive
environment, the increase in pulp prices was not passed on to consumers, thus
reducing the Company's gross margins. The adverse impact of these events was
further compounded by the Company's planned transition to a single national
brand from four regional brands and the simultaneous roll-out of an "ultra-
thin" premium diaper, which experienced slow initial consumer acceptance.
 
  In response to these events, management implemented a plan to improve sales
and margins, increase operating efficiency and substantially reduce costs
throughout the Company's operations. The major components of the cost
reduction program included the closure of the Company's Houston manufacturing
facility, reduction of manufacturing and general overhead costs and a
redesigned premium diaper, which reduced pulp content and thus overall product
cost. In addition, this redesign led to an increase in consumer acceptance of
the new "ultra-thin" premium diaper. To offset its loss of export sales to
Mexico, the Company re-entered the Mexican diaper market in the second quarter
of 1996 through contract manufacturing arrangements with a local producer.
 
  The foregoing factors should be taken into account, along with the other
factors discussed below, in comparing the Company's results during the three
months ended March 31, 1996 and 1997, and in understanding the results that
may be expected in the future.
 
RESULTS OF OPERATIONS
 
  The following table sets forth the specified components of income and
expense for the Company expressed as a percentage of net sales for the three
months ended March 31, 1996 and 1997.
 
<TABLE>
<CAPTION>
                                                                  
                                                                  THREE MONTHS
                                                                      ENDED 
                                                                    MARCH 31
                                                                  -------------
                                                                  1996    1997
                                                                  -----   -----
   <S>                                                            <C>     <C>
   Net sales..................................................... 100.0%  100.0%
   Cost of goods sold............................................  64.0    61.1
                                                                  -----   -----
   Gross profit..................................................  36.0    38.9
   Selling, general and administrative expenses..................  38.0    31.5
                                                                  -----   -----
   Operating income (loss).......................................  (2.0)    7.4
   Interest expense, net.........................................   4.4     3.7
   Other expense.................................................    --     0.2
                                                                  -----   -----
   Income (loss) before income tax provision.....................  (6.4)    3.5
   Income tax provision..........................................   0.1     0.2
                                                                  -----   -----
   Net income (loss).............................................  (6.5)%   3.3%
                                                                  =====   =====
</TABLE>
 
 Three Months Ended March 31, 1997 Compared to the Three Months Ended March
31, 1996
 
  Net Sales. Net sales increased 33.6% to $60.2 million for the three months
ended March 31, 1997 from $45.0 million for the three months ended March 31,
1996. Domestic sales increased 13.7% to $45.6 million for the three months
ended March 31, 1997 from $40.1 million for the same period in 1996, primarily
as a result of the introduction of the new baking soda product in May 1996 and
the continued growth in training pants sales. The Company believes that the
introduction of the new baking soda product contributed to an increased share
in existing retail accounts and expanded penetration into new accounts. Net
sales in the international sector grew to $14.6 million for the quarter ended
March 31, 1997 from $4.9 million in the prior comparable period. This
 
                                      10
<PAGE>
 
substantial increase reflected primarily the improved sales volume for the
Company's operations in Argentina, the acquisition of a manufacturer in Mexico
in December 1996 and the Company's majority-owned consolidated venture in
Brazil, which began operations in March 1997.
 
  Cost of Goods Sold. Cost of goods sold decreased as a percentage of net
sales to 61.1% for the three months ended March 31, 1997 compared to 64.0% for
the three months ended March 31, 1996. The decrease from 1996 levels reflected
reduced pulp prices and raw material usage and the benefits of higher volumes
over the fixed cost base. This reduction in cost of goods sold as a percentage
of net sales came despite an increase in international sales which have
generally lower gross profit margins.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of net sales to 31.5% for
the three months ended March 31, 1997 compared to 38.0% of net sales for the
three months ended March 31, 1996. The decrease reflected the Company's focus
on reducing domestic per-pad selling costs, increases in international sales
which have lower selling and promotional costs and a decrease in general and
administrative costs.
 
  Operating Income. As a result of the above factors, the Company's operating
income increased $5.3 million to $4.4 million for the three months ended March
31, 1997 from an operating loss of $880,000 for the three months ended March
31, 1996. Operating income as a percentage of net sales was 7.4% for the three
months ended March 31, 1997.
 
  Interest Expense. Interest expense increased slightly to $2.2 million for
the three months ended March 31, 1997 as compared to $2.0 million for the
three months ended March 31, 1996. The increase reflected increased borrowings
under the Revolving Credit Facility and amortization of additional deferred
loan costs related to the refinancing transactions discussed under "Liquidity
and Capital Resources".
 
  Income Taxes. The Company recorded a provision of $150,000 related to state
and foreign taxes for the three months ended March 31, 1997. A portion of the
Company's available net operating loss carryforwards offset the need for any
federal tax provision related to the Company's domestic operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's liquidity and capital requirements include, but are not
limited to the payment of principal and interest on its debt; the funding of
working capital needs, primarily inventory and accounts receivable; and the
funding of capital investments in machinery, equipment and computer systems.
Historically, the Company has financed its debt service, working capital and
capital expenditure requirements through a combination of internally generated
cash flow, borrowings under the Company's revolving credit facility and other
sources and proceeds from private and public offerings of debt securities and
equity. In addition, the Company's strategy to pursue international expansion
opportunities through acquisition, joint venture or other arrangements may
require the Company to seek additional capital from private or public
offerings of debt securities or equity.
 
  The matters discussed above under "Overview" had a material adverse impact
on the Company's financial position and results of operations. In addition,
the Company's liquidity was adversely affected, which required it to, among
other things, obtain various amendments and waivers from the lenders under its
existing revolving credit facility and defer payment of the interest due on
November 1, 1995 under its $45.0 million of outstanding 12 1/2% Senior Notes,
which default was cured by the payment of overdue interest on February 29,
1996 as part of the Company's 1996 refinancing.
 
  The Company's operations used $6.6 million of cash during the three months
ended March 31, 1996 but provided $3.7 million of cash flows from operations
for the three months ended March 31, 1997 reflecting the Company's return to
profitability. Capital expenditures for the three months ended March 31, 1996
and 1997 were $647,000 and $3.4 million, respectively. The significant
increase between periods in capital expenditures reflected machine
enhancements incurred primarily in connection with the launch of "Drypers with
Aloe Vera".
 
                                      11
<PAGE>
 
Operations and capital expenditures in the 1996 period were funded primarily
with $8.8 million of proceeds from the private placement of convertible
preferred stock. For the three months ended March 31, 1997, capital
expenditures were funded primarily by cash flows from operations.
 
  The Company's current assets increased from $51.6 million at December 31,
1996 to $58.5 million at March 31, 1997, and current liabilities, including
short-term debt, increased from $42.9 million at December 31, 1996 to $49.4
million at March 31, 1997. Total debt decreased from $65.2 million at December
31, 1996 to $64.0 million at March 31, 1997.
 
  The Company currently has available a Revolving Credit Facility with a
borrowing base of up to $21.0 million. Borrowings under the Revolving Credit
Facility bear interest at a rate of prime plus 1 3/4% per annum. Borrowing
availability under the Revolving Credit Facility is a function of advance
rates based on eligible accounts receivable and inventory and is secured by
accounts receivable, inventory, trademarks and trade names, stock of certain
subsidiaries and other intangibles.
 
  The Company also has an outstanding term loan with a bank in the principal
amount of $1.0 million at March 31, 1997. The term loan covenants are similar
to those of the Revolving Credit Facility. Principal payments of $125,000 are
due quarterly, and borrowings are secured by a diaper production line.
Borrowings under the term loan bear interest at prime plus 2% and mature on
May 1, 1999.
 
  In February 1997, the Company began a series of transactions in which it
established a majority-owned subsidiary in Brazil to market its products,
acquired the rights to the Puppet brand name and entered into a supply
arrangement with a Brazilian manufacturer. The Company initially paid 1.0
million shares of common stock and canceled an outstanding $2.2 million
receivable from such manufacturer as partial consideration for the
acquisition. The sellers of the Puppet brand name exercised an option to
receive $4.0 million in cash in lieu of the 1.0 million shares, and such cash
was paid to the sellers in May 1997.
 
  On April 24, 1997, the Company entered into a Note Purchase Agreement with a
financial institution, whereby the Company obtained $10.0 million in financing
to increase available working capital. The financing was provided through the
issuance of two unsecured $5.0 million promissory notes, bearing interest at
12% per annum payable semiannually and due on May 1, 1999.
 
  The Company's estimated cash requirements during 1997 are primarily the
funding of working capital needs, payment of debt service and planned capital
expenditures of approximately $13.5 million. The capital expenditures in 1997
are primarily related to the Company's new product launch in the second
quarter of 1997, as well as expansion of its domestic and international
manufacturing capacity. Of the total capital expenditure budget, approximately
$3.4 million had been incurred through March 31, 1997.
 
  The Company believes, excluding acquisitions, that the combination of its
cash on hand, cash flow from operations, the borrowing availability under
existing working capital facilities and existing operating lease financing
arrangements should allow the Company to meet its working capital, capital
expenditure and debt service requirements, remain in compliance with its
financial covenants and manage its business needs for the foreseeable future.
 
INFLATION
 
  Inflationary conditions in the United States have been moderate and, except
for pulp prices in 1995, have not had a material impact on the Company's
results of operations or financial position. Despite higher inflationary rates
in Latin America, inflation has not had a material impact on the results of
operations of the Company's operations located in that region because the
Company has generally been able to pass on cost increases to its customers.
 
                                      12
<PAGE>
 
FOREIGN CURRENCY
 
  The Company operates in the United States and various foreign countries and
is therefore subject to currency fluctuations. The Company's foreign
operations attempt to minimize the effects of currency risk by offsetting,
whenever possible, amounts payable in U.S. dollars with amounts receivable in
U.S. dollars. As a matter of policy, the Company does not engage in currency
speculation. Other than the December 1994 devaluation of the Mexican peso
described above, changes in exchange rates historically have not materially
impacted the Company's net sales, costs or business practices.
 
NEW ACCOUNTING STANDARDS
 
  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
statement establishes new standards for computing and presenting earnings per
share requiring the presentation of "basic" and "diluted" earnings per share
as compared to "primary" and "fully diluted" earnings per share. The Company
is required to adopt SFAS No. 128 in the first quarter of fiscal 1998. Earlier
adoption is not permitted and restatement of all prior period earnings per
share data is required. The Company believes the "diluted" disclosure required
under SFAS No. 128 will not differ materially from the historical primary
earnings per share amounts for the periods presented.
 
                                      13
<PAGE>
 
                          PART II. OTHER INFORMATION
 
ITEM 5.OTHER INFORMATION
 
 Cautionary Statements:
 
  The Company's expectations with respect to future results of operations
embodied in oral and written forward looking statements are subject to the
following risks and uncertainties that must be considered when evaluating the
likelihood of the Company's realization of such expectations:
 
    The disposable diaper industry is characterized by substantial price
  competition, which is affected through price changes, product count changes
  and promotions. Typically, because of their large market share, one of the
  Company's larger branded competitors initiates such pricing changes. The
  Company typically responds to such pricing changes with changes to its own
  prices, product counts or promotional programs. The process of implementing
  such changes may require a number of months, and the Company's operating
  results may be adversely affected.
 
    Raw material prices, notably wood pulp, are a major component of the
  total cost to produce disposable baby diapers and training pants. While the
  cost of pulp has declined significantly from the record-high levels
  experienced in the fourth quarter of 1995, there can be no assurance that
  if pulp prices rise again in the future the Company will be able to pass
  those increases to its customers or redesign its products to reduce pulp
  usage; therefore, operating margins could be adversely affected.
 
    The Company markets its products in various foreign countries and is,
  therefore, subject to currency and other economic fluctuations in these
  countries. Changes in the value of the U.S. dollar against these currencies
  and the ability of consumers in some foreign countries to afford disposable
  diapers will affect the Company's results of operations and financial
  position.
 
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
 
  (a)  Exhibits--Reference is made to the Exhibit Index on page 17 for a list
       of exhibits filed as part of this report pursuant to Item 601 of
       Regulation S-K.
 
  (b)  Reports on Form 8-K--A report on Form 8-K was filed with the Commission
       February 19, 1997, in which the Company reported the acquisition,
       effective February 1, 1997, of certain assets and rights of Chansommes
       Do Brasil Ind E Com. LTDA., the formation of a joint venture to utilize
       such assets and the entering into a manufacturing and technology
       agreement.
 
                                      14
<PAGE>
 
                                   SIGNATURES
 
  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.
 
                                          DRYPERS CORPORATION
 
Date: May 15, 1997                        By:     /s/ Jonathan Foster
                                             ----------------------------------
                                                 Chief Financial Officer
                                                (Duly Authorized Officer)
                                              (Principal Financial Officer)
 
                                       15
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                     PAGE
       EXHIBIT NUMBER AND DESCRIPTION                               NUMBER
       ------------------------------                               ------
       <C>  <S>                                                     <C>
       10.1 Note Purchase Agreement Dated April 24, 1997
       11.1 Statement Regarding Computation of Per Share Earnings
       27   Financial Data Schedule
</TABLE>
 
                                       16