<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 QUARTERLY PERIOD ENDED              SEPTEMBER 30, 1998
                              --------------------------------------------------

                                         OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________________________________ TO
______________________________


 COMMISSION FILE NUMBER   333-58233
                          ---------

                           DIAMOND BRANDS INCORPORATED
--------------------------------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                   MINNESOTA                              41-1565294
--------------------------------------------------------------------------------
 (STATE OR OTHER JURISDICTION OF INCORPORATION OR     (I.R.S. EMPLOYEE
 ORGANIZATION)                                        IDENTIFICATION NO.)


  1800 CLOQUET AVE., CLOQUET, MINNESOTA                         55720
--------------------------------------------------------------------------------
      (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)


                                  218/879-6700
--------------------------------------------------------------------------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


--------------------------------------------------------------------------------
   (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
                                     REPORT)

     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 PERIODS 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
                    ---       ---


<PAGE>

                            DIAMOND BRANDS INCORPORATED

                                 TABLE OF CONTENTS

                                                                          PAGE


PART I - FINANCIAL INFORMATION

     ITEM-1.   Financial Statements (Unaudited)

               Consolidated Balance Sheets                                   3

               Consolidated Statements of Operations                         4

               Consolidated Statements of Cash Flow                          5

               Notes to Consolidated Financial Statements                    6

     ITEM-2.   Management's Discussion and Analysis of Results
               of Operations and Financial Condition                         9


PART II - OTHER INFORMATION

     Signature                                                              16


<PAGE>

                            DIAMOND BRANDS INCORPORATED
                      Consolidated Balance Sheets (Unaudited)
                        (In Thousands, Except Share Amounts)


<TABLE>
<CAPTION>
                                                                                   September 30,        December 31,
                                                                                       1998                 1997
                                                                                   -------------        ------------
<S>                                                                                <C>                  <C>
                                    ASSETS
CURRENT ASSETS:
    Accounts receivable, net of allowances of $773 and $1,195                            $17,374             $15,526
    Inventories                                                                           22,285              20,744
    Deferred tax asset                                                                     2,641                 -
    Prepaid expenses                                                                       2,205                 406
                                                                                   -------------        ------------

        Total current assets                                                              44,505              36,676
                                                                                   -------------        ------------

PROPERTY, PLANT AND EQUIPMENT, net of
    accumulated depreciation of $17,854 and $16,715                                       17,152              17,544

GOODWILL                                                                                  38,192              39,454

DEFERRED FINANCING COSTS                                                                   9,049                 876
                                                                                   -------------        ------------

                                                                                        $108,898             $94,550
                                                                                   -------------        ------------
                                                                                   -------------        ------------

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
    Current maturities of long-tem debt                                                   $2,000              $7,892
    Accounts payable                                                                       6,541               4,500
    Accrued expenses                                                                      11,851              11,037
                                                                                   -------------        ------------

        Total current liabilities                                                         20,392              23,429
                                                                                   -------------        ------------

DEFERRED INCOME TAXES                                                                        735                 -

POSTRETIREMENT BENEFIT OBLIGATIONS                                                         1,586               1,586

LONG-TERM DEBT, net of current maturities                                                226,921              41,605
                                                                                   -------------        ------------

        Total liabilities                                                                249,634              66,620
                                                                                   -------------        ------------

COMMITMENTS AND CONTINGENCIES

Redeemable preferred stock, $0.01 par value; 1,000,000 shares authorized;
    47,000 issued and outstanding, net of subscriptions receivable of $1,217              34,836                 -

STOCKHOLDERS' EQUITY (DEFICIT):
    Common stock, $.01 par value; 50,000,000 shares authorized;
        1,491,000 and 16,112,500 shares issued and outstanding                                15                 161
    Warrants                                                                              10,640                 -
    Additional paid in capital                                                             1,488                 774
    Retained earnings (deficit)                                                         (187,715)             26,995
                                                                                   -------------        ------------

        Total stockholders' equity (deficit)                                            (175,572)             27,930
                                                                                   -------------        ------------

                                                                                        $108,898             $94,550
                                                                                   -------------        ------------
                                                                                   -------------        ------------

     The accompanying notes are an integral part of these consolidated balance
                                      sheets.
</TABLE>


                                       3
<PAGE>
                            DIAMOND BRANDS INCORPORATED
                 Consolidated Statements of Operations (Unaudited)
                                   (In Thousands)

<TABLE>
<CAPTION>
                                                                         Three Months Ended             Nine Months Ended
                                                                            September 30,                 September 30,
                                                                         1998           1997           1998           1997
                                                                    -------------- -------------- -------------- --------------
<S>                                                                 <C>            <C>            <C>            <C>
NET SALES                                                                 $30,675        $31,498        $89,233        $86,165

COST OF SALES                                                              21,024         20,758         62,372         58,380
                                                                    -------------- -------------- -------------- --------------

        Gross profit                                                        9,651         10,740         26,861         27,785

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                3,291          2,940         15,925          8,274

GOODWILL AMORTIZATION                                                         420            420          1,261          1,100
                                                                    -------------- -------------- -------------- --------------

        Operating income                                                    5,940          7,380          9,675         18,411

INTEREST EXPENSE                                                            5,951          1,185         13,588          3,391
                                                                    -------------- -------------- -------------- --------------

        Income (Loss) before provision (benefit) for income taxes             (11)         6,195         (3,913)        15,020

PROVISION (BENEFIT) FOR INCOME TAXES                                           68            -           (2,763)         1,376
                                                                    -------------- -------------- -------------- --------------

        Net income (loss)                                                     (79)         6,195         (1,150)        13,644

PREFERRED STOCK DIVIDENDS AND ACCRETION                                     1,255            -            2,301            -
                                                                    -------------- -------------- -------------- --------------

        Net income (loss) applicable to common stock                      ($1,334)        $6,195        ($3,451)       $13,644
                                                                    -------------- -------------- -------------- --------------
                                                                    -------------- -------------- -------------- --------------

PRO FORMA NET INCOME:

    Income (loss) before provision for income taxes                          ($11)        $6,195        ($3,913)       $15,020

    Pro forma income tax expense (benefit) (Note 2)                           -            2,500         (1,600)         6,000
                                                                    -------------- -------------- -------------- --------------

    Pro forma net income (loss)                                              ($11)        $3,695        ($2,313)        $9,020
                                                                    -------------- -------------- -------------- --------------
                                                                    -------------- -------------- -------------- --------------

   The accompanying notes are an integral part of these consolidated statements.
</TABLE>


                                       4
<PAGE>

                            DIAMOND BRANDS INCORPORATED
                 Consolidated Statements of Cash Flows (Unaudited)
                                   (In Thousands)

<TABLE>
<CAPTION>
                                                                                                  Nine Months Ended
                                                                                                    September 30,
                                                                                                1998            1997
                                                                                            --------------  --------------
<S>                                                                                         <C>             <C>
OPERATING ACTIVITIES
    Net income (loss)                                                                             ($1,150)        $13,644
    Adjustments to reconcile net income (loss) to net cash provided by operating activities
        Depreciation and amortization                                                               4,424           3,740
        Deferred income taxes                                                                      (1,906)          1,376
        Accretion of debentures                                                                     2,566             -
        Change in operating assets and liabilities, net of effects of acquisition
            Accounts receivable                                                                    (1,848)         (4,781)
            Inventories                                                                            (1,541)         (3,003)
            Prepaid expenses                                                                       (1,799)            367
            Accounts payable                                                                        2,041             248
            Accrued expenses                                                                        4,416           1,190
                                                                                            --------------  --------------
            Net cash provided by operating activities                                               5,203          12,781
                                                                                            --------------  --------------


INVESTING ACTIVITIES
    Acquisition of Empire, net of cash received                                                       -           (24,696)
    Purchases of property, plant and equipment                                                     (1,523)         (2,455)
                                                                                            --------------  --------------

            Net cash used for investing activities                                                 (1,523)        (27,151)
                                                                                            --------------  --------------

FINANCING ACTIVITIES
    Borrowings under bank revolving line of credit                                                 27,200          32,900
    Repayments of bank revolving line of credit                                                   (30,700)        (26,800)
    Net proceeds from preferred stock and warrants                                                 44,529             -
    Borrowings on long-term debt                                                                  225,105          21,000
    Repurchase of common stock                                                                   (211,421)            -
    Repayments of long-term debt                                                                  (44,747)         (5,509)
    Exercise of warrants                                                                                4             -
    Exercise of options                                                                             1,258             -
    Distributions to stockholders                                                                  (5,488)         (6,851)
    Debt issuance costs                                                                            (9,420)           (370)
                                                                                            --------------  --------------

            Net cash provided by (used for) financing activities                                   (3,680)         14,370
                                                                                            --------------  --------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                              -              -

CASH AND CASH EQUIVALENTS, beginning of period                                                         -              -
                                                                                            --------------  --------------

CASH AND CASH EQUIVALENTS, end of period                                                   $           -  $           -
                                                                                            --------------  --------------
                                                                                            --------------  --------------

   The accompanying notes are an integral part of these consolidated statements.
</TABLE>


                                       5
<PAGE>

                            DIAMOND BRANDS INCORPORATED
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.   BASIS OF PRESENTATION
     The accompanying consolidated financial statements include the accounts of
     Diamond Brands Incorporated ("Holdings") and its wholly owned subsidiary,
     Diamond Brands Operating Corp. ("Operating Corp") and Operating Corp.'s
     wholly-owned subsidiaries, Forster Inc. and Empire Candle, Inc. after 
     elimination of all material intercompany balances and transactions.  
     Holdings and Operating Corp. are collectively referred to as "the 
     Company".

     The Company is a leading manufacturer and marketer of a broad range of
     consumer products, including wooden matches and firestarters, plastic
     cutlery and straws, scented, citronella and holiday candles, and
     toothpicks, clothespins and wooden crafts.  The Company's products are
     marketed primarily in the United States and Canada under the nationally
     recognized Diamond, Forster and Empire brand names.

     The interim consolidated financial statements of the Company are unaudited;
     however, in the opinion of management, all adjustments necessary for a fair
     presentation of such consolidated financial statements have been reflected
     in the interim periods presented.  The significant accounting policies and
     certain financial information which are normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles, but which are not required for interim reporting purposes, have
     been condensed or omitted.  The accompanying consolidated financial
     statements of the Company should be read in conjunction with the
     consolidated financial statements and related notes included in the
     Company's audited financial statements for the year ended December 31,
     1997.

2.   RECAPITALIZATION
     On March 3, 1998, the stockholders of the Company entered into a
     recapitalization agreement (the "Recapitalization Agreement") with Seaver
     Kent - TPG Partners, L.P. and Seaver Kent I Parallel, L.P. (collectively
     "the Sponsors"), which provided for the recapitalization of the Company.

     Pursuant to the Recapitalization Agreement, in April 1998, the Company
     purchased from the existing stockholders 15,129,232 shares of the Company's
     common stock for $211.5 million by (i) issuing $100.0 million of senior
     subordinated notes and $45.1 million senior discount debentures, (ii)
     entering into a bank credit agreement which provided for $80.0 million in
     term loan facilities and a $25.0 million revolving credit facility, and
     (iii) selling redeemable preferred stock with warrants to the Sponsors and
     other investors for $47.0 million.  The Sponsors and other investors
     exercised warrants for 417,382 shares of common stock at closing.  The
     recapitalization was accounted for as a recapitalization transaction for
     accounting purposes.


                                       6
<PAGE>

3.   REDEEMABLE CUMULATIVE PREFERRED STOCK
     Pursuant to the Recapitalization Agreement, the Company issued $47.0
     million ($45.8 million in cash and $1.2 million in notes receivable) of
     redeemable cumulative preferred stock (the Preferred Stock) and common
     stock warrants (the Warrants).  The Warrants are exercisable at $0.01 per
     share of common stock and expire in April 2008.  The Preferred Stock ranks
     senior to all classes of common stock of the Company and is entitled to
     receive cash dividends equal to 12% of the liquidation preference of $1,000
     per share ($47.0 million) plus all unpaid dividends until the mandatory
     redemption date of October 15, 2009.  The Company has the option at any
     time to redeem the Preferred Stock at a price equal to liquidation
     preference plus all unpaid dividends.

     The net proceeds from the issuance of the Preferred Stock and Warrants were
     allocated based on the relative fair values of the securities issued.  The
     value assigned to the Warrants of $12.3 million has been reflected as a
     discount to the Preferred Stock which is being accreted to its mandatory
     redemption value using the effective interest method (15% effective yield).

4.   LONG TERM DEBT
     In April 1998, the Company completed offerings of $100.0 million of 10 1/8%
     senior subordinated notes due to 2008 and $84 million of 12 7/8% senior
     discount debentures due 2009 with an original issue discount of $38.9
     million.  The net proceeds to the Company for the offerings, after
     discounts, commissions and other offering costs were $138.4 and were used
     to repay existing indebtedness and purchase common stock of the Company.

     The Company also entered into a bank credit agreement which provides for
     $80.0 million in term loan facilities with interest rates from LIBOR
     (5.56250% at September 30, 1998) plus 2.0% to LIBOR plus 2.25% due in
     installments through March 2006 and a $25.0 million revolving credit
     facility at LIBOR plus 2.0%.  As of September 30, 1998, the Company was in
     compliance with the provisions of its debt covenants.

5.   INCOME TAXES
     Effective January 1, 1997, the Company converted from a C corporation to an
     S corporation due to a change in the tax laws allowing entities with
     subsidiaries to elect this status.  Deferred tax assets and liabilities as
     of December 31, 1996 are reflected as a charge in the consolidated
     statement of operations for the nine months ended September 30, 1997.

     The taxable income or loss of the Company for the years ended after
     December 31, 1996 and prior to the recapitalization is included in the
     individual returns of the stockholders for federal tax purposes and, to the
     extent allowed and elected, for state tax purposes.  Accordingly, there is
     no provision for current income taxes for the period from January 1, 1998
     to April 20, 1998 and the nine months ended September 


                                       7
<PAGE>
     
     30, 1997.  Effective with the recapitalization in April 1998, the 
     Company elected C corporation status and recognized deferred income 
     taxes for temporary differences between the tax and financial reporting 
     bases.

     The unaudited pro forma income tax expense is presented assuming the
     Company had been a C corporation since January 1, 1997.

6.   NEW ACCOUNTING PRONOUNCEMENTS
     Statement of Accounting Standards (SFAS) No. 131, "Disclosures About
     Segments of an Enterprise and Related Information," issued in June 1997 and
     effective for fiscal years beginning after December 15, 1997, redefines how
     operating segments are determined and requires expanded quantitative and
     qualitative disclosure relating to the company's operating segments.  The
     Company believes that the effect of adopting SFAS No. 131 will not be
     significant.

     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
     Activities", issued in June 1998, establishes accounting and reporting
     standards for derivative instruments and for hedging activities.  It
     requires that an entity recognize all derivatives as either assets or
     liabilities and measure those instruments at fair value.  The Company
     believes that the effect of adopting SFAS No. 133 will not be significant
     to the results of operations.


                                       8
<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                   FINANCIAL CONDITION AND RESULTS OF OPERATIONS



GENERAL

Diamond Brands Incorporated, through its subsidiary Diamond Brands Operating 
Corp. (collectively the Company), is a leading manufacturer and marketer of a 
broad range of consumer products, including wooden matches and firestarters 
(Wooden Lights), plastic cutlery and straws (Cutlery), scented, citronella 
and holiday candles (Candles), and toothpicks, clothespins and wooden crafts 
(Woodenware).  The Company's products are marketed primarily under the 
nationally recognized Diamond, Forster and Empire brand names, which have 
been in existence since 1881, 1887 and 1950, respectively.

The Company derives its revenue primarily from the sale of its products to 
substantially all major grocery stores, drug stores, mass merchandisers and 
warehouse clubs in the United States.  During the nine months ended September 
30, 1998, sales to the Company's top 10 customers accounted for approximately 
36% of the Company's gross sales, with one customer accounting for 
approximately 15% of the Company's gross sales. The Company's ability to 
maintain and increase its sales depends on a variety of factors including its 
competitive position in such areas as price, quality, brand identity, 
distribution and customer service.  The Company's products are manufactured 
at its four automated manufacturing facilities located in Cloquet, Minnesota, 
East Wilton, Maine, Strong, Maine, and Kansas City, Kansas.

Net sales, as calculated by the Company, are determined by subtracting 
discounts and allowances from gross sales.  Discounts and allowances consist 
of price promotions, cash discounts, corporate rebates, slotting fees, 
consumer coupons, co-op advertising and unsaleables. The Company's cost of 
sales and its resulting gross margin (defined as gross profit as a percentage 
of net sales) are principally determined by the cost of raw materials, the 
cost of the labor to manufacture its products, the overhead expenses of its 
manufacturing facilities, warehouse costs and freight expenses to its 
customers.  In recent years, the Company has focused on improving its gross 
margin by seeking to:  (i) consolidate manufacturing operations; (ii) reduce 
headcount and expenses in manufacturing; and (iii) increase operating 
efficiencies through capital projects with rapid returns on investment.

Polystyrene resin, a commodity whose market price fluctuates with supply and 
demand, is a significant component of cost of sales in the Company's Cutlery 
products.  In order to mitigate the impact of changing polystyrene resin 
prices, the Company in January 1997 entered into a three-year supply contract 
with a major supplier of polystyrene resin, under which the Company believes 
it receives the lowest price available to any customer purchasing similar 
volume, and receives short-term price protection during periods of rising 
prices. During periods of rising prices, the Company generally has been able 
to pass through the majority of the polystyrene resin price increases to its 
customers on a delayed basis.  During periods of declining polystyrene resin 
prices, the Company generally has reduced prices to its customers.

Selling, general and administrative expenses consist primarily of selling 
expenses, broker commissions and administrative costs.  Broker commissions 
and certain selling expenses generally vary with sales volume while 
administrative costs are relatively fixed in nature.


                                       9
<PAGE>

RECAPITALIZATION.  Diamond Brands Incorporated (Holdings), the Stockholders 
and Seaver Kent & Company, LLC (the Sponsors) entered into the 
Recapitalization Agreement, the Sponsors and other investors purchased from 
Holdings, for an aggregate purchase price of $47.0 million, Holdings 
Preferred Stock together with the Warrants to purchase from Holdings Holdings 
Common Stock.  The Warrants provide the holders with the right to subscribe 
and purchase from Holdings Holdings Common Stock at the purchase price at 
$0.01 per share at any time prior to their expiration date in April 2008.  
The values assigned to the Warrants and Holdings Preferred Stock were $12.3 
million and $34.7 million, respectively, based upon the sale prices of 
comparable preferred stock instruments in the marketplace.  Dividends in 
respect of Holdings Preferred Stock accumulate at 12% per annum (representing 
a 15% per annum effective yield) to its mandatory redemption value of $47.0 
million on the mandatory redemption date of October 15, 2009.  Holdings has 
the option, at any time, to redeem Holdings Preferred Stock at a price equal 
to the Liquidation Preference plus all accumulated and unpaid dividends.  The 
shares of Holdings Common Stock issuable upon the full exercise of the 
Warrants would represent 77.5% of the outstanding shares of Holdings Common 
Stock after giving effect to such issuance.  In addition, Holdings purchased 
for $211.4 million, subject to certain working capital adjustments, from the 
Stockholders all outstanding shares of Holdings' capital stock, other than 
the Retained Shares.  The Retained Shares would represent 22.5% of the 
outstanding shares of Holdings Common Stock after giving effect to the full 
exercise of the Warrants, having the Implied Value of $15.0 million. The 
Equity Repurchase price of $13.98 per share was determined based upon a 
competitive process with potential investors managed by Donaldson, Lufkin & 
Jenrette Securities Corporation on behalf of the Company.  Holdings, the 
Sponsors and the holders of the Retained Shares also entered into a 
Stockholers Agreement pursuant to which, among other things, the Sponsors 
have the ability to direct the voting of outstanding shares of Holdings 
Common Stock in proportion to their ownership of such shares as if the 
Warrants were exercised in full.  Accordingly, the Sponsors have voting 
control of Holdings.

In connection with the Recapitalization, Holdings organized Diamond Brands 
Operating Corp. and, immediately prior to the consummation of the 
Recapitalization, Holdings transferred substantially all of its assets and 
liabilities to Operating Corp. Holdings' current operation are, and future 
operations are expected to be, limited to owning the stock of Operating Corp. 
Operating Corp. repaid substantially all of the Company's funded debt 
obligations existing immediately before the consummation of the 
Recapitalization in the amount of $51.8 million.

Funding requirements for the Recapitalization (which consummated on April 21, 
1998) were $296.5 million (including the Implied Value of the Retained 
Shares) and were satisfied through the Retained Shares and the following:  
(i) the purchase by the Sponsors and other investors of Holdings Preferred 
Stock and the Warrants for $47.0 million ($45.8 million in cash and $1.2 
million in officer notes receivables); (ii) $45.14 million of gross proceeds 
from the Offering, (iii) $80.0 million of borrowings under the Term Loan 
Facilities; (iv) $10.6 million of borrowings under the Revolving Credit 
Facility; and (v) $100.0 million of gross proceeds from the sale by Operating 
Corp. of the Senior Subordinated Notes in a separate offering.

The Equity Repurchase, the Offering, the Debt Retirement, the issuance and 
the sale by Holdings of Holdings Preferred Stock and the Warrants, the 
issuance and sale by Operating Corp. of Senior Subordinated Notes and the 
borrowing by Operating Corp. of funds under the Bank Facilities (which 
proceeds were distributed by Operating Corp. to Holdings) were effected in 
connection with the Recapitalization.  The Recapitalization was accounted for 
as recapitalization transaction for accounting purposes.

                                      10
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, gross sales and 
gross sales as a percentage of the Company's aggregate net sales for the 
Company's major product groups, as well as the Company's aggregate net sales, 
EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin.

<TABLE>
<CAPTION>
                                            Three Months Ended September 30,                   Nine Months Ended September 30,
                                             1998                     1997                     1998                    1997
                                      ----------------         ----------------        -----------------        -----------------
                                                 (DOLLARS IN MILLIONS)                             (DOLLARS IN MILLIONS)
<S>                                   <C>         <C>          <C>         <C>         <C>          <C>         <C>          <C>
     Wooden Lights                    $5.9         19.2%       $5.2         16.5%      $15.7         17.6%      $14.8         17.2%
     Cutlery                           9.1         29.6         7.6         24.2        29.4         33.0        26.3         30.5
     Candles                           7.6         24.8        10.4         33.0        18.7         21.0        17.1         19.8
     Woodenware                        7.3         23.8         6.9         21.9        23.1         25.9        22.5         26.1
     Institutional/Other               4.4         14.3         4.0         12.7        12.7         14.2        13.0         15.1
                                      ----        -----        ----        -----       -----        -----       -----        -----

         Total gross sales            34.3        111.7        34.1        108.3        99.6        111.7        93.7        108.7

     Discounts and allowances         (3.6)       (11.7)       (2.6)        (8.3)      (10.4)       (11.7)       (7.5)         8.7
                                      ----        -----        ----        -----       -----        -----       -----        -----

          Net sales                  $30.7        100.0%      $31.5        100.0%      $89.2          100%      $86.2        100.0%
                                      ----        -----        ----        -----       -----        -----       -----        -----
                                      ----        -----        ----        -----       -----        -----       -----        -----

     EBITDA (1)                       $7.0         22.8%       $8.6         27.3%      $12.9         14.5%      $22.0         25.5%

     Recapitalization                  -            -           -            -           6.1          -           -            -
          Expenses (2)

     Adjusted EBITDA (3)              $7.0        22.8%        $8.6        27.3%       $19.0        21.3%       $22.0        25.5%
                                      ----        -----        ----        -----       -----        -----       -----        -----
                                      ----        -----        ----        -----       -----        -----       -----        -----
</TABLE>

(1)  EBITDA represents operating income plus depreciation and amortization 
     (excluding amortization of deferred financing costs). The Company 
     believes that EBITDA provides useful information regarding the Company's 
     ability to service its debt; however, EBITDA does not represent cash 
     flow from operations as defined by generally accepted accounting 
     principles and should not be considered a substitute for net income 
     as an indicator of the Company's operating performance or cash flow as a 
     measure of liquidity.

(2)  Represents one time costs incurred in connection with the 
     Recapitalization including brokerage fee ($2.7 million), change in 
     control management bonuses and option payments ($2.2 million), and legal 
     and professional fees ($1.2 million).

(3)  Represents EBITDA excluding Recapitalization Expenses.

                                      11
<PAGE>

THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997

The following table sets forth, for the periods indicated, certain historical
statement of operations data and such data as a percentage of net sales for the
Company.

<TABLE>
<CAPTION>
                                                                    Three Months Ended September 30,
                                                                     1998                     1997
                                                              ------------------       ------------------
                                                                         (dollars in millions)
                                                                     Actual                   Actual
<S>                                                           <C>          <C>         <C>          <C>
     Net sales                                                $30.7        100.0%      $31.5        100.0%
     Cost of sales                                             21.0         68.4        20.8         66.0
                                                              -----        -----       -----        -----
          Gross profit                                          9.7         31.6        10.7         34.0
     Selling, general and administrative expenses               3.3         10.7         2.9          9.2
     Goodwill amortization                                       .4          1.3          .4          1.3
                                                              -----        -----       -----        -----
          Operating income                                      6.0         19.6         7.4         23.5
     Interest expense                                           6.0         19.6         1.2          3.8
                                                              -----        -----       -----        -----
          Income before provision for
          income taxes                                       $  -            -  %       $6.2         19.7%
                                                              -----        -----       -----        -----
                                                              -----        -----       -----        -----
</TABLE>

NET SALES. Net sales for the three months ended September 30, 1998 were $30.7 
million, down $.8 million from the comparable three months in 1997.  Total 
gross sales, however, increased .6% over third quarter 1997, gross sales to 
$34.3 million.  Gross sales for Cutlery increased $1.5 million or 19.7% due 
to continued strong performance in both branded and private label. Gross 
sales of Wooden Lights, Woodenware and Institutional/Other products all 
experienced solid increases (13.5%, 5.8% and 10.0% respectively), while 
Candle sales declined $2.8 million or 26.9% from the comparable quarter in 
1997.  The drop in Candle sales can be attributed to a lost customer in 1998 
and production lagging demand.  The modest growth in gross sales was offset 
by an increase in promotions and slotting allowances of $1.0 million, 
primarily for Cutlery and Candles.

GROSS PROFIT. Gross profit for the three months ended September 30, 1998, 
decreased $1.1 million or 10.1% to $9.6 million, representing a corresponding 
drop in gross margin to 31.5% from 34.1% in 1997.  The decline in gross 
profit results from production problems relating to the candle line ($.4 
million); additional obsolescence provision associated with candles ($.3 
million) and high freight and distribution costs ($.4 million).

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and 
administrative expenses increased $.4 million to $3.3 million for the three 
months ended September 30, 1998. General spending was up slightly due to 
travel and year 2000 remediation matters and the Company had one time 
non-recurring cost relating to the severance of the Vice President of Sales 
and Marketing ($.2 million).

GOODWILL AMORTIZATION.  Goodwill amortization for the three months ended 
September 30, 1998 was $.4 million, equal to such amount for the comparable 
three months in 1997.

INTEREST EXPENSE.  Interest expense for the three months ended September 30, 
1998 totaled $6.0 million compared to $1.2 million in 1997.  This increase 
resulted from the increased debt load and deferred financing costs associated 
with the Recapitalization.

                                      12
<PAGE>

EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA).  EBITDA
for the three months ended September 30, 1998 was $7.0 million compared to
$8.6 million, or 22.8% of net sales for 1998 compared to 27.3% for 1997.

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997

The following table sets forth, for the periods indicated, certain historical
statement of operations data and such data as a percentage of net sales for the
Company.

<TABLE>
<CAPTION>
                                                                    Nine Months Ended September 30,
                                                                     1998                     1997
                                                              -----------------        ------------------
                                                                         (dollars in millions)
                                                                     Actual                   Actual
<S>                                                           <C>          <C>         <C>          <C>
     Net sales                                                $89.2        100.0%      $86.2        100.0%
     Cost of sales                                             62.3         69.8        58.4         67.8
                                                              -----        -----       -----        -----
          Gross profit                                         26.9         30.2        27.8         32.2
     Selling, general and administrative expenses               9.8         11.0         8.3          9.6
     Recapitalization Costs                                     6.1          6.8           -            -
     Goodwill amortization                                      1.3          1.5         1.1          1.3
                                                              -----        -----       -----        -----
          Operating income                                      9.7         10.9        18.4         21.3
     Interest expense                                          13.6         15.2         3.4          3.9
                                                              -----        -----       -----        -----

          Income (loss) before provision for income taxes     $(3.9)        (4.3%)     $15.0         17.4%
                                                              -----        -----       -----        -----
                                                              -----        -----       -----        -----
</TABLE>

NET SALES.  Net sales for the nine months ended September 30, 1998, increased 
3.5% to $89.2 million from $86.2 million for the comparable period in 1997, 
primarily due to the February, 1997 acquisition of Empire which added net 
sales of $3.0 million.  The Company continued to experience solid growth in 
Cutlery as the gross sales increased $3.1 million or 11.8% due to strong 
performance in both branded and private label.  Gross sales of Wooden Lights 
and Woodenware increased 6.1% or 2.7% respectively while gross sales of 
Institutional/Other decreased slightly.  Actual gross sales on Candles 
decreased $1.4 or 8.2%, when adjusted for the February 1997 acquisition.  The 
growth in gross sales was offset by increased promotions and slotting 
allowances of $2.9 million, primarily for Candles and Cutlery, including $.3 
million of unusual Candle allowances.

GROSS PROFIT.  Gross profit decreased $.9 million for the nine months ended 
September 30, 1998, while corresponding gross margin declined from 32.2% to 
30.2%.  The impact of the February, 1997 acquisition of Empire ($.8 million) 
was offset by inventory and production problems ($1.5 million) associated 
with the Candle product line.  The Company has made a claim against the 
former majority shareholders under the Recapitalization Agreement to recover 
certain of these costs.  Management believes the inventory problems were one 
time and non-recurring in nature. Excluding the effects of these factors, 
gross margin would have been 31.8%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and 
administrative expenses increased  by $1.5 million to $9.8 million in the 
nine months ended September 30, 1998. The Company had non-recurring costs 
relating to the severance of the Chief Operating Officer of the Candle 
division and Vice President of Sales and Marketing ($.3 million), the 
write-off of receivables as a result of the Venture Stores bankruptcy ($.1 
million) and expensing of recruiting and relocation costs ($.2 million) to 
strengthen the management team. In addition, the Company incurred higher 
expenses to support the introduction of Reflections candles into the grocery 
trade.

                                      13
<PAGE>

RECAPITALIZATION EXPENSES.  One-time charges of $6.1 million associated with 
the recapitalization on April 21, 1998 were expensed, including brokerage 
fees of $2.7 million, change of control management bonuses and option 
payments of $2.2 million and legal, professional and accounting fees of $1.2 
million.

GOODWILL AMORTIZATION.  Goodwill amortization in 1998 was $1.3 million, up 
from $1.1 million in 1997 as the result of the Empire Acquisition.

INTEREST EXPENSE.  Interest expense for the nine months ended September 30, 
1998 totaled $13.6 million compared to $3.4 million for the compared nine 
months in 1997.  This increase is the result of the increased debt load and 
deferred financing costs associated with the recapitalization.

Included are the one time expensing of bridge commitment fees ($1.0 million) 
relating to the recapitalization and write-off of deferred finance costs ($.7 
million) related to pre-recapitalization debt.

EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA).  
EBITDA for the nine months ended September 30, 1998 was $12.9 million or 
14.5% compared to $22.0 million or 25.5% for 1997.  Excluding 
recapitalization costs, the adjusted EBITDA is $19.0 million or 21.3%.

LIQUIDITY AND CAPITAL RESOURCES.  Cash provided by operating activity was 
$5.2 million for nine months ending September 30, 1998 and $12.8 million for 
1997. The Company's primary cash requirements are for working capital and 
capital expenditures which generally are funded internally or available under 
the current revolving credit facility.

Capital expenditures for the nine months ended September 30, 1998 were $1.5 
million compared to $2.5 million for 1997.

RECENTLY ISSUED ACCOUNTING STANDARDS.  Financial Accounting Standards Board 
Statement (SFAS) NO. 131, "Disclosures About Segments of an Enterprise and 
Related Information," issued in June 1997 and effective for fiscal years 
beginning after December 15, 1997, redefines how operating segments are 
determined and requires expanded quantitative and qualitative disclosures 
relating to the company's operating segments.  The Company believes that the 
effect on it of adopting SFAS No. 131 will not be significant.

INFLATION AND ECONOMIC TRENDS.  Although its operations are affected by 
general economic trends, the Company does not believe that inflation has had 
a material impact on its results of operations.

                                      14
<PAGE>

YEAR 2000 

Many computer systems and software applications, including most of 
those used by the Company, identify dates using only the last two digits of 
the year.  These systems are unable to distinguish between dates in the year 
2000 and dates in the year 1900.  That inability (referred to as the "Year 
2000" issue), if not addressed, could cause certain systems or applications 
to fail or provide incorrect information after December 31, 1999 or when 
using dates after December 31, 1999.  This in turn, could have an adverse 
effect on Diamond Brands, due to Diamond Brands' direct dependence on its own 
system and applications and indirect dependence on those of other entities 
with whom Diamond Brands must interact.

The Company has implemented a process to either replace or modify all of the 
Company's current computer systems and software applications which will be 
Year 2000 compliant. The Company expects to complete the entire project by 
June 1999. In connection with this process, the Company has retained two 
information technology consulting groups.

The Company currently estimates that its costs incurred in 1997 and through 
the year 2000 to enhance its information systems will cost approximately $1.2 
million.  These costs include estimates for employee compensation on the 
project team, consultants, hardware and software. The Company does not 
anticipate incurring any additional expenses in connection with the Year 2000 
issue.

As a result of the implementation of the new information system, Diamond 
Brands is not likely to initiate other major systems projects in connection 
with the Year 2000 issue. There can be no assurance that Diamond Brands will 
not experience cost overruns or delays in connection with its plan for 
replacing or modifying systems.

FORWARD-LOOKING STATEMENTS.  Forward-looking statements herein are made 
pursuant to the safe harbor provisions of the Private Securities Litigation 
Reform Act of 1995.  There are certain important factors that could cause 
results to differ materially from those anticipated by some of the statements 
made herein. Investors are cautioned that all forward-looking statements 
involve risks and uncertainty.  In addition to the factors discussed above, 
among the factors that could cause actual results to differ materially are 
the following:  The timing and strength of new product offerings, pricing 
strategies of competitors and the Company's ability to obtain sufficient 
financing to meet its liquidity needs.

                                      15

<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.


                                     DIAMOND BRANDS INCORPORATED (Registrant)
                                     
                                     
                                     By: /s/ Thomas W. Knuesel
                                         ---------------------

                                     Thomas W. Knuesel Vice President of Finance
                                     and Chief Financial Officer (authorized
                                     officer, principal financial and 
                                     accounting officer)


                                     Date: November 13, 1998
                                           -----------------


                                       16