<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-QSB

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Quarter Ended June 30, 1998 or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Transition Period from _______to_______

Commission File Number 0-22432

                      DIPLOMAT DIRECT MARKETING CORPORATION
                                   (Formerly)
                              DIPLOMAT CORPORATION
                              --------------------
             (Exact name of registrant as specified in its charter)

Delaware                                                              13-3727399
-------------------------------                              -------------------
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                               Identification No.)

25 Kay Fries Drive, Stony Point, New York                                  10980
-----------------------------------------                             ----------
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code:  914 786-5552

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

         State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: August 12, 1998, 11,049,872
Common Shares outstanding

         Transitional Small Business Disclosure (check One):

 Yes    [    ]         No [ X ]

<PAGE>

                      DIPLOMAT DIRECT MARKETING CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                           <C>
PART I - FINANCIAL INFORMATION

Item 1- Financial Statements
                  Consolidated Balance Sheet - June 30, 1998......................................................3

                  Consolidated Statements of Operations - For the three months and nine months ended June
                  30, 1998 and June 30, 1997......................................................................4

                  Consolidated Statements of Cash Flows - For the nine months ended June 30, 1998 and June
                  30, 1997........................................................................................5

                  Notes to Financial Statements................................................................6-11

Item 2 - Management's Discussion and Analysis of Financial
           Conditions and Results of Operations...............................................................12-15

PART II - OTHER INFORMATION

Item 2 - Changes in Securities...................................................................................16

Item 4 - Submission of Matters to a Vote of Security Holders.....................................................16

Item 6 - Exhibits and Reports on Form 8-K........................................................................16

SIGNATURES.......................................................................................................18

</TABLE>


                                        2

<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)
                                  JUNE 30,1998

                                     ASSETS

CURRENT ASSETS:

           Cash and cash equivalents                                 $   171,384
           Accounts receivable                                         2,255,315
           Inventories                                                10,557,482
           Prepaid expenses                                            7,851,379
           Other current assets                                        2,273,155
                                                                     -----------
TOTAL CURRENT ASSETS                                                  23,108,715
NOTES RECEIVABLE                                                         600,000
PROPERTY AND EQUIPMENT
          less accumulated depreciation                                3,406,761
INTANGIBLE ASSETS                                                     20,533,250
OTHER ASSETS                                                             607,938
                                                                     -----------
                                                                     $48,256,664

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

           Accounts payable-trade                                    $ 6,490,573
           Loans payable-officers                                        225,000
           Loans payable-bank                                          2,846,125
           Accrued expenses                                           14,159,299
           Current maturities of long term debt                          703,430
                                                                     -----------
TOTAL CURRENT LIABILITIES                                             24,424,427

LONG TERM DEBT, less current maturities                                6,048,936
                                                                     -----------

STOCKHOLDERS' EQUITY:
          Preferred stock                                             16,113,107
          Common stock                                                     1,100
          Paid-in capital                                              9,930,314
          Accumulated deficit                                          8,261,220
                                                                     -----------
               TOTAL SHAREHOLDERS' EQUITY                             17,783,301
                                                                     $48,256,664

                              See notes to financial statements.


                                        3

<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
                              STATEMENTS OF INCOME
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                          Nine Months Ended                    Three Months Ended
                                                  Jun 30, 1998      June 30, 1997      June 30, 1998       June 30, 1997
<S>                                             <C>                <C>                <C>                <C>
NET SALES                                       $    57,118,755    $     5,846,461    $    20,603,127    $     2,227,429

COST OF SALES                                        26,029,624          2,943,273          9,000,300          1,306,494
                                                ---------------    ---------------    ---------------    ---------------
GROSS PROFIT                                         31,089,131          2,903,188         11,602,827            920,935

SELLING, GENERAL AND ADMINISTRATIVE                  28,018,326          1,346,355         10,947,665            491,817
                                                ---------------    ---------------    ---------------    ---------------
OPERATING INCOME                                      3,070,805          1,556,833            655,162            429,118

INTEREST EXPENSE                                       (958,501)          (353,912)          (316,252)           (93,563)
                                                ---------------    ---------------    ---------------    ---------------
INCOME BEFORE INCOME TAXES                            2,112,304          1,202,921            338,910            335,555

INCOME TAXES                                                  0            276,000                  0             78,000
                                                ---------------    ---------------    ---------------    ---------------
INCOME FROM CONTINUING OPERATIONS                     2,112,304            926,921            338,910            257,555

INCOME(LOSS) FROM DISCONTINUED OPERATIONS            (2,311,691)            132,358           (239,593)          (164,484)
                                                ---------------    ---------------    ---------------    ---------------

NET INCOME(LOSS)                                       (199,387)         1,059,279             99,317             93,071

PREFERRED STOCK DIVIDENDS                               236,250            162,000             78,750             79,500
                                                ---------------    ---------------    ---------------    ---------------
NET INCOME(LOSS) TO COMMON
          SHAREHOLDERS                          $      (435,637)   $       897,279    $        20,567    $        13,571

NET INCOME(LOSS) PER COMMON SHARE
          CONTINUING OPERATION                             0.18               0.17               0.02               0.04
          DISCONTINUED OPERATIONS                         (0.22)              0.02              (0.02)             (0.02)
                                                ---------------    ---------------    ---------------    ---------------
NET INCOME(LOSS) PER COMMON SHARE-BASIC                   (0.04)              0.19               0.00               0.02
NET INCOME(LOSS) PER COMMON SHARE-DILIATED                (0.01)              0.14               0.01               0.01

AVERAGE NUMBER OF SHARES USED IN COMPUTATION-
          BASIC                                      10,596,513          5,458,525         11,049,872          5,843,525
          DILUTED                                    15,886,916          7,474,173         15,693,317          7,474,173
</TABLE>



                       See notes to financial statements.


                                        4

<PAGE>

             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                          Nine months ended
                                                                                  June 30, 1998     June 30, 1997
<S>                                                                              <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
         Income (loss) from continued operations                                      2,112,306           926,920
         Income (loss) from discontinued operations                                  (2,311,691)          132,358
                                                                                 --------------    --------------
         Net income (Loss)                                                             (199,385)        1,059,278
         Adjustments to reconcile net income to net cash provided by operating
            activities:

            Change in operating assets & liabilities                                 (3,143,235)
             Writeoff of goodwill from subsidiary sold                                3,659,245
            Depreciation and amortization                                             1,408,064           305,177
                                                                                 --------------    --------------
                                                                                      1,724,689         1,364,455
CHANGES IN ASSETS AND LIABILITIES

         (Increase)decrease in accounts receivable                                     (532,484)         (132,871)
         (Increase) decrease  in inventories                                         (4,202,862)       (1,811,135)
         (Increase)decrease in prepaid expenses                                      (6,218,799)         (411,318)
         (Increase)decrease in other current assets                                     478,311           749,324
         (Increase)decrease in other assets                                          (6,076,819)          (18,047)
         Increase(decrease) in accounts payable                                       1,272,328           (89,098)
         Increase(decrease)  in accrued expenses                                      8,458,309          (683,574)
                                                                                 --------------    --------------
                                                                                     (5,097,328)       (1,032,264)
                                                                                 --------------    --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
         Acquisition of property and equipment, net                                    (741,853)         (194,032)
         Sale of Biobottoms assets                                                    1,000,000                 0
         Acquisition of subsidiaries                                                 (5,181,596)                0
                                                                                 --------------    --------------
                                                                                     (4,923,449)         (194,032)
                                                                                 --------------    --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
         Issuance of common & preferred stock                                         5,893,794           591,380
         Preferred stock dividend                                                      (284,140)         (162,000)
         Proceeds from loans  payable                                                 5,000,000                 0
         Repayments of loans payable                                                   (236,197)          (66,326)
         Revolving credit agreement                                                    (233,173)          804,971
                                                                                 --------------    --------------
                                                                                     10,140,284         1,168,025
                                                                                 --------------    --------------
NET INCREASE(DECREASE) IN CASH                                                          119,507           (58,271)
CASH AND CASH EQUIVALENTS-beginning of period                                            51,877            69,258
                                                                                 --------------    --------------
CASH AND CASH EQUIVALENTS-end of period                                                 171,384            10,987

</TABLE>


                                        5


<PAGE>



             DIPLOMAT DIRECT MARKETING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    NINE MONTHS ENDED JUNE 30, 1998 AND 1997

1.       SIGNIFICANT ACCOUNTING POLICIES

         A. The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The accompanying financial statements reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented. Except as otherwise disclosed, all such adjustments are of a
normal and recurring nature. The results of operations for any interim period
are not necessarily indicative of the results attainable for a full fiscal year.

         B. Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.

         C. Property and equipment are stated at cost. Depreciation is provided
using primarily the straight-line method and accelerated methods (for machinery
and equipment) over the expected useful lives of the assets, which range from
31.5 years for the building and real property, to between five and 10 years for
machinery, furniture and equipment.

         D. The Company follows SFAS 109 for income taxes. Pursuant to SFAS 109,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax basis of assets and liabilities and are measured
by applying enacted tax rates and laws to taxable years in which such
differences are expected to reverse.

         E. For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.

         F. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.

         G. In March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 121. "Accounting
For the Impairment of Long Lived Assets and For Long Lived Assets to be Disposed
Of" SFAS No. 121 requires the Company to review long-lived assets and certain
identifiable assets and any goodwill related to those assets for impairment
whenever circumstances and situations change such that there is an indication
that the carrying amounts may not be recoverable. The adoption of SFAS No. 121
did not result in any material adjustments in the financial statements.

         H. Effective December 30, 1995, the Company adopted SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments", which requires
disclosure of fair value information about financial instruments whether or not
recognized in the balance sheet. The carrying amounts reported in the balance
sheet for cash, trade receivables, accounts payable and accrued expenses
approximate fair value based on the short term maturity of these instruments.


                                       6
<PAGE>

         I. The Company accounts for stock transactions in accordance with APB
No. 25 "Accounting for Stock to Employees". In accordance with SFAS No. 123,
"Accounting for Stock based Compensation", the Company has adopted the pro-forma
disclosure requirements contained therein.

         J. Direct response advertising costs, consisting primarily of catalog
preparation, printing and postage expenditures, are amortized over the period
during which the benefits are expected.

         K. Revenue is recognized at the time merchandise is shipped to
customers. Proceeds received from merchandise not shipped are reflected as
"customers' unshipped orders", a current liability.

         L. The term "the Company" shall include Diplomat Direct Marketing
Corporation and its wholly-owned subsidiaries, Diplomat Holdings, Inc. (formerly
known as Biobottoms, Inc. ("Biobottoms"), Brownstone Holdings, Inc.
("Brownstone"), Ecology Kids, Inc. ("Ecology Kids") and Lew Magram, Ltd. 
("Magram"), unless otherwise indicated. The term "Diplomat" shall refer to the
operations of the Diplomat Corporation exclusive of its subsidiaries.

         M. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
No. 128"), which became effective for both interim and annual financial
statements for periods ending after December 15, 1997. FAS No. 123 requires a
presentation of "Basic" and (where applicable) "Diluted" earnings per share.
Generally, Basic earnings per share are computed on only the weighted average
number of common shares actually outstanding during the period, and the Diluted
computation considers potential shares issuable upon exercise or conversion of
other outstanding instruments where dilution would result. Furthermore, FAS No.
128 requires the restatement of prior period reported earnings per share to
conform to the new standard.

The following is a reconciliation of the numerator and denominator underlying
the earnings per share computations:


<TABLE>
<CAPTION>
                                                 For the Nine Months ended June 30, 1998
                                                    Income        Shares      Per Share
                                                  (Numerator)   (Denominator)   Amount
                                                  -----------   ------------  ---------
<S>                                              <C>            <C>           <C>

Income from continuing operations                $ 2,112,304
Preferred stock dividends                           (236,250)

Basic EPS:
Income available to common
 shareholders                                    $ 1,876,054     10,596,513   $   0.18

Effective of Dilutive Securities:
Options, warrants and conversions                    236,250      5,290,403
                                                 -----------    -----------
Diluted EPS:

Income (loss) available to common stockholders
 and assumed conversions                         $ 2,112,304     15,886,916   $   0.13
</TABLE>


                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                  For the Nine Months ended June 30, 1997
                                                    Income        Shares      Per Share
                                                  (Numerator)   (Denominator)   Amount
                                                  -----------   ------------  ---------
<S>                                               <C>            <C>           <C>

Income   from continuing operations               $   926,921
Preferred stock dividends                            (162,000)
                                                  -----------
Basic EPS:
Income available to common
  shareholders                                    $   764,921       5,458,525     $.14

Effect of Dilutive Securities:
Options, warrants and conversions                     162,000       2,015,648
                                                  -----------       ---------
Diluted EPS:
Income available to common shareholders
 and assumed conversions                          $   926,921       7,474,173     $.12

<CAPTION>
                                                 For the Three months ended June 30, 1998
                                                    Income        Shares      Per Share
                                                  (Numerator)   (Denominator)   Amount
                                                  -----------   ------------  ---------
<S>                                               <C>            <C>           <C>
Income from continuing operations                $   338,910
Preferred stock dividends                            (78,750)
                                                 -----------
Basic EPS:
Income available to common
  shareholders                                    $  260,160      11,049,872      $.02

Effect of Dilutive Securities:
Options, warrants and conversions                     78,750       4,643,445
                                                  ----------     -----------

Diluted EPS:
Income available to common shareholders
 and assumed conversions                          $  338,910      15,693,317      $.02

</TABLE>

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                 For the Three Months ended June 30, 1997
                                                    Income        Shares      Per Share
                                                  (Numerator)   (Denominator)   Amount
                                                  -----------   ------------  ---------
<S>                                               <C>            <C>           <C>

Income from continuing operations                  $257,555
Preferred stock dividends                           (79,500)

Basic EPS:
Income available to common
  shareholders                                     $178,055        5,843,525      $.03

Effect of Dilutive Securities:
Options, warrants and conversions                    79,500        1,630,648
                                                   --------        ---------

Diluted EPS:

Income available to common shareholders
 and assumed conversions                           $257,555        7,474,173      $.03
</TABLE>



2.       ACQUISITION OF LEW MAGRAM, LTD.

         On February 19, 1998 the Company completed the acquisition of Lew
Magram, Ltd. (Magram), a New York corporation with a place of business in
Teaneck, New Jersey, which is in the business of mail order catalog sales of
womens' clothing. The accompanying financial statements include unaudited
pro-forma balance sheets and income statements as if the acquisition was
effected as of July 1, 1997, the date that the Company assumed effective control
of Magram. The acquisition was accounted for as a purchase and the consideration
consisted of the issuance of 95,000 shares of the Company's $.10 par value,
Series D convertible preferred stock and 250,000 shares of the Company's common
stock. The Series D preferred stock is convertible into 3,166,667 shares of the
Company's common stock. The fair market value of the consideration was
approximately $8.7 million and acquisition costs were approximately $646,000.
The Company recorded the carryover basis for a certain selling stockholder of
Magram who is also a principal stockholder of the Company.

         The net fair market value of the identifiable assets acquired was
approximately $1.9 million, and included customer lists valued at $5 million.
The customer lists are being amortized over a period of 10 years. Goodwill
amounted to approximately $7.4 million and is being amortized over 25 years.

         The following unaudited pro-forma summary combines the consolidated
results of operations of the Company and Magram as if the acquisition had
occurred at the beginning of 1996, after giving effect to certain adjustments,
including amortization and preferred stock dividends.

                                   Nine months
                                      ended
                                    June 30,
                                   -----------
                                      1997
                                   (Unaudited)

                                       9
<PAGE>

         Net sales                 $58,653,691

         Net income to
          common shareholders      $   537,008

         Net income per common
           share                         $ .10

         The pro-forma results do not necessarily represent results which would
have occurred if the acquisition had taken place on the basis assumed above, nor
are they indicative of the results of future combined operations.

         On October 30, 1997, the Company acquired out of bankruptcy all the
assets of Jean Grayson's Brownstone Studios, Inc., a mail order catalog company.
As a result of this acquisition, the scope of the Company's business has
expanded into the mature women's apparel and accessories markets primarily
through direct mail catalog. Brownstone has moved from its Secaucus, NJ.

3.       DISCONTINUED OPERATIONS

         On April 17, 1998, the Company entered into an Asset Purchase Agreement
(the "Agreement") with Genesis Direct Thirty-Four, LLC ("Buyer") in which the
Buyer purchased substantially all of the assets and assumed certain of the
liabilities of Biobottoms. The Buyer paid $2,270,000 in cash and a note and
assumed $5,749,000 in liabilities. The note is subject to reduction depending on
the net assets acquired as determined in a Closing Date Balance Sheet. If the
amount of the Net Value of Acquired Assets is less than negative $778,000 or the
accrued expenses and customer liabilities included in the Assumed Liabilities
exceed $828,877, the greater of such deficiencies will reduce the amount of the
note.

         The Company shall retain all claims for tax refunds, tax loss carry
forwards or carrybacks of tax credits of any kind applicable to the business of
Biobottoms prior to the closing of the Asset Sale. The Agreement further
specifies that certain intercompany and affiliated person liabilities will not
be assumed by the Buyer.

         The following is a summary of the loss on the disposition of
Biobottom's operations:

Property and equipment written off:                  $(1,702,887)
         Cost                                          1,378,348
                                                     -----------
         Less: Accumulated depreciation                 (324,539)
Net property written off 
Other assets written off:
         Accounts receivable                            (430,743)
         Inventory                                    (1,973,998)
         Prepaid expenses                               (972,433)
         Other assets                                    (46,993)
         Goodwill                                     (3,659,245)
                                                     -----------
Total Assets written off                              (7,407,951)
Liabilities to be assumed:                           -----------



                                       10
<PAGE>

         Accounts payable                              3,425,782
         Accrued liabilities                             566,908

         Loans payable-bank                            1,430,000
         Obligations under capital leases                116,765
         Other                                            51,645
                                                     -----------
Total Liabilities written off                          5,591,100
                                                     -----------
Proceeds to be received                                2,270,000
                                                     -----------
Gain on disposal of assets                               453,149
Loss to measurement date 11/30/97                       (449,444)
Loss through disposal date                            (2,315,396)
                                                     -----------
Loss From discontinued operations                    $(2,311,391)
                                                     ===========


                                       11
<PAGE>

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

         Except for historical matters contained herein, the matters discussed
herein are forward-looking statements and are made pursuant to the safe harbor
provisions of The Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect assumptions and involve risks and
uncertainties which may affect the Company's business and prospectus and cause
actual results to differ materially from these forward-looking statements.

RESULTS OF OPERATIONS

Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 30, 1997

NET SALES

         Consolidated net sales for the Nine Month Period ended June 30, 1998
("1998 Period") increased approximately $51,300,000 from the Nine Month Period
ended June 30, 1997 ("1997 Period"), primarily as a result of the sales
attributable to the Magram and Brownstone operations in the 1998 period. The
sales of Diplomat for the 1998 Period were $5,586,000 as compared to $5,846,000
for the 1997 Period.

         Consolidated cost of sales were 46% of net sales in the 1998 Period and
50% in the 1997 Period. The increase in cost of sales of $23,100,000 in the 1998
Period was primarily from Magram and Brownstone.

OPERATING EXPENSES

         Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses increased approximately
$26,700,000 from the 1997 Period to the 1998 Period, primarily as a result of
the purchase of Magram and Brownstone in 1997. Operating expenses of Diplomat
for the 1998 Period were $1,972,000 as compared to $1,346,000 in the 1997
Period. Consolidated operating expenses were 49% of net sales in the 1998 Period
and 23% in the 1997 Period because of the restructuring at the end of 1996 which
took effect in 1997.

         Interest expense increased $605,000 from 1997 to 1998 as a result of
borrowings of Magram and Brownstone in 1997.

         Income from continuing operations increased from $927,000 for the 1997
Period to $2,112,000 for the 1998 Period. On April 17, 1998, substantially all
the assets of Biobottoms were sold resulting in a loss from discontinued
operations of $(2,112,304).

         The net loss for the 1998 Period was $(199,387) as compared to net 
income of $1,059,279 for the 1997 Period.

         At June 30, 1998, the Company has recorded deferred tax assets of
$1,362,000. The full utilization of such deferred tax assets is dependent upon
the Company realizing taxable income in future years. The total amount of future
taxable income for utilizing such deferred tax assets will be approximately
$3,400,000. Based on the current period's operations, such realization would
take approximately three years.

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997


                                       12
<PAGE>

NET SALES

         Consolidated net sales for the Three Month Period ended June 30, 1998
("1998 Period") increased approximately $18,400,000 from the Three Month Period
ended June 30, 1997 ("1997 Period"), primarily as a result of the sales
attributable to the Magram and Brownstone operations in the 1998 Period. The
sales of Diplomat for the 1998 Period were $1,580,000 as compared to $2,227,000
for the 1997 Period.

         Consolidated cost of sales were 44% of net sales in the 1998 Period and
59% in the 1997 Period. The increase in cost of sales of $7,700,000 in the 1998
Period was primarily from Magram and Brownstone.

OPERATING EXPENSES

         Consolidated operating expenses, which include selling, general,
administrative, warehouse and distribution expenses increased approximately
$10,500,000 from the 1997 Period to the 1998 Period, primarily as a result of
the purchase of Magram and Brownstone in 1997. Operating expenses of Diplomat
for the 1998 Period were $692,000 as compared to $492,000 in the 1997 Period.
Consolidated operating expenses were 53% of net sales in the 1998 Period and 22%
in the 1997 Period because of the restructuring at the end of 1996 which took
effect in 1997.

         Interest expense increased $223,000 from 1997 to 1998 as a result of
borrowings of Magram and Brownstone in 1997.

         Income from continuing operations increased from $257,555 for the 1997
Period to $338,910 for the 1998 Period. On April 17, 1998, substantially all the
assets of Biobottoms were sold resulting in a loss from discontinued operations
of $(2,311,691) of which $(239,593) is reported in the current quarter.

         The net income for the 1998 Period was $99,317 as compared to net
income of $93,071 for the 1997 Period.




LIQUIDITY AND CAPITAL RESOURCES

         The Company completed an initial public offering on November 13, 1993
and received net proceeds of approximately $4,454,000. Proceeds of the offering
were used for purchases of inventory, marketing and promotion, product
development, reduction of accounts payable and repayment of loans from a
principal stockholder and executive officer. The Company has relied upon the
proceeds of its initial public offering, borrowings from an institutional
lender, a principal stockholder and director of the Company, and proceeds from
the exercise of warrants in 1995, 1996 and 1997 in order to fund its operations,
including financing the approximately $5,100,000 decrease in cash flow from
operations for the nine months ended June 30, 1998, which was primarily used in
the operations of Magram and Brownstone. At June 30, 1998, there was a working
capital deficiency of approximately $2,000,000. The Company is currently
investigating potential sources of capital through long term debt or equity
financing.

         The Company's principal working capital credit facility is provided by
Congress Financial Corporation ("Congress").


                                       13
<PAGE>

         In April 1994, the Company entered into an agreement with Congress
providing the Company with a maximum $3 million secured line of credit to be
used for loans and trade letters of credit. The loans are secured by
substantially all of the Company's personal property, including without
limitation, accounts receivable, inventory and trademarks. The interest rate on
loans is two (2%) percent above the prime rate announced by Core States Bank.
The credit agreement contains restrictions relating to the payment of dividends.
Additionally, prior to amendment, the Company was required to maintain a minimum
of $3,500,000 in stockholders' equity and a minimum of $4,500,000 of working
capital (excluding the Congress loan and certain subordinated debt). At
September 30, 1996, the Company was not in compliance with these financial
covenants, however Congress continued to extend the Company credit under the
terms of the original agreement. On February 25, 1997, the violations were
waived by Congress, and the Company and Congress agreed on revised financial
covenants. Under the revised agreement, the stockholders' equity and working
capital minimums (excluding the Congress loan and certain subordinated debt)
were reduced to $(750,000) and $500,000, respectively, and shall be increased
during the fiscal year ending September 30, 1997 to $(250,000) and $1,500,000,
respectively. The Company is currently negotiating revised financial covenats to
reflect the current corporate structure.

         Under the terms of the credit agreement, the Company could borrow up to
85% (reduced to 80% in the third quarter of 1997) of the amount of eligible
accounts receivable (as defined in the agreement), not to exceed the maximum
credit. In February 1995 the Agreement was amended to adjust the formula used to
determine the amount available for revolving loans by including therein an
amount based upon eligible inventory not to exceed $750,000.

         As of October 30, 1997, Brownstone entered into a loan agreement with
Congress providing Brownstone with a maximum $5.5 million secured line of credit
to be used for loans and trade letters of credit. The line of credit is secured
by all of the assets of Brownstone and guaranteed by the Company and Magram. The
interest rate is two percent (2%) above the prime rate announced by Core States
Bank. The loan agreement provides for certain restrictive covenants, including
restrictions on Brownstone's debt financing, dividends and distributions, and
transactions with the Company and its subsidiaries. The loan agreement also
requires Brownstone maintain a net worth (excluding debt subordinated to the
Congress loan) of $300,000 until June 30, 1998, and $500,000 thereafter.

         Prior to the acquisition of Magram, Magram had entered into a loan
agreement, dated as of August 13, 1996, with Congress providing Magram with a
maximum $5.0 million secured line of credit to be used for loans and trade
letters of credit. The line of credit is secured by all of the assets of Magram
and guaranteed by the Company and Brownstone. The interest rate is one and
one-half percent (1 1/2%) above the prime rate announced by Core States Bank.
The loan agreement provides for certain restrictive covenants, including
restrictions on Magram's debt financing, dividends and distributions and
transactions with the Company and its subsidiaries. The loan agreement also
requires Magram maintain working capital of at least $1,500,000 and net worth
(excluding debt subordinated to the Congress loan) of $1,600,000. Upon the
acquisition of Lew Magram, these covenants were waived by Congress, and the
Company and Congress are currently negotiating revised contracts.

         The lines of credit between Congress and each of the Company,
Brownstone and Magram are each guaranteed by Robert M. Rubin up to an aggregate
maximum amount of $1,500,000.

         The Company has also financed its operations and acquisitions through
loans from Mr. Rubin, including approximately $2,900,000 in connection with the
acquisition of Biobottoms in February 1996, a $600,000 working capital loan in
November 1996, a $200,000 working capital loan in February 1997, and, with Jay
Kaplowitz, a $2,205,000 loan for the financing of Jean Grayson's Brownstone
Studio, Inc. prior to the asset acquisition by Brownstone and working capital
for Biobottoms and the company. Except for the $200,000 working capital loan,
each of the above mentioned loans have been converted into the Company's stock.


                                       14
<PAGE>

         A significant source of financing for the Company was the sale of
equity and debt securities.

         In July 1995, the Company, in connection with a financial consulting
agreement, issued to Boulder Enterprises, Inc., Class B, Class C D Warrants,
each exercisable for 500,000 shares of common stock, at $.137, $2.50 and $3.00
per share, respectively. All of the Class B Warrants were exercised during 1995
providing the Company with net proceeds of $628,000. The Class D Warrants
expired in July, 1996. The Class C Warrants were exercised in April 1997
providing the Company with proceeds of $500,000.

         In August 1996, the Company, in connection with the a Non-Qualified
Stock Option Plan, issued 500,000 options which were exercised at a price of
$.95 per share. In November 1996, the Company, in connection with an Incentive
Stock Option Plan, issued 1,060,000 options at an exercise price of $1.00 per
share and in May 1997 issued an additional 150,000 options at an exercise price
of $2.375 per share.

         In May 1997, the Company, in connection with a Private Placement,
offered 1,250,000 shares of Common Stock at a price of $2.00 per share.

         In October 1997, in part to raise capital for the Company's acquisition
out of bankruptcy of substantially all of the assets of Jean Grayson's
Brownstone Studio, Inc., the Company completed a private placement of its
securities which raised $3,345,000 from accredited investors. The private
placement consisted of units, each unit consisting of ten shares of Series E
Preferred Stock and 7,500 shares of Common Stock at a purchase price of $10,000
per unit.

         On June 29, 1998, the Company completed the sale of Subordinated
Debentures to Tandem Capital in the amount of $5,000,000 to be used for working
capital. In connection with the transaction, the Company issued warrants to
purchase 208,300 shares of Common Stock.

         There can be no assurance that the Company will operate profitably in
the future or that cash from operations will become the principal source of
funds for operations.


                                       15
<PAGE>

PART II  OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

         On June 29, 1998, the Company completed the sale of $5,000,000
principal amount 12% Subordinated Debentures to Sirrom Capital Corporation d/b/a
Tandem Capital ("Tandem"). The Debentures, which are due June 28, 2003, are
secured by all of the assets of the Company and its subsidiaries, but junior to
existing liens. The Company issued Tandem 208,300 common stock purchase warrants
exercisable at approximately $2.50 for five years. The Company is obligated 
to issue Tandem up to an additional 416,600 warrants at the market price upon
issuance, subject to certain adjustments, if the Debentures are not redeemed
prior to February 28, 1999, and an additional 200,000 warrants exercisable at
the market price upon issuance, subject to certain adjustments, for each year
thereafter as long as the Debentures are outstanding until the Debentures are
due. The issuance was exempt from registration by virtue of Section 4(2) under
the Securities Act of 1933, as amended (the "Act").

ITEM 4.  MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS

         The Company held its annual meeting of stockholders on May 19, 1998.
The purpose of the meeting was to vote for the election of directors ("Proposal
1"), to amend the Company's Certificate of Incorporation to change the name of
the Company to Diplomat Direct Marketing Corporation ("Proposal 2") to amend the
Company's Certificate of Incorporation to increase the authorized number of
directors to seven ("Proposal 3"), to approve the Company's 1998 Stock Option
Plan ("Proposal 4") and to ratify the appointment of Feldman, Sherb, Ehrlich &
Company as the Company's independent certified public accountants ("Proposal
5").

         Proposal 1 - The following persons were elected to serve as
directors of the corporation for the ensuing year: Jonathan Rosenberg, Robert M.
Rubin, Stuart Leiderman, Warren H. Golden, Wesley C. Fredericks, Jr., Howard B.
Katz and David Abel. There were 11,211,762 votes cast in favor, 22,400 votes
against and 13,640 votes withheld for each of the above named directors.

         Proposal 2 - The proposal to amend the Company's Certificate of
Incorporation to change the Company's name to Diplomat Direct Marketing
Corporation was approved. There were 11,197,892 votes cast in favor, 24,270
votes against and 25,640 votes withheld for the proposal.

         Proposal 3 - The proposal to amend the Company's Certificate of
Incorporation to increase the number of authorize directors to seven was
approved. There were 11,178,262 votes cast in favor, 61,300 votes against and
8,240 votes withheld for the proposal.

         Proposal 4 - The proposal to approve the Company's 1998 Stock Option
Plan was approved. There were 11,137,172 votes cast in favor, 82,390 votes
against and 28,240 votes withheld for the proposal.

         Proposal 5 - The proposal to ratify Feldman Sherb Ehrlich & Co., P.C.
as the Company's independent certified public accountants for the ensuing year
was approved. There were 11,225,212 votes cast in favor, 14,950 votes against
and 7,640 votes withheld for the proposal.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         21.1     List of Subsidiaries


                                       16
<PAGE>

         27.1     Financial Data Schedule

         99.1     Form of Debenture Purchase Agreement between Sirrom Capital 
                  Corporation and Diplomat Direct Marketing Corporation, et al

         99.2     Form of 12% Subordinated Debenture

         99.3     Form of Initial Stock Purchase Warrant

         99.4     Form of Additional Stock Purchase Warrant

         99.5     Form of Contingent Stock Purchase Warrant

         99.6     Form of Security Agreement

(b)      Reports on Form 8-K

         On May 11, 1998, the Company filed a report dated April 24, 1998 on
Form 8-K, Item 2, covering the sale of substantially all of the assets of its
wholly-owned subsidiary, Biobottoms, Inc.

         On June 15, 1998, the Company filed a report dated June 9, 1998 on Form
8-K Item 5, covering the amendment to the Company's Certificate of
Incorporation, as amended, to provide for the change in the Company's name to
Diplomat Direct Marketing Corporation and to increase the authorized number of
directors from six to seven.


                                       17
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                            DIPLOMAT DIRECT MARKETING
                                             CORPORATION

August 15, 1998                             By:/s/ Jonathan Rosenberg
                                               ----------------------
                                               Jonathan Rosenberg
                                               Chief Executive Officer

August 15, 1998                             By:/s/ Irwin Oringer
                                               ----------------------
                                               Irwin Oringer
                                               Principal Accounting Officer and
                                               Controller


                                       18
<PAGE>
  
                                  EXHIBIT INDEX

         21.1     List of Subsidiaries

         27.1     Financial Data Schedule

         99.1     Form of Debenture Purchase Agreement between Sirrom Capital 
                  Corporation and Diplomat Direct Marketing Corporation, et al

         99.2     Form of Debenture

         99.3     Form of Initial Stock Purchase Warrant

         99.4     Form of Additional Stock Purchase Warrant

         99.5     Form of Contingent Stock Purchase Warrant

         99.6     Form of Security Agreement


                                       19