<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                     For the quarter ended December 31, 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
             (Exact name of registrant as specified in its charter)
                         (Formerly Diplomat Corporation)

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)

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

         Check 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, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|

         The number of shares outstanding of the registrant's Common Stock,
$.0001 Par Value, on March 4, 1999 was 12,162,372 shares.



<PAGE>


                      DIPLOMAT DIRECT MARKETING CORPORATION
                   DECEMBER 1998 QUARTERLY REPORT ON FORM 10-Q

                                TABLE OF CONTENTS

                         PART I - FINANCIAL INFORMATION

                                                                     Page Number

Item 1. Financial Statements ................................................1-8
Item 2. Management's Discussion and Analysis of Financial Condition
             and Results of Operations......................................9-13

Item 3. Quantitative and Qualitative Disclosures About Market Risk............13

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings.....................................................14
Item 2. Changes in Securities and Use of Proceeds.............................14
Item 3. Defaults Upon Senior Securities.......................................14
Item 4. Submission of Matters to a Vote of Security Holders...................14
Item 5. Other Information.....................................................14
Item 6. Exhibits and Reports on Form 8-K......................................14






                                        i


<PAGE>


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         This Quarterly Report on Form 10-Q contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements, which are other than statements of historical facts. These
statements are subject to uncertainties and risks including, but not limited to,
product and service demand and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, government regulation, and
other risks defined in this document and in statements filed from time to time
with the Securities and Exchange Commission. All such forward-looking statements
are expressly qualified by these cautionary statements and any other cautionary
statements that may accompany the forward-looking statements. In addition,
Diplomat Direct Marketing Corporation disclaims any obligations to update any
forward-looking statements to reflect events or circumstances after the date
hereof.

                                INTRODUCTORY NOTE

         The term "Company" used herein refers to Diplomat Direct Marketing
Corporation and its wholly-owned subsidiaries, Lew Magram Ltd. ("Lew Magram"),
Brownstone Holdings, Inc. ("Brownstone"), Ecology Kids, Inc. ("Ecology Kids")
and Diplomat Holdings, Inc.






                                       ii

<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

         Consolidated Balance Sheets as of December 31, 1998
         and September 30, 1998..............................................2
         Consolidated Statements of Operations
              for the quarters ended December 31, 1998 and 1997..............3
         Consolidated Statements of Cash Flows
              for the quarters ended December 31, 1998 and 1997..............4
         Notes to Consolidated Financial Statements.........................5-8




                                       1
<PAGE>


             Diplomat Direct Marketing Corporation and Subsidiaries
                           Consolidated Balance Sheets
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                           December 31,       September 30,
                                                                                              1998                 1998
                                                                                              ----                 ----
<S>                                                                                    <C>                  <C>            
Assets
Current:

       Cash and cash equivalents                                                       $        662,467     $       322,778
       Accounts receivable, net                                                               2,164,393           1,921,209
       Inventories                                                                           12,465,451          11,066,380
       Prepaid catalogs                                                                       6,211,502           8,051,651
       Prepaid expenses                                                                       1,630,278           1,379,567
       Other current assets                                                                     559,268             837,946
                                                                                       ----------------     ---------------
              Total current assets                                                           23,693,359          23,579,531
                                                                                       ----------------     ---------------

Property and equipment, net                                                                   3,982,169           4,176,903
                                                                                       ----------------     ---------------

Other assets:

       Goodwill, net of amortization                                                         14,463,686          14,587,358
       Customer list, net of amortization                                                     6,900,000           7,100,000
       Note receivable                                                                          870,000             870,000
       Other                                                                                    645,091             645,091
                                                                                       ----------------     ---------------
              Total assets                                                                  $50,554,305         $50,958,883
                                                                                            ===========         ===========

Liabilities and Stockholders' Equity
Current liabilities:

       Accounts payable and accrued expenses                                                $14,492,021     $    18,469,136
       Loans payable - officers                                                                 225,000             225,000
       Loans payable - Congress Financial Corp.                                               8,759,731           5,504,371
       Open prepaid orders                                                                      872,542           1,211,165
       Outstanding merchandise credit                                                         2,299,289           1,892,148
       Current maturities of long-term debt                                                     845,337             939,816
                                                                                       ----------------     ---------------
              Total current liabilities                                                      27,493,920          28,241,636
                                                                                       ----------------     ---------------

Long-term debt, less current maturities                                                       6,367,764           6,383,585
                                                                                       ----------------     ---------------

Stockholders' equity

       Preferred stock, $.10 par value - shares authorized 1,000,000;
         issued and outstanding 545,983 (Liquidation value of $16,380,000)                        5,461               5,461
       Common stock, $.0001 par value - shares authorized 50,000,000;
         issued and outstanding 11,049,872                                                        1,112               1,112
       Additional paid-in capital                                                            25,835,390          25,835,445
       Accumulated deficit                                                                   (9,149,342)         (9,508,356)
                                                                                       ----------------     ---------------
              Total stockholders' equity                                                     16,692,621          16,333,662
                                                                                       ----------------     ---------------

       Total liabilities and stockholders' equity                                           $50,554,305         $50,958,883
                                                                                       ================     ===============
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       2
<PAGE>



             Diplomat Direct Marketing Corporation and Subsidiaries
                      Consolidated Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                              Three Months Ended December 31,
                                                                                1998                  1997
                                                                                ----                  ----
<S>                                                                          <C>                   <C>        
Net sales                                                                    $23,059,559           $17,983,991
Cost of goods sold                                                            11,273,661             7,864,273
                                                                          --------------        --------------
       Gross profit                                                           11,785,898            10,119,718
Selling, general and administrative expenses                                  10,839,172             9,171,837
                                                                          --------------        --------------
       Operating income                                                          946,726               947,881
Interest expense                                                                (482,779)             (337,961)
                                                                          --------------        --------------
       Income before income tax (expense) benefit                                463,947               609,920
Income tax (expense) benefit                                                       --                    --
                                                                          --------------        --------------
       Income from continuing operations                                         463,947               609,920
Loss on discontinued operations                                                  (26,183)             (386,266)
                                                                          --------------        --------------
Net income                                                                       437,764               223,654
Preferred stock dividends                                                        (78,750)             (126,640)
                                                                          --------------        --------------
Net income to common stockholders                                         $      359,014        $       97,014
                                                                          ==============        ==============
Per common share - Basic
       Net income from continuing operations                              $          .03        $          .05
       Net income (loss) from discontinued operations                              --                     (.04)
                                                                          --------------        --------------
Net income - Basic                                                        $          .03        $          .01
Per common share - Diluted:
       Net income from continuing operations                              $          .03        $          .06
       Net income (loss) from discontinued operations                              --                     (.04)
                                                                          --------------        --------------
Net income - Diluted                                                      $          .03        $          .02
                                                                          ==============        ==============

Average number of shares used in computation            - Basic               11,049,872              8,880,733
                                                                              ==========              =========
                                                        - Diluted             15,737,317             10,331,206
                                                                              ==========             ==========
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       3
<PAGE>


             Diplomat Direct Marketing Corporation and Subsidiaries
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                                    12/31/98               12/31/97
<S>                                                                          <C>                   <C>        
Cash flows from operating activities:
    Net income                                                                      $437,764               $223,654
    Adjustments to reconcile net income to net cash 
        Used in operating activities:
            Amortization                                                             323,672                203,256
            Depreciation                                                             124,926                167,609
            (Increase) decrease in accounts receivable                              (243,184)            (1,467,223)
            (Increase) decrease in inventories                                    (1,399,071)            (4,895,696)
            (Increase) decrease in prepaid expenses                                 (250,711)               113,799
            (Increase) decrease in prepaid catalogs                                1,840,149             (1,858,527)
            (Increase) decrease in other assets                                      278,678                391,731
            (Increase) decrease in assets held for sale                                                     420,148
            Increase (decrease) in accounts payable                               (3,977,170)               694,365
                and accrued liabilities
            Increase (decrease) in outstanding merchandise credits                   407,141              6,110,983
            Increase (decrease) in prepaid orders                                   (338,623)               314,279
                                                                                   ---------                -------
            Net cash provided (used) by operating activities                      (2,796,429)               418,378

Cash flows from investing activities:
    Purchase and sale of property and equipment                                       69,808               (494,972)
    Acquisition of subsidiary assets                                                       0             (4,079,530)
                                                                                   ---------            -----------
            Net cash provided (used) by investing activities                          69,808             (4,574,502)

Cash flows from financing activities:
    Issuance of common and preferred stock                                                                  478,398
    Revolving credit loans                                                         3,255,360              4,439,337
    Preferred stock dividends paid                                                   (78,750)              (126,640)
    Increase in long term debt and loans payable                                    (110,300)                58,523
                                                                                   ---------                 ------
            Net cash provided (used) by financing activities                       3,066,310              4,849,618

Net increase (decrease) in cash                                                      339,689                693,494
Cash at beginning of period                                                          322,778                 59,750
                                                                                     -------                 ------
Cash at end of period                                                               $662,467               $753,244
                                                                                    ========               ========
</TABLE>



          See accompanying notes to consolidated financial statements.




                                       4
<PAGE>


             Diplomat Direct Marketing Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements

1.     Summary of Significant     (a)  The consolidated financial statements
       Accounting Policies             include the accounts of Diplomat
                                       Direct Marketing Corporation (the
                                       "Company") and its wholly owned
                                       subsidiaries. All significant
                                       intercompany balances and transactions
                                       have been eliminated.

                                  (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 ten years for
                                       machinery, furniture and equipment.

                                  (d)  The Company follows Statement of
                                       Financial Accounting Standards ("SFAS")
                                       No. 109. Pursuant to SFAS No. 109, for
                                       income taxes, deferred tax assets and
                                       liabilities are determined based on
                                       differences between the financial
                                       reporting and tax bases 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
                                       consolidated financial statements and the
                                       reported amounts of revenues and expenses
                                       during the reporting period. Actual
                                       results could differ from those
                                       estimates.

                                  (g)  Statement of Financial Accounting
                                       Standards No. 128, "Earnings per Share."
                                       ("SFAS No. 128") is effective for
                                       financial statements for fiscal periods
                                       ending after December 15, 1997. The new
                                       standard establishes standards for
                                       computing and presenting earnings per
                                       share. The effect of adopting SFAS No.
                                       128 is not expected to be material.

                                       Statement of Financial Accounting
                                       Standards No. 130, "Reporting
                                       Comprehensive Income," established
                                       standards for reporting and display of
                                       comprehensive income, its components and
                                       accumulated balances. Comprehensive
                                       income is defined to include all changes
                                       in equity except those resulting from
                                       investments by owners and distributions
                                       to owners. Among other disclosures, SFAS
                                       No. 130 requires that all items that are
                                       required to be recognized under current
                                       accounting standards are components of
                                       comprehensive income be reported in a
                                       financial statement that is displayed
                                       with the same prominence as other
                                       financial statements.

                                       Statement of Financial Accounting
                                       Standards No. 131, "Disclosures about
                                       Segments of an Enterprise and Related
                                       Information," which supersedes SFAS No.
                                       14, "Financial Reporting for Segments of
                                       a Business Enterprise," establishes
                                       standards for the way that public
                                       enterprises report information about
                                       operating segments in interim


                                       5
<PAGE>


                                       financial statements issued to the
                                       public. It also establishes standards for
                                       disclosures regarding products and
                                       services, geographic areas and major
                                       customers. SFAS No. 131 defines operating
                                       segments as components of and enterprises
                                       about which separate financial
                                       information is available that is
                                       evaluated regularly by Management in
                                       deciding how to allocate resources and in
                                       assessing performance.

                                       Both SFAS Nos. 130 and 131 are effective
                                       for financial statements for periods
                                       beginning after December 15, 1997 and
                                       require comparative information for
                                       earlier years to be restated. The
                                       adoption of these standards is not
                                       expected to have a material effect on the
                                       Company?s financial position or results
                                       of operations. The Company is currently
                                       reviewing SFAS No. 131 and has of yet
                                       been unable to fully evaluate the impact,
                                       if any, it may have on future financial
                                       statement disclosures.

                                       Statement of Financial Accounting
                                       Standards No. 133 "Accounting for
                                       Derivative Instruments and Hedging
                                       Activities" establishes accounting and
                                       reporting standards for Derivative
                                       Instruments. The Company has not in the
                                       past or does it anticipate that it will
                                       engage in transactions involving
                                       Derivative Instruments which will impact
                                       the Financial Statements.

                                  (h)  Long-lived assets, primarily property and
                                       equipment, goodwill and customer lists
                                       are periodically reviewed by management
                                       to determine if there has been a
                                       permanent impairment in their value by
                                       evaluating various factors, including
                                       current and projected operating results.
                                       Based on this assessment, management
                                       concluded that at December 31, 1998 and
                                       September 30, 1998, the Company's long-
                                       lived assets were fully realizable.

                                  (i)  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.

                                  (j)  The Company accounts for stock
                                       transactions with employees in accordance
                                       with APB No. 25, "Accounting for Stock
                                       Issued to Employees." In accordance with
                                       SFAS No. 123, "Accounting for Stock Based
                                       Compensation," the Company has adopted
                                       the pro forma disclosure requirements
                                       contained therein.

                                  (k)  Direct response advertising costs,
                                       consisting primarily of catalog
                                       preparation, printing and postage
                                       expenditures, are amortized over the
                                       period in which related revenues are
                                       expected to be realized, generally three
                                       to six month. Advertising costs,
                                       principally the amortization of such
                                       prepaid catalog costs attributable to
                                       continuing operations, included in the
                                       accompanying statement of operations were
                                       $6,298,336 for the three months ended
                                       December 31, 1998 and $5,174,353 for the
                                       three months ended December 31, 1997.
                                       Included in other current assets at
                                       December 31, 1998, is $6,211,502 and at
                                       September 30, 1998, $8,051,651 of prepaid
                                       catalog costs.

                                  (l)  Revenue is recognized at the time
                                       merchandise is shipped to customers.
                                       Proceeds received for merchandise not yet
                                       shipped are reflected as "prepaid
                                       orders," a current liability.


                                       6
<PAGE>
                                  (m)  The Company issues merchandise credits
                                       for certain returns of merchandise sold
                                       with substantial discounts. Because of
                                       Lew Magram's policy of writing off unused
                                       credits issued with the return of sale
                                       merchandise, it may be liable for future
                                       claims on such amounts previously written
                                       off.

2.     Business                        The Company is engaged in two continuing
                                       lines of business and, accordingly, its
                                       operations are classified into two
                                       business segments: mail order catalog
                                       retail operations, and the manufacturing,
                                       marketing and distribution of infants'
                                       accessories principally to mass
                                       merchandisers. In 1998, the Company sold
                                       the Biobottoms subsidiary. The operations
                                       of that company have been accounted for
                                       as discontinued operations.

                                  (a)  Acquisition of Lew Magram
                                       On February 19, 1998, the Company
                                       (through its wholly owned subsidiary,
                                       Magram Acquisition Corp.) closed on the
                                       acquisition of Lew Magram, Ltd. ("Lew
                                       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 women's clothing. For
                                       accounting purposes, the acquisition was
                                       effected as of July 1, 1997, the date
                                       that the Company assumed effective
                                       control of Lew Magram. The acquisition
                                       was accounted for as a purchase and the
                                       consideration consisted of the issuance
                                       of 95,000 shares of the Company's $.01
                                       par value, Series D, convertible into
                                       3,166,667 shares of the Company's common
                                       stock (which assumes a market value of
                                       $4.00 per share). The preferred stock
                                       does not pay any dividends, but
                                       participates with common in any Company
                                       distributions. The preferred stock has a
                                       liquidation preference of $100 per share.
                                       An additional 250,000 shares of common
                                       stock were also given as consideration to
                                       the sellers. 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 certain
                                       selling stockholders of Lew Magram who
                                       are also principal stockholders of the
                                       Company.

                                       The net fair market value of identifiable
                                       assets acquired was approximately $6.9
                                       million, and included customer lists
                                       valued at $5 million. The customer lists
                                       are being amortized over a period of 10
                                       years. Cost in excess of net assets
                                       acquired amounted to approximately $10
                                       million and is being amortized over 25
                                       years.

                                  (b)  Acquisition of Brownstone
                                       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 for the
                                       assumption of approximately $10,000,000
                                       in liabilities and an option to the
                                       owners of Jean Grayson's Brownstone
                                       Studios, Inc. to purchase 200,000 shares
                                       of Diplomat common stock at $3.9375
                                       (market value) for a period of three
                                       years. The acquisition was accounted for
                                       as a purchase, accordingly, the operating
                                       results include the operations of
                                       Brownstone for the period November 1,
                                       1997, through October 3, 1998. The
                                       purchase price was allocated to assets
                                       acquired based on their estimated fair
                                       value, including customer lists valued at
                                       $3,000,000 which will be amortized on a
                                       straight line basis over ten years. This
                                       treatment results in approximately
                                       $4,000,000 in cost in excess of net
                                       assets acquired which will be amortized
                                       on a straight line basis over twenty-five
                                       years. 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 catalogs. Since Brownstone
                                       was in bankruptcy prior to its
                                       acquisition in October 1997, presentation
                                       of financial information as if it had
                                       been acquired on October 1, 1996 was not
                                       available and would not be meaningful.


                                       7
<PAGE>


                                  (c)  Sale of Biobottoms
                                       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. The amount of the
                                       reduction of the note is in dispute. The
                                       Company, however, believes that the
                                       reduction will not be material. 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 carryforwards 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.

                                       Following is a summary of net assets and
                                       the results of operations of Biobottoms:

<TABLE>
<CAPTION>
                                       December 31, 1997
                                       <S>                        <C>            <C>
                                       Assets
                                            Current                              $5,206,854
                                            Property and Equipment                  349,025
                                            Other                                 3,493,295
                                       Liabilities

                                            Current                               6,148,011
                                            Long-Term                                67,301
                                       Net assets disposed of                     2,833,862

                                       Periods Ended December 31          1998         1997
                                       Sales                      $         --   $4,357,043
                                                                  ------------   ----------
                                       Cost of Sales                        --    2,206,720
                                       Operating Expenses               26,183    2,474,061
                                       Interest                             --       62,528
                                                                   -----------       ------
                                                                        26,183    4,743,309
                                                                   -----------    ---------
                                       Net Loss                       $(26,183)   $(386,266)
                                                                      =========   ==========

</TABLE>


                                       8
<PAGE>


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

         The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere herein.
Except for historical information contained herein, certain statements herein
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
that may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among others, the
receipt and timing of future customer orders, price pressures and other
competitive factors leading to a decrease in anticipated revenues and gross
profit margins.

Introduction

         The Company's core business has historically focused on the wholesale
marketing and distribution of infant apparel and accessories. Through recent
acquisitions, the Company has repositioned its business to direct mail catalog
retailing with a significant emphasis on the women's apparel market.

         Ecology Kids, a wholly owned subsidiary of the Company, manufactures
and distributes cloth diapers, diaper covers, layette, infant and child travel
products and other infants accessories marketed primarily under the Ecology Kids
name, primarily to major mass merchandisers.

         On October 30, 1997, Brownstone, a newly formed, wholly owned
subsidiary of the Company, acquired out of bankruptcy all of 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.

         On February 19, 1998, the Company completed the acquisition of Lew
Magram Ltd., a New York corporation, resulting in Lew Magram becoming a wholly
owned subsidiary of the Company. Lew Magram is a direct-mail cataloger of
women's fashion clothing founded approximately 50 years ago. The Company, which
effectively took control over Lew Magram in July 1997, has integrated the
operations of Brownstone and Lew Magram.

         On April 17, 1998, the Company sold substantially all of the assets of
its then wholly owned subsidiary Biobottoms, Inc. ("Biobottoms") for $2,270,000
in cash and notes and $5,749,000 in assumption of liabilities.

         The Company is currently experiencing significant delays in fulfilling
merchandise orders. This is a result of the Company's difficulty in obtaining
timely shipment of inventory from its vendors to meet the strong customer
demand. Some of the Company's vendors and their lending institutions have been
reluctant to extend credit to the Company in such amounts and upon such terms as
to support timely delivery of inventory as needed to meet orders. This
reluctance is principally a result of the Company's insufficient working capital
to satisfy vendors extending additional credit. The Company's inability to
timely deliver merchandise has resulted in increased order cancellations, which
for the quarter ended December 31, 1998, have been approximately 25% of demand.
The Company's order cancellations have historically been 10% of demand, which is
consistent with industry standards. The Company has received a non-binding
proposal for new financing to improve its working capital position, thereby
strengthening 


                                       9
<PAGE>


its ability to obtain improved credit availability on more favorable terms,
timely deliver merchandise to its customers, reduce order cancellations, and
improve initial customer response.

Results of Operations

         Three Months Ended December 31, 1998 Compared to Three Months Ended
December 31, 1997

         Net Sales

         Consolidated net sales from continuing operations for the three months
ended December 31, 1998, increased by 20% to $23.1 million from $18.0 million
for the three months ended December 31, 1997. This significant sales growth was
primarily due to the acquisition by Brownstone of the assets of Jean Grayson's
Brownstone Studio out of bankruptcy as of October 26, 1997. This new subsidiary
accounted for sales of $10.8 million for the three months ended December 31,
1998 compared to $2.4 million for the three months ended December 31, 1997.

         The Company believes that its strategy to maintain circulation plans
but convert more orders to shipped sales, plus its entry into e-commerce in
1999, can substantially increase sales without proportionate expense.

         Gross Margin

         Consolidated gross profit from continuing operations increased by 17%
from $10.1 million for the three months ended December 31, 1997 to $11.8 million
for the three months ended December 31, 1998, primarily as a result of the
Company's increase sales from its Brownstone subsidiary. However, gross profit
from continuing operations as a percentage of net sales decreased from 56% for
the three months ended December 31, 1997 to 51% for the three months ended
December 31, 1998 due to a decrease in margins on clearance merchandise.

         Selling, General and Administrative Expenses

         Selling, general and administrative expenses from continuing operations
as a percentage of net sales decreased from 51% for the three months ended
December 31, 1997 to 47% for the three months ended December 31, 1998. Although
expenses as a percentage of net sales were lower for the three months ended
December 31, 1998 as compared to the same period ended December 31, 1997, the
dollar increase in expenses is attributable to the increase in catalog
production costs which are typically written off over the sales life of the
catalog. For the three months ended December 31, 1998, these costs were $6.3
million as compared to $5.2 million for the three months ended December 31,
1997. Order cancellations resulted in lost net sales and an inflated catalog
cost relationship in both periods.

         Other operating expenses as a percent of net sales increased for the
three months ended December 31, 1998 as compared to the three months ended
December 31, 1997 due primarily to an increase in depreciation and amortization
of tangible and intangible assets as well as an increase in interest expense.

         Income from Continuing Operations


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<PAGE>


         Income from continuing operations before income taxes for the three
months ended December 31, 1998 was approximately $464,000 as compared to
$610,000 for the three months ended December 31, 1997 primarily due to an
increase in interest, depreciation and amortization expenses.

         Net Income

         Net income for the three months ended December 31, 1998 was $359,000,
as compared to net income for the three months ended December 31, 1997 of
$97,000, a 309% increase. This difference was primarily due to the loss in 1997
from the discontinued Biobottoms operations.

Liquidity and Capital Resources

         The Company's principal source of working capital is asset based loan
facilities provided by Congress Financial Corporation ("Congress"). Each of the
Company's operating subsidiaries, Ecology Kids, Lew Magram and Brownstone, has a
separate loan facility from Congress. Each loan facility is guaranteed by the
Company and cross-guaranteed by each operating subsidiary. In addition, Robert
M. Rubin, the Company's Chairman of the Board, has personally guaranteed the
Brownstone and Lew Magram loan facilities up to an aggregate of $1.0 million.
The Company's aggregate indebtedness to Congress increased from $5.5 million on
September 30, 1998 to $8.8 million on December 31, 1998. The Company's accounts
payable and accrued expenses decreased from $18.5 million on September 30, 1998
to $14.5 million on December 31, 1998. This increase in borrowing from Congress
was used to pay down certain accounts payable and accrued expenses.

         The loan facility with Ecology Kids provides Ecology Kids with a
maximum $3 million secured line of credit to be used for loans and trade letters
of credit. The loan facility is secured by substantially all of the assets of
Ecology Kids. The interest rate is 1 1/2% above the prime rate announced by
CoreStates Bank. The loan facility contains certain restrictive covenants
including restrictions relating to the payment of dividends. Ecology Kids is
required to maintain a minimum of $(250,000) in stockholders' equity and a
minimum of $1,500,000 of working capital (excluding the Congress loan and
certain subordinated debt). Under the terms of the agreement, the Company could
borrow up to 80% of the amount of eligible accounts receivable (as defined in
the agreement), not to exceed the maximum credit.

         The loan facility with Brownstone provides Brownstone with a maximum
$5.5 million secured line of credit to be used for loans and trade letters of
credit. The loan facility is secured by all of the assets of Brownstone. The
interest rate is 2% above the prime rate announced by CoreStates Bank. The loan
facility provides for certain restrictive covenants, including restrictions on
additional debt financing, dividends and distributions, and transactions with
the Company and its subsidiaries, and requires Brownstone maintain minimum
working capital and net worth.

         The Loan Facility with Magram provides 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. The interest rate
is 1 1/2% above the prime rate announced by CoreStates 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, and requires Magram maintain minimum working capital and
net worth.

         On June 29, 1998, the Company issued $5,000,000 principal amount of its
8% subordinated secured debentures to Sirrom Capital Corporation, d/b/a Tandem
Capital ("Tandem Debentures"). The 


                                       11
<PAGE>


debentures are due June 29, 2003, and bear interest at 8%, payable quarterly.
The Tandem Debentures are secured by all of the personal property of the Company
and its subsidiaries and includes certain restrictive covenants, including
restrictions on dividends and distributions, additional debt financing and
transaction with the Company and its subsidiaries. The Company also issued
warrants in connection with the issuance of the Tandem Debentures. At the time
of the loan, the Company issued warrants to purchase up to 208,300 shares of its
Common Stock exercisable at $2.35 per share for five years. Effective February
28, 1999, because the debentures remained outstanding, the Company issued
416,600 warrants to Tandem at an exercise price of $1.60 per share. The exercise
price is to be adjusted downward if the Company's common stock price is below
this exercise price to an exercise price equal to the greater of 80% of the
market price on June 29, 1999 or $2.00 per share. Tandem will also receive
200,000 warrants each June 29 commencing in 1999 while the debentures remain
outstanding.

         The Company is currently experiencing working capital shortages and
requires additional capital resources to fund its existing operations. The
Company has borrowed the maximum amounts available under each of the Congress
loan facilities as of the date hereof and there is no unused loan availability.
Several letters of intent have been received by the Company from lending
institutions, one of which is anticipated, although there can be no assurance,
to be closed before the end of March 1999 creating additional working capital
availability of over $4.0 million. The majority stockholder has agreed to bridge
up to $1.5 million of the Company's new financing. The Company is pursuing a
number of financing alternatives, although there can be no assurance that such
efforts will result in necessary financing or that the terms of such financing
will be on terms favorable to existing stockholders. The failure to secure
additional working capital will materially adversely affect the business and
financial condition of the Company. Insufficient working capital may require the
Company to alter operations significantly.

         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.

Seasonality

         The Company's business does not follow the seasonal pattern typical of
the retail apparel industry, but is, instead, more closely related to the timing
and distribution of catalog mailings. Through 1997 there were significant
variations in the Company's seasonal sales volume with the largest volume period
being first quarter, ending December 31. In 1998, the Lew Magram and Brownstone
acquisitions helped to spread out the volume evenly throughout the year since
mail order volume varies only in proportion to the orders generated and
merchandise shipped. Accordingly, the Company is now less susceptible to
seasonable variations.

Impact of the Year 2000 Issue

         The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

         The Company is totally Y2K compliant in its catalog operations software
and Ecology Kids 


                                       12
<PAGE>

operating software. Certain minor changes may be required in ancillary network
related software which are not critical to daily operations. The Company plans
to complete these changes by July 31, 1999.

         The Company has a plan in place to contact all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remedy their own Year 2000 issues. There can be no
guarantees that the systems of third parties on which the Company's systems rely
or which influence the business of the Company's suppliers will be timely
remedied, that any attempted remediation will be successful, or that such
conversions would be compatible with the Company's systems.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not Applicable







                                       13
<PAGE>


                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         On December 28, 1998, the Company granted to certain of its employees
options under its November 1996 Stock Option Plan. The options permit the
holders the right to purchase in the aggregate up to 860,000 shares of the
Company's common stock at an exercise price of $1.00 per share. The options
expire on December 28, 2003. One-fourth of the options granted are immediately
exercisable and the remaining options are exercisable in equal numbers in an
equal amount each year for the next three years. The grant of the options is
exempt under the Securities Act of 1933, as amended, by virtue of the exemption
under Section 4(2).

ITEM 3.  DEFAULTS IN SENIOR SECURITIES

         None.

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

         None.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(b)      Exhibits.

         27       Financial Data Schedule

(b)      Reports on Form 8-K.

         On October 16, 1998, the Company filed Form 8-K/A1, amending the
Company's 8-K filed on March 6, 1998, solely to include the financial statements
in connection with the Company's acquisition of Lew Magram Ltd.




                                       14
<PAGE>


                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                               DIPLOMAT DIRECT MARKETING CORPORATION

Dated: March 5, 1999           By: /s/ JONATHAN ROSENBERG
                               ----------------------------
                                       Jonathan Rosenberg
                                       President and Chief Executive Officer

                               By: /s/ IRWIN ORINGER
                                   -----------------
                                       Irwin Oringer
                                       Chief Accounting Officer








                                       15
<PAGE>


                                  EXHIBIT INDEX


27       Financial Data Schedule