<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                        
                                   FORM 10-Q
                                        
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
    EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED 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 0-23422
                                        
                             --------------------

                              DRYPERS CORPORATION
             (Exact name of Registrant as specified in its charter)
                                        
              Delaware                                  76-0344044
    (State or other jurisdiction           (IRS Employer Identification Number) 
  of incorporation or organization)


        5300 Memorial, Suite 900
            Houston, Texas                                  77007
(Address of principal executive offices)                 (Zip Code)


    Registrant's telephone number, including the area code:  (713) 869-8693

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                            [X] Yes          [_] No

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

                (Class)                       (Outstanding at July 31, 1998)
                 -----                         ---------------------------- 
      Common Stock, $.001 Par Value                       17,200,342
<PAGE>
 
PART I.  FINANCIAL INFORMATION

ITEM 1.  UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     The following information required by Rule 10-01 of Regulation S-X is
     provided herein for Drypers Corporation and subsidiaries:

     Consolidated Balance Sheets -- December 31, 1997 and June 30, 1998.

     Consolidated Statements of Earnings for the Three Months and Six
     Months Ended June 30, 1997 and 1998.

     Consolidated Statement of Stockholders' Equity for the Six Months Ended
     June 30, 1998.

     Consolidated Statements of Cash Flows for the Six Months Ended June 30, 
     1997 and 1998.

     Notes to Consolidated Financial Statements.

                                       i
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                           December 31,         June 30,
                                       ASSETS                                                  1997               1998
                                       ------                                              ------------         --------
                                                                                                               (unaudited)
<S>                                                                                        <C>                   <C> 
CURRENT ASSETS:                                                                                           
         Cash and cash equivalents...................................................         $  9,269           $ 14,229
         Accounts receivable, net of allowance for doubtful accounts of $2,064 and                        
              $2,280, respectively...................................................           33,941             45,724
         Inventories.................................................................           21,090             23,235
         Prepaid expenses and other..................................................           12,730             15,405
                                                                                              --------           --------
                Total current assets.................................................           77,030             98,593
PROPERTY AND EQUIPMENT, net of depreciation and amortization of  $17,769                                  
     and $20,917, respectively.......................................................           53,270             72,892
INTANGIBLE AND OTHER ASSETS, net of amortization of $13,438 and 
   $15,128, respectively...........................................................             74,932             85,618
                                                                                              --------           --------
                                                                                              $205,232           $257,103
                                                                                              ========           ========
                        LIABILITIES AND STOCKHOLDERS' EQUITY                                                                      
                        ------------------------------------
                                                                                                          
CURRENT LIABILITIES:                                                                                      
         Short-term borrowings.......................................................         $     --           $  8,093
         Current portion of long-term debt...........................................            1,593              2,883
         Accounts payable............................................................           16,558             23,280
         Accrued liabilities.........................................................           10,151             12,552
                                                                                              --------           --------
                Total current liabilities............................................           28,302             46,808
LONG-TERM DEBT.......................................................................            1,755              3,240
SENIOR TERM NOTES....................................................................          115,000            146,051
OTHER LONG-TERM LIABILITIES..........................................................            4,595              8,614
                                                                                              --------           --------
                                                                                               149,652            204,713
COMMITMENTS AND CONTINGENCIES                                                                             
STOCKHOLDERS' EQUITY:                                                                                     
         Preferred stock, $.01 par value, 5,000,000 shares authorized, 61,110 and                         
              -0- shares issued and outstanding, respectively........................                1                 --
         Common stock, $.001 par value, 30,000,000 shares authorized, 10,513,223 and                      
          17,200,342 shares issued and outstanding, respectively.....................               10                 17
         Additional paid-in capital..................................................           69,998             72,302
         Warrants....................................................................            1,097                180
         Retained deficit............................................................          (15,526)           (20,176)
         Foreign currency translation adjustments....................................               --                 67
                                                                                              --------           --------
                Total stockholders' equity...........................................           55,580             52,390
                                                                                              --------           --------
                                                                                              $205,232           $257,103
                                                                                              ========           ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       1
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF EARNINGS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
                                        
<TABLE>
<CAPTION>
                                                                      Three Months Ended                   Six Months Ended
                                                                            June 30                             June 30
                                                                 -----------------------------      -------------------------------
                                                                     1997             1998              1997               1998
                                                                 ------------      -----------      -------------      ------------
                                                                                            (unaudited)
<S>                                                              <C>               <C>              <C>                <C>
NET SALES..................................................      $    72,551       $    80,805      $    132,712       $   159,397
COST OF GOODS SOLD.........................................           44,983            47,667            81,739            94,916
                                                                 -----------       -----------      ------------       -----------
                 Gross profit..............................           27,568            33,138            50,973            64,481
SELLING, GENERAL AND ADMINISTRATIVE
    EXPENSES...............................................           22,972            27,399            41,933            59,876
                                                                 -----------       -----------      ------------       -----------
                Operating income...........................            4,596             5,739             9,040             4,605
RELATED-PARTY INTEREST EXPENSE.............................               82                --               170                --
OTHER INTEREST EXPENSE, net................................            1,930             4,453             4,040             7,903
OTHER INCOME...............................................              165               219                42               275
                                                                 -----------       -----------      ------------       -----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION                              2,749             1,505             4,872            (3,023)
INCOME TAX PROVISION.......................................              566               406               716             1,547
                                                                 -----------       -----------      ------------       -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM....................            2,183             1,099             4,156            (4,570)
EXTRAORDINARY ITEM, costs of early extinguishment
    of debt................................................           (7,769)               --            (7,769)               --
                                                                 -----------       -----------      ------------       -----------
NET INCOME (LOSS)..........................................           (5,586)            1,099            (3,613)           (4,570)
PREFERRED STOCK DIVIDEND...................................              168                --               336                80
                                                                 -----------       -----------      ------------       -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
    STOCKHOLDERS...........................................      $    (5,754)      $     1,099      $     (3,949)      $    (4,650)
                                                                 ===========       ===========      ============       ===========
INCOME (LOSS) PER COMMON SHARE:
INCOME (LOSS) BEFORE
    EXTRAORDINARY ITEM:
                Basic......................................      $       .26       $       .07      $        .49       $      (.32)
                                                                 ===========       ===========      ============       =========== 
                Diluted....................................      $       .12       $       .06      $        .23       $      (.32)
                                                                 ===========       ===========      ============       ===========
    EXTRAORDINARY ITEM:
                Basic......................................      $      (.99)      $        --      $       (.99)      $        --
                                                                 ===========       ===========      ============       ===========
                Diluted....................................      $       .42       $        --      $       (.43)      $        --
                                                                 ===========       ===========      ============       ===========
    NET INCOME (LOSS):
                Basic......................................      $      (.73)      $       .07      $       (.50)      $      (.32)
                                                                 ===========       ===========      ============       =========== 
                Diluted....................................      $      (.30)      $       .06      $       (.20)      $      (.32)
                                                                 ===========       ===========      ============       =========== 
COMMON SHARES OUTSTANDING..................................        7,875,910        16,868,179         7,856,844        14,704,116
                                                                 ===========       ===========      ============       ===========
COMMON AND POTENTIAL COMMON SHARES
   OUTSTANDING.............................................       18,482,412        18,793,958        18,242,149        14,704,116
                                                                 ===========       ===========      ============       ===========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       2
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)

                                        
<TABLE>
<CAPTION>
                                  PREFERRED                                                                               FOREIGN
                                    SHARES     COMMON SHARES                       ADDITIONAL                             CURRENCY
                                 ISSUED AND     ISSUED AND    PREFERRED  COMMON     PAID-IN              RETAINED       TRANSLATION
                                 OUTSTANDING    OUTSTANDING     STOCK     STOCK     CAPITAL   WARRANTS    DEFICIT       ADJUSTMENTS
                                 -----------   ------------   ---------  -------   ---------  --------   ---------     -------------

<S>                              <C>            <C>           <C>         <C>      <C>         <C>        <C>          <C>
BALANCE, December 31, 1997....      61,110      10,513,223       $ 1        $10     $69,998    $1,097     $(15,526)        $   --
  Conversion of preferred                                                                                
   stock and dividends into                                                                              
   common stock (unaudited)...     (61,110)      6,292,364        (1)         7       1,058        --           --             --
  Preferred stock dividends                                                                              
     ($1.25 per share)                                                                                  
     (unaudited)..............          --              --        --         --          --        --          (80)            --
  Effect of stock option and                                                                             
   stock purchase plans                                                                                  
      (unaudited).............          --          12,254        --         --         265        --           --             -- 
  Exercise of warrants                                                                                   
     (unaudited)..............          --         382,501        --         --         980      (917)          --             --
  Net loss (unaudited)........          --              --        --         --          --                 (4,570)            --
  Translation adjustments
   (unaudited)................          --              --        --         --          --        --           --             67
                                   -------      ----------      ----        ---     -------    ------     --------         ------
BALANCE, June 30, 1998                                                                                   
   (unaudited)................          --      17,200,342       $--        $17     $72,302    $  180     $(20,176)        $   67  
                                   =======      ==========       ===        ===     =======    ======     ========         ======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       3
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                           Six Months Ended
                                                                                                June 30
                                                                                        ----------------------
                                                                                          1997          1998
                                                                                        -------       --------
                                                                                             (unaudited)
<S>                                                                                    <C>           <C> 
                                                                                                    
CASH FLOWS FROM OPERATING ACTIVITIES:                                                               
  Net loss......................................................................       $ (3,613)      $ (4,570)
  Adjustments to reconcile net loss to net cash used in
      operating activities--                                                                        
      Depreciation and amortization.............................................          4,037          4,500
      Non-cash portion of extraordinary item....................................          3,745             --
      Deferred income taxes.....................................................             --           (213)
      Other.....................................................................            (43)          (563)
      Changes in operating assets and liabilities, net of acquisitions--                                                
          Increase in--                                                                  
              Accounts receivable...............................................         (5,461)       (11,532)
              Inventories.......................................................         (1,016)        (2,591)
              Prepaid expenses and other........................................         (2,312)        (4,763)
      Increase (decrease) in--                                                                                 
              Accounts payable..................................................            892          2,757
              Accrued and other liabilities.....................................           (219)         2,883
                                                                                       --------       --------
                    Net cash used in operating activities.......................         (3,990)       (14,092)
                                                                                       --------       --------
CASH FLOWS FROM INVESTING ACTIVITIES:                                                               
      Purchase of property and equipment........................................         (8,518)       (15,399)
      Investment in Brazilian venture, net of cash acquired.....................         (9,500)        (3,946)
      Investment in other noncurrent assets.....................................           (643)        (1,127)
      Payments under noncompete agreement.......................................          ( 126)            --
                                                                                       --------       --------
              Net cash used in investing activities.............................        (18,787)       (20,472)
                                                                                       --------       --------
CASH FLOWS FROM FINANCING ACTIVITIES:                                                               
      Borrowings under senior term notes........................................        115,000         31,087
      Payments on senior term notes.............................................        (43,434)            --
      Borrowings under working capital facility.................................         10,000             --
      Payments under working capital facility...................................        (10,000)            --
      Borrowings under revolvers................................................         79,296         43,193
      Payments on revolvers.....................................................        (94,918)       (35,100)
      Borrowings under (payments on) other debt.................................         (3,972)         2,923
      Financing related costs...................................................         (3,773)        (2,676)
      Proceeds from exercise of stock options and warrants......................            222             97
                                                                                       --------       --------
              Net cash provided by financing activities.........................         48,421         39,524
                                                                                       --------       --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......................................         25,644          4,960
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................          4,923          9,269
                                                                                       --------       --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................       $ 30,567       $ 14,229
                                                                                       ========       ========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       4
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                        

1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
  The consolidated financial statements included herein have been prepared by
Drypers Corporation (the "Company"), without audit, in accordance with Rule 
10-01 of Regulation S-X for interim financial statements required to be filed
with the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures are adequate to make the information presented not misleading.  The
financial statements included herein should be reviewed in conjunction with the
Company's December 31, 1997 financial statements and related notes thereto.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end.  The results of operations for the three months and
six months ended June 30, 1998 are not necessarily indicative of the results
that will be realized for the fiscal year ending December 31, 1998.

  The unaudited consolidated financial information as of and for the three-month
and six-month periods ended June 30, 1997 and 1998, has not been audited by
independent accountants, but in the opinion of management of the Company, all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the consolidated balance sheets, statements of earnings,
statement of stockholders' equity and statements of cash flows at the date and
for the interim periods indicated have been made.
 
  In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information".  This statement requires disclosure
related to each segment of an enterprise's operations similar to that required
under current standards with the addition of quarterly disclosure requirements
and a finer partitioning of geographic disclosures.  The Company is required to
adopt SFAS No. 131 for the fiscal year ending December 31, 1998.

  In March 1998, Statement of Position (SOP) 98-1, "Accounting for the Costs of 
Computer Software Developed or Obtained For Internal Use", was issued by the 
American Institute of Certified Public Accountants. SOP 98-1 requires that 
certain costs related to computer software developed or obtained for internal 
use be expensed. The Company is required to adopt SOP 98-1 as of January 1, 
1999.

  In April 1998, SOP 98-5, "Reporting on the Costs of Start-Up Activities", was
issued by the American Institute of Certified Public Accountants. SOP 98-5
requires that all nongovernmental entities expense costs of start-up activities
as those costs are incurred. The Company is required to adopt SOP 98-5 as of
January 1, 1999. The Company does not expect the adoption of SOP 98-5 to have a
material effect on its financial position or results of operations.

  Cash interest paid for the six months ended June 30, 1997 and 1998 was
$5,041,000 and $7,133,000, respectively.  Cash taxes paid for the six months
ended June 30, 1997 and 1998 were $70,000 and  $1,760,000, respectively.

                                       5
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                  (UNAUDITED)

2. EARNINGS PER SHARE

  As of December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share".  SFAS No. 128 requires dual presentation of basic and diluted earnings
per share ("EPS") data and restatement of all prior periods presented.  Basic
EPS is computed using the weighted average number of common shares outstanding
during the period.  Diluted EPS gives effect to the potential dilution of
earnings which may have occurred if dilutive potential common shares had been
issued.  The following reconciles the income and shares used in the basic and
diluted EPS computations (in thousands, except share data):
 
<TABLE>
<CAPTION>
                                                           Three Months Ended                   Six Months Ended
                                                                 June 30                            June 30
                                                      -----------------------------      ------------------------------
                                                          1997             1998              1997              1998
                                                      ------------      -----------      ------------      ------------
                                                                                (unaudited)
<S>                                                   <C>               <C>              <C>               <C>
Basic Earnings Per Share:                         
-------------------------                         
Income (loss) before extraordinary item, less            
        preferred  stock dividend.................    $     2,015       $     1,099      $     3,820       $    (4,650)
Extraordinary item................................         (7,769)               --           (7,769)               --
                                                      -----------       -----------      -----------       -----------
Net income (loss) attributable to common          
        stockholders..............................    $    (5,754)      $     1,099      $    (3,949)      $    (4,650)
                                                      ===========       ===========      ===========       ===========
Weighted average number of common shares                                            
        outstanding...............................      7,875,910        16,868,179        7,856,844        14,704,116 
                                                      ===========       ===========      ===========       =========== 
Income (loss) before extraordinary item...........    $       .26       $       .07      $       .49       $      (.32)
Extraordinary item................................           (.99)               --            ( .99)               --
                                                      -----------       -----------      -----------       -----------
Net income (loss).................................    $      (.73)      $       .07      $     ( .50)      $      (.32)
                                                      ===========       ===========      ===========       ===========
Diluted Earnings Per Share:                       
---------------------------                       
Income (loss) before extraordinary item...........    $     2,183       $     1,099      $     4,156       $    (4,650)
Extraordinary item................................         (7,769)               --           (7,769)               --
                                                      -----------       -----------      -----------       -----------
Net income (loss).................................    $    (5,586)      $     1,099      $    (3,613)      $    (4,650)
                                                      ===========       ===========      ===========       ===========
Weighted average number of common shares          
        outstanding...............................      7,875,910        16,868,179        7,856,844        14,704,116
Dilutive effect - options and warrants............      1,741,667         1,925,779        1,452,887                --
Dilutive effect - preferred stock.................      8,864,835                --        8,932,418                --
                                                      -----------       -----------      -----------       -----------
                                                       18,482,412        18,793,958       18,242,149        14,704,116
                                                      ===========       ===========      ===========       ===========
Income (loss) before extraordinary item...........    $       .12       $       .06      $       .23       $      (.32)
Extraordinary item................................           (.42)               --             (.43)               --
                                                      -----------       -----------      -----------       -----------
Net income (loss).................................    $      (.30)      $       .06      $      (.20)      $      (.32)
                                                      ===========       ===========      ===========       ===========
</TABLE>

     Common shares from the exercise or conversion of options, warrants and
convertible preferred stock excluded from the diluted earnings per share
calculation because their effect was antidilutive to the calculation totaled
110,940 and 264,704 for the three months ended June 30, 1997 and 1998,
respectively, and 120,940 and 133,083 for the six months ended June 30, 1997 and
1998, respectively.


3.  COMPREHENSIVE INCOME

    In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which requires companies to display comprehensive income and its components in
the financial satements. Comprehensive income (loss), which encompasses net
income and currency translation adjustments, is as follows:

<TABLE>
<CAPTION>
                                                           Three Months Ended                   Six Months Ended
                                                                 June 30                            June 30
                                                      -----------------------------      ------------------------------
                                                          1997             1998              1997              1998
                                                      ------------      -----------      ------------      ------------
<S>                                                   <C>               <C>              <C>               <C>
Net income (loss) attributable to common
 stockholders                                           $(5,754)         $1,099            $(3,949)          $(4,650)
Currency translation adjustments                             --              67                 --                67
                                                        -------          ------            -------           -------
Comprehensive income (loss)                             $(5,754)         $1,166            $(3,949)          $(4,583)
                                                        =======          ======            =======           =======
</TABLE> 
    
4.   ACQUISITION

     On April 6, 1998, the Company exercised its fair value option to acquire
the remaining equity interest in the parent company of Chansommes do Brasil Ind.
e Com. Ltda. ("Chansommes"), the Brazilian manufacturer 

                                       6
<PAGE>
 
of its diapers. The acquisition was accounted for as a purchase, and the
purchase price of $9,250,000 was allocated to the acquired assets and
liabilities assumed based on their estimated fair values (property and equipment
of $11,069,000 and liabilities of $10,392,000). The consideration paid for
Chansommes exceeded the estimated fair market value of the net tangible assets
acquired by approximately $8,573,000 and this excess was recorded as goodwill.
This transaction effectively gives the Company a 100% ownership interest in the
Brazilian manufacturer of its diapers.

5.  INVENTORIES

     Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                           December 31,     June 30,
                                              1997            1998
                                           -----------      --------
<S>                                         <C>             <C>
                                                    (unaudited)
Raw Materials...................             $ 6,948         $ 8,285
Finished Goods..................              14,142          14,950
                                             -------         -------
                                             $21,090         $23,235
                                             =======         =======
</TABLE>


     Inventories are stated at the lower of cost (first-in, first-out) or market
value.  Finished goods inventories include the cost of materials, labor and
overhead.

6.  DEBT

Short-Term Borrowings
 
     On April 1, 1998, the Company entered into a three-year $50,000,000 new
credit facility with BankBoston, N.A. to replace the Company's former revolving
credit facility. The new credit facility permits the Company to borrow under a
borrowing base formula equal to the sum of 75% of the aggregate net book value
of its accounts receivable and 50% of the aggregate net book value of its
inventory on a consolidated basis, subject to additional limitations on
incurring debt. The new credit facility bears interest in the range of prime to
prime plus 3/4%, or LIBOR plus 1 1/2% to LIBOR plus 2 1/2%, in each case based
on the Company's debt to EBITDA ratio determined on a quarterly basis. The new
credit facility is secured by substantially all of the Company's assets. At 
June 30, 1998, the Company's borrowing base would have permitted the Company to
borrow up to an additional $36,600,000. As of June 30, 1998, borrowings
outstanding under this facility were approximately $8,093,000.

  The new credit facility requires the Company, among other things, to maintain
a minimum consolidated net worth, as defined, a minimum consolidated fixed
charge coverage ratio, as defined, a maximum consolidated funded debt to
adjusted consolidated EBITDA ratio, as defined, and a maximum level of annual
capital expenditures. The Company was in compliance with the terms of the new
revolving credit facility as of June 30, 1998.
 
Long-Term Debt

 Long-term debt consisted of the following (in thousands):

                                       7
<PAGE>
 
<TABLE>
<CAPTION>
                                                                             December 31,        June 30,
                                                                                 1997             1998
                                                                           ----------------   -------------
<S>                                                                        <C>                <C>
                                                                                                (unaudited)
Note payable, due 2001, interest at 8.4%, partially secured by
 land and buildings.....................................................           $ 1,950         $ 1,804
Various other notes payable.............................................             1,398           4,319
                                                                                   -------         -------
                                                                                     3,348           6,123
 Less: current maturities...............................................            (1,593)         (2,883)
                                                                                   -------         -------
                                                                                   $ 1,755         $ 3,240
                                                                                   =======         =======
</TABLE>

Senior Term Notes

 Long-term debt under senior term notes consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                          December 31,       June 30,
                                                                             1997              1998
                                                                        ---------------   --------------
<S>                                                                     <C>               <C>
                                                                                           (unaudited)
10 1/4% Senior Notes, interest due semiannually on June 15 and
  December 15, principal due June 15, 2007, including unamortized       
  bond premium of $-- and $1,051, respectively.......................          $115,000        $146,051
                                                                               ========        ========
</TABLE>

     On June 24, 1997, the Company closed a private issuance of $115,000,000
aggregate principal amount of its 10 1/4% Senior Notes due 2007 ("10 1/4% Senior
Notes"). Proceeds from the offering of the 10 1/4% Senior Notes were used to
repurchase $43,400,000 of the $45,000,000 in principal amount of the Company's
outstanding 12 1/2% Senior Notes pursuant to a tender offer therefor, to repay a
$10,000,000 working capital facility, to repay borrowings outstanding under the
Company's revolving credit facility, to repay a term loan with a bank and to
repay the Company's junior subordinated debt and other indebtedness and for
general corporate purposes. In connection with these transactions, the Company
recognized an extraordinary expense of $7,769,000 for the write-off of
capitalized debt issuance costs and prepayment and other fees, of which
$3,745,000 was non-cash. On December 10, 1997, the Company redeemed the
remaining $1,600,000 of 12 1/2% Senior Notes pursuant to an optional redemption
provision. The Company completed an exchange offer on October 14, 1997, pursuant
to which all of the 10 1/4% Senior Notes issued at that time were tendered for a
like principal amount of new notes with identical terms which may be offered and
sold by the holders without restrictions or limitations under the Securities Act
of 1933, as amended.

     On March 17, 1998, the Company closed a private issuance of an additional
$30,000,000 of 10 1/4% Senior Notes (the "New Senior Notes") at a price of
103.625% of the principal amount thereof. The New Senior Notes were issued under
the same indenture as the June 1997 issuance of 10 1/4% Senior Notes. Proceeds
of the issuance of the New Senior Notes were used to repay all outstanding
indebtedness under the revolving credit facility and the remaining proceeds have
been and will be used for general corporate purposes, including capital
expenditures. The Company completed an exchange offer on July 13, 1998, pursuant
to which all of the New Senior Notes were tendered for a like principal amount
of new notes with identical terms which may be offered and sold by the holders
without restrictions or limitations under the Securities Act of 1933, as
amended.

     The indenture governing the 10 1/4% Senior Notes and the New Senior Notes
contains certain covenants that, among other things, limit the Company's ability
to incur additional indebtedness; pay dividends; purchase capital stock; make
certain other distributions, loans and investments; sell assets; enter into
transactions with related persons; and merge, consolidate or transfer
substantially all of its assets. The indenture also contains provisions for
acceleration of payment of principal upon a change of control, as defined.

                                       8
<PAGE>
 
7.  EQUITY

  On May 21, 1998, the shareholders voted to approve an increase in the
authorized number of shares of Common Stock, $.001 par value, from 20,000,000
shares to 30,000,000 shares.

8.  COMMITMENTS AND CONTINGENCIES
 
  The Company is currently negotiating a lease financing arrangement for an
additional training pant line. Furthermore, the Company has committed to
purchase four additional diaper lines to be delivered in 1998.

  The Company is involved in certain lawsuits and claims arising in the normal
course of business.  In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a material
adverse effect on the financial position or results of operations of the
Company.

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

  The following discussion and analysis, together with the accompanying
consolidated financial statements and related notes, are intended to aid in
understanding the Company's results of operations as well as its financial
position, cash flows, indebtedness and other key financial information.  Unless
otherwise indicated, references herein to "Drypers" or "the Company" refer to
Drypers Corporation and its subsidiaries.

  From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995).  Words such as "anticipate", "estimate", "project" and
similar expressions are intended to identify such forward-looking statements.
Forward-looking statements may be made by management orally or in writing,
including, but not limited to, in press releases, as part of this Management's
Discussion and Analysis of Financial Condition and Results of Operations and as
part of other sections of this Quarterly Report on Form 10-Q and the Company's
other filings with the Securities and Exchange Commission under the Securities
Act of 1933 and the Securities Exchange Act of 1934.

  Such forward-looking statements are subject to certain risks, uncertainties
and assumptions, including without limitation those identified below.  Should
one or more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates.

  Among the factors that have a direct bearing on the Company's results of
operations and financial condition are leverage and debt service, competitive
industry, price changes by competitors, dependence on key products and
acceptance of product innovations, costs of certain raw materials, international
operations, currency fluctuations, currency devaluations, currency restrictions,
intellectual property risks, technological changes, scope of insurance coverage,
covenant limitations and other factors discussed herein.

                                       9
<PAGE>
 
OVERVIEW

     Drypers is a leading manufacturer and marketer of premium quality, value-
priced disposable baby diapers and training pants sold under the Drypers(R)
brand name in the United States and under the Drypers and other brand names
internationally. The Company also manufactures and sells lower-priced diapers
under other brand names in the United States and internationally, as well as
private label diapers and training pants and pre-moistened baby wipes. The
Company currently sells its products principally to approximately 640 U.S.
grocery retailers with an estimated 21,000 retail outlets. The Company
continually seeks to expand its U.S. grocery store distribution network while
increasing its limited penetration of the mass-merchant and drugstore chain
markets, and has made notable progress with mass-merchants in the first half of
1998. Since 1993, Drypers has significantly expanded its international presence,
competing in the lower-priced branded and private label categories. The Company
currently produces diapers in Puerto Rico, Argentina, Brazil and Mexico. Wal-
Mart International has selected the Company to be its private label supplier of
disposable diapers to Wal-Mart stores throughout Latin America (which are
currently located in Argentina, Brazil and Mexico) and in Puerto Rico. The
Company intends to continue to expand its operations in Argentina, Brazil and
Mexico and is actively seeking further expansion opportunities through
acquisition, joint venture or other arrangements in Latin America and the
Pacific Rim.

     In October 1997, the Company acquired an option, exercisable in 1998, to
purchase all of the outstanding stock of NewLund Laboratories, Inc., the
developer and marketer of a new concept in laundry detergents. If the Company
exercises this option, it will acquire NewLund for a total of $4.2 million. The
new product allows a single, small sheet of nonwoven fabric coated with
detergent, whitener, fabric softener and static guard to be used in both the
washer and the dryer. This product is currently in limited distribution under
the brand name Xclaim in the southeastern United States. The Company plans to
expand the distribution of Xclaim in the near future.

     On August 6, 1998, the Company announced the introduction of two new
product innovations, Drypers(R) Supreme with Germ Guard(TM) and Drypers(R)
Antibacterial Baby Wipes with Germ Guard(TM). The Company expects both products
to be on retailers' shelves in October 1998. Drypers Supreme with Germ Guard,
containing an antibacterial treatment, is a super-premium line extension of the
Drypers with Aloe Vera premium diaper line, and will feature adjustable grip
tabs and increased absorbency. Drypers Supreme will incorporate popular features
of Drypers with Aloe Vera, including breathable sides and a soft, cloth-like
backing, in addition to featuring Sesame Street characters. The Company will
also be launching Drypers Antibacterial Baby Wipes with Germ Guard as an
extension of its growing baby wipes business.

     The Company's domestic operations include sales in the United States,
Puerto Rico and exports from these manufacturing operations. The following table
sets forth the Company's domestic and international net sales for the three
months and six months ended June 30, 1997 and 1998.

<TABLE>
<CAPTION>
                                            Three Months Ended                   Six Months Ended         
                                                  June 30                             June 30             
                                     ---------------------------------   --------------------------------- 
                                          1997              1998              1997              1998
                                     ---------------   ---------------   ---------------   ---------------
                                                             (dollars in millions)
<S>                                  <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>
Domestic..........................    $47.1    64.9%    $50.3    62.3%   $ 92.6    69.8%    $101.4   63.6%
International.....................     25.5    35.1      30.5    37.7      40.1    30.2       58.0   36.4
                                      -----   -----     -----   -----    ------   -----     ------  -----
  Total net sales.................    $72.6   100.0%    $80.8   100.0%   $132.7   100.0%    $159.4  100.0%
                                      =====   =====     =====   =====    ======   =====     ======  =====
</TABLE>

                                       10
<PAGE>
 
     Gross profit margins vary significantly across the Company's product lines,
as do the levels of promotional and marketing support. Accordingly, gross profit
margins fluctuate with changes in the relative sales mix of the Company's
various product lines. Since the differences in gross profit margins are
generally offset by differences in promotional spending levels, changes in sales
mix do not necessarily cause significant fluctuations in operating margins.


RESULTS OF OPERATIONS

  The following table sets forth the specified components of income and expense
for the Company expressed as a percentage of net sales for the three months and
six months ended June 30, 1997 and 1998.

<TABLE>
<CAPTION>
                                                                  Three Months Ended        Six Months Ended
                                                                       June 30                  June 30
                                                                 --------------------      ------------------
                                                                  1997         1998         1997        1998
                                                                 -------      -------      ------      ------
                                                                                   (unaudited)
<S>                                                              <C>          <C>          <C>         <C>
Net sales..................................................       100.0%       100.0%      100.0%      100.0%
Cost of goods sold.........................................        62.0         59.0        61.6        59.5
                                                                  -----        -----       -----       -----
Gross profit...............................................        38.0         41.0        38.4        40.5
Selling, general and administrative expenses...............        31.7         33.9        31.6        37.6
                                                                  -----        -----       -----       -----
Operating income...........................................         6.3          7.1         6.8         2.9
Interest expense, net......................................         2.7          5.5         3.2         5.0
Other income...............................................          .2           .3          --          .2
                                                                  -----        -----       -----       -----
Income (loss) before income tax provision..................         3.8          1.9         3.6        (1.9)
Income tax provision.......................................          .8           .5          .5         1.0
                                                                  -----        -----       -----       -----
Income (loss) before extraordinary item....................         3.0%         1.4         3.1 %      (2.9)%
                                                                  =====        =====       =====       =====
</TABLE>

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

Net Sales

  Net sales increased 11.4% to $80.8 million for the three months ended June 30,
1998 from $72.6 million for the three months ended June 30, 1997. Domestic sales
increased 6.8% to $50.3 million for the three months ended June 30, 1998 from
$47.1 million for the three months ended June 30, 1997. This increase primarily
reflects positive trade and consumer reaction to the national media campaign in
the United States which began in February 1998 for the Company's premium brand
diapers. The increase in U.S. sales between periods was offset by a decline in
export sales resulting from pricing pressures in Asia due to recent currency
devaluations. Net sales in the international sector grew to $30.5 million for
the three months ended June 30, 1998 from $25.5 million in the prior comparable
period. This increase of 19.6% primarily reflected the continued growth in sales
volume for the Company's operations in Argentina and in Brazil, where a new
product line "Xuxa by Drypers" has been very successful since its introduction
in June 1998. The increase in sales for Argentina and Brazil offset lower sales
in Mexico resulting from a now concluded price war by a competitor initiated in
the first quarter of 1998.

Cost of Goods Sold

  Cost of goods sold as a percentage of net sales decreased to 59.0% for the
three months ended June 30, 1998 compared to 62.0% for the three months ended
June 30, 1997. This decrease primarily reflects an increase in international
gross margins, mainly in Brazil. In the United States, gross margins were
unchanged as a result of prior years' price increases being offset by the effect
of excess capacity.

                                       11
<PAGE>
 
Selling, General and Administrative Expenses

  Selling, general and administrative expenses increased as a percentage of net
sales to 33.9% for the three months ended June 30, 1998 compared to 31.7% for
the three months ended June 30, 1997. The increase reflected the costs
associated with the Company's national television advertising campaign in the
United States, which began in February 1998, and increased selling and
promotional costs related to international sales, primarily in Brazil.

Operating Income 

  As a result of the above factors, the Company's operating income increased
$1.1 million to $5.7 million for the three months ended June 30, 1998 from $4.6
million for the three months ended June 30, 1997.

Interest Expense, net

  Interest expense, net increased to $4.5 million for the three months ended
June 30, 1998 as compared to $2.0 million for the three months ended June 30,
1997. The increase was primarily due to the issuance of the Company's 10 1/4%
Senior Notes due 2007 ("10 1/4% Senior Notes") in June 1997 and March 1998 for
$115.0 million and $30.0 million, respectively, and amortization of additional
deferred loan costs related to these transactions.

Income Taxes

  The Company recorded a provision of $406,000 related to foreign taxes for the
three months ended June 30, 1998, compared to a provision of $566,000 in 1997.
The decrease is a result of management's focus on international tax planning 
strategies during 1998.

Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997

Net Sales

  Net sales increased 20.1% to $159.4 million for the six months ended June 30,
1998 from $132.7 million for the six months ended June 30, 1997. Domestic sales
increased 9.4% to $101.4 million for the six months ended June 30, 1998 from
$92.6 million for the six months ended June 30, 1997. This increase was
primarily the result of the June 1997 introduction of Drypers with Aloe Vera and
the launch of the licensing arrangement for the Sesame Street characters, in
addition to the national media campaign in the United States for the Company's
premium brand diapers, and increased distribution in the training pant and
private label categories. The Company believes that the national media campaign
and the introduction of the new product contributed to an increased share in
existing retail accounts and expanded penetration into new accounts in the
United States. The increase in U.S. sales between periods was offset by a
decline in export sales resulting from pricing pressures in Asia due to recent
currency devaluations. Net sales in the international sector grew to $58.0
million for the six months ended June 30, 1998 from $40.1 million in the prior
comparable period. This increase primarily reflected the continued growth in
sales volume for the Company's operations in Argentina and Brazil, which was
slightly offset by lower sales in Mexico due to a now concluded price war
initiated by a competitor in the first quarter of 1998.

Cost of Goods Sold

  Cost of goods sold as a percentage of net sales decreased to 59.5% for the six
months ended June 30, 1998 compared to 61.6% for the six months ended June 30,
1997. This decrease primarily reflects an increase in international gross
margins, mainly in Brazil. In the United States, gross margins were unchanged as
a result of prior years' price increases being offset by the effect of excess
capacity.

                                       12
<PAGE>
 
Selling, General and Administrative Expenses

  Selling, general and administrative expenses increased as a percentage of net
sales to 37.6% for the six months ended June 30, 1998 compared to 31.6% for the
six months ended June 30, 1997. The increase reflected the costs associated with
the Company's national television advertising campaign in the United States,
which began in February 1998, and increased selling and promotional costs
related to international sales, primarily in Brazil.

Operating Income 

  As a result of the above factors, the Company's operating income decreased
$4.4 million to $4.6 million for the six months ended June 30, 1998 from $9.0
million for the six months ended June 30, 1997.

Interest Expense, net

  Interest expense, net increased to $7.9 million for the six months ended 
June 30, 1998 as compared to $4.2 million for the six months ended June 30,
1997. The increase was primarily due to the issuance of 10 1/4% Senior Notes in
June 1997 and March 1998 for $115.0 million and $30.0 million, respectively, and
amortization of additional deferred loan costs related to these transactions.

Income Taxes

  The Company recorded a provision of $1.5 million related to foreign taxes for 
the six months ended June 30, 1998, compared to a provision of $716,000 for the 
comparable period in 1997. The increase is related to the increase in 
international earnings during 1998.

LIQUIDITY AND CAPITAL RESOURCES

  The Company's liquidity requirements include, but are not limited to, the
payment of principal and interest on its debt; the funding of working capital
needs, primarily inventory, accounts receivable and advertising and promotional
expenses; the funding of capital investments in machinery, equipment and
computer systems; and the funding of acquisitions. Historically, the Company has
financed its debt service, working capital, capital expenditure and acquisition
requirements through a combination of internally generated cash flow, borrowings
under the Company's revolving credit facility and other sources and proceeds
from private and public offerings of debt and equity securities.

  The Company's operations used $15.6 million of cash during the six months
ended June 30, 1998 and used $4.0 million of cash during the six months ended
June 30, 1997. The use of cash during the six months ended June 30, 1998
primarily reflected the national television campaign in the United States, the
buildup of inventory to support the increase in sales volume (and the
corresponding increase in accounts receivable), payment of interest on the 10
1/4% Senior Notes and expenditures related to the Xclaim product. The Company's
operations used $6.9 million of cash during the year ended December 31,1997,
reflecting the cash portion of the extraordinary item related to the Company's
June 1997 issuance of $115.0 million of 10 1/4% Senior Notes and increases in
working capital primarily for the growth in the Mexico and Brazil operations,
the latter including advances to the Company's contract manufacturer for future
inventory purchases.

  The Company's capital expenditures were $15.4 million for the six months ended
June 30, 1998 and $8.5 million for the six months ended June 30, 1997. The
significant increase between periods in capital expenditures related primarily
to international production capacity increases. The Company's capital
expenditures were $21.6 million for the year ended December 31, 1997, reflecting
machine enhancements incurred in connection with the launch of Drypers with Aloe
Vera and production capacity increases. The Company financed its capital
expenditures in 1997 and the first half of 1998 through borrowings under its
former revolving credit facility and from the proceeds of the $115.0 million and
$30.0 million offerings of 10 1/4% Senior Notes in June 1997 and March 1998,
respectively.

  The Company incurred cost increases of approximately $8.0 million in the first
quarter of 1998 and approximately $2.0 million in the second quarter of 1998.
The majority of these increases represented the cost of the Company's new
advertising campaign (in connection with which there will be no near-term
corresponding

                                       13
<PAGE>
 
reduction of promotional expenses), while the remainder related to the costs
associated with the new laundry detergent business and the expansion of capacity
in several Latin American markets.

  The Company's estimated cash requirements during 1998, excluding the
aforementioned cost increases, are primarily the funding of working capital
needs, payment of debt service and planned capital expenditures of approximately
$25.0 million for the fiscal year, $15.4 million of which have been incurred
through the second quarter. The planned capital expenditures in 1998 are
primarily related to the expansion of international capacity, which includes the
construction of a new facility in Mexico, and modifications to existing domestic
equipment to enable the Company to make future product enhancements.

  The Company operates in an industry in which patents relating to products,
processes, apparatus and materials are more numerous than in many other fields.
The Company takes careful steps to design, produce and sell its baby diapers and
other products so as to avoid infringing any valid patents of its competitors.
There can be no assurance that the Company will not be held to be infringing
existing patents in the future.  Any such holding could result in an injunction,
damages and/or an increase in future operating costs as a result of design
changes or payment of royalties with respect to such patents, which might have a
material adverse effect on the financial condition or results of operations of
the Company.  In addition, as the Company continues to introduce new products
and product innovations, the Company may incur expenses related to additional
license agreements and/or additional patent infringement insurance coverage.

  The Company's working capital was $51.8 million as of  June 30, 1998 compared
to $48.7 million as of December 31, 1997.  The Company's current assets
increased from $77.0 million as of December 31, 1997 to $98.6 million as of
June 30, 1998, and current liabilities increased from $28.3 million as of
December 31, 1997 to $46.8 million as of June 30, 1998. Total debt increased
from $118.3 million at December 31, 1997 to $160.3 million as of June 30, 1998.

  On April 6, 1998, the Company exercised its fair value option to acquire the
remaining equity interest in the parent company of Chansommes do Brasil Ind. e
Com. Ltda., the Brazilian manufacturer of its diapers. The acquisition was
accounted for as a purchase, and the purchase price of approximately $9.3
million was allocated to the acquired assets and liabilities assumed based on
their estimated fair values. This transaction has been approved by the Brazilian
government. The transaction effectively gives the Company a 100% ownership
interest in the Brazilian manufacturer of its diapers. Following this
transaction, the Company's total investment in Brazil is approximately $15.0
million.

  On April 1, 1998, the Company entered into a new three-year $50.0 million
credit facility to replace the former revolving credit facility. The new credit
facility permits the Company to borrow under a borrowing base formula equal to
the sum of 75% of the aggregate net book value of its accounts receivable and
50% of the aggregate net book value of its inventory on a consolidated basis,
subject to additional limitations on incurring debt. The new credit facility
bears interest in the range of prime to prime plus 3/4%, or LIBOR plus 1 1/2% to
LIBOR plus 2 1/2%, in each case based on the Company's debt to EBITDA ratio
determined on a quarterly basis. The new credit facility is secured by
substantially all of the Company's assets. At June 30, 1998, the Company's
borrowing base would have permitted the Company to borrow up to an additional
$36.6 million.

  On March 17, 1998, the Company closed a private issuance of an additional
$30.0 million of 10 1/4% Senior Notes (the "New Senior Notes") at a price of
103.625% of the principal amount thereof. The New Senior Notes were issued under
the same indenture as the June 1997 issuance of 10 1/4% Senior Notes. Proceeds
from the offering of the New Senior Notes were $30.4 million, $5.0 million of
which was used to repay all outstanding indebtedness under the Company's former
revolving credit facility and the remaining proceeds have been and will be used
for general corporate purposes, including capital expenditures. The Company
completed an exchange offer on July 13, 1998, pursuant to which all of the New
Senior Notes were tendered for a like principal amount of new notes with
identical terms which may be offered and sold by the holders without
restrictions or limitations under the Securities Act of 1933, as amended.

  In October 1997, the Company acquired an option for $1.5 million, exercisable
in 1998, to purchase all of the outstanding stock of NewLund Laboratories, Inc.,
the developer and marketer of a new concept in laundry detergents. The exercise
price for the option to acquire NewLund is $2.7 million.
 
  On June 24, 1997, the Company closed its private issuance of $115.0 million
aggregate principal amount of 10 1/4% Senior Notes.  Proceeds from the offering
of the 10 1/4% Senior Notes were used to repurchase 

                                       14
<PAGE>
 
$43.4 million of the $45.0 million in principal amount of the Company's
outstanding 12 1/2% Senior Notes pursuant to a tender offer therefore, to repay
a $10.0 million working capital facility, to repay borrowings outstanding under
the Company's former revolving credit facility, to repay a term loan with a
bank, to repay the Company's junior subordinated debt and other indebtedness and
for general corporate purposes. In connection with these transactions, the
Company recognized an extraordinary expense of $7.8 million for the write-off of
capitalized debt issuance costs and prepayment and other fees, of which $3.7
million was non-cash. On December 10, 1997, the Company redeemed the remaining
$1.6 million of 12 1/2% Senior Notes pursuant to an optional redemption
provision. The Company completed an exchange offer on October 14, 1997, pursuant
to which all of the 10 1/4% Senior Notes issued at that time were tendered for a
like principal amount of new notes with identical terms which may be offered and
sold by the holders without restrictions or limitations under the Securities Act
of 1933, as amended.

     Management believes that future cash flow from operations, together with
cash on hand, available borrowings under the new credit facility and the net
proceeds of the New Senior Notes described above will be adequate to meet the
Company's anticipated cash requirements, including working capital, capital
expenditures, debt service and acquisitions, for the foreseeable future.

INFLATION

     Inflationary conditions in the United States have been moderate and have
not had a material impact on the Company's results of operations or financial
position. Despite higher inflationary rates in Latin America, inflation has not
had a material impact on the results of operations of the Company's operations
located in that region because the Company has generally been able to pass on
cost increases to its customers.

NEW ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". This
statement requires disclosure related to each segment of an enterprise's
operations similar to that required under current standards with the addition of
quarterly disclosure requirements and a finer partitioning of geographic
disclosures. The Company is required to adopt SFAS No. 131 for the fiscal year
ending December 31, 1998.

  In March 1998, Statement of Position (SOP) 98-1, "Accounting for the Costs of 
Computer Software Developed or Obtained For Internal Use", was issued by the 
American Institute of Certified Public Accountants. SOP 98-1 requires that 
certain costs related to computer software developed or obtained for internal 
use be expensed. The Company is required to adopt SOP 98-1 as of January 1, 
1999.

      In April 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs
of Start-Up Activities", was issued by the American Institute of Certified
Public Accountants. SOP 98-5 requires that all nongovernmental entities expense
costs of start-up activities as those costs are incurred. The Company is
required to adopt SOP 98-5 as of January 1,1999. The Company does not expect the
adoption of SOP 98-5 to have a material effect on its financial position or
results of operations.

YEAR 2000

     The operation of the Company's business is dependent in part on its
computer software programs and operating systems  (collectively, "Programs and
Systems").  These Programs and Systems are used in several key areas of the
Company's business, including materials purchasing, inventory management,
pricing, sales, shipping and financial reporting, as well as in various
administrative functions.  The Company has been evaluating its Programs and
Systems to identify potential year 2000 compliance problems.  The year 2000
compliance issues exist because many computer systems and applications currently
use two digit date fields to designate a year.  Therefore, date sensitive
systems may recognize the year 2000 as the year 1900 or not at all.  This
inability to recognize or properly treat the year 2000 may cause the Programs
and Systems to process critical financial and operational information
incorrectly.  It is anticipated that replacement of most of the Company's
Programs and Systems will be necessary to make such Programs and Systems year
2000 compliant.  The Company is also communicating with suppliers, financial
institutions and others to coordinate Year 2000 conversions.

     Based on present information, the Company believes that it will be able to
achieve such year 2000 compliance through a  replacement of existing Programs
and Systems with new Programs and Systems that are already year 2000 compliant.
However, no assurance can be given that these efforts will be successful.  The

                                       15
<PAGE>
 
Company expects that the expenses and capital expenditures associated with the
replacement of the Company's Programs and Systems will be approximately $4.0
million over the next two years.


                          PART II.  OTHER INFORMATION
                                        
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     (a)  Annual Meeting of Stockholders--May 21, 1998

     (b)  Inapplicable.

     (c)  On May 21, 1998, the Stockholders voted in regard to the following
proposals:

        Proposal No. 1--To elect two persons to serve as directors of the
Company for a three-year term or until their respective successors are duly
elected and qualified.

         Proposal No. 2--To consider and vote on a proposal to approve an
amendment to the Drypers Corporation Amended and Restated 1995 Key Employee
Stock Option Plan to increase the aggregate number of shares of the Company's
Common Stock with respect to which options may be granted under the plan by
1,000,000 to allow for the grant of additional options under the plan.

        Proposal No. 3--To consider and vote on a proposal to amend the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 20,000,000 to 30,000,000.

        Proposal No. 4--To consider and vote on a proposal to ratify the
appointment of Arthur Andersen LLP as the Company's independent public
accountants for the fiscal year ending December 31, 1998.
 
        As of April 13, 1998, the record date for determining stockholders
entitled to vote at the Annual Meeting of Stockholders, the Company had
outstanding and entitled to vote 16,818,923 shares of Common Stock.

        The following table lists the votes cast for each proposal:

<TABLE> 
<CAPTION> 

                                     Number of Shares
-----------------------------------------------------------------------------------------
      Proposal                For           Against       Abstain        Broker Non-Votes
--------------------       ---------       --------       -------        ----------------
<S>                        <C>             <C>            <C>            <C>
No. 1                                                                 
Walter V. Klemp            14,234,501         475,757            --                 --
Nolan Lehman               14,240,051         470,207            --                 --
No. 2                      10,038,334       1,515,150        35,735          3,121,039
No. 3                      14,529,620         150,678        29,959                 --
No. 4                      14,657,676          38,300        14,281                 --
</TABLE>

ITEM 5.  OTHER INFORMATION

Cautionary Statements:

     From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995).  Words such as "anticipate", "estimate", "project" and
similar expressions are intended to identify such forward-looking statements.

                                       16
<PAGE>
 
Forward-looking statements may be made by management orally or in writing,
including, but not limited to, in press releases, as part of Management's
Discussion and Analysis of Financial Condition and Results of Operations and as
part of other sections of this Quarterly Report on Form 10-Q and the Company's
other filings with the Securities and Exchange Commission under the Securities
Act of 1933 and the Securities Exchange Act of 1934.

     Such forward-looking statements are subject to certain risks, uncertainties
and assumptions, including without limitation those identified below.  Should
one or more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates.

     Among the factors that have a direct bearing on the Company's results of
operations and financial condition are the following factors:

     LEVERAGE AND DEBT SERVICE.  The Company is highly leveraged.  The Company's
ability to meet its debt service obligations and to reduce its total debt will
be dependent upon the Company's future performance, which will be subject to
general economic conditions and financial, business and other factors affecting
the operations of the Company, many of which are beyond its control. There can
be no assurance that the Company's business will continue to generate cash flow
at or above current levels. If the Company is unable to generate sufficient cash
flow from operations in the future to service its debt, it may be required to
refinance all or a portion of its existing debt or to obtain additional
financing. There can be no assurance that any such financing could be obtained
on terms acceptable to the Company, if at all.

     COMPETITIVE INDUSTRY. In the United States, the Company experiences
substantial competition from a number of producers of disposable baby diapers
and training pants, including larger manufacturers of the leading national
brands and other private label manufacturers. A number of these producers have
substantially greater manufacturing, marketing and financial resources than the
Company and thus are able to exert significant influence on the worldwide
markets in which they compete. Actions by the Company's competitors could have a
material adverse effect on the Company.

     PRICE CHANGES BY COMPETITORS. The disposable diaper industry is
characterized by substantial price competition, which is effected through price
changes, product count changes and promotions. Typically, because of their large
market share, one of the Company's larger competitors initiates such pricing
changes. The Company may respond to these pricing changes with changes to its
own prices, product counts or promotional programs. The process of fully
implementing such changes may require a number of months and the Company's
operating results may be adversely affected. For example, a price per package
and product count reduction by Procter & Gamble in the first quarter of 1995 led
to a subsequent repositioning of the Company's Drypers brand, which adversely
affected the Company's results of operations during that period. Additionally,
during the third quarter of 1997 and first quarter of 1998, price competition by
Procter & Gamble adversely impacted the Company's operations in Puerto Rico and
Mexico, respectively. There can be no assurance that future price or product
changes by the Company's larger competitors will not have a material adverse
effect on the Company or that the Company will be able to react with price or
product changes of its own to maintain its current market position. In addition,
there can be no assurance that the major producers of private label diapers will
not price or position their products in such a manner as to have a material
adverse effect on the Company.

     DEPENDENCE ON KEY PRODUCTS AND ACCEPTANCE OF PRODUCT INNOVATIONS. The
Company's Drypers brand premium brand diapers and training pants accounted for
61.3%, 62.0% and 52.3% of the Company's net sales for 1995, 1996 and 1997,
respectively. The Company has made substantial investments in manufacturing
equipment and processes for these products. In addition, the Company from time
to time has introduced product innovations that are incorporated into all of the
Company's premium products. The Company is substantially dependent on the
continued success of sales of these products and customer acceptance of its
product innovations. A number of factors could materially reduce sales by the
Company of its products, or the profitability of such sales, including actions
by its competitors, shifts in consumer preferences or the lack of 

                                       17
<PAGE>
 
acceptance of the Company's product innovations. There can be no assurance that
in the future such factors will not have a material adverse effect on the
Company.

     COSTS OF CERTAIN RAW MATERIALS. Raw materials, especially pulp,
superabsorbent polymers and polypropylene nonwoven fabric, are significant
components of the Company's products and packaging. An industry-wide shortage or
a significant increase in the price of any of these components could adversely
affect the Company's ability to maintain its profit margins in the event price
competition does not permit the Company to increase its prices.

     INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS, DEVALUATIONS AND
RESTRICTIONS. The Company currently has operations in Argentina, Mexico, Brazil,
Singapore, Malaysia and Colombia and expects its international operations to
become a larger contributor to sales and profitability in the future. The
success of the Company's sales to, operations in and expansion into
international markets depends on numerous factors, many of which are beyond the
Company's control. Such factors include economic conditions in the foreign
countries in which the Company operates and to which it sells its products. In
addition, international operations and expansion may increase the Company's
exposure to certain common risks in the conduct of business outside the United
States, including currency exchange rate fluctuations, restrictions on the
repatriation of profits and assets, compliance with foreign laws and standards,
political risks and risks of increases in duties, taxes and governmental
royalties. Moreover, the level of the Company's exports are impacted by the
relative strength or weakness of the U.S. dollar. Other than the United States,
each  country in which the Company operates has experienced political and
economic instability in recent years. Moreover, as recent events in the Latin
American region have demonstrated, negative economic or political developments
in one country in the region can lead to or exacerbate economic crises elsewhere
in the region. The economies of Latin America are characterized by extensive
government intervention in the economy; inflation and, in some cases,
hyperinflation; currency devaluations, fluctuations, controls and shortages and
troubled and insolvent financial institutions.  Any of the foregoing could have
a material adverse effect on the Company.

     INTELLECTUAL PROPERTY RISKS. The Company's larger branded competitors
normally seek U.S. and foreign patent protection for the product enhancements
they develop. The Company believes it has been able to introduce product
features comparable to those introduced by its competitors by using
manufacturing methods or materials that are not protected by patents, although
there can be no assurance that the Company will be able to continue to do so in
the future. To the extent the Company is not able to introduce comparable
products on a timely basis, its financial position and results of operations
could be materially adversely affected,

     In addition, the Company from time to time has received, and may receive in
the future, communications from third parties, asserting that the Company's
products, trademarks, designs, labels or packaging infringe upon such third
parties' intellectual property rights. There can be no assurance that third
parties will not successfully assert claims against the Company with respect to
existing or future products or packaging. Should the Company be found to
infringe upon the intellectual property rights of others, the Company could be
required to cease use of certain products, trademarks, designs, labels or
packaging or pay damages to the affected parties, any of which could have a
material adverse effect on the Company. Substantial costs also may be incurred
by the Company in redesigning its labels or packaging, in selecting and clearing
new trademarks or in defending any legal action.

     TECHNOLOGICAL CHANGES. The disposable diaper industry is subject to
frequent technological innovations, with the Company's larger branded
competitors having been the leaders in product design and development
historically. The large research and development departments of these companies
have developed most of the important product enhancements in the disposable baby
diaper industry in the past several years. The Company believes that by working
closely with its suppliers, distributors and other industry participants it has
been able to introduce product enhancements comparable to those introduced by
its competitors when needed to maintain the Company's competitive position,
although there can be no assurance that the Company will be able, or will have
adequate resources, to do so in the future. To the extent the Company is not
able or does not have adequate resources to introduce comparable products on a
timely basis, its financial position and results of operations could be
materially adversely affected.

                                       18
<PAGE>
 
     SCOPE OF INSURANCE COVERAGE. The Company obtains insurance coverage that 
management of the Company believes is adequate for its needs based in part on 
coverage obtained by companies that are in the same industry as the Company and 
the needs of the Company in its various locations around the world. To the 
extent that such insurance coverage is insufficient to cover a claim in a 
particular situation or to the extent that coverage is denied by the carrier for
some reason, the Company may be required to fund any such losses out of 
available cash flow and its financial position and results of operations could 
by materially adversely affected.

     COVENANT LIMITATIONS. The Company's debt and operating lease agreements
contain numerous financial and operating covenants that limit the discretion of
the Company's management with respect to certain business matters. These
covenants place significant restrictions on, among other things, the ability of
the Company to incur additional debt, to create liens or other encumbrances, to
pay dividends and make other investments and restricted payments, to sell or
otherwise dispose of assets and to merge or consolidate with other entities. The
new credit facility also requires the Company to meet certain financial ratios
and tests. A failure to comply with the obligations contained in such debt
agreements could result in an event of default thereunder, which could result in
acceleration of the related debt and the acceleration of debt under other
instruments evidencing debt that may contain cross-acceleration or cross-default
provisions.

     DEPENDENCE ON KEY PERSONNEL. The Company believes that its continued
success will depend to a significant extent upon the abilities and continued
efforts of its senior management. The loss of the services of any one or more of
such key personnel could have an adverse effect on the Company and there can be
no assurance that the Company would be able to find suitable replacements for
such key personnel. The Company has employment agreements with certain of its
senior executives. The Company does not maintain key man life insurance on any
of its executives.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

   (a) Exhibits - Reference is made to the Exhibit Index on Page 20 for a list
       of exhibits filed as part of this report pursuant to Item 601 of
       Regulation S-K.

   (b) Reports on Form 8-K - A report on Form 8-K was filed with the Commission
       on May 6, 1998 in which the Company announced the exercise of its option
       to acquire the remaining interest in the parent company of Chansommes do
       Brasil Ind. e Com. Ltda., the Brazilian contract manufacturer of its
       diapers.
 

                                   SIGNATURES
                                        
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
 registrant has duly caused this report to be signed on its behalf by the
 undersigned thereunto duly authorized.

                                             DRYPERS CORPORATION

 Date: August 14, 1998                       By: /s/ JONATHAN P. FOSTER
       ---------------                          --------------------------
                                                Chief Financial Officer
                                                (Duly Authorized Officer)
                                                (Principal Financial Officer)

                                       19
<PAGE>
 
                                 EXHIBIT INDEX

                         EXHIBIT NUMBER AND DESCRIPTION
                         ------------------------------

                                        
10.1 Employment Agreement dated January 1, 1998 by and between Drypers
     Corporation and Walter V. Klemp.

10.2 Employment Agreement dated January 1, 1998 by and between Drypers
     Corporation and Raymond M. Chambers.

10.3 Employment  Agreement dated January 1, 1998 by and between Drypers
     Corporation and  Joe D. Tanner.

27   Financial Data Schedule

                                       20