<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 MARCH 31, 1998
                                        
                                       OR
                                        
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

             For the Transition Period From            to
                        Commission file number 0-23422
                                        
                            ----------------------

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


   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 April 24, 1998)
                 -----                         ----------------------------- 
      Common Stock, $.001 Par Value                     16,818,923
<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 March 31, 1998.

     Consolidated Statements of Earnings for the Three Months Ended March 31,
     1997 and 1998.

     Consolidated Statement of Stockholders' Equity for the Three Months Ended
     March 31, 1998.

     Consolidated Statements of Cash Flows for the Three Months Ended March 31,
     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,     MARCH 31,
                                       ASSETS                                                   1997          1998   
                                       ------                                                ---------    -------------
                                                                                                           (UNAUDITED)
CURRENT ASSETS:                                                                                         
<S>                                                                                        <C>             <C>
         Cash and cash equivalents...................................................        $  9,269       $ 22,379
         Accounts receivable, net of allowance for doubtful accounts of $2,064 and                      
              $2,127, respectively...................................................          33,941         41,269
         Inventories.................................................................          21,090         22,933
         Prepaid expenses and other..................................................          12,730         18,153
                                                                                             --------       --------
                Total current assets.................................................          77,030        104,734
PROPERTY AND EQUIPMENT, net of depreciation and amortization of  $17,769                                
     and $18,762, respectively.......................................................          53,270         58,890
INTANGIBLE AND OTHER ASSETS, net of amortization of $13,438 and                                         
     $14,251, respectively...........................................................          74,932         76,089
                                                                                             --------       --------
                                                                                             $205,232       $239,713
                                                                                             ========       ========
                         LIABILITIES AND STOCKHOLDERS' EQUITY                                                                    
                         ------------------------------------
                                                                                                        
CURRENT LIABILITIES:                                                                                    
         Current portion of long-term debt...........................................        $  1,593       $  2,377
         Accounts payable............................................................          16,558         18,646
         Accrued liabilities.........................................................          10,151         15,148
                                                                                             --------       --------
                Total current liabilities............................................          28,302         36,171
LONG-TERM DEBT.......................................................................           1,755          3,240
SENIOR TERM NOTES....................................................................         115,000        146,078
OTHER LONG-TERM LIABILITIES..........................................................           4,595          3,307
                                                                                             --------       --------
                                                                                              149,652        188,796
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, 20,000,000 shares authorized, 10,513,223 and                    
              16,818,923 shares issued and outstanding, respectively.................              10             17
         Additional paid-in capital..................................................          69,998         71,091
         Warrants....................................................................           1,097          1,084
         Retained deficit............................................................         (15,526)       (21,275)
                                                                                             --------       --------
                Total stockholders' equity...........................................          55,580         50,917
                                                                                             --------       --------
                                                                                             $205,232       $239,713
                                                                                             ========       ========
</TABLE>

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

                                       1
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF EARNINGS
                       (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                                THREE MONTHS ENDED
                                                                                                     MARCH 31
                                                                                   --------------------------------------------
                                                                                         1997                       1998
                                                                                   -----------------         -------------------
<S>                                                                                <C>                       <C>
                                                                                                   (UNAUDITED)
NET SALES..................................................................             $    60,161                 $    78,592
COST OF GOODS SOLD.........................................................                  36,756                      47,249
                                                                                        -----------                 -----------
              Gross profit.................................................                  23,405                      31,343
SELLING, GENERAL AND ADMINISTRATIVE
    EXPENSES...............................................................                  18,961                      32,477
                                                                                        -----------                 -----------
              Operating income (loss)......................................                   4,444                      (1,134)
RELATED-PARTY INTEREST EXPENSE.............................................                      88                          --
OTHER INTEREST EXPENSE, net................................................                   2,110                       3,450
OTHER INCOME (EXPENSE).....................................................                    (123)                         56
                                                                                        -----------                 -----------
INCOME (LOSS) BEFORE INCOME
    TAX PROVISION..........................................................                   2,123                      (4,528)
INCOME TAX PROVISION.......................................................                     150                       1,141
                                                                                        -----------                 -----------
NET INCOME (LOSS)..........................................................                   1,973                      (5,669)
PREFERRED STOCK DIVIDEND...................................................                     168                          80
                                                                                        -----------                 -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
    STOCKHOLDERS...........................................................             $     1,805                 $    (5,749)
                                                                                        ===========                 ===========
INCOME (LOSS) PER COMMON SHARE:
            Basic..........................................................                    $.23                       $(.46)
                                                                                        ===========                 ===========
            Diluted........................................................                    $.11                       $(.46)
                                                                                        ===========                 ===========
                                                                                          7,837,778                  12,540,053
COMMON SHARES  OUTSTANDING.................................................             ===========                 ===========
 
COMMON AND POTENTIAL COMMON SHARES OUTSTANDING.............................
                                                                                         17,924,752                  12,540,053
                                                                                        ===========                 ===========
</TABLE>

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

                                       2
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES

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

                                        
<TABLE>
<CAPTION>
                                      PREFERRED     COMMON    
                                       SHARES       SHARES                              ADDITIONAL
                                     ISSUED AND   ISSUED AND    PREFERRED     COMMON      PAID-IN                  RETAINED
                                     OUTSTANDING  OUTSTANDING     STOCK       STOCK       CAPITAL    WARRANTS       DEFICIT
                                    ------------  -----------   ---------    ---------  ----------   --------     -----------
<S>                                 <C>           <C>           <C>          <C>        <C>           <C>         <C>
BALANCE, December 31, 1997....           61,110   10,513,223         $ 1         $10       $69,998      $1,097      $(15,526)
  Conversion of preferred                                                                                  
   stock and dividends into                                                                                                  
   common stock (unaudited)...          (61,110)   6,292,364          (1)          7         1,058          --            --
  Preferred stock dividends                                                                                
     ($ 1.24 per share)                                                                                    
     (unaudited)..............               --           --          --          --            --          --           (80)
 Effect of stock option and                                                                                
  stock purchase plans                                                                                                         
  (unaudited).................               --        5,000          --          --            22          --            --   
  Exercise of warrants                                                                                                         
     (unaudited)..............               --        8,336          --          --            13         (13)           --   
  Net loss (unaudited)........               --           --          --          --            --          --        (5,669)  
                                        -------   ----------       -----       -----       -------      ------      --------    
BALANCE, March 31, 1998                                                                                                        
 (unaudited)..................               --   16,818,923       $  --         $17       $71,091      $1,084      $(21,275)   
                                        =======   ==========       =====       =====       =======      ======      ========    
</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>
                                                                                        THREE MONTHS ENDED
                                                                                              MARCH 31
                                                                                   --------------------------
                                                                                     1997            1998
                                                                                   ---------      -----------
<S>                                                                                <C>            <C>
                                                                                          (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:                                             
  Net income (loss).............................................................    $  1,973      $ (5,669)
  Adjustments to reconcile net income (loss) to net cash provided by (used in)                    
   operating activities--                                                                         
      Depreciation and amortization.............................................       2,041         2,080
      Other.....................................................................         (43)         (303)
      Changes in operating assets and liabilities --                                              
          (Increase) decrease in--                                                                
              Accounts receivable...............................................      (4,544)       (7,328)
              Inventories.......................................................      (2,520)       (2,473)
              Prepaid expenses and other........................................      (1,051)       (4,190)
          Increase in--                                                                           
              Accounts payable..................................................       6,179         2,088
              Accrued and other liabilities.....................................       1,691         4,997
                                                                                    --------      --------
                    Net cash provided by (used in) operating activities.........       3,726       (10,798)
                                                                                    --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:                                                             
        Purchase of property and equipment......................................      (3,440)       (7,222)
        Investment in other noncurrent assets...................................        (374)         (590)
        Payments under noncompete agreement.....................................        ( 63)           --
                                                                                    --------      --------
                    Net cash used in investing activities.......................      (3,877)       (7,812)
                                                                                    --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:                                                             
        Borrowings under senior term notes......................................          --        31,087
        Borrowings under revolvers..............................................      40,756        35,100
        Payments on revolvers...................................................     (41,943)      (35,100)
        Borrowings under (payments on) other debt...............................        (125)        2,269
        Financing related costs.................................................          --        (1,658)
        Proceeds from exercise of stock options.................................         222            22
                                                                                    --------      --------
                    Net cash provided by (used in) financing activities.........      (1,090)       31,720
                                                                                    --------      --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................      (1,241)       13,110
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................       4,923         9,269
                                                                                    --------      --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................    $  3,682      $ 22,379
                                                                                    ========      ========
</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
ended March 31, 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
periods ended March 31, 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 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 for the fiscal year ending December 31, 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 three months ended March 31, 1997 and 1998 was
$464,000 and $234,000, respectively.  Cash taxes paid for the three months ended
March 31, 1997 and 1998 were $70,000 and $842,000, 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  
                                                                          March 31           
                                                                 ----------------------------           
                                                                     1997           1998
                                                                 ------------    -----------
                                                                          (unaudited)
<S>                                                               <C>            <C> 
Basic Earnings Per Share:
------------------------                               
 Net income (loss) attributable to common stockholders            $     1,805    $    (5,749)            
                                                                  ===========    ===========             
 Weighted average number of common shares outstanding.              7,837,778     12,540,053             
                                                                  ===========    ===========             
 Basic EPS............................................            $       .23    $      (.46)            
                                                                  ===========    ===========             
                                                                                                         
Diluted Earnings Per Share:                                                                              
--------------------------                                                                               
 Net income (loss)....................................            $     1,973    $    (5,749)            
                                                                  ===========    ===========             
 Weighted average number of common shares outstanding.              7,837,778     12,540,053             
 Dilutive effect--options and warrants................              1,086,974             --             
 Dilutive effect--preferred stock.....................              9,000,000             --             
                                                                  -----------   ------------             
                                                                   17,924,752     12,540,053             
                                                                  ===========    ===========
 Diluted EPS..........................................            $       .11    $      (.46)            
                                                                  ===========    ===========             
</TABLE>

     For the three months ended March 31, 1997 and 1998, 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 75,617, and 6,012,955, respectively.

3.  INVENTORIES

 Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    December 31           March 31
                                                                       1997                  1998
                                                                    -----------         ------------     
                                                                                         (unaudited)
<S>                                                                 <C>                 <C>
Raw Materials........................................                   $ 6,948            $ 6,692
Finished Goods.......................................                    14,142             16,241
                                                                        -------            -------
                                                                        $21,090            $22,933
                                                                        =======            =======
</TABLE>

                                       6
<PAGE>
 
     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.

4.  DEBT

Short-Term Borrowings

  As of December 31, 1997 and March 31, 1998, the Company had no borrowings
outstanding under revolving credit facilities.

  The Company's former revolving credit facility was a three-year facility with
a borrowing base of up to $21,000,000.  Borrowings under the Company's former
revolving credit facility accrued interest at a rate of prime plus 1 3/4% per
annum.  Borrowings were collateralized by accounts receivable, inventory,
trademarks and trade names, stock of certain subsidiaries and other intangibles.
As of March 31, 1998, no borrowings were  outstanding under this facility.  The
Company was in compliance with the terms of the revolving credit facility as of
March 31, 1998.  (See Note 7 for a description of the Company's new revolving
credit facility).
 
Long-Term Debt

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

<TABLE>
<CAPTION>
                                                                           December 31       March 31
                                                                              1997             1998
                                                                          ------------      -----------
<S>                                                                       <C>               <C>
                                                                                            (unaudited)
Note payable, due 2001, interest at 8.4%, partially secured by
 land and buildings.............................................             $ 1,950          $ 1,853
Various other notes payable.....................................               1,398            3,764
                                                                             -------          -------
                                                                               3,348            5,617
 Less: current maturities.......................................              (1,593)          (2,377)
                                                                             -------          -------
                                                                             $ 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        March 31
                                                                             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 $1,078, respectively.......................       $115,000        $146,078
                                                                            ========        ========
</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. 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% Series B
Senior Notes due November 1, 2002 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.

                                       7
<PAGE>
 
  The Company completed an exchange offer on October 14, 1997, pursuant to which
all of the 10 1/4% 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.

     On March 17, 1998, the Company closed its 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 will be used for general corporate purposes, including capital
expenditures.

  The Company plans to file an exchange offer registration statement by May 15,
1998 with the Securities and Exchange Commission for the purpose of registering
and issuing in exchange for all of the New Senior Notes 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 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.

5.   EQUITY

  On March 2, 1998, the remaining holders of the Company's 7.5% Preferred Stock
elected to exchange their preferred stock and related accrued dividends for
6,279,768 shares of the Company's common stock.

6.  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.

7.   SUBSEQUENT EVENTS

New Revolving Credit Facility
 
  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 will bear 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
March 31, 1998, the Company's borrowing base would have permitted the Company to
borrow up to $42.4 million.

                                       8
<PAGE>
 
Acquisition of Brazilian Manufacturer
 
  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 of its diapers. The
acquisition will be accounted for as a purchase, and the purchase price of
approximately $5,200,000 will be allocated to the acquired assets and
liabilities assumed based on their estimated fair values. This transaction is
subject to approval by the Brazilian government.  The transaction gives the
Company a 100% ownership interest in the Brazilian manufacturing facility of its
diapers.  Following this transaction, the Company's total investment in Brazil
is approximately $15,000,000.


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, covenant limitations and
other factors discussed herein.

OVERVIEW

  Drypers is a leading manufacturer and marketer of premium quality, value-
priced disposable baby diapers and training pants sold under the Drypers brand
name in the United States and under the Drypers and other brand names
internationally. The Company also manufactures and sells lower-priced diapers
under other brand names in the United States and internationally, as well as
private label diapers and training pants and pre-moistened baby wipes.   The
Company currently sells its products principally to approximately 635 U.S.
grocery retailers with an estimated 20,000 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.

                                       9
<PAGE>
 
  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 believes
that the specialty nature of this product gives it an opportunity to develop a
profitable niche within the $4 billion consumer laundry detergent business. The
Company has redesigned the packaging for the product and has an agreement to
purchase the product from a third party who is responsible for manufacturing
Xclaim and for further research and development and capital expenditures related
thereto. The Company plans to expand the distribution of Xclaim in 1998 and
believes that this product will further leverage the existing Drypers' sales and
marketing organization.

  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
ended March 31, 1997 and 1998.

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                                March 31
                                           --------------------------------------------------
                                                    1997                       1998
                                           -----------------------   ------------------------
<S>                                        <C>         <C>           <C>         <C>
                                                         (dollars in millions)
Domestic................................       $45.6         75.8%       $51.0          64.9%
International...........................        14.6         24.2         27.6          35.1
                                               -----        -----        -----         -----
  Total net sales.......................       $60.2        100.0%       $78.6         100.0%
                                               =====        =====        =====         =====
</TABLE>

     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
ended March 31, 1997 and 1998.

<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                                                              March 31
                                                                     ---------------------------
                                                                         1997            1998
                                                                     ----------       ----------
<S>                                                                  <C>              <C> 
Net sales.....................................................           100.0%           100.0%
Cost of goods sold............................................            61.1             60.1
                                                                         -----            -----
Gross profit..................................................            38.9             39.9
Selling, general and administrative expenses..................            31.5             41.3
                                                                         -----            -----
Operating income (loss).......................................             7.4             (1.4)
Interest expense, net.........................................             3.7              4.4
Other income (expense)........................................            (0.2)             0.1
                                                                         -----            -----
Income (loss) before income tax provision.....................             3.5             (5.7)
Income tax provision..........................................             0.2              1.5
                                                                         -----            -----
Net income (loss).............................................             3.3%            (7.2)%
                                                                         =====            =====
</TABLE>

                                       10
<PAGE>
 
Three Months Ended March 31, 1998 Compared to the Three Months Ended March 31,
1997.

Net Sales

  Net sales increased 30.6% to $78.6 million for the three months ended March
31, 1998 from $60.2 million for the three months ended March 31, 1997. Domestic
sales increased 11.8% to $51.0 million for the three months ended March 31, 1998
from $45.6 million for the three months ended March 31, 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 mitigated by a
decline in export sales resulting from pricing pressures in Asia due to recent
currency declines.  Net sales in the international sector grew to $27.6 million
for the three months ended March 31, 1998 from $14.6 million in the prior
comparable period. This substantial increase primarily reflected the continued
growth in sales volume for the Company's operations in Argentina and Mexico and
the growth of business from the Company's operations in Brazil, which began in
March 1997.

Cost of Goods Sold

  Cost of goods sold decreased slightly as a percentage of net sales to 60.1%
for the three months ended March 31, 1998 compared to 61.1% for the three months
ended March 31, 1997. This decrease reflected an increase in price per pad for
the North American business and the benefits of higher volumes over the
Company's fixed cost base, offset by growth in international sales, which have
generally lower gross profit margins (and correspondingly lower selling and
promotional costs).

Selling, General and Administrative Expenses

  Selling, general and administrative expenses increased as a percentage of net
sales to 41.3% for the three months ended March 31, 1998 compared to 31.5% for
the three months ended March 31, 1997. The increase reflected the costs
associated with the Company's national television advertising campaign in the
United States, which began in February 1998, offset by increases in
international sales, which have lower selling and promotional costs, and a
slight increase in promotional costs in Mexico due to price competition from The
Procter & Gamble Company  occurring late in the quarter.

Operating Income (Loss)

  As a result of the above factors, the Company's operating income decreased
$5.5 million to an operating loss of $1.1 million for the three months ended
March 31, 1998 from operating income of $4.4 million for the three months ended
March 31, 1997.

Interest Expense, net

  Interest expense, net increased to $3.5 million for the three months ended
March 31, 1998 as compared to $2.2 million for the three months ended March 31,
1997. The increase was primarily due to the June 1997 issuance of $115.0 million
of 10 1/4% Senior Notes due 2007 and amortization of additional deferred loan
costs related to this transaction.

                                       11
<PAGE>
 
Income Taxes

  The Company recorded a provision of $1.1 million related to foreign taxes for
the three months ended March 31, 1998, compared to a provision of $150,000 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 provided $3.7 million of cash during the three months
ended March 31, 1997 and used $10.8 million of cash during the three months
ended March 31, 1998. The use of cash during the three months ended March 31,
1998 primarily reflected the national television media campaign in the United
States, the buildup of inventory to support the increase in sales volume,
expenditures related to the Xclaim product and international capital
expenditures.  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 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 $7.2 million for the three months
ended March 31, 1998 and $3.4 million for the three months ended March 31, 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 quarter 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 million in the first
quarter of 1998 and expects to  incur approximately $2 million in the second
quarter of 1998. The majority of these increases represent the cost of the
Company's new advertising campaign (in connection with which there will be no
near-term corresponding reduction of promotional expenses), while the remainder
relates 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
$20.0 million for the entire fiscal year. The planned capital expenditures in
1998 are primarily related to the expansion of international capacity 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 

                                       12
<PAGE>
 
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 $68.6 million as of  March 31, 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 $104.7 million as of
March 31, 1998 and current liabilities increased from $28.3 million as of
December 31, 1997 to $36.2 million as of March 31, 1998. Total debt increased
from $118.3 million at December 31, 1997 to $151.7 million as of March 31, 1998.

  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 $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's former revolving credit facility provides for up to $21.0
million of borrowings.  Borrowings under the Company's revolving credit facility
bore interest at a rate of prime plus 1 3/4% per annum and were to mature in
February 1999. No borrowings were outstanding under the revolving credit
facility as of March 31, 1998.

  On April 1, 1998, the Company entered into a new three-year $50.0 million
credit facility to replace the old 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
will bear 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 March 31, 1998, the Company's
borrowing base would have permitted the Company to borrow up to $42.4 million.

     On March 17, 1998, the Company closed its 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 will be
used for general corporate purposes, including capital expenditures.

  In February 1997, the Company began a series of transactions in which it
established a 51% owned subsidiary in Brazil to market its products, acquired
the rights to the Puppet brand name and entered into a supply arrangement with a
Brazilian manufacturer. The Company initially paid 1.0 million shares of common
stock and canceled an outstanding $2.2 million receivable from such manufacturer
as consideration for the transactions. The sellers of the Puppet brand name
exercised an option to receive $4.0 million in cash in lieu of the 1.0 million
shares, and such cash was paid to the sellers in May 1997. During the second
quarter of 1997, the Company also exercised a portion of its fair value option
to purchase 44% of the remaining 49% interest in its Brazilian subsidiary for
$5.3 million in cash.  On April 6, 1998, the Company exercised its fair value
option to acquire the remaining equity interest in the parent company of
Chansommes. The acquisition will be accounted for as a purchase, and the
purchase price of approximately $5.2 million will be allocated to the acquired
assets and liabilities assumed based on their estimated fair values. This
transaction is subject to approval by the Brazilian government.  The transaction
gives the Company a 100% ownership interest in the Brazilian 

                                       13
<PAGE>
 
manufacturing facility of its diapers. Following this transaction, the Company's
total investment in Brazil is approximately $15.0 million.

     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.

     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 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 for the fiscal year ending December 31, 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
Company expects that the expenses and capital expenditures associated with the
replacement of the Company's Programs and Systems will be approximately $3
million over the next two years.

                                       14
<PAGE>
 
                          PART II.  OTHER INFORMATION
                                        
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.
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, price competition by Procter & Gamble
adversely impacted the Company's operations in Puerto Rico. 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 

                                       15
<PAGE>
 
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 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.

                                       16
<PAGE>
 
     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 effected.

     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.

                                       17
<PAGE>
 
ITEM  6.     EXHIBITS AND REPORTS ON FORM 8-K

 (a) Exhibits - Reference is made to the Exhibit Index on Page 19 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
     January 20, 1998 in which the Company announced the launch of a national
     media campaign for its premium U.S. diapers. Additionally, a report on Form
     8-K was filed with the Commission on March 26, 1998, in which the Company
     announced the completion of its private sale of $30.0 million principal
     amount of 10 1/4% Senior Notes due 2007.
 

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

                                            DRYPERS CORPORATION

 Date: May 13, 1998                         By: /s/ JONATHAN P. FOSTER 
       ------------                             --------------------------
                                                  Chief Financial Officer
                                                 (Duly Authorized Officer)
                                               (Principal Financial Officer)

                                       18
<PAGE>
 
                                 EXHIBIT INDEX

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

                                        
10.1 Credit Agreement dated as of April 1, 1998 by and among Drypers Corporation
     and the Banks which are parties thereto and BankBoston, N.A., as Agent.

27   Financial Data Schedule