SETTLEMENT AGREEMENT

               This  Settlement  Agreement  is made and entered into as of March
19, 1999, between Paragon Trade Brands, Inc., a Delaware corporation, debtor and
debtor in  possession  ("Paragon") and  Kimberly-Clark  Corporation,  a Delaware
corporation ("K-C").


                              W I T N E S S E T H:

               WHEREAS,  Paragon  and  K-C  are  parties to an  action  entitled
KIMBERLY-CLARK  CORPORATION V. PARAGON TRADE BRANDS, INC., Case No. 3:95-cv-2574
(N.D. Tex.) filed by K-C  on or about  October 25, 1995,  in  the  United States
District Court for the Northern District of Texas (the "Action");

               WHEREAS, Paragon has denied liability  in the Action and asserted
counterclaims therein;

               WHEREAS,  on January 6, 1998,  Paragon filed a voluntary petition
for  relief  under  chapter 11 of title 11 of the  United  States  Code with the
United States  Bankruptcy  Court for the Northern  District of Georgia,  Atlanta
Division, which chapter 11 case currently is pending;

               WHEREAS,  on or about June 5, 1998, K-C filed a proof of claim in
Paragon's chapter 11 case asserting,  among other things,  unsecured prepetition
claims  in excess of  approximately  $890  million  (without  trebling)  against
Paragon in respect of Paragon's alleged  infringement of certain K-C patents (as
further defined in Section 1.31 hereof, the "K-C Proof of Claim");

               WHEREAS,  on or about  June 5,  1998,  K-C filed  the  Withdrawal
Motion (as defined  below)  seeking  withdrawal  of the  reference to the United
States Bankruptcy Court for the Northern District of Georgia,  Atlanta Division,
with respect to all matters relating to the K-C Proof of Claim;

               WHEREAS,  Paragon and K-C have agreed to  effectuate a settlement
of all claims,  counterclaims and disputes asserted or assertable by and against
the other, including, but not limited to, the Action and the K-C Proof of Claim,
in accordance with the terms and conditions set forth herein; and

               WHEREAS,  this  Settlement  Agreement  is  essential to Paragon's
efforts to emerge successfully from its chapter 11 case;

               NOW, THEREFORE, for good and valuable consideration, and in order
to settle all claims and disputes  between  Paragon and K-C,  and to  facilitate
Paragon's expeditious and effective reorganization,  the parties hereto agree as
follows:

<PAGE>

     1.   DEFINITIONS. In  addition  to such other terms as are defined in other
sections of this Settlement Agreement,  the following terms (which appear in the
Settlement  Agreement as capitalized  terms) have the following meanings as used
in the Settlement Agreement:

               1.1. "Action" shall have the meaning ascribed to such term in the
     first "WHEREAS" clause of this Settlement Agreement.


               1.2.  "Administrative  Expense Claim" means a Claim for costs and
     expenses of  administration  which is entitled  to  administrative  expense
     priority under sections 503(b) and 507(a)(1) of the Bankruptcy Code.

               1.3.  "Affiliate"  means any Person that is (a) an  affiliate  as
     such term is defined  in  section  101(2) of the  Bankruptcy  Code,  (b) an
     existing or future direct or indirect  subsidiary or parent  corporation of
     Paragon or K-C (as the case may be),  or (c) an  existing  or future  joint
     venture or general or limited partnership governed by any applicable law in
     which (i)  Paragon  or K-C (as the case may be) or any  existing  or future
     direct or indirect  subsidiary or parent  corporation of Paragon or K-C (as
     the case may be) is a joint venturer or general or limited  partner or (ii)
     a  joint  venture  or  general  or  limited  partnership  governed  by  any
     applicable  law in  which  Paragon  or K-C (as the  case may be) is a joint
     venturer  or general or limited  partner,  as the case may be. The  defined
     term  "Affiliate"  also includes all  successors and assigns of each of the
     foregoing.

               1.4.  "Allowed  Claim" means a Claim which is finally  allowed in
     the Chapter 11 Case and is not subject to further allowance or disallowance
     by the  Bankruptcy  Court  or an  objection  being  filed  by any  party in
     interest.

               1.5.  "Ancillary  Agreements"  means  the K-C  License  Agreement
     annexed hereto as Exhibit A, the Paragon License  Agreement  annexed hereto
     as Exhibit B, the Paragon  Release annexed hereto as Exhibit C, and the K-C
     Release annexed hereto as Exhibit D.

               1.6.  "Appeal"  means that  certain  appeal taken by K-C from the
     April 10th Order.

               1.7.  "April  10th  Order"  means (a) that  certain  order of the
     Bankruptcy  Court,  dated April 10,  1998,  and  entered on the  Bankruptcy
     Court's  docket on April 10,  1998,  as  evidenced  by docket  number  619,
     together with (b) that certain order of the  Bankruptcy  Court,  dated June
     17, 1998, and entered on the Bankruptcy Court's docket on June 18, 1998, as
     evidenced by docket number 841, denying K-C's motion for reconsideration of
     the order referenced in clause (a) of this definition.



                                      -2-
<PAGE>

               1.8.  "Bankruptcy  Code" means the Bankruptcy Reform Act of 1978,
     11 U.S.C.  ss.ss.  101, ET seq.,  as the same was in effect on the Petition
     Date, as amended by any amendments applicable to the Chapter 11 Case.

               1.9.  "Bankruptcy Court" means the United States Bankruptcy Court
     for the Northern District of Georgia,  Atlanta Division,  or, to the extent
     that such court ceases to exercise  jurisdiction  over the Chapter 11 Case,
     such other court or adjunct  thereof that exercises  jurisdiction  over the
     Chapter 11 Case.

               1.10. "Bankruptcy Court Approval Order" means an order (which, if
     not  previously  entered as a separate order despite  Paragon's  reasonable
     good faith efforts,  may be a Confirmation  Order) of the Bankruptcy Court,
     in form  and  substance  acceptable  to  Paragon  and K-C,  approving  this
     Settlement  Agreement,  the Paragon Release and the K-C Release;  PROVIDED,
     that if the Bankruptcy  Court Approval Order also is a Confirmation  Order,
     (i) only those provisions relating to approval of this Settlement Agreement
     must be in form and  substance  acceptable  to K-C, and (ii) K-C shall have
     the right to object to the other provisions of any such Confirmation Order.

               1.11.  "Bankruptcy  Rules" means the Federal  Rules of Bankruptcy
     Procedure,  effective  August 1, 1991, in accordance with the provisions of
     28 U.S.C. ss. 2075, as now in effect or hereafter amended.

               1.12. "Business Day" means any day, other than a Saturday, Sunday
     or "legal holiday" (as such term is defined in Bankruptcy Rule 9006(a)).

               1.13.  "Chapter  11 Case"  means  Paragon's  case  pending in the
     Bankruptcy  Court  pursuant  to  chapter  11 of  the  Bankruptcy  Code  and
     administered under case number 98 - 60390 (Murphy, J.).

               1.14.  "Claim"  means a claim as such term is  defined in section
     101(5) of the Bankruptcy Code.

               1.15.  "Confirmation Date" means the date on which the Bankruptcy
     Court  enters  an  order  confirming,  pursuant  to  section  1129  of  the
     Bankruptcy Code, a Plan for Paragon.

               1.16. "Confirmation Order" means an order of the Bankruptcy Court
     confirming a Plan pursuant to section 1129 of the Bankruptcy Code.

               1.17.  "Creditors'  Committee"  means the  Official  Committee of
     Unsecured  Creditors in the Chapter 11 Case,  as appointed by the Office of
     the United  States  Trustee for the 


                                      -3-
<PAGE>

     Northern  District of Georgia, Atlanta Division, as reconstituted from time
     to time.

               1.18. "Debtor" means Paragon.

               1.19. "Effective Date" means the first Business Day that the Plan
     becomes effective in accordance with its terms.

               1.20.  "Estate"  means the estate  created in the Chapter 11 Case
     for Paragon by section 541 of the Bankruptcy Code.

               1.21.  "Federal  Circuit  Court" means the United States Court of
     Appeals for the Federal  Circuit,  or, to the extent that such court ceases
     to exercise  jurisdiction over the P&G Appeal,  such other court or adjunct
     thereof that exercises jurisdiction over the P&G Appeal.

               1.22. "Final Order" means an order or judgment which has not been
     reversed, stayed, modified or amended and as to which the time to appeal or
     seek review,  rehearing,  reargument  or  certiorari  has expired and as to
     which no appeal or petition  for  review,  rehearing,  reargument,  stay or
     certiorari  is  pending,  or as to which  any  right to  appeal  or to seek
     certiorari,  review,  or  rehearing  has been  waived,  or,  if an  appeal,
     reargument,  petition for review,  certiorari or rehearing has been sought,
     the order or judgment which has been affirmed by the highest court to which
     the order was  appealed or from which the  reargument,  review or rehearing
     was sought, or certiorari has been denied, and as to which the time to take
     any further  appeal or seek further  reargument,  review or  rehearing  has
     expired.

               1.23.  "Georgia  District Court" means the United States District
     Court for the Northern District of Georgia,  Atlanta  Division,  or, to the
     extent that such court ceases to exercise  jurisdiction  over the Appeal or
     the Withdrawal  Motion,  such other court or adjunct thereof that exercises
     jurisdiction over the Appeal or Withdrawal Motion, as applicable.

               1.24.  "Impaired"  means  impaired  within the meaning of section
     1124 of the Bankruptcy Code.

               1.25. "K-C Allowed  Administrative  Claim" shall have the meaning
     set forth in Section 2.1 hereof.

               1.26.   "K-C  Allowed  Claims"  means,   collectively,   the  K-C
     Conditionally  Allowed Claim, the K-C Fixed Allowed General Unsecured Claim
     and the K-C Allowed Administrative Claim.

                                      -4-
<PAGE>

               1.27.  "K-C  Conditionally  Allowed Claim" shall have the meaning
     set forth in Section 2.1 hereof.

               1.28. "K-C Fixed Allowed General  Unsecured Claim" shall have the
     meaning set forth in Section 2.1 hereof.

               1.29. "K-C License Agreement" means the license agreement annexed
     hereto as Exhibit A.

               1.30.  "K-C  Licensed  Patents"  means the patents  identified in
     Exhibit E hereto.

               1.31.  "K-C Proof of Claim"  shall have the  meaning  ascribed to
     such term in the  fourth  "WHEREAS"  clause of this  Settlement  Agreement,
     which proof of claim has been  assigned  claim number 469 in the Chapter 11
     Case.  As used herein,  K-C Proof of Claim also shall  include the proof of
     claim  number 110 filed by K-C in the  Chapter 11 Case on or about  January
     21, 1998.

               1.32.  "K-C Release" means the general  release annexed hereto as
     Exhibit D.

               1.33.  "License  Agreements"  means the Paragon License Agreement
     and the K-C License Agreement.

               1.34.  "Paragon License  Agreement"  means the license  agreement
     annexed hereto as Exhibit B.

               1.35. "Paragon Patents" means the patents identified in Exhibit F
     hereto.

               1.36.  "Paragon Release" means the general release annexed hereto
     as Exhibit C.

               1.37.  "Parties"  means  Paragon  and  K-C and  their  respective
     successors and assigns, collectively.

               1.38.  "Person" means any individual,  corporation,  partnership,
     association,  indenture trustee,  organization,  joint stock company, joint
     venture,  estate,  trust,  governmental  unit or any political  subdivision
     thereof,  the Creditors'  Committee,  holders of equity interests in and/or
     claims against Paragon or any other entity.

               1.39. "Petition Date" means January 6, 1998.

               1.40. "Plan" means a plan of reorganization for Paragon confirmed
     by the Bankruptcy  Court pursuant to section 1129 of the Bankruptcy Code in
     the Chapter 11 Case,  as the same may be amended or modified,  relying upon
     and/or  incorporating  and,  INTER  ALIA,  implementing  the  terms of this
     Settlement Agreement.

                                      -5-
<PAGE>

               1.41.  "P&G"  means  The  Procter  &  Gamble  Company,   an  Ohio
     corporation.

               1.42.  "P&G Appeal"  means that  certain  appeal taken by Paragon
     from the P&G  Judgment  and Rule 59 Denial,  which  appeal is  evidenced by
     Paragon's Notice of Appeal,  filed July 2, 1998, and Paragon's Amendment to
     Notice of Appeal,  filed  August 4, 1998,  which  appeal is docketed in the
     Federal Circuit Court as No. 98-1480.

               1.43.  "P&G  Judgment"  means,  collectively,  that  certain  (a)
     Opinion and  Judgment,  issued on  December  30,  1997,  and entered on the
     docket for the United States District Court for the District of Delaware on
     January 6, 1998, in favor of P&G and against  Paragon;  (b) Money  Judgment
     entered on June 2, 1998;  and (c) Permanent  Injunction  entered on June 2,
     1998.

               1.44.  "P&G  Judgment  Amount"  means one  hundred  seventy-eight
     million four hundred  twenty-nine  thousand five hundred thirty-six dollars
     ($178,429,536.00), plus accrued interest thereon, from the date of entry of
     the Money Judgment described in the preceding paragraph until the date that
     the  Litigated  Reduction or  Consensual  Reduction  (as defined in Section
     2.1(c) hereof) is approved by a Final Order, at the rate applicable to such
     Money Judgment.

               1.45. "Rule 59 Denial" means that certain Opinion and Order, both
     entered August 4, 1998,  denying  Paragon's  motion for relief from the P&G
     Judgment pursuant to Federal Rule of Civil Procedure 59.

               1.46.  "Settlement  Effective  Date" means the first Business Day
     after the Bankruptcy  Court Approval Order is entered and is not subject to
     any stay.

               1.47.  "Texas  District  Court" means the United States  District
     Court for the  District of Texas,  or, to the extent that such court ceases
     to  exercise  jurisdiction  over the  Action,  such other  court or adjunct
     thereof that exercises jurisdiction over the Action.

               1.48.  "Unimpaired"  means not  impaired  within  the  meaning of
     section 1124 of the Bankruptcy Code.

               1.49. "Withdrawal Motion" means that certain motion dated June 5,
     1998, filed by K-C in the Georgia District Court, seeking withdrawal of the
     reference to the Bankruptcy  Court with respect to all matters  relating to
     the K-C Proof of Claim.

     2. ALLOWED AMOUNT AND TREATMENT OF K-C CLAIMS.

                                      -6-
<PAGE>

               2.1. ALLOWED AMOUNT OF CLAIMS. K-C shall be granted three Allowed
     Claims in the  Chapter 11 Case (and the K-C Proof of Claim  shall be deemed
     amended accordingly):

               (a)  an Allowed  Administrative  Expense  Claim (the "K-C Allowed
                    Administrative Claim") in an amount equal to the sum of five
                    million dollars and zero cents ($5,000,000.00);

               (b)  an Allowed Claim (the "K-C Fixed Allowed  General  Unsecured
                    Claim") in an amount equal to the sum of (i) one hundred ten
                    million dollars and zero cents  ($110,000,000.00)  plus (ii)
                    interest on the  principal  amount of  $110,000,000.00  from
                    April 15, 1999 and through and including the Effective  Date
                    of the Plan; and

               (c)  an Allowed Claim (the "K-C Conditionally  Allowed Claim") in
                    an amount equal to (i) forty  percent (40%) of the amount by
                    which the P&G  Judgment  Amount is reduced  (the  "Litigated
                    Reduction")  by a  Final  Order  as a  result  of  Paragon's
                    prosecution (if Paragon so elects,  in its sole and absolute
                    discretion, to continue such prosecution) of the P&G Appeal,
                    minus   (ii)   twenty   million   dollars   and  zero  cents
                    ($20,000,000.00).   In  the  event  that   Paragon  and  P&G
                    consensually  resolve the P&G Appeal after a decision on the
                    merits of the P&G Appeal by the Federal  Circuit Court,  the
                    K-C  Conditionally  Allowed  Claim  shall  equal  (i)  forty
                    percent  (40%) of the amount by which the agreed  payment to
                    P&G on account of the  claims  which are the  subject of the
                    P&G  Judgment  is less  than the P&G  Judgment  Amount  (the
                    "Consensual  Reduction"),  minus (ii) twenty million dollars
                    and zero cents  ($20,000,000.00).  In the event that Paragon
                    and P&G  consensually  resolve  the P&G Appeal  prior to the
                    issuance  of any  decision  on  the  merits  by the  Federal
                    Circuit Court,  K-C shall not be entitled to receive the K-C
                    Conditionally  Allowed  Claim and such Claim shall be deemed
                    not to exist.
     
     For purposes of the preceding clause 2.1(b)(ii), to the extent the  payment
     of same is permitted  under applicable law,  or either P&G or other holders
     of  allowed  prepetition,  general  unsecured  claims  receive  payment  of
     postpetition  interest,  interest shall accrue at six percent (6%) on a per
     annum  365 day year  basis  (the  "Postpetition  Interest Rate").

                                      -7-
<PAGE>

               2.2. TREATMENT OF THE K-C ALLOWED  ADMINISTRATIVE  CLAIM. The K-C
     Allowed  Administrative Claim shall be afforded treatment under the Plan as
     an Administrative Expense Claim in accordance with section 1129(a)(9)(A) of
     the Bankruptcy Code.

               2.3.  CLASSIFICATION  AND  TREATMENT  OF THE  K-C  FIXED  ALLOWED
     GENERAL  UNSECURED  CLAIM.  Paragon shall  classify and treat the K-C Fixed
     Allowed General  Unsecured Claim as a prepetition,  general unsecured claim
     in any Plan proposed by Paragon,  and shall classify such claim in the same
     class as all other holders of prepetition, general unsecured Allowed Claims
     against  Paragon in any such Plan;  PROVIDED,  HOWEVER,  that  Paragon  may
     include  a usual  and  customary  "convenience,"  "small  claims"  or other
     similar class of prepetition,  general  unsecured  Allowed Claims that does
     not include the K-C Fixed Allowed  General  Unsecured  Claim in its Plan if
     Paragon determines it is necessary or appropriate.

               2.4.  CLASSIFICATION  AND  TREATMENT  OF  THE  K-C  CONDITIONALLY
     ALLOWED  CLAIM.  Paragon  shall  classify  and treat the K-C  Conditionally
     Allowed Claim, to the extent that the Litigated Reduction or the Consensual
     Reduction  occurs,  in the same  manner  under  its  Plan as the K-C  Fixed
     Allowed General Unsecured Claim. In the event that the Confirmation Date of
     a  Plan   proposed  by  Paragon  is  before  the  date  on  which  the  K-C
     Conditionally  Allowed Claim is determined,  Paragon shall  establish under
     such  Plan  an  adequate  reserve,  as  agreed  to by  the  Parties  and/or
     determined by the Bankruptcy Court, to provide for the treatment of the K-C
     Conditionally  Allowed Claim provided for herein as and when the amount, if
     any, of such Allowed Claim is determined.  The principal  amount due to K-C
     with respect to the K-C  Conditionally  Allowed Claim shall,  to the extent
     the payment of same is  permitted  under  applicable  law, or either P&G or
     other holders of allowed  prepetition,  general  unsecured  claims  receive
     payment  of  postpetition  interest,  bear  interest  at  the  Postpetition
     Interest Rate from the date on which the Litigated  Reduction or Consensual
     Reduction,  as  applicable,  is  approved by a Final Order or, in the event
     Bankruptcy Court approval is not required,  otherwise  becomes binding upon
     Paragon and K-C (the  "Interest  Commencement  Date") until and through (a)
     the Effective Date, if the Interest  Commencement  Date occurs prior to the
     Effective Date, or (b) the date upon which Paragon effects its distribution
     to K-C on account of the K-C Conditionally Allowed Claim under the Plan, if
     the Interest Commencement Date occurs after the Effective Date.

               2.5. CONVERSION OF CHAPTER 11 CASE.  Notwithstanding  anything to
     the  contrary  contained  herein,  in the  event  the  Chapter  11  Case is
     converted  to a case  under  chapter  7 of the  Bankruptcy  Code,  each K-C
     Allowed  


                                      -8-
<PAGE>

     Claim  shall (a) have all the  rights of any other  claim of equal priority
     against  Paragon that shall have become an Allowed Claim prior to  the date
     of  such conversion,  and (b) be  treated  as an Allowed Claim in any  such
     chapter 7 case.

               2.6.  DISMISSAL OF CHAPTER 11 CASE.  Notwithstanding  anything to
     the  contrary  contained  herein,  in the event that the Chapter 11 Case is
     dismissed,  the K-C Allowed  Claims shall be deemed  obligations of Paragon
     following  dismissal of the Chapter 11 Case, and (a) in the case of the K-C
     Allowed  Administrative  Claim and the K-C Fixed Allowed General  Unsecured
     Claim,  such claims shall become due and payable on the date the Chapter 11
     Case is  dismissed,  and (b) in the case of the K-C  Conditionally  Allowed
     Claim, such claim shall become due and payable on the first date that is on
     or after the date that both (i) the Chapter 11 Case is  dismissed  and (ii)
     the  Litigated  Reduction  or the  Consensual  Reduction  shall  have  been
     approved by a Final Order.

     3. DISMISSAL OF THE ACTION, THE APPEAL AND THE WITHDRAWAL MOTION.

               3.1. By Order of the Georgia  District  Court dated  February 18,
     1999,  the  Appeal,  Paragon's  motion  to  dismiss  the  Appeal,  and  the
     Withdrawal Motion were dismissed without costs and without prejudice to the
     right, of either Party within sixty (60) days, to re-open such  proceedings
     if settlement of such  proceedings  is not  consummated.  If the Bankruptcy
     Court  denies  approval of this  Settlement  Agreement,  the Parties  shall
     cooperate  with  one  another  to take  such  steps  as are  necessary  and
     appropriate to ensure that these proceedings are re-opened.

               3.2. Within five (5) Business Days after the Settlement Effective
     Date: (a) K-C shall dismiss with prejudice (i) the Action,  (ii) the Appeal
     and (iii)  the  Withdrawal  Motion;  and (b)  Paragon  shall  dismiss  with
     prejudice its  counterclaims  in the Action.  From and after the Settlement
     Effective  Date,  Paragon  shall not contest any Valid Claim (as defined in
     the K-C License Agreement) held or asserted by K-C.

     4. LICENSES.

               4.1.  Contemporaneously  with the  execution  of this  Settlement
     Agreement,  K-C shall  execute  and  deliver  to  Paragon  the K-C  License
     Agreement.

               4.2. In  consideration  for the payments to K-C set forth in this
     Settlement  Agreement,  and subject to the truth of the  representation and
     warranties  of Paragon  described  on Exhibit G hereto,  K-C,  on behalf of
     itself and Kimberly-Clark  Worldwide, Inc. (who K-C represents and warrants
     are 


                                      -9-
<PAGE>

     the only  holders of  patents  issued as of March 1,  1999,  including  any
     reissues  and  reexaminations  thereof,  in the  United  States or  Canada,
     including any  territories  thereof,  as to which K-C or any of its current
     Affiliates  has any  right  to  assert  or  prosecute  against  an  alleged
     infringer),  covenants  not to sue  Paragon  or its  wholly-owned  Canadian
     subsidiary for  infringement  of any of its current patents which have been
     issued as of March 1,  1999,  including  any  reissues  and  reexaminations
     thereof,  in the  United  States or  Canada  (collectively,  including  any
     territories of any of the foregoing, the "Approved Countries") with respect
     to the specific  products  attached  hereto as Exhibits  H-1 through  H-12,
     including  dual cuff  versions of any of Exhibits H-1 through H-9 where the
     only product  change is the  replacement  of the single leg cuff feature on
     such products with the dual leg cuff feature found on Exhibits H-10 through
     H-12 (the "Approved  Products").  Notwithstanding the foregoing and subject
     to  the  K-C  Release,  (X)  K-C  covenants  not  to  sue  Paragon  or  its
     wholly-owned  Canadian  subsidiary for  infringement  of U.S. patent number
     5,879,341  issued on March 9, 1999 in the name of Odorzynski,  with respect
     to  products  of Paragon  that are made,  used or sold on or before June 7,
     1999 (provided that such covenant not to sue shall not apply to products of
     Paragon that are made, used or sold after June 7, 1999, other than products
     made on or prior to June 7, 1999 but sold thereafter), and (Y) K-C shall be
     entitled to assert or prosecute against Paragon and/or its Affiliates:  (a)
     claims under (i) U.S.  patent number B1 5,147,343  issued on March 17, 1998
     to  Kellenberger,  (ii) U.S. patent number 5,601,542 issued on February 11,
     1997 to Melius,  and (iii) U.S. patent number  5,843,056 issued on December
     1, 1998 to Good, to the extent that Paragon's products do not remain within
     the respective "safe harbors" described in Exhibit I hereto; and (b) claims
     related to patents  owned by K-C or as to which K-C has any right to assert
     or  prosecute  against an alleged  infringer  with  respect to (i) products
     other than the Approved Products, (ii) process/method patents claims, (iii)
     patents  issued  under  the  laws of  countries  other  than  the  Approved
     Countries,  or (iv) U.S. patent number  5,176,671 issued on January 5, 1993
     in the name of  Roessler  et al.,  with  respect  to  products  of  Paragon
     (including the Approved  Products  attached hereto as Exhibits H-1, H-5 and
     H-11)  that are made,  used or sold on and after the date that is two years
     after the date of execution of this  Settlement  Agreement;  and nothing in
     the covenant not to sue contained in this Section 4.2,  which was issued in
     exchange for good and valuable  consideration,  shall be admissible against
     K-C in connection with any patent claim which it has preserved the right to
     bring under this Section.

               4.3. Subject to the occurrence of the Settlement  Effective Date,
     Paragon agrees that in any future dispute  regarding a Valid Claim (as such
     term is defined in the K-C License  Agreement),  Paragon  shall not contest
     the validity of the K-C  


                                      -10-
<PAGE>

     Licensed  Patents and  the  validity  of  such  patents  shall be presumed.
     Subject to the occurrence of the  Settlement  Effective  Date, the entry of
     the  Bankruptcy  Court  Approval  Order  shall  be  deemed to be a judgment
     binding upon  Paragon  and  K-C  as to the  provisions  of  this Settlement
     Agreement, including this Section 4.3.

               4.4.  Contemporaneously  with the  execution  of this  Settlement
     Agreement,  Paragon  shall  execute and deliver to K-C the Paragon  License
     Agreement.

               4.5. On or before the date hereof, Paragon shall have changed the
     superabsorbent    material   in   its    products   to   fit   within   the
     Kellenberger/Melius "safe harbor" described in Exhibit I hereto.

     5. RELEASES.

               5.1.  Contemporaneously  with the  execution  of this  Settlement
     Agreement,  Paragon shall  execute and hold in escrow the Paragon  Release.
     Paragon  shall release and deliver to K-C the Paragon  Release  within five
     (5) Business Days after the Settlement Effective Date.

               5.2.  Contemporaneously  with the  execution  of this  Settlement
     Agreement,  K-C shall execute and hold in escrow the K-C Release. K-C shall
     release and deliver to Paragon  the K-C  Release  within five (5)  Business
     Days after the Settlement Effective Date.

     6. REPRESENTATIONS OF THE PARTIES.

               6.1. K-C  represents  and warrants  that (a) it has not filed any
     proofs of claim in the  Chapter  11 Case other than the K-C Proof of Claim,
     and (b) it has not acquired or transferred or entered into any agreement to
     acquire or transfer any proofs of claim,  including the K-C Proof of Claim,
     filed against Paragon in the Chapter 11 Case. K-C represents,  warrants and
     covenants that it (a) has not and will not amend, modify or supplement,  or
     seek to amend,  modify or supplement  the K-C Proof of Claim and, (b) shall
     not  acquire  any  claims  asserted  against  Paragon  by any Person in the
     Chapter 11 Case without Paragon's prior written consent.

               6.2.   Paragon   represents  and  warrants  that  the  statements
     contained in Exhibit G hereto are true and correct.

     7. RESTRICTIONS ON TRANSFER OF K-C ALLOWED CLAIMS.  Unless Paragon,  in its
sole and absolute discretion, otherwise agrees in writing, K-C shall not sell or
otherwise  transfer all or any portion of the K-C Allowed Claims for a period of
ninety 


                                      -11-
<PAGE>

(90)  days  following  the  date  of  execution  of this  Settlement  Agreement.
Following such ninety (90) day period,  K-C shall not sell or otherwise transfer
all or any  portion of the K-C  Allowed  Claims to any Person or Persons  unless
such Person or Persons (i) agree(s) to be bound to the terms and  conditions  of
this  Settlement  Agreement,  and (ii)  sign(s) an agreement  that  specifically
provides that Paragon is an intended third party  beneficiary of such Person(s)'
agreement  to be so bound to, and subject to the  enforcement  of, the terms and
conditions  of this  Settlement  Agreement.  Notwithstanding  any  assignment or
transfer by K-C of all or any portion of the K-C  Allowed  Claims in  accordance
with the  terms  hereof,  K-C  shall  continue  to  remain  bound by each of the
provisions of this Settlement  Agreement,  including,  but not limited to, K-C's
obligations to execute,  deliver and perform its  obligations  under each of the
Ancillary Agreements.  In the event that K-C sells or otherwise transfers all or
any  portion  of  the  K-C  Proof  of  Claim  or the  K-C  Allowed  Claims,  and
notwithstanding any provisions  contained herein or in the K-C License Agreement
to the  contrary,  the  K-C  License  Agreement,  if not  previously  terminated
pursuant to its terms, shall remain in full force and effect notwithstanding (a)
the lack, if any, of entry of the  Bankruptcy  Court Approval Order on or before
July 31, 1999, or (b) the reversal or modification of such order on appeal.

     8. EXCLUSIVITY AND PLAN CONFIRMATION.

               8.1.  If  Paragon  complies  with  its  obligations   under  this
     Settlement  Agreement,  K-C shall not oppose any  requests  by Paragon  for
     extensions of its exclusive periods to file a plan of reorganization and to
     solicit acceptances thereto  (collectively,  the "Exclusive Periods") under
     section 1121 of the Bankruptcy  Code through and including May 31, 1999 and
     July 31, 1999, respectively, as long as it appears reasonably probable that
     the Effective Date can occur on or before July 31, 1999.

               8.2.  Notwithstanding  the provisions of section 8.1 hereof,  K-C
     shall have the right to object to (a) any motion  filed by Paragon  seeking
     an extension of the Exclusive Periods if Paragon is not diligently pursuing
     final approval of this  Settlement  Agreement  (including  its  obligations
     under Section 19 below),  or (b)  confirmation  of any Plan proposed in the
     Chapter 11 Case.

     9.  AMENDMENT.  This  Settlement  Agreement may not be amended except by an
instrument in writing  signed by both Parties  hereto after prior written notice
to counsel to the  Creditors'  Committee  and, if such  amendment  constitutes a
material modification of this Settlement  Agreement,  approval of the Bankruptcy
Court if the Effective Date has not yet occurred.

     10. NOTICES. Any notices or other communications hereunder or in connection
herewith  shall be in  writing  and shall 


                                      -12-
<PAGE>

be deemed  to  have been  duly  given  when  delivered  in person,  by facsimile
transmission or by registered or certified mail (postage prepaid, return receipt
requested) addressed, as follows:
 
       If to Paragon, to:

        Paragon Trade Brands, Inc.
               180 Technology Parkway
               Norcross, Georgia  30092
               Telephone:  678-969-5000
               Facsimile:  678-969-4959
               Attention:  Chairman of the Board
               Attention:  General Counsel

        with a copy to:

        Willkie Farr & Gallagher
               787 Seventh Avenue
               New York, New York  10019-6099
               Telephone:  212-728-8000
               Facsimile:  212-728-8111
               Attention:  Myron Trepper, Esq.

        Cravath Swaine & Moore
               Worldwide Plaza
               825 Eighth Avenue
               New York, New York  10019
               Telephone:  212-474-1000
               Facsimile:  212-474-3700
               Attention:  Richard W. Clary, Esq.

        Alston & Bird LLP
               One Atlantic Center
               1201 West Peachtree Street
               Atlanta, Georgia  30309
               Telephone:  404-881-7000
               Facsimile:  404-881-7777
               Attention:  Neal Batson, Esq.

        O'Melveny & Myers LLP
               Citicorp Center
               153 East 53rd Street
               New York, New York  10022
               Telephone:  (212) 326-2000
               Facsimile:  (212) 326-2061
               Attention:  Joel B. Zweibel, Esq.

        If to K-C, to:

        Kimberly-Clark Corporation

               P.O. Box 619100
               Dallas, Texas 75261-9100



                                      -13-
<PAGE>

               Telephone: (972) 281-1215
               Facsimile: (972) 281-1492
               Attention:  General Counsel

        with a copy to:

        Sidley & Austin
               One First National Plaza
               Chicago, Illinois  60603
               Telephone:  (312) 853-7000
               Facsimile:  (312) 853-7036
               Attention:  Shalom L. Kohn, Esq.

        O'Melveny & Myers LLP
               Citicorp Center
               153 East 53rd Street
               New York, New York  10022
               Telephone:  (212) 326-2000
               Facsimile:  (212) 326-2061
               Attention:  Joel B. Zweibel, Esq.

or such other address as shall be furnished in writing  pursuant to these notice
provisions  by any Party.  A notice of change of address  shall not be deemed to
have been given until received by the addressee.

     11. EFFECT ON LITIGATION.  Neither this Settlement Agreement, the Ancillary
Agreements,  nor any of the  terms  hereof  or  thereof,  nor any  negotiations,
documents,  pleadings,  proceedings  or public  reports in respect of any of the
foregoing, shall constitute or be construed as or be deemed to be evidence of an
admission on the part of either  Paragon or K-C of any  liability or wrong doing
whatsoever,  or of the  truth or  untruth  of any of the  claims  made by either
Paragon or K-C in their  disputes or of the merit or lack of merit of any of the
defenses thereto;  nor shall this Settlement  Agreement (including the Ancillary
Agreements),  or any of  the  terms  hereof,  or  any  negotiations,  documents,
pleadings,  proceedings or public reports in respect of any of the foregoing, be
offered or received  in  evidence or used or referred to in any such  proceeding
against either Paragon or K-C or used or referred to in any such  proceeding for
any purpose  whatsoever  except with respect to (i) effectuation and enforcement
of this Settlement  Agreement or the Ancillary Agreements and the discontinuance
of the Action,  the Appeal or the  Withdrawal  Motion,  or (ii) with  respect to
proceedings  in the Chapter 11 Case to  authorize  and approve  this  Settlement
Agreement and the execution and delivery hereof, and to confirm the Plan.

     12. EQUITABLE  REMEDIES.  The Parties hereto agree that irreparable  damage
would occur in the event that any of the provisions of this Settlement Agreement
were not  performed  in  accordance  with its specific  terms or otherwise  were
breached.  It  accordingly  is agreed  that the  Parties  shall be  entitled  to



                                      -14-
<PAGE>

specific  enforcement of the terms and  provisions  hereof and to injunctive and
other equitable  relief in the Bankruptcy Court or any other court of the United
States or any state thereof having  jurisdiction in addition to any other remedy
to which they are entitled to at law or in equity. To the extent such injunctive
or other  equitable  relief  requires  the  posting  of a bond or other  similar
requirement, each Party expressly waives the satisfaction of such requirement by
the other Party.

     13.  HEADINGS.  The  descriptive  headings of the several  sections of this
Settlement  Agreement are inserted for  convenience of reference only and do not
constitute  a part of this  Settlement  Agreement,  nor in any  way  affect  the
interpretation of any provisions hereof.

     14.  APPLICABLE  LAW. This  Settlement  Agreement  shall be governed in all
respects, including validity,  interpretation and effect, by the Bankruptcy Code
and the laws of the State of New York,  without  giving effect to the principles
of conflicts of law thereof.

     15. COUNTERPARTS.  This Settlement Agreement may be executed in two or more
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same instrument.

     16. ENTIRE  SETTLEMENT.  This  Settlement  Agreement  (including  the other
documents  referred  to  herein)  (a)  constitutes  the entire  settlement,  and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof, and (b) except as
otherwise  expressly  provided herein,  is not intended to confer upon any other
person any rights or remedies hereunder.

     17. RULES OF CONSTRUCTION.

               17.1.  Any term  used in this  Settlement  Agreement  that is not
     defined  herein,  but that is used in the Bankruptcy Code or the Bankruptcy
     Rules,  shall  have the  meaning  assigned  to that  term in (and  shall be
     construed  in  accordance  with  the  rules  of  construction   under)  the
     Bankruptcy Code or the Bankruptcy  Rules.  Without  limiting the foregoing,
     the rules of  construction  set forth in section 102 of the Bankruptcy Code
     shall apply to the Settlement Agreement, unless superseded herein.

               17.2. The words  "herein",  hereof,"  "hereto,"  "hereunder"  and
     others of similar import refer to the  Settlement  Agreement as a whole and
     not to any  particular  section,  subsection  or clause  contained  in this
     Settlement Agreement, unless the context requires otherwise.

               17.3. Any reference in this  Settlement  Agreement to an existing
     document  or 


                                      -15-
<PAGE>

     exhibit  means such  document or exhibit as it may be amended,  modified or
     supplemented by the Parties.

               17.4.  Whenever  from the  context it is  appropriate,  each term
     stated in either the singular or the plural shall include both the singular
     and the  plural,  and each  pronoun  stated in the  masculine,  feminine or
     neuter includes the masculine, feminine and neuter.

               17.5.  In computing  any period of time  prescribed or allowed by
     this Settlement Agreement,  the provisions of Bankruptcy Rule 9006(a) shall
     apply.

     18.  CONDITIONS.  As an express  condition  precedent to the obligations of
Paragon and K-C under this Settlement Agreement:

               18.1. BANKRUPTCY COURT APPROVAL. An order shall have been entered
     approving this Settlement Agreement in all respects,  which order shall not
     be subject to any stay.  In the event that the  Bankruptcy  Court  Approval
     Order is not  entered,  the  terms  of this  Settlement  Agreement  and the
     Ancillary  Agreements  shall not be binding on any of the  Parties  hereto,
     except that (a) Sections 11 and 24 hereof shall remain binding, and (b) the
     License  Agreements  shall  continue to be effective and  terminable by the
     Parties in accordance with the terms thereof.

               18.2. EXECUTION OF THE LICENSE AGREEMENTS. Contemporaneously with
     the execution hereof, Paragon and K-C shall execute and deliver each of the
     License Agreements.

     19.  AGREEMENT TO COOPERATE.  As soon as reasonably  practicable  after the
date of execution of this  Settlement  Agreement,  Paragon shall take reasonable
good faith steps to promptly  obtain the entry of the Bankruptcy  Court Approval
Order through the filing of a motion  pursuant to, INTER ALIA,  Bankruptcy  Rule
9019,  and K-C shall take such steps as reasonably  requested by Paragon in good
faith to obtain entry of the Bankruptcy Court Approval Order.

     20. REQUISITE  AUTHORITY.  Each of the undersigned  Parties  represents and
warrants that, except as affected by the requirements of the Bankruptcy Code for
the approval  of, and subject to the terms of, this  Settlement  Agreement,  (a)
this Settlement  Agreement and all other documents executed or to be executed by
such  Party  in  accordance  with  this  Settlement   Agreement  are  valid  and
enforceable  in  accordance  with  their  terms,  (b) such  Party  has taken all
necessary corporate action required to authorize the execution,  performance and
delivery of this Settlement  Agreement and the related  documents,  and (c) upon
this Settlement Agreement being approved by an order of the Bankruptcy Court, it
will perform this  Settlement  Agreement and consummate all of the  transactions
contemplated hereby.

                                      -16-
<PAGE>

     21.  ANNOUNCEMENTS.   All  press  releases  by  any  Party  regarding  this
Settlement  Agreement  shall be  approved  by both  Paragon and K-C prior to the
issuance  thereof;  provided  that any Party may make any public  disclosure  it
believes  in good  faith is  required  by law or  regulation  (in which case the
disclosing  Party shall  advise the other Party prior to making such  disclosure
and  provide  such  other  Party an  opportunity  to review  and  comment on the
proposed  disclosure).  Paragon's  filing of a motion with the Bankruptcy  Court
seeking  approval of this Settlement  Agreement shall not be considered a public
announcement requiring K-C's approval for purposes of this Section 21.

     22.  JURISDICTION.  Unless  and  until  the  Chapter  11 Case is  closed or
dismissed,  the Bankruptcy  Court shall retain exclusive  jurisdiction,  and the
Parties  consent to such exclusive  jurisdiction,  to hear and determine any and
all matters,  claims or disputes arising from or relating to the  interpretation
and/or implementation of this Settlement Agreement;  PROVIDED, HOWEVER, that the
Bankruptcy Court shall not retain  jurisdiction  following the Effective Date to
determine  matters,  claims  and  disputes  concerning  the  interpretation  and
enforcement of the License Agreements.

     23.  CONFIDENTIALITY.   Nothing  contained  in  this  Settlement  Agreement
modifies, or is intended to modify, the obligations of K-C and/or its employees,
advisors and agents under any confidentiality agreements that such Entities have
executed with Paragon.


                     (REST OF PAGE INTENTIONALLY LEFT BLANK)



                                      -17-
<PAGE>


               IN WITNESS  WHEREOF,  each of the Parties  hereto has caused this
Settlement Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first above written.

                                            PARAGON TRADE BRANDS, INC.
                                            Debtor and Debtor in Possession

                                            By:    /S/ B.V. ABRAHAM            
                                               --------------------------------
                                               Title:  Chairman and CEO

                                            KIMBERLY-CLARK CORPORATION

                                            By:    /S/ O. GEORGE EVERBACH      
                                               --------------------------------
                                               Title:  Senior Vice President -
                                                         Law and Government 
                                                         Affairs


                                      -18-