CANADIAN LICENSE AGREEMENT 

        This  Agreement,  effective as of the date of execution by both parties,
is by and between THE PROCTER & GAMBLE  COMPANY,  an Ohio  Corporation  having a
principal  place of  business at One Procter & Gamble  Plaza,  Cincinnati,  Ohio
45202,  (hereinafter  referred to as "P&G") and PARAGON  TRADE  BRANDS,  INC., a
Delaware  Corporation  having a principal  place of  business at 180  Technology
Parkway, Norcross, Georgia 30092, and its wholly-owned subsidiary, Paragon Trade
Brands  (Canada)  Inc.,  a  Canadian  corporation  having a  principal  place of
business at 1600 Clark Boulevard, Brampton, Ontario, Canada L6T 3V7 (hereinafter
collectively referred to as "Paragon"). P&G and Paragon will be jointly referred
to as the "parties".

        WHEREAS,  P&G is the  owner  of  Canadian  Patent  Application  585,807,
"Mechanical  Fastening  Means  With  Disposal  Means  For  Disposable  Absorbent
Articles"  filed  on  December  13,  1988  to  Robertson  et al.  (the  Canadian
counterpart of U.S. Patent 4,963,140)  relating to an absorbent article having a
mechanical fastening system with disposal means;

        WHEREAS,  P&G owns patents  corresponding to Canadian Patent Application
585,807 in a number of other countries;

        WHEREAS,  Paragon makes,  uses, offers for sale and sells a Supreme line
of  disposable  infant  diapers  having a  mechanical  fastening  system  with a
nonwoven outer cover;
<PAGE>
                                       2


        WHEREAS,  P&G believes that the Supreme diapers made and sold by Paragon
fall  within the scope of one or more of the pending  claims of Canadian  Patent
Application 585,807 to Robertson et al.; and

        WHEREAS,  Paragon desires to obtain from P&G and P&G is willing to grant
to  Paragon a royalty  bearing,  non-exclusive  right to make,  to have made for
Paragon with the prior written  consent of P&G, to use, to offer for sale and to
sell in Canada certain integral disposable  absorbent articles with a mechanical
fastening  system having a disposal  means  consisting of a nonwoven outer cover
which are  within  the scope of one or more of any  issued  claims of any patent
issuing from Canadian Patent Application 585,807 to Robertson et al.;

        NOW THEREFORE, in consideration of the promises,  mutual covenants,  and
agreements contained herein, the parties agree as follows:

DEFINITIONS

"Licensed Product" as used herein,  shall mean an integral disposable  absorbent
article  comprising  an infant  diaper or an adult  diaper  having a  mechanical
fastening system  consisting of (i) a closure member of a hook fastening member;
(ii) a landing  member of a loop  fastening  member;  and (iii)  disposal  means
consisting of a nonwoven  outer cover having a limited  degree of  engageability
with the hook  fastening  member of less than 750 grams as  defined  by the Test
Method  designated  "Strength Of Attachment Of  Mechanical  Fastening  Member To
Diaper  Backsheet"  (attached hereto as Appendix 1) and falling within the scope
of one or more of any valid and  enforceable  claims of any patent  issuing from
Canadian  Patent   Application   585,807  to  Robertson  et  al.  

<PAGE>
                                       3


including  any  continuations,   continuation-in-part,   divisionals,  reissues,
reexaminations, or extensions thereof.

"Net Sales Price",  as used herein,  shall mean the revenue  received by Paragon
from the sale of Licensed  Products to independent  third parties in Canada less
the following  amounts:  (i)  discounts,  including cash  discounts,  or rebates
actually  allowed or granted,  (ii) credits or allowances  actually granted upon
claims or returns  regardless of the party requesting the return,  (iii) freight
charges paid for delivery,  (iv) revenue for defective articles sold exclusively
as scrap, and (v) taxes or other  governmental  charges levied on or measured by
the invoiced amount whether absorbed by the billing or the billed party.

"Settlement  Agreement",  as used herein,  shall mean the  Settlement  Agreement
entered into between Paragon and P&G concurrently with this License Agreement.

REPRESENTATIONS AND WARRANTIES

With the  exception  of  non-exclusive  license  rights  granted to others,  P&G
represents  and  warrants  that:  1) it is the  owner of all  right,  title  and
interest in and to Canadian Patent  Application  585,807 to Robertson et al. and
2) it has the  right  to  enter  this  Agreement  without  breaching  any  other
agreement or obligation to a third party.

Paragon represents and warrants that it is an independent entity and that it has
the right to enter into this Agreement  without breaching any other agreement or
obligation to a third party.

LICENSE GRANT
<PAGE>
                                       4


1.      Upon  execution  of  this  License  Agreement  by both  parties,  and in
        consideration  of  Paragon's   agreement  to  pay  prospective   running
        royalties on Licensed  Products in accordance  with Paragraph (2) below,
        P&G agrees to grant and hereby does grant to  Paragon,  as of January 7,
        1999, a non-exclusive license to make, to have made for Paragon with the
        prior  written  consent of P&G, to use, to offer for sale and to sell in
        Canada, without the right to grant sublicenses, Licensed Products.

2.      As  consideration  for the prospective  license rights herein granted by
        P&G,  Paragon agrees that it will,  commencing  upon the issuance of any
        patent issuing from Canadian Patent Application  585,807 to Robertson et
        al.,  begin to pay to P&G a  running  royalty  in  accordance  with each
        applicable provision of the following schedule:

        (A)    For a  restricted,  non-exclusive  license in  Canada under P&G's
               Canadian Patent Application  585,807 to Robertson et al. to make,
               to have made for Paragon with the  prior written  consent of P&G,
               to use, to offer for sale and to sell, without the right to grant
               sublicenses,  Licensed  Products  which fall within  the scope of
               one or more valid and  enforceable  claims of any  patent issuing
               from  Canadian  Patent  Application 585,807  to  Robertson et al.
               having  an  engageability  between the hook fastening  member and
               the nonwoven outer cover,  as defined by the Test Method attached
               hereto,  of less  than  500 grams - Three  Eighths of One Percent
               (0.375%) of the Net Sales Price of Licensed Products;

        (B)    For a  restricted,  non-exclusive  license in  Canada under P&G's
               Canadian Patent Application  585,807 to Robertson et al. to make,
               to have made for Paragon with 

<PAGE>
                                       5


               the  prior written  consent of P&G, to use, to offer for sale and
               to  sell,  without  the  right  to  grant  sublicenses,  Licensed
               Products  which fall  within  the scope of  one or more valid and
               enforceable  claims of any  patent issuing from  Canadian  Patent
               Application  585,807 to Robertson et al. having an  engageability
               between the hook fastening  member and  the nonwoven outer cover,
               as defined by the Test  Method attached hereto,  of  between  500
               grams  and 750 grams -- One Half of One Percent (0.5%) of the Net
               Sales  Price of  Licensed Products.

        Subject to Paragraph 6.5 of the Settlement Agreement,  the parties agree
        that  a  non-limiting   example  of  Licensed  Products  falling  within
        subsection  (A) is  Paragon's  Supreme  product  (a  sample  of which is
        attached  hereto as Appendix 2). Paragon agrees to notify P&G in writing
        within ten (10) days if it  changes  any of its  products  in such a way
        that it no longer intends to make running royalty  payments  pursuant to
        subsections (A) or (B) hereof.

3.      The license  rights  granted  in Paragraph  (1)  under  Canadian  Patent
        Application  585,807 to Robertson et al. shall  automatically  expire on
        the date of expiration of any said  patent issuing  therefrom, including
        any  continuations, continuations-in-part, divisionals,  reexaminations,
        reissues  or extensions  thereof.  Should any patent licensed  hereunder
        be  held  to have  lapsed for  the  failure  to  pay  maintenance  fees,
        royalties  for  said  patent  shall  not be due  for the  period  of any
        such  lapse. However,  should any such  lapsed  patent  subsequently  be
        considered  as not having  expired  by the  acceptance  by the  relevant
        Canadian  Patent Authority  of delayed  payment of the  maintenance fee,
        the license  rights granted under said patent shall automatically revive
        and royalties shall again accrue 

<PAGE>
                                       6


        beginning on the date that the term of the patent has been maintained as
        a result of the  acceptance by the relevant Canadian Patent Authority of
        a payment of the maintenance fee.  P&G agrees  to provide written notice
        to Paragon of the lapse of any such  patent, and if applicable, the date
        that the patent has been maintained as a result of the acceptance by the
        relevant  Canadian  Patent   Authority  of  a  delayed  payment  of  the
        maintenance fee.

 4.     Within thirty (30) days of June 28, 1999, Paragon shall provide P&G with
        an initial  statement  reporting  Paragon's Net  Sales Price of Licensed
        Products  covered by  this  License  Agreement for the period  beginning
        on January 7, 1999 and ending on June 27, 1999 and be accompanied by the
        appropriate  royalty payment.  On an ongoing basis, the  Paragon  fiscal
        year ends on the last Sunday of December.  Therefore, after making  said
        initial  report,  Paragon shall,  within 30 days  after the  end of each
        subsequent Paragon fiscal year, commencing on December 26, 1999, provide
        P&G with  an  annual statement  reporting  Paragon's Net  Sales Price of
        Licensed  Products covered by this  License  Agreement for the preceding
        one year period.  The parties recognize that the report and  payment for
        the 1999  fiscal  year will  cover only the six month  period commencing
        on June 28, 1999  and  ending  on December  26,  1999  in  light  of the
        previous initial report and  payment.  Each report shall specify the Net
        Sales  Price of Licensed  Products  attributable on an individual  basis
        to each  of the  categories (A) and (B)  set forth in  Paragraph  (2) of
        this License Agreement.  Each such report is due within thirty (30) days
        of the close of the fiscal  year for which the report is made, and shall
        be accompanied by the royalty payment owed to P&G by Paragon.

               Each such report shall be treated as confidential and proprietary
        information of Paragon and shall only be used for the purposes set forth
        herein.  The report shall only be 

<PAGE>
                                       7


        shared  within  P&G with  such persons  at P&G who  need  to  know  such
        information for the purposes set forth herein.  Each such  report may be
        shared  with  P&G's  outside  counsel or auditors  who need to know such
        information  for the  purpose of  verifying  such report.

5.      Once each year,  at P&G's election  and  expense, Paragon's  independent
        public accountant  shall  certify to P&G that the annual  report for the
        previous  period or year is true, complete and that royalties  have been
        paid for Licensed Products sold during the previous year.  Paragon shall
        keep correct and complete records  containing  all information  required
        for  computation and  verification of the amounts to be paid   hereunder
        for a period of at least three (3) years after making  each such report.
        Upon  reasonable  notice,  during regular  business  hours,  independent
        "Big Six" public  accountants  selected  by P&G,  and paid for by P&G in
        the event the Paragon payment being verified proves accurate  to  within
        two  percent  (2.00%), may  make such examinations of Paragon's records,
        not more frequently than once a year, as P&G deems necessary  to  verify
        such  reports  and  payments  provided for  hereunder.  Such examination
        shall  occur  at  such  location  as  designated  by  Paragon,  and such
        verification  shall  only  state the  amount  of payments due in each of
        categories (A) or (B) of  Paragraph  (2) of this License  Agreement.  If
        the  Paragon payment  does not  prove  accurate to  within  two  percent
        (2.00%),  royalties  being  underpaid,  then  Paragon shall pay for such
        independent public accountants.

6.      If  Paragon  shall be  in default  in making any  payments  hereunder at
        the times and in  the manner herein  provided or  in complying  with the
        financial  obligations it assumed pursuant to the concurrently  executed
        Settlement  Agreement  with P&G, P&G may give written  notice to Paragon
        specifying  the  particulars  of such default,  and in the event Paragon
        does 

<PAGE>
                                       8


        not fully remedy such default within thirty (30) days after such notice,
        P&G may at  its option,  terminate  this License Agreement by giving ten
        (10) days prior written notice to Paragon to that effect.  In  addition,
        P&G  may proceed to enforce the  defaulted  obligation of Paragon by any
        legally available  means.  No waiver on the part of P&G in respect  to a
        default  by  Paragon  shall be  construed as a waiver of P&G's  right to
        proceed  under this  Paragraph with  respect to  subsequent defaults.

7.      Neither  expiration  of this License  Agreement in  accordance  with its
        provisions  nor  termination  of this License  Agreement  shall  relieve
        Paragon  of its  obligations  for  payment  of  unpaid  royalties  under
        Paragraph (2) or for  enforcement  of any other  obligation or liability
        accrued  hereunder  prior to the  effective  date of such  expiration or
        termination.

8.      The failure of either party to strictly enforce this License  Agreement,
        or to insist upon the strict  compliance with its terms shall not at any
        time be considered a waiver or  condonation by such party of the default
        or  failure  by the  other  party to  strictly  perform  the  covenants,
        conditions and agreements on its part to be performed.

9.      Paragon agrees, when its existing supply of packaging after the issuance
        of any patent  from Canadian Patent  Application 585,807 to Robertson et
        al. has  been exhausted, to mark the packages of its  Licensed  Products
        to be sold within  Canada with the following  statement: "Licensed under
        one or more of the following  Canadian Patents (with  appropriate patent
        numbers  filled   in  per  Paragraph  (2))",   and  if  a  reexamination
        certificate  or a reissue of any such  patent  occurs,  to place on  its
        packages   appropriate  statements   relating  to   that   reexamination
        certificate and/or that reissue  patent.  There shall be no 

<PAGE>
                                       9


        reference to  "The Procter & Gamble Company", "Procter & Gamble", "P&G",
        any variation or affiliate  thereof, or any trademark or tradename owned
        or controlled  by P&G on the packaging.

10.     No  patent  rights  outside  Canada are  granted by P&G in this  License
        Agreement.  However,  P&G agrees  that it will, upon request by Paragon,
        negotiate in good faith in an attempt to  establish mutually  acceptable
        terms and conditions for Paragon to obtain non-exclusive royalty bearing
        license rights under P&G's foreign patents corresponding to the Canadian
        Patent Application licensed herein on a case by case basis.  The parties
        recognize  that the terms and  conditions,  including the royalty rates,
        for said foreign  license rights may not be the same as those herein set
        forth nor the same with respect to one another.

11.     P&G hereby waives any and all rights to sue (including,  but not limited
        to, actions to enjoin and/or  recover damages  from) Paragon for making,
        having made for Paragon with the prior  written  consent of P&G,  using,
        offering for sale, and/or selling Licensed Products in Canada, provided:
        (1) this  License  Agreement  has not been  terminated  by either party;
        (2) Paragon  is in  full  compliance  with  all  material  terms  of the
        concurrently  executed Settlement  Agreement with P&G  and is current in
        meeting  its  obligation  to  pay  the  running  royalties  provided  in
        Paragraph (2) hereof; and (3) Paragon is  otherwise  in full  compliance
        with the  material  terms of this  License  Agreement.

12.     Notices  relating  to this  Agreement  shall be in writing  and shall be
        considered  served when deposited as certified or registered  U.S. mail,
        return receipt  requested,  in a sealed envelope with sufficient postage
        affixed, addressed as follows:
<PAGE>
                                       10


        P&G:          Attention:  Vice President & General Counsel - Patents
                      The Procter & Gamble Company
                      Winton Hill Technical Center
                      6090 Center Hill Avenue
                      Cincinnati, Ohio 45224

        Paragon:      Attention:  Vice President & General Counsel
                      Paragon Trade Brands, Inc.
                      180 Technology Parkway
                      Norcross, GA   30092

13.     The  parties  agree  that this  License  shall be  personal  to  Paragon
        and shall be nontransferable  and nonassignable to third parties without
        the  prior  written consent  of P&G,  which consent  P&G  agrees  not to
        unreasonably  withhold  or  unreasonably  delay.  In this  context,  the
        parties agree that it is not an unreasonable  ground for P&G to withhold
        or  delay  its  consent if  the  effect  of  the  proposed  transfer  or
        assignment  would  be to allow  a  transferee  or assignee to obtain the
        prospective  right to  make,  import,  use,  offer for  sale and/or sell
        Licensed  Products in Canada without entering into a mutually  agreeable
        settlement agreement for any past infringing activity by  the transferee
        or assignee  with respect to the patents  included  in the definition of
        "Licensed Products".  In addition, the parties  agree that this  License
        shall not  apply to the  manufacture,  import,  use or sale of  Licensed
        Products by any  other business  entity  acquired  by Paragon,  by which
        Paragon is  acquired,  merged with  Paragon,  consolidated with Paragon,
        partnered  with  Paragon,  or in  any other  business  arrangement  with
        Paragon  after the  effective date  of this Agreement  without the prior
        written  consent of P&G,  which consent  P&G agrees not to  unreasonably
        withhold or unreasonably  delay.  In  this context,  the  parties  agree
        that it  is  not an unreasonable  ground  for P&G to  withhold  or delay
        its consent if the effect of the proposed  transaction would be to allow
        an acquiring,  merging or consolidating entity or  

<PAGE>
                                       11


        partner to obtain the prospective right to make, import,  use, offer for
        sale  and/or sell  Licensed  Products in Canada  without entering into a
        mutually agreeable settlement agreement with P&G for any past infringing
        activity  by the acquiring, merging or  consolidating  entity or partner
        with  respect to  the patents  included in the  definition  of "Licensed
        Products".

14.     In the event the Settlement Agreement executed concurrently  herewith is
        not  approved  by the  Bankruptcy Court  (as  defined  in the Settlement
        Agreement)  or in  the  event that  the order  approving the  Settlement
        Agreement  does not become a Final Order by July 31, 1999 (as defined in
        the Settlement  Agreement),  this License  Agreement shall be terminable
        by P&G,  at P&G's  option.  Termination in such  circumstance  shall not
        relieve Paragon of its obligation to pay royalties accrued hereunder for
        the period before  termination.  P&G  agrees to provide  Paragon  with a
        three  month conversion period after the date of termination. Royalties,
        as set forth above, shall be due on  the Licensed Products  manufactured
        and/or  sold during  the  conversion period  and such royalties shall be
        payable within 30 days of the end of the conversion period.

15.     P&G agrees to give Paragon  notice of all future  running  royalty based
        private  label  or brand  manufacturer  licenses  granted  under the P&G
        Canadian Patent  Application herein, and, upon written  request, provide
        Paragon  copies of all such  subsequent running royalty based agreements
        within  thirty (30) days  of  execution of any such agreements.  Paragon
        shall be entitled, upon thirty (30) days written request to P&G, to have
        this License Agreement brought into conformity with any such  subsequent
        running royalty based license to any private label or brand manufacturer
        other than Paragon in the event P&G 

<PAGE>
                                       12


        grants  any  license under any of the P&G  Canadian  Patent Applications
        herein under terms more favorable than those set forth herein.

16.     This  Agreement  and the  Settlement  Agreement  set  forth  the  entire
        understanding  of the parties with respect to the subject  matter herein
        set forth.  There are no ancillary  understandings  or  agreements  with
        respect to the subject matter of this License Agreement.

17.     This  Agreement  may  be  executed  in  counterparts.  Each  part  shall
        constitute an original.

18.     This  Agreement  shall become  effective as of the date of acceptance by
        the last party to sign.



FOR: PARAGON TRADE BRANDS, INC.             FOR: THE PROCTER & GAMBLE COMPANY



By  /S/ B.V. ABRAHAM                        By  /S/ MARK D. KETCHUM             
    --------------------------------            --------------------------------

Title  CHAIRMAN AND CEO                     Title  PRESIDENT - GLOBAL BABY CARE 
      ------------------------------              ------------------------------

Date  FEBRUARY 2, 1999                      Date  FEBRUARY 2, 1999              
      ------------------------------              ------------------------------



FOR: PARAGON TRADE BRANDS (CANADA), INC.


By  /S/ CHRIS OLIVER                
    --------------------------------

Title  PRESIDENT                    
      ------------------------------

Date  FEBRUARY 2, 1999              
      ------------------------------