SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

  [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 26, 1999

                                       OR

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

                         Commission file number 1-11368

                           PARAGON TRADE BRANDS, INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                     91-1554663
(State or other jurisdiction of             (I.R.S. employer identification no.)
 incorporation or organization)

     180 TECHNOLOGY PARKWAY
        NORCROSS, GEORGIA                                 30092
(Address of principal executive offices)                (Zip code)

       Registrant's telephone number, including area code: (678) 969-5000

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                                              NAME OF EACH EXCHANGE ON WHICH
         TITLE OF EACH CLASS                           REGISTERED
         -------------------                  ------------------------------
Common Stock, par value $.01 per share                     N/A

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.  Yes   X      No
                                        -----        -----

Indicate  by check mark  whether  the  Registrant  has filed all  documents  and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.   Yes   X      No
                            -----        -----

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

As of February 29, 2000, there were 11,891,000 shares of the Registrant's Common
Stock  outstanding,  and  the  aggregate  market  value  of such  stock  held by
nonaffiliates of the Registrant was  $118,891,000  (based on the deemed value of
$10.00 per share of the common stock distributed  pursuant to the Company's Plan
of Reorganization as of January 28, 2000).

                                                        Exhibit Index on Page 85

<PAGE>


                           PARAGON TRADE BRANDS, INC.
                       TABLE OF CONTENTS TO ANNUAL REPORT
                                  ON FORM 10-K


<TABLE>
<CAPTION>
                                     PART I
                                                                                                                    PAGE
<S>           <C>                                                                                                    <C>

Item 1:       BUSINESS                                                                                                1

Item 2:       PROPERTIES                                                                                              9

Item 3:       LEGAL PROCEEDINGS                                                                                       9

Item 4:       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                    13


                                     PART II

Item 5:       MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
              STOCKHOLDER MATTERS                                                                                    13

Item 6:       SELECTED FINANCIAL DATA                                                                                14

Item 7:       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS                                                                                  16

Item 7A:      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                             31

Item 8:       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                            32

Item 9:       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE                                                                                   67


                                    PART III

Item 10:      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                     67

Item 11:      EXECUTIVE COMPENSATION                                                                                 69

Item 12:      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                         78

Item 13:      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                         80


                                     PART IV

Item 14:      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                                        80
</TABLE>

                                     Page i

<PAGE>

                                     PART I

ITEM 1:       BUSINESS

GENERAL

Paragon Trade Brands, Inc. (the "Company") is the leading  manufacturer of store
brand infant  disposable  diapers in North America.  The Company  manufactures a
line of premium and economy diapers,  training pants and feminine care and adult
incontinence products which are distributed throughout North America,  primarily
through grocery and food stores, mass merchandisers, warehouse clubs, toy stores
and drug stores that market the Company's  products  under their own store brand
names. The Company has also established  international joint ventures in Mexico,
Argentina,  Brazil and China for the manufacture  and sale of infant  disposable
diapers and other absorbent personal care products.

RECENT DEVELOPMENTS

On  January  28,  2000,  the  Company  emerged  from  Chapter 11  protection  as
contemplated  under its Second Amended Plan of  Reorganization  (as subsequently
modified  through January 13, 2000, the "Plan").  All  pre-petition  obligations
were  discharged.  Pursuant  to the  Plan,  Wellspring  Capital  Management  LLC
("Wellspring")  and  certain  of  its  affiliates   purchased  an  aggregate  of
11,516,405  shares,  or  approximately  97 percent,  of the common  stock of the
reorganized  Company for a cash contribution of $115.2 million.  Under the Plan,
general  unsecured  creditors  of the  Company  are  entitled  to receive  their
pro-rata  share of $115.4  million in cash and $146.0  million of 11.25  percent
senior  subordinated notes due 2005 (the "New Notes"). A total of 178,365 shares
and 625,821 warrants to purchase  additional  shares of the Company's new common
stock will be distributed to holders of old common stock under the Plan.  Common
stockholders  of record as of January 13, 2000 will receive  .0149 shares of the
Company's  new common stock and .0524  warrants for each share of the  Company's
old common stock held on such date and  surrendered in accordance with the Plan.
The warrants are  transferable,  have an exercise  price of $18.91 per share and
expire on January 28, 2010.  General  unsecured  creditors and  stockholders  of
record as of January 13, 2000 are entitled to receive  their  pro-rata  share of
the proceeds,  if any, of certain  litigation claims that remain with the estate
and  which  will  be  prosecuted  on  their  behalf  by  the  litigation  claims
representative  appointed  under the Plan.  The Company had filed for Chapter 11
protection  on January 6, 1998 after losing a material  patent  litigation  case
described herein. See "REORGANIZATION CASE" and "ITEM 3: LEGAL PROCEEDINGS."

On January 28, 2000,  the Company and certain  subsidiaries  of the Company,  as
guarantors,  entered  into a  three-year  $95 million  financing  facility  (the
"Credit Facility") with a bank group led by Citicorp USA, Inc. ("Citicorp"). The
maximum  borrowing  under the Credit  Facility  may not exceed the lesser of $95
million or an amount determined by a borrowing base formula.  The borrowing base
formula is  comprised  of certain  specified  percentages  of eligible  accounts
receivable,  eligible  inventory,  equipment  and  personal  property  and  real
property of the Company.  The Credit Facility has a sub-limit of $15 million for
the  issuance  of letters of credit.  The  Credit  Facility  contains  customary
financial  covenants.  See  "MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS: RECENT DEVELOPMENTS."

On January 28, 2000, the Company issued the New Notes as contemplated  under the
Plan. The New Notes are guaranteed by certain domestic  subsidiaries and are not
callable until February 1, 2003.  Interest is payable  semi-annually  and during
the first two years can be paid in kind if free cash  flow,  as  defined  in the
Indenture, falls below projected levels. The New Notes are subordinated in right
of payment to the  payment of all  senior  indebtedness.  The New Notes  contain
customary restrictive covenants.

The Company will record the reorganization and related transactions using "fresh
start"  accounting as required by Statement of Position 90-7 ("SOP 90-7") issued
by the American  Institute of Certified Public  Accountants.  See  "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: RECENT
DEVELOPMENTS."

                                     Page 1
<PAGE>

REORGANIZATION CASE

The Company has previously  disclosed that The Procter & Gamble Company  ("P&G")
had filed a lawsuit  against  it in the  United  States  District  Court for the
District of Delaware (the "Delaware District Court") alleging that the Company's
"Ultra"  disposable baby diaper products infringed two of P&G's dual cuff diaper
patents.  The lawsuit sought injunctive relief, lost profit and royalty damages,
treble damages and attorneys' fees and costs. The Company denied liability under
the  patents  and  counterclaimed  for  patent  infringement  and  violation  of
antitrust laws by P&G. The Company also disclosed that if P&G were to prevail on
its claims,  an award of all or a substantial  amount of the relief requested by
P&G could have a material  adverse effect on the Company's  financial  condition
and results of operations.

On December 30, 1997, the Delaware  District Court issued a Judgment and Opinion
which found that two of P&G's dual cuff diaper  patents were valid and infringed
by certain of the Company's disposable diaper products, while also rejecting the
Company's patent  infringement  claims against P&G. The Delaware  District Court
had earlier dismissed the Company's antitrust  counterclaim on summary judgment.
The Judgment  entitled P&G to damages  based on sales of the  Company's  diapers
containing the  "inner-leg  gather"  feature.  While the final damages number of
approximately  $178.4  million was not entered by the  Delaware  District  Court
until  June  2,  1998,  the  Company  originally  estimated  the  liability  and
associated  litigation costs to be approximately $200 million. The amount of the
award   resulted  in  violation  of  certain   covenants   under  the  Company's
then-existing  bank loan agreements.  As a result,  the issuance of the Judgment
and the uncertainty it created caused an immediate and critical  liquidity issue
for the Company.

On January 6, 1998, the Judgment was entered on the docket in Delaware in such a
manner  that P&G would have been able to begin  placing  liens on the  Company's
assets.  As a result,  the  Company  filed for  relief  under  Chapter 11 of the
Bankruptcy Code, 11 U.S.C.  Section 101 et seq., in the United States Bankruptcy
Court for the  Northern  District of Georgia  (Case No.  98-60390) on January 6,
1998 (the "Chapter 11 filing"). None of the Company's subsidiaries were included
in the Chapter 11 filing. The Chapter 11 filing was designed to prevent P&G from
placing  liens on Company  property,  permit the Company to appeal the  Delaware
District  Court's  decision  on the P&G case in an orderly  fashion and give the
Company the opportunity to resolve  liquidated and  unliquidated  claims against
the Company, which arose prior to the Chapter 11 filing.

In connection  with the Chapter 11 filing,  on January 30, 1998,  the Bankruptcy
Court  entered a Final Order  approving  the Credit  Agreement  (the "DIP Credit
Facility") as provided under the Revolving Credit and Guarantee  Agreement dated
as of January 7, 1998, among the Company, as Borrower,  certain  subsidiaries of
the Company,  as  guarantors,  and a bank group led by The Chase  Manhattan Bank
("Chase").  Pursuant  to the  terms  of the  DIP  Credit  Facility,  Chase  made
available to the Company a revolving  credit and letter of credit facility in an
aggregate principal amount of $75 million. The Company's maximum borrowing under
the DIP Credit  Facility could not have exceeded the lesser of $75 million or an
available  amount as  determined  by a borrowing  base  formula.  The DIP Credit
Facility  had a sublimit of $10  million for the  issuance of letters of credit.
The DIP Credit  Facility  expired  on January  28,  2000,  the date the  Company
consummated its plan of reorganization described below. As part of its exit from
Chapter 11, the Company entered into the Credit Facility, as described below.

On October 26, 1995, Kimberly-Clark  Corporation ("K-C") filed a lawsuit against
the Company in U.S. District Court in Dallas,  Texas,  alleging  infringement by
the Company's  products of two K-C patents  relating to dual cuffs.  The lawsuit
sought injunctive  relief,  royalty damages,  treble damages and attorneys' fees
and costs. The Company denied liability under the patents and counterclaimed for
patent  infringement  and violation of antitrust  laws by K-C. In addition,  K-C
subsequently  sued the  Company on another  patent  issued to K-C which is based
upon a further  continuation of one of the K-C dual cuff patents asserted in the
case. That suit was consolidated with the then-pending action.

On March 19, 1999,  the Company  entered into a  Settlement  Agreement  with K-C
which  fully and  finally  settled  all  matters  related  to the Texas  action,
including  the  Company's  counterclaims,  and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy  Court on August 6, 1999 (the "K-C Approval  Order").
The  Equity  Committee  appealed  the K-C  Approval  Order.  See "ITEM 3:  LEGAL
PROCEEDINGS."

                                     Page 2
<PAGE>

On July 12, 1999, the Bankruptcy Court approved certain bidding  procedures,  an
expense  reimbursement  and a termination fee (the "Bidding  Procedures  Order")
relating to a proposed  investment by Wellspring,  a private investment company,
to acquire  the  Company as part of a plan of  reorganization  (the  "Wellspring
Transaction").  The Bidding  Procedures Order provided for the  consideration of
competing  investment  proposals from other qualified bidders and for the filing
by the Company of a stand-alone  plan of  reorganization.  The Equity  Committee
appealed the Bidding Procedures Order. See "ITEM 3: LEGAL PROCEEDINGS."

On August 25,  1999,  with the support of the  Official  Committee  of Unsecured
Creditors (the "Creditors'  Committee" and,  together with the Equity Committee,
the "Committees"),  the Company filed a stand-alone plan of reorganization  (the
"Initial  Plan")  with the  Bankruptcy  Court.  The  Initial  Plan  provided  an
alternative  to the  Wellspring  Transaction.  In  accordance  with the  Bidding
Procedures  Order,  an auction  commenced  on September  21,  1999.  The auction
continued thereafter until the Company,  after consultation with the Committees,
P&G and K-C,  determined  to  conclude  the  auction on October 4, 1999.  At the
conclusion of the auction, the Company,  after consultation with the Committees,
P&G and K-C,  determined  that Wellspring had submitted the best bid. On October
15, 1999, the Company and the Creditors'  Committee,  as co-proponents,  jointly
filed an  amendment to the Plan (the  "Amended  Plan")  which  incorporated  the
Wellspring  Transaction,  as modified by the Company after consultation with its
various  creditor  constituencies.  The Amended Plan also provided  that, in the
event the Wellspring Transaction was not consummated,  the proponents could have
pursued confirmation of a stand-alone plan of reorganization.

On or about  November 15, 1999,  the Company and the  Creditors'  Committee,  as
co-proponents,   filed  the  Plan  and  a  related   Disclosure   Statement  (as
subsequently  modified  through  November 18, 1999, the "Disclosure  Statement")
with the Bankruptcy Court. The Plan incorporated the Wellspring Transaction.  By
order dated  November 18, 1999,  the  Bankruptcy  Court  approved the Disclosure
Statement.  At such time,  the  Bankruptcy  Court also approved  certain  voting
procedures and  established  January 7, 2000 as the voting deadline for the Plan
and January 13, 2000 as the date for a hearing to consider  confirmation  of the
Plan. A  confirmation  hearing was held by the  Bankruptcy  Court on January 13,
2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan.

On January 28, 2000,  Paragon was  reorganized  pursuant to the Plan through the
consummation of the Wellspring Transaction.  As contemplated under the Plan, the
Equity  Committee has withdrawn  with  prejudice its appeals of the P&G Approval
Order,  the K-C Approval  Order and the Bidding  Procedures  Order.  See "RECENT
DEVELOPMENTS, "ITEM 3: LEGAL PROCEEDINGS."

As a result of the Chapter 11 filing, the Company has incurred significant costs
for professional  fees. The Company was also required to pay certain expenses of
the  Committees,  including  professional  fees,  to the  extent  allowed by the
Bankruptcy  Court.  Pursuant to the Plan,  a reserve has been  established  from
which any  remaining  professional  fees and expenses  related to the Chapter 11
reorganization proceeding will be paid. See "ITEM 3: LEGAL PROCEEDINGS."

The Company has  previously  disclosed that it had been notified by the New York
Stock  Exchange  ("NYSE")  during  1998  that as a result  of the  $200  million
settlement  contingency related to the P&G litigation and the Company's net loss
in 1997, certain minimum listing  requirements had not been maintained.  Trading
in the  common  stock of the  Company  on the NYSE  was  suspended  prior to the
opening of trading on July 8, 1999. As of July 9, 1999, the National Association
of Securities Dealers, Inc.  Over-the-Counter Bulletin Board (the "OTCBB") began
publishing quotations of the Company's common stock under the symbol PGNFQ. As a
result of the Plan,  on February 2, 2000,  the OTCBB  ceased  quotations  of the
Company's  common stock.  The Company is in the process of attempting to qualify
its new common stock for  quotation on the OTCBB but cannot  predict  whether or
when such quotation will commence.

                                     Page 3
<PAGE>

PRODUCTS

The Company manufactures  several diaper product lines: a premium-quality  Ultra
line, an Economy line and a Supreme line.  The Company also  manufactures a line
of training pants. Ultra diaper sales accounted for approximately 82 percent, 86
percent and 81 percent of the Company's total unit sales in 1999, 1998 and 1997,
respectively.  Economy  diaper  units  represented  approximately  6 percent,  7
percent and 9 percent of the  Company's  total unit sales in fiscal  years 1999,
1998 and 1997,  respectively.  The Supreme product  represented  approximately 5
percent,  4 percent  and 5 percent of the  Company's  total unit sales in fiscal
years  1999,  1998 and  1997,  respectively.  Training  pant  units  represented
approximately  7 percent of the Company's total unit sales in 1999 and 4 percent
in 1998 and 1997.

The  Company's  Ultra diaper  combines  fluff pulp with  superabsorbent  polymer
("SAP") in the absorbent  inner core.  SAP is  significantly  more absorbent and
better  able to retain  liquids  than fluff  pulp.  To enhance  performance  and
appearance,   the  Ultra  diaper  incorporates  a  number  of  product  features
comparable to those  introduced by national branded  manufacturers.  The Company
now produces its Ultra diaper in six  different  sizes which are designed to fit
babies  better as they grow and  develop.  In 1998,  the Company  introduced  an
improved  Ultra  diaper  which  incorporated  stretch  tabs  and a hook and loop
closure system.

The Economy  diaper is designed to satisfy the needs of the more  cost-conscious
value  segment  shopper.  Its  absorbent  pad  contains  fluff pulp and SAP. Its
features   include  a  "tape  landing  zone"   allowing  for  easy  fitting  and
re-adjustment after fastening.  The Company produces the Economy diaper in three
unisex sizes.

The Company's Supreme diaper product is similar to its Ultra diaper but contains
a premium  absorbent  core and parts of the outer cover and closure  systems use
premium materials.

The  Company's  training pant is designed for use by children  primarily  during
their transition from diapers. The Company's training pant utilizes an absorbent
core of fluff pulp and SAP and a cloth-like  nonwoven  outer cover.  The Company
produces its training pant in two gender-specific sizes and two unisex sizes. In
1999,  the Company  introduced  an enhanced  training pant product with improved
performance and aesthetic appeal.

In 1996, the Company began  manufacturing  a line of feminine care products that
included ultra thin,  maxi and super maxi pads,  pantiliners,  panty shields and
regular and super absorbent tampons.  In 1997, the Company began manufacturing a
line of adult  incontinence  products that includes  guards,  undergarments  and
bladder  control pads. In 1998, the Company  curtailed its tampon  manufacturing
operations,  but continues to source  tampons  through a contract  manufacturing
relationship.

PRODUCT DEVELOPMENT

To enhance  the  Company's  objective  of  providing  its trade  customers  with
premium-quality store brand disposable diapers, training pants and feminine care
and adult incontinence  products,  the Company devotes significant  resources to
market  research  and  product  design and  development  to enable it to improve
product  performance and consumer  acceptance.  The Company believes that it has
the  largest  product  development  program  of any  manufacturer  in  the  U.S.
disposable  diaper market,  other than the national branded  manufacturers.  The
Company  spent  approximately  $3.6  million,  $4.2  million and $5.1 million on
research and development in fiscal years 1999, 1998 and 1997, respectively.

PATENT RIGHTS

Because  of the  emphasis  on  product  innovations  in the  disposable  diaper,
feminine care and adult  incontinence  markets,  patents and other  intellectual
property  rights are an  important  competitive  factor.  The  national  branded
manufacturers  have sought to vigorously  enforce their patent  rights.  Patents
held by the national  branded  manufacturers  could severely limit the Company's
ability to keep up with branded  product  innovations by prohibiting the Company
from introducing products with comparable  features.  To protect its competitive
position,  the Company has created an intellectual  property  portfolio  through
development,  acquisition and licensing that includes approximately 300 U.S. and
foreign  patents  relating  to  disposable  diaper,   feminine  care  and  adult

                                     Page 4
<PAGE>

incontinence  product  features and  manufacturing  processes.  The Company also
subjects new product  innovations to a rigorous patent  clearance  process which
includes a review by the  Company's  outside  patent  counsel.  This  process is
designed to minimize patent risk related to the Company's products. See "ITEM 3:
LEGAL  PROCEEDINGS"  and  "ITEM  7:  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS: RISK AND UNCERTAINTIES."

MAJOR CUSTOMERS

The Company's net sales to its largest trade customer,  Wal-Mart  Stores,  Inc.,
and Sam's Club, a division of Wal-Mart Stores, Inc., represented an aggregate of
approximately 25 percent, 19 percent and 15 percent of total net sales in fiscal
years  1999,  1998  and  1997,  respectively.  As is  customary  in  the  infant
disposable  diaper  market,  the  Company in most cases does not have  long-term
contracts with its trade customers.  The Company estimates that  approximately 7
percent of net sales were to trade  customers  in Canada in fiscal  years  1999,
1998 and 1997, respectively.

FOREIGN OPERATIONS

On January  26,  1996,  the  Company  through its wholly  owned  subsidiary  PTB
International,  Inc. ("PTBI") completed the purchase of a 15 percent interest in
Grupo P.I. Mabe,  S.A. de C.V.  ("Mabesa"),  the second largest  manufacturer of
infant disposable  diapers in Mexico,  for $15.3 million in cash plus additional
consideration  based on Mabesa's  future  financial  results  through 2001.  The
Company also acquired an option to purchase an additional 34 percent interest in
Mabesa at a contractually  determined  price.  In 1999, 1998 and 1997,  based on
Mabesa's  prior  year's   financial   results,   the  Company  paid   additional
consideration of $.2 million, $2.8 million and $3.4 million, respectively.

In  addition,  PTBI  acquired a 49 percent  interest for $1.6 million in cash in
Paragon-Mabesa  International  ("PMI"),  a joint venture that developed a diaper
manufacturing  facility  in Tijuana,  Mexico.  An  affiliate  of Mabesa owns the
remaining  51 percent.  The Company  sold  certain  assets to PMI as part of the
development of PMI's manufacturing facility in Tijuana,  Mexico. The Company has
assisted in financing the equipment,  building  construction and start-up of the
Tijuana, Mexico facility which is completely operational. The Company has signed
a Product  Supply  Agreement with PMI and purchases  substantially  all of PMI's
production for sale to North American trade customers.

On August 26, 1997, PTBI purchased a 49 percent interest in Stronger Corporation
S.A.  ("Stronger"),   a  financial  investment  corporation  incorporated  under
Uruguayan  law. An affiliate of Mabesa owns the  remaining 51 percent.  Stronger
has been used to establish  joint  ventures in  Argentina  and Brazil and can be
used to establish additional Latin American joint ventures.  In each of 1998 and
1999, PTBI made additional capital contributions of $2.0 million to Stronger.

On August 26, 1997,  Stronger  acquired 70 percent of Serenity  S.A.,  the third
largest diaper  manufacturer in Argentina,  for  approximately  $11.6 million in
cash plus additional  consideration based on Serenity's future financial results
through  2000.  Stronger  also  acquired an option to purchase the  remaining 30
percent  interest  in Serenity by 2002 at a  contractually  determined  exercise
price.  Serenity  manufactures infant disposable  diapers,  sanitary napkins and
adult  incontinence  products in two  facilities.  PTBI advanced $5.7 million to
Stronger,  its  pro-rata  share  of the  purchase  price,  and  paid  additional
consideration  of $.6  million  in  1998.  Stronger  paid  the  1999  additional
consideration.   PTBI  has  guaranteed   Stronger's   additional   consideration
obligation  which is  estimated  not to exceed an  aggregate  of $1.2 million in
2000.

On November  10, 1997,  Stronger  acquired 99 percent of the  disposable  diaper
business of MPC Productos  para Higiene Ltda.  ("MPC") for  approximately  $10.5
million in cash from Cremer  S.A.,  a  Brazilian  textile  manufacturer.  MPC is
engaged in the manufacture,  distribution,  and sale of disposable diapers, skin
lotions for  children and other  personal  care  products.  PTBI  advanced  $5.1
million to Stronger, its pro-rata share of the purchase price in 1997.

                                     Page 5
<PAGE>

In 1998,  Paragon  established  Goodbaby  Paragon  Hygienic  Products  Co.  Ltd.
("Goodbaby"), a manufacturing and marketing joint venture in China with Goodbaby
Group of  Kunshan  City and First  Shanghai  Investment  of Hong  Kong.  Paragon
purchased a 40 percent  interest in the joint  venture with  Goodbaby  Group and
First Shanghai  Investment at 30 percent each. Initial registered capital of the
venture was approved by the Chinese government at $15 million, to be funded over
a two-year  period. A joint venture business license was approved by the Chinese
government on December 31, 1997.  Groundbreaking for a new factory took place in
February 1998. The joint venture began  production  and  distribution  of infant
disposable  diapers in October  1998.  Paragon  made  capital  contributions  to
Goodbaby of $4.0 million in 1998 and $.8 million in 1999.

RAW MATERIALS

The principal raw material  components of the Company's  products are SAP, fluff
pulp,  polyethylene  backsheet,  polypropylene  nonwoven liner, closure systems,
hotmelt adhesive, elastic and tissue.

One of the primary raw materials used in the production of disposable diapers is
SAP.  In April  1998,  the  Company  entered  into an  agreement  with  Clariant
International  Ltd.  (subsequently  purchased  by BASF  Corporation)  whereby it
agreed,  subject  to  certain  limitations,  to  purchase  100  percent  of  its
requirements of SAP through  December 31, 2001.  Fluff pulp, a product made from
wood fibers,  is another  primary raw  material.  The Company's  agreement  with
Weyerhaeuser Company ("Weyerhaeuser") pursuant to which it purchased 100 percent
of its requirements of bleached chemical fluff pulp expired August 31, 1998. The
Company  has  continued   purchasing   substantially   all  of  its  fluff  pulp
requirements  from  Weyerhaeuser.  The Company  believes that at least two other
sources of supply exist for fluff pulp.

The Company's gross margins are  significantly  impacted by raw material prices,
especially  the  price of fluff  pulp  which  can  fluctuate  dramatically.  The
Company's  operating  results  benefited from  relatively  favorable  fluff pulp
market  prices in 1998 and 1999 but may be  adversely  affected  by  anticipated
increases in raw material  prices,  primarily  fluff pulp, in 2000. See "ITEM 7:
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS: RISKS AND UNCERTAINTIES."

COMPETITION-Disposable Diapers

National Branded Manufacturers

The principal aspects of competition from the national branded manufacturers are
price,  product  quality,  product  innovation  and customer  service.  The U.S.
disposable  diaper market is led by the national brands  manufactured by P&G and
K-C. The Company  estimates  that, in 1999, the national  branded  manufacturers
accounted for approximately 74 percent of all U.S.  disposable diaper sales. The
market position of these manufacturers, relative to the Company, varies from one
geographic region to another, but due to their substantial financial,  technical
and  marketing  resources,  each of these  companies  has the  ability  to exert
significant influence on the infant disposable diaper market.

The  market  for  disposable  diapers  is  divided  into the  premium  and value
segments.  The premium segment accounts for approximately 60 percent of the unit
volume. Both K-C and P&G dominate the premium segment.  The value segment of the
industry,  which the Company estimates accounted for approximately 40 percent of
unit volume in 1999, is highly  competitive.  The Company includes store brands,
control  labels,  P&G's Luvs(R),  Drypers(R),  Fitti(R),  and all other regional
brands in the value segment.

In total,  P&G is the dominant  manufacturer  in the U.S.  diaper  market,  with
approximately 40 percent market share. P&G manufactures two brands:  Pampers(R),
its premium brand with  approximately  26 percent  market share,  and Luvs,  its
value brand with 14 percent market share. K-C manufactures the number one diaper
brand,  Huggies(R),  with  approximately  34 percent market share.  K-C does not
offer a value brand,  but supplies  some store brand  training  pants within the
value segment.

Price  has  been a  significant  variable  in the  competitive  strategy  of the
national  branded  companies and the value  segment in the past three years.  In
recent years,  pricing  pressure has been most evident in the shift of volume to

                                     Page 6
<PAGE>

mass  merchants  who  aggressively  sell  multi-packs.  Multi-packs  represent a
package  configuration  that provides the consumer two, three, four or six times
the  amount of diapers  found in a standard  convenience  count  package.  These
multi-packs  sell at unit prices 10 to 15 percent below the branded  convenience
count package. For most of 1998, pricing pressures and a shift of volume to mass
merchants  continued.  In October of 1998,  the national  brands  instituted a 5
percent  price  increase  on certain of their  product  offerings.  The  Company
implemented  a similar  price  increase on certain of its products in the fourth
quarter of 1998.  The  Company  has  realized  some of the  benefit of the price
increase.  Competitive  factors have  prevented  and may continue to prevent the
Company  from  realizing  the full  benefit of the price  increase.  The Company
believes that the national branded  manufacturers  have lower per unit costs and
higher  margins than the  Company,  principally  due to their higher  volume and
prices, coupled with fewer variations in product and packaging. In addition, the
national branded  manufacturers  have access to substantially  greater financial
resources than the Company.  As a result, the Company believes that the national
branded  manufacturers are capable of maintaining or reducing prices, even in an
environment of rising raw material prices.

Product  quality and  innovation  are critical  aspects of  competition  for the
national  branded  manufacturers.  They have  substantially  larger research and
development budgets than the Company and are able to develop product innovations
more rapidly than the Company and may thereby gain market share at the Company's
expense.   The  Company   estimates  that  since  1985,  the  national   branded
manufacturers have generally introduced a product innovation approximately every
12 months.

While  in  recent  years  the  Company  has  been  able  to  introduce   product
enhancements   comparable   to  those   introduced   by  the  national   branded
manufacturers,  there  can be no  assurance  that  the  Company  will be able to
continue to introduce  such product  innovations  at the pace required to remain
competitive  with  the  national  branded  manufacturers.  Producing  comparable
products could adversely affect the Company's gross margins.  To the extent that
the  Company  is unable  to  introduce  comparable  products  due to the  patent
landscape,  it could  experience  a decline in net sales and net  earnings.  See
"ITEM 3: LEGAL PROCEEDINGS" and "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES."

Customer  service is another area where the national brands are able to compete.
The Company  believes  that each of the national  branded  manufacturers  has an
order-delivery   cycle  that  is   significantly   shorter  than  the  Company's
order-delivery  cycle. In addition,  the national branded  manufacturers  devote
substantially  greater  financial  resources than the Company to providing trade
customers with category expertise,  customized  promotional campaigns and market
support. The national branded  manufacturers have sophisticated  electronic data
interchange  systems  that  interface  directly  with their  customers'  product
information  systems.  In 1998, the Company  successfully  implemented a process
improvement and information  technology upgrading project to further enhance its
customer service capabilities. See "ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

Value Segment

The Company  competes in the value  segment of the market  with  national  value
brands and store brand products. As with the national branded competition, price
has been a significant variable in the competitive strategy of the value segment
in the past  three  years.  The value  segment is also  characterized  by excess
capacity.  The Company's largest competitor in the value segment is P&G with its
Luvs brand. The next largest competitor is Drypers Corp. K-C also produces store
brand training pants.

The Company  seeks to compete  against  other  value  segment  manufacturers  by
emphasizing  research  and  development  and by  striving  to maintain a leading
position among value segment competitors in product quality. Smaller competitors
of the Company are sometimes able to introduce new product features more quickly
than the Company, in part as a result of having fewer diaper machines to convert
to new production processes.

                                     Page 7
<PAGE>

COMPETITION-Feminine Care & Adult Incontinence

The principal  bases of competition in the feminine care and adult  incontinence
market are price, product quality,  product innovation and customer service. The
U.S.  feminine  care and adult  incontinence  retail  market is led by  national
branded manufacturers including K-C, P&G, Johnson and Johnson, Inc., and Playtex
Products,  Inc.  The  Company  estimates  that in  1999,  the  national  branded
manufacturers  accounted for  approximately 92 percent of all U.S. feminine care
and  approximately 76 percent of all U.S. adult  incontinence  sales. The market
position  of these  manufacturers,  relative  to the  Company,  varies  from one
geographic region to another, but due to their substantial financial,  technical
and  marketing  resources,  each of these  companies  has the  ability  to exert
significant influence on the feminine care market and adult incontinence market.
Another  manufacturer  is the  dominant  supplier of store brand  feminine  care
products.  The Company experienced greater than anticipated  operating losses in
its feminine care and adult  incontinence  businesses in 1999, 1998 and 1997 and
expects these losses to continue near-term. The Company has developed a business
plan that supports the  realization  of its  investment in its feminine care and
adult  incontinence  business.  Accordingly,  the Company has not  recorded  any
adjustments in its financial  statements  relating to the  recoverability of the
operating  assets of the  feminine  care and adult  incontinence  business.  The
Company's  ability to recover its  investment is dependent  upon the  successful
execution of the Company's  feminine care and adult  incontinence  business plan
now that the Company has emerged from Chapter 11. The Company believes that with
the distractions and uncertainties related to Chapter 11 behind it, the feminine
care and adult incontinence  business will see an increase in sales and improved
results. There can be no assurances, however, that such improved results will be
realized.  See  "ITEM 7:  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL
CONDITION AND RESULTS OF OPERATIONS: RISKS AND UNCERTAINTIES."

EMPLOYEES

At December 26, 1999, the Company had approximately  1,150 full-time  employees,
including   approximately  930  employees  located  at  its  four  manufacturing
facilities.

ENVIRONMENT

The Company is subject to federal,  state,  local and foreign laws,  regulations
and ordinances  that (i) govern  activities or operations  that may have adverse
environmental  effects,  such as discharges to air and water as well as handling
and disposal  practices for solid and hazardous  wastes or (ii) impose liability
for the costs of cleaning up, and certain damages  resulting from, sites of past
spills and  disposals  or other  releases  of  hazardous  substances  (together,
"Environmental Laws").

The Company  uses  certain  substances  and  generates  certain  wastes that are
regulated by or may be deemed hazardous under applicable Environmental Laws. The
Company believes that it currently conducts its operations,  and in the past has
conducted  its   operations,   in   substantial   compliance   with   applicable
Environmental  Laws. From time to time, however,  the Company's  operations have
resulted or may result in certain  noncompliance  with applicable  requirements.
The Company  believes,  however,  that it will not incur  compliance  or cleanup
costs  pursuant  to  applicable  Environmental  Laws that  would have a material
adverse effect on the Company's results of operations or financial condition.

The Company  monitors  Environmental  Laws and  regulations,  as well as pending
legislation,  in each of the markets in which its products are sold. A number of
states have passed or are considering legislation intended to discourage the use
of disposable products, including disposable diapers, or to encourage the use of
nondisposable or recyclable products. The Company does not believe that any such
laws  currently in effect will have a material  adverse effect on its results of
operations or financial condition.

See "ITEM 7:  MANAGEMENT'S DISCUSSION  AND ANALYSIS OF  FINANCIAL CONDITION  AND
RESULTS OF  OPERATIONS: FORWARD-LOOKING STATEMENTS."

                                     Page 8
<PAGE>


ITEM 2:       PROPERTIES

As of December 26, 1999,  the Company  operated four  manufacturing  facilities,
with  plants  located  in  the  United  States  at  Macon,   Georgia;   Harmony,
Pennsylvania;  Gaffney,  South Carolina;  and Waco,  Texas.  The Company owned a
plant in Canada at Brampton, Ontario.

The following  table  summarizes the physical  properties  that were held by the
Company at December 26, 1999:

<TABLE>
<CAPTION>
                                                                                APPROXIMATE
                                                                                    SIZE
               LOCATION                                  USE                     (SQ. FEET)                OWNED/LEASED
---------------------------------------          ---------------------       -------------------        -------------------
<S>                                                 <C>                             <C>                       <C>
INFANT CARE:
     Brampton, Ontario                              Held for Sale                    76,000                   Owned
     Harmony, Pennsylvania                          Manufacturing                   173,000                   Owned
     Macon, Georgia                                 Manufacturing                   308,000                   Owned
     Waco, Texas                                    Manufacturing                   151,000                   Owned
FEMININE CARE AND ADULT INCONTINENCE:
     Gaffney, South Carolina                        Manufacturing                   213,000                   Leased
CORPORATE AND OTHER:
     Norcross, Georgia                               Headquarters                    69,000                   Owned
</TABLE>

The facility in Brampton, Ontario was sold in February 2000.


ITEM 3:       LEGAL PROCEEDINGS

THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit
in January 1994 in the  Delaware  District  Court  alleging  that the  Company's
"Ultra"  infant  disposable  diaper  products  infringed  two of P&G's dual cuff
diaper patents.  The lawsuit sought injunctive  relief,  lost profit and royalty
damages,  treble  damages and  attorneys'  fees and costs.  The  Company  denied
liability  under the  patents and  counterclaimed  for patent  infringement  and
violation of antitrust laws by P&G. In March 1996,  the Delaware  District Court
granted  P&G's motion for summary  judgment to dismiss the  Company's  antitrust
counterclaim.  The trial was completed in February 1997,  the parties  submitted
post-trial  briefs and closing  arguments  were  conducted  on October 22, 1997.
Legal fees and costs for this litigation were significant.

On December 30, 1997, the Delaware  District Court issued a Judgment and Opinion
finding that P&G's dual cuff patents were valid and infringed, while at the same
time finding the Company's patent to be invalid, unenforceable and not infringed
by P&G's  products.  Judgment  was  entered  on  January  6,  1998.  Damages  of
approximately  $178.4  million  were  entered  against  Paragon by the  Delaware
District  Court on June 2, 1998. At the same time,  the Delaware  District Court
entered injunctive relief agreed upon by P&G and the Company. On August 4, 1998,
the Company filed with the Federal  Circuit Court of Appeals its amended  notice
of appeal.  The appeal was fully  briefed,  and oral  argument was scheduled for
February 5, 1999.

The Judgment had a material adverse effect on the Company's  financial  position
and its results of operations. As a result of the District Court's Judgment, the
Company  filed for relief under  Chapter 11 of the  Bankruptcy  Code,  11 U.S.C.
Section 101 et seq.,  in the United  States  Bankruptcy  Court for the  Northern
District of Georgia (Case No. 98-60390) on January 6, 1998. See "--IN RE PARAGON
TRADE BRANDS, INC.," below.

P&G filed alleged claims in the Company's Chapter 11  reorganization  proceeding
ranging from approximately $2.3 billion (without trebling) to $6.5 billion (with
trebling),  which included a claim of $178.4 million for the Delaware  Judgment.
See "--IN RE PARAGON TRADE BRANDS, INC.," below.

On February 2, 1999,  the Company  entered into a Settlement  Agreement with P&G
which fully and finally  settled all matters  related to the Delaware  Judgment,
the Company's appeal of the Delaware Judgment,  P&G's motion to


                                     Page 9
<PAGE>

find the Company in contempt of the  Delaware  Judgment and P&G's proof of claim
filed in the Company's  Chapter 11 reorganization  proceeding.  The P&G Approval
Order was issued on August 6,  1999.  As a part of the P&G  settlement,  Paragon
granted  P&G an allowed  unsecured  prepetition  claim of $158.5  million and an
allowed  administrative  claim of $5 million.  As a part of the settlement,  the
Company  entered into  License  Agreements  for the U.S.  and Canada,  which are
exhibits to the  Settlement  Agreement,  with  respect to certain of the patents
asserted by P&G in its proof of claim,  including those asserted in the Delaware
action.  The U.S. and Canadian patent rights  licensed by the Company  permitted
the Company to convert to a dual cuff baby diaper design. The product conversion
is  complete.  In  exchange  for these  rights,  the  Company  pays P&G  running
royalties  on net sales of the  licensed  products  equal to 2  percent  through
October  2005,  .75 percent  thereafter  through  October  2006 and .375 percent
thereafter  through March 2007 in the U.S.; and 2 percent  through  October 2008
and 1.25 percent  thereafter  through  December 2009 in Canada.  The  Settlement
Agreement  also  provides,  among other things,  that P&G will grant the Company
and/or its  affiliates  "most favored  licensee"  status with respect to patents
owned by P&G on the date of the Settlement Agreement or for which an application
was  pending on that date.  In  addition,  the  Company has agreed with P&G that
prior to litigating any future patent  dispute,  the parties will engage in good
faith negotiations and will consider arbitrating the dispute before resorting to
litigation. The Equity Committee appealed the P&G Approval Order.

While the Company  believes  that the royalty rates being charged by P&G are the
same royalties that will be paid by the Company's major store brand  competitors
for similar patent rights,  these royalties,  together with royalties to be paid
to K-C described herein, have had, and will continue to have, a material adverse
impact on the Company's  future  financial  condition and results of operations.
While these royalty costs have been  partially  offset by projected raw material
cost savings  related to the  conversion  to a dual cuff design,  the  Company's
overall  raw  material  costs  have  increased.  These  royalty  costs have been
partially  offset by price  increases  announced  by the  Company  in the fourth
quarter  of 1998 and  will  continue  to be  offset  to the  extent  such  price
increases are maintained.

Under the terms of the P&G Settlement Agreement,  the Company has withdrawn with
prejudice its appeal of the Delaware  Judgment to the Federal  Circuit,  and P&G
has withdrawn with  prejudice its motion in Delaware  District Court to find the
Company in contempt of the Delaware Judgment. In addition, pursuant to the terms
of the Plan, the Equity Committee has withdrawn with prejudice its appeal of the
P&G Approval Order. See "--IN RE PARAGON TRADE BRANDS, INC." below.

KIMBERLY-CLARK  CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995,
K-C filed a lawsuit  against the Company in the U.S.  District  Court in Dallas,
Texas,  alleging  infringement  by the  Company's  products  of two K-C  patents
relating to dual cuffs. The lawsuit sought injunctive  relief,  royalty damages,
treble damages and attorneys' fees and costs. The Company denied liability under
the  patents  and  counterclaimed  for  patent  infringement  and  violation  of
antitrust  laws by K-C.  Several  pre-trial  motions  were filed by each  party,
including  a motion  for  summary  judgment  filed by K-C  with  respect  to the
Company's antitrust  counterclaim and a motion for summary judgment filed by the
Company on one of the patents  asserted by K-C. In  addition,  K-C  subsequently
sued the Company on another  patent  issued to K-C which is based upon a further
continuation  of one of the K-C dual cuff  patents  asserted  in the case.  That
action was consolidated  with the then-pending  action.  Legal fees and costs in
connection with this litigation were significant.

As a result of the  Company's  Chapter 11  filing,  the  proceedings  in the K-C
litigation were stayed.  The Bankruptcy  Court issued an order on April 10, 1998
permitting,  among  other  things,  a partial  lifting  of the stay to allow the
issuance of the special  master's  report on the items under his  consideration.
K-C  filed  with  the  Bankruptcy  Court a  motion  for  reconsideration  of the
Bankruptcy  Court's April 10, 1998 order, which was denied on June 15, 1998. K-C
has  appealed  this  denial of  reconsideration  to the  District  Court for the
Northern District of Georgia. The Company objected to K-C's appeal and sought to
have it dismissed. K-C also filed a motion with the District Court in Atlanta to
withdraw the  reference  (the  "Withdrawal  Motion") with respect to all matters
pertaining to its proof of claim from the jurisdiction of the Bankruptcy  Court.
By order executed  February 18, 1999, the appeal,  the Withdrawal Motion and the
Company's  motion to dismiss the appeal were  dismissed  by the  District  Court
without  prejudice to the right of either party within sixty days to re-open the
actions if a settlement was not consummated.  See "--IN RE PARAGON TRADE BRANDS,
INC." below.

                                    Page 10
<PAGE>

The Company has previously  disclosed  that had K-C prevailed on its claims,  an
award of all or a substantial  portion of the relief requested by K-C could have
had a material  adverse  effect on the  Company's  financial  condition  and its
results of operations.

K-C filed alleged claims in the Company's Chapter 11  reorganization  proceeding
ranging from approximately $893 million (without trebling) to $2.3 billion (with
trebling). See "--IN RE PARAGON TRADE BRANDS, INC.," below.

On March 19, 1999,  the Company  entered into a  Settlement  Agreement  with K-C
which  fully and  finally  settled  all  matters  related  to the Texas  action,
including  the  Company's  counterclaims,  and K-C's proof of claim filed in the
Company's  Chapter 11  reorganization  proceeding.  The K-C  Approval  Order was
issued by the  Bankruptcy  Court on August 6,  1999.  Under the terms of the K-C
Settlement  Agreement,  the Company granted K-C an allowed unsecured prepetition
claim of $110 million and an allowed  administrative  claim of $5 million.  As a
part of the settlement, the Company entered into License Agreements for the U.S.
and Canada, which are exhibits to the Settlement Agreement,  with respect to the
patents  asserted by K-C in the Texas action.  The patent rights licensed by the
Company from K-C permitted the Company to convert to a dual cuff diaper  design.
The product  conversion is complete.  In exchange for these patent  rights,  the
Company pays K-C annual running  royalties on net sales of the licensed products
in the U.S.  and Canada  equal to: 2.5 percent of the first $200  million of net
sales of the covered diaper products and 1.5 percent of such net sales in excess
of $200 million in each calendar year commencing  January 1999 through  November
2004. The Company has agreed to pay a minimum annual royalty for diaper sales of
$5 million, but amounts due on the running royalties will be offset against this
minimum.  The Company also pays K-C running  royalties of 5 percent of net sales
of covered  training pant products for the same period,  but there is no minimum
royalty for training pants. As part of the settlement, the Company has granted a
royalty-free  license to K-C for three  patents  which the  Company in the Texas
action claimed K-C  infringed.  The Equity  Committee  appealed the K-C Approval
Order.

The Company  believes that the overall  effective  royalty rate that the Company
will pay to K-C,  together with royalties to be paid to P&G described above, has
had,  and will  continue to have,  a material  adverse  impact on the  Company's
future financial condition and results of operations.  While these royalty costs
have been partially offset by projected raw material cost savings related to the
conversion to a dual cuff design,  the Company's overall raw material costs have
increased.  These royalty costs have been  partially  offset by price  increases
announced by the Company in the fourth  quarter of 1998 and will  continue to be
offset to the extent such price increases are maintained.

As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents related to the use of SAP in diapers and training pants, so
long as the Company uses SAP which exhibits certain performance  characteristics
(the "SAP Safe Harbor").  The Company  experienced  certain product  performance
issues  the  Company  believes  may have  been  related  to the SAP the  Company
initially  converted  to in December  of 1998.  In  February  1999,  the Company
converted to a new SAP. The Company is encountering  increased product costs due
to the  increased  price and usage of the new SAP.  While the Company is working
diligently with its SAP suppliers to develop a more  cost-effective  alternative
which is still within the SAP Safe Harbor,  the Company  cannot  predict at this
time whether or when the added costs will be fully offset.  The Company  expects
that these  increased  product costs will have a material  adverse impact on its
financial  condition and results of operations for at least 2000 and potentially
beyond.

On  October  29,  1999,  in  accordance  with the  terms  of the K-C  Settlement
Agreement,  K-C dismissed  with  prejudice its complaint in the Texas action and
the Company  dismissed with prejudice its  counterclaims in the Texas action. On
November 4, 1999, K-C filed a stipulation  dismissing with prejudice its related
filings  in the  Georgia  District  Court.  On  November  2, 1999,  the  parties
exchanged mutual releases pursuant to the Settlement Agreement.  In addition, in
accordance  with the terms of the Plan, the Equity  Committee has withdrawn with
prejudice  its appeal of the K-C  Approval  Order.  See "--IN RE  PARAGON  TRADE
BRANDS, INC." below.

IN RE PARAGON TRADE BRANDS, INC. - As described above, on December 30, 1997, the
Delaware  District Court issued a Judgment and Opinion in the Company's  lawsuit
with P&G finding  that two of P&G's diaper  patents were valid and  infringed by
the  Company's  "Ultra"  disposable  baby  diapers,  while  also  rejecting  the
Company's patent infringement claim against P&G. Judgment was entered on January
6, 1998.  While a final damages number was


                                    Page 11
<PAGE>

not  entered by the  Delaware  District  Court  until June 2, 1998,  the Company
originally  estimated  the  liability  and  associated  litigation  costs  to be
approximately  $200  million.  The amount of the award  resulted in violation of
certain  covenants under the Company's bank loan  agreements.  As a result,  the
issuance of the Judgment and the  uncertainty it created caused an immediate and
critical  liquidity  issue for the  Company  which  necessitated  the Chapter 11
filing.

Subsequently,  damages of  approximately  $178.4  million were  entered  against
Paragon by the Delaware  District  Court on June 2, 1998. At the same time,  the
Delaware  District  Court entered  injunctive  relief agreed upon by P&G and the
Company.  See "--THE  PROCTER & GAMBLE  COMPANY V. PARAGON TRADE BRANDS,  INC.,"
above.

The Chapter 11 filing prevented P&G from placing liens on the Company's  assets,
permitted  the Company to appeal the Delaware  District  Court's  decision in an
orderly fashion and afforded the Company the  opportunity to resolve  liquidated
and unliquidated  claims against the Company which arose prior to the Chapter 11
filing.

On February 2, 1999,  the Company  entered into a Settlement  Agreement with P&G
which fully and finally  settled all matters  related to the Delaware  Judgment,
the Company's appeal of the Delaware Judgment,  P&G's motion to find the Company
in  contempt  of the  Delaware  Judgment  and P&G's  proof of claim filed in the
Company's  Chapter 11  reorganization  proceeding.  See "--THE  PROCTER & GAMBLE
COMPANY V. PARAGON TRADE BRANDS, INC.," above.

On March 19, 1999,  the Company  entered into a  Settlement  Agreement  with K-C
which  fully and  finally  settles  all  matters  related  to the Texas  action,
including  the  Company's  counterclaims,  and K-C's proof of claim filed in the
Company's   Chapter  11   reorganization   proceeding.   See   "--KIMBERLY-CLARK
CORPORATION V. PARAGON TRADE BRANDS, INC.," above.

On July 12, 1999, the Bankruptcy  Court  approved the Bidding  Procedures  Order
relating to the Wellspring  Transaction.  The Bidding  Procedures Order provided
for the  consideration  of competing  investment  proposals from other qualified
bidders  and  for  the  filing  by  the  Company  of  a   stand-alone   plan  of
reorganization.  The Equity  Committee filed a motion for amended  findings with
respect to the  Bankruptcy  Court's July 12, 1999 order.  The  Bankruptcy  Court
denied the Equity Committee's  motion. The Equity Committee appealed the Bidding
Procedures Order.

On August 25, 1999,  with the support of the Creditors'  Committee,  the Company
filed the Initial Plan with the Bankruptcy  Court.  The Initial Plan provided an
alternative  to the  Wellspring  Transaction.  In  accordance  with the  Bidding
Procedures  Order,  an auction was commenced on September 21, 1999.  The auction
continued  thereafter until the Company,  after consultation with the Creditors'
Committee, the Equity Committee, P&G and K-C, determined to conclude the auction
on October  4, 1999.  At the  conclusion  of the  auction,  the  Company,  after
consultation with the Creditors' Committee,  the Equity Committee,  P&G and K-C,
determined  that Wellspring had submitted the best bid. On October 15, 1999, the
Company  and the  Creditors'  Committee,  as  co-proponents,  jointly  filed the
Amended Plan which incorporated the Wellspring  Transaction,  as modified by the
Company after consultation with its various creditor constituencies. The Amended
Plan  also  provided  that,  in the  event the  Wellspring  Transaction  was not
consummated,  the proponents  could have pursued  confirmation  of a stand-alone
plan of reorganization.

On or about  November 15, 1999,  the Company and the  Creditors'  Committee,  as
co-proponents,  filed  the Plan and  Disclosure  Statement  with the  Bankruptcy
Court. The Plan incorporated the Wellspring Transaction. By order dated November
18, 1999, the Bankruptcy Court approved the Disclosure Statement.  At such time,
the Bankruptcy  Court also approved  certain voting  procedures and  established
January 7, 2000 as the voting  deadline for the Plan and January 13, 2000 as the
date for a hearing to consider  confirmation of the Plan. A confirmation hearing
was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13,
2000, the Bankruptcy Court confirmed the Plan.

                                    Page 12
<PAGE>

On January 28, 2000,  Paragon was  reorganized  pursuant to the Plan through the
consummation of the Wellspring Transaction.  As contemplated under the Plan, the
Equity  Committee has withdrawn  with  prejudice its appeals of the P&G Approval
Order, the K-C Approval Order and the Bidding  Procedures  Order. See Note 15 of
Notes to Consolidated Financial Statements.

On January 28, 2000,  the Company  entered into the Credit  Facility with a bank
group led by Citicorp.  This  facility is designed to  supplement  the Company's
cash on hand and  operating  cash  flow.  As of March 7,  2000,  there  were $12
million in direct borrowings outstanding under this facility and an aggregate of
$2 million in letters of credit issued thereunder.  The Credit Facility contains
customary financial covenants.

Legal fees and costs in connection with the Chapter 11 reorganization proceeding
were significant.

TRACY PATENT - The Company  previously  received  notice from a Ms. Rhonda Tracy
that Ms. Tracy believed the Company's diapers infringe a patent issued in August
1998 to Ms. Tracy (U.S. Patent No. 5,797,824). The Company responded, based upon
advice of its independent  patent counsel,  that it believes its products do not
infringe any valid claim of Ms. Tracy's  patent.  On April 29, 1999, the Company
received  notice  that Ms.  Tracy had filed suit in the United  States  District
Court for the Northern  District of Illinois  against K-C,  Tyco  International,
Ltd.,  Drypers  Corporation  and a number of the Company's  customers,  alleging
infringement  of her patent.  The  Company was not named as a defendant  in this
suit.  Rather, Ms. Tracy indicated in her April 29, 1999 letter that the Company
would be sued upon completion of the current suit.

The  Company  and Ms.  Tracy  entered  into a  Settlement  Agreement,  which was
approved by the  Bankruptcy  Court on  December  8, 1999,  pursuant to which the
Company paid Ms. Tracy  $500,000 in exchange for a release from  liability  from
any claims under Ms. Tracy's patent for the Company, its Affiliates,  as defined
therein,  and retailers who sell  products  manufactured  by the Company and its
Affiliates.  Under the terms of the Settlement Agreement, Ms. Tracy also granted
a  nonexclusive,  fully paid-up,  irrevocable,  worldwide  license to permit the
Company and its Affiliates to make,  have made,  lease,  use,  import,  offer to
sell,  and sell  disposable  absorbent  products  under the terms of Ms. Tracy's
patent.  This  license  also extends to retailers to the extent they are selling
products manufactured by the Company and its Affiliates.

KIMBERLY-CLARK  WORLDWIDE,  INC. V. PARAGON  TRADE  BRANDS,  INC. - On March 20,
2000,  Kimberly-Clark  Worldwide,  Inc. ("K-C") filed suit in the U.S.  District
Court in Delaware  against the Company for  allegedly  infringing  a certain K-C
patent  related to a method and  apparatus  for  attaching a graphic  patch to a
disposable  absorbent  garment.  The suit seeks injunctive  relief,  unspecified
treble  damages,  interest  and  attorneys'  fees and  expenses.  The Company is
currently evaluating the suit.

OTHER  - The  Company  is also a  party  to  other  legal  activities  generally
incidental to its activities. Although the final outcome of any legal proceeding
or dispute is subject to a great many variables and cannot be predicted with any
degree of certainty,  the Company presently believes that any ultimate liability
resulting  from any or all legal  proceedings or disputes to which it is a party
will not have a material adverse effect on its financial condition or results of
operations.


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

On or about  November 15, 1999,  the Company and the  Creditors'  Committee,  as
co-proponents,  filed  the Plan and  Disclosure  Statement  with the  Bankruptcy
Court.  By order dated  November 18, 1999,  the  Bankruptcy  Court  approved the
Disclosure  Statement.  At such time, the Bankruptcy Court also approved certain
voting procedures and established Friday, January 7, 2000 as the voting deadline
for the Plan and  Thursday,  January  13,  2000 as the  date  for a  hearing  to
consider confirmation of the Plan.

In  accordance  with  the  Bankruptcy  Court's  November  18,  1999  order,  the
Disclosure Statement was mailed by Bankruptcy Services,  LLC ("BSI"),  Paragon's
Balloting  Agent,  to all record  holders of the  Company's  common  stock as of
November 1, 1999, along with solicitation  materials seeking their vote in favor
of the Plan. After the Bankruptcy  Court-approved  voting deadline of January 7,
2000, BSI tabulated the votes received in favor of the


                                    Page 13
<PAGE>

Plan. The following table sets forth the number of  stockholders  who voted for,
against and abstained from voting for the Plan.

Votes For:                                3,638,026
Votes Against:                              156,625
Abstentions:                                  2,400
Broker Nonvotes:                          8,061,961

Under the Bankruptcy  Code,  abstentions and broker nonvotes are not counted for
purposes of plan approval.


                                     PART II

ITEM 5:       MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
              STOCKHOLDER MATTERS

As of  February  29,  2000,  there were 262  holders of record of the  Company's
common  stock.  The  Company has not paid  dividends  on its common  stock.  The
Company's Credit Facility prohibits the Company from paying cash dividends. Upon
termination  of  the  Credit  Facility  or  any  other  agreement  with  similar
restrictions on dividends, the Board of Directors will determine future dividend
policy based upon the  Company's  results of  operations,  financial  condition,
capital requirements and other  circumstances.  The Company is in the process of
attempting to qualify its new common stock for quotation on the OTCBB. See "ITEM
7:  MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS:  RISKS AND  UNCERTAINTIES."  See  "Note 21 of Notes to  Consolidated
Financial  Statements"  regarding the quarterly  high and low price range of the
Company's  old  common  stock then  outstanding.  The  Company  did not sell any
securities of the Company that were not  registered  under the Securities Act of
1933, as amended, during the fiscal year ended December 26, 1999.


ITEM 6:       SELECTED FINANCIAL DATA

The  following  table sets forth  selected  consolidated  financial  data of the
Company on a historical  basis as  described  below.  The selected  consolidated
financial data as of December 26, 1999 and December 27, 1998,  have been derived
from the audited  consolidated  financial  statements  of the Company  which are
included in Item 8 of this annual report on Form 10-K. The selected consolidated
financial data as of December 28, 1997, December 29, 1996 and December 31, 1995,
and for the years then ended have been  derived  from the  audited  consolidated
financial  statements  of the Company.  The Company  uses a 52/53-week  year for
financial reporting  purposes.  The fiscal year ended December 31, 1995 reflects
53 weeks of operations.

                                    Page 14
<PAGE>

(Dollar amounts in millions, except per share data)

<TABLE>
<CAPTION>
                                             1999              1998               1997               1996              1995
                                       ----------------- ------------------ ------------------ ----------------- -----------------
<S>                                     <C>               <C>                 <C>                <C>               <C>
EARNINGS STATEMENT DATA(1)
Net Sales                               $    498.7        $    535.2          $   562.0          $   581.9         $    518.8
EBITDA(2)                               $     13.3        $     58.4          $    62.5          $    91.5         $     46.2
Operating profit (loss)                 $    (25.5)(3)    $    (58.0)(4)      $  (183.8)(5)      $    35.7(6)      $     (3.6)(7)
Net earnings (loss)                     $    (28.4)(3)    $    (65.4)(4)(8)   $  (212.7)(5)(9)   $    21.1(6)      $     (3.4)(7)

PER SHARE DATA(1)
Basic earnings (loss) per share         $    (2.37)(3)    $    (5.48)(4)(8)   $  (17.86)(5)(9)   $    1.76(6)      $     (.29)(7)

BALANCE SHEET DATA(1)
Total assets                            $    400.5        $    429.3          $   376.1          $   373.1         $    266.7
Liabilities subject to
     compromise                         $    406.7        $    406.9          $       -          $       -         $        -
Long-term debt                          $        -        $        -          $    70.0          $    70.0         $        -
Shareholders' equity (deficit)          $    (89.8)       $    (61.8)         $     5.0          $   214.7         $    191.7

OTHER DATA
Capital spending                        $     26.0        $     28.3          $    49.4          $    48.9         $     17.4
Depreciation and amortization           $     37.2        $     34.5          $    35.5          $    38.8         $     36.0
Diaper units sold (millions)                 3,176             3,463              3,689              3,761              3,378

------------------
<FN>
(1)      See Notes 1, 4 and 16 of Notes to Consolidated Financial Statements.

(2)      Operating  profit (loss)  before  interest,  taxes,   depreciation  and
amortization  and nonrecurring  charges  discussed in footnotes 3, 4, 5, 6 and 7
below ("EBITDA").

(3)      Includes $1.6 for the closure of Brampton, Ontario facility.

(4)      Includes settlement contingencies of $78.5 for the estimated settlement
costs  of  P&G's  and  K-C's  claims  asserted  in  the  Company's   Chapter  11
reorganization  proceeding,  including the settlement of the P&G patent judgment
and the K-C Texas action,  and a $3.4 asset  impairment of the Company's  tampon
manufacturing  line.  See Notes 1, 4 and 16 of Notes to  Consolidated  Financial
Statements and "ITEM 3: LEGAL PROCEEDINGS."

(5)      Includes  settlement  contingency of  $200 for an adverse judgment in a
patent  litigation  matter with P&G and $10.6 of asset impairments and inventory
adjustments  related to the write-off of software and  consulting  costs and the
discontinuation of the Company's tampon manufacturing  operation. See Notes 1, 4
and 16 of Notes to Consolidated Financial Statements.

(6)      Includes costs for the integration of Pope & Talbot's disposable diaper
business  purchased in February 1996 and costs related to the  relocation of the
corporate headquarters to Atlanta. Excluding these costs, operating profit would
be $52.7,  net  earnings  would be $31.7 and basic  earnings  per share would be
$2.64.

(7)       Includes  restructuring and charges taken in the first quarter of 1995
for the closure of the La Puente, California plant, corporate headquarters staff
reductions,  and other charges.  Excluding these charges, operating profit would
be $10.1, net earnings would be $5.4 and basic earnings per share would be $.46.

(8)      Includes a $32.6 reserve against deferred and other tax-related assets.

(9)      Includes a $100.2 reserve against deferred and other tax-related assets.
</FN>
</TABLE>

                                    Page 15
<PAGE>


ITEM 7:       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS

OVERVIEW

RECENT DEVELOPMENTS

REORGANIZATION.  On January 28,  2000,  the Company  emerged  from Chapter 11 as
contemplated  under the Plan.  All  pre-petition  obligations  were  discharged.
Pursuant to the Plan,  Wellspring  purchased 11,516,405 shares, or approximately
97 percent,  of the common stock of the reorganized  Company for $115.2 million.
Under the Plan,  general  unsecured  creditors  of the Company  are  entitled to
receive their  pro-rata  shares of $115.4  million in cash and the New Notes.  A
total of 178,365 shares and 625,821  warrants to purchase  additional  shares of
the  Company's  new common  stock will be  distributed  to holders of old common
stock under the Plan. Common  stockholders of record as of January 13, 2000 will
receive  .0149  shares of the  Company's  new common stock for each share of the
Company's  old common stock and .0524  warrants for each share of the  Company's
old common stock held on such date and  surrendered in accordance with the Plan.
The warrants are  transferable,  have an exercise  price of $18.91 per share and
expire on January 28, 2010.  General  unsecured  creditors and  stockholders  of
record as of January 13, 2000 are entitled to receive  their  pro-rata  share of
the proceeds,  if any, of certain  litigation claims that remain with the estate
and  which  will  be  prosecuted  on  their  behalf  by  the  litigation  claims
representative appointed under the Plan.

CREDIT  FACILITY.  On January 28, 2000, the Company and certain  subsidiaries of
the  Company,  as  guarantors,  entered  into the Credit  Facility.  The maximum
borrowing  under the Credit Facility may not exceed the lesser of $95 million or
an amount determined by a borrowing base formula.  The borrowing base formula is
comprised of certain  specified  percentages  of eligible  accounts  receivable,
eligible  inventory,  equipment  and personal  property and real property of the
Company.  The Credit Facility has a sub-limit of $15 million for the issuance of
letters of credit.

Borrowings  under the Credit  Facility  are secured by a security  interest  in,
pledge and lien on substantially  all of the Company's North American assets and
properties and the proceeds  thereof.  Borrowings  under the Credit Facility are
guaranteed  by certain  domestic  subsidiaries  and may be used to fund  working
capital  and  other  general  corporate  purposes  including   acquisitions  and
investments  in  existing  and new  international  joint  ventures.  The  Credit
Facility  contains  restrictive  covenants,  including  among  other  things,  a
prohibition on dividends,  limitations  on the creation of additional  liens and
indebtedness,  limitations  on  capital  expenditures,  investments,  loans  and
advances,  the sales of  assets  and  transactions  with  affiliates.  Financial
covenants  include the maintenance of minimum earnings before  interest,  taxes,
depreciation and amortization, fixed charges, coverage ratio, tangible net worth
and a maximum leverage ratio.

The Credit  Facility  provides that  borrowings  will bear interest at a rate of
1.50 percent in excess of Citibank's  base rate, or at the Company's  option,  a
rate of 2.50  percent  in excess of the  reserve  adjusted  eurodollar  rate for
interest  periods  of one,  two,  three or six  months.  After  March 31,  2001,
borrowing  rates  will be subject  to a pricing  grid  based upon the  Company's
leverage  ratio and could decrease by a maximum of .5 percent and increase by a
maximum of .25 percent.  The Company will pay a commitment fee of .5 percent per
annum on the unused portion of the Credit Facility, a letter of credit fee equal
to 2.75  percent  per annum on the  average  outstanding  letters  of credit and
certain other fees.

On January  28,  2000,  the  Company  borrowed  approximately  $15.0  million to
consummate  the Plan.  As of March 7, 2000 the Company had  approximately  $12.0
million of borrowings  and $2.0 million in letters of credit  outstanding  under
the Credit Facility. See "RISKS AND UNCERTAINTIES" herein.

SENIOR SUBORDINATED NOTES. On January 28, 2000, the Company issued the New Notes
as contemplated under the Plan. The New Notes are guaranteed by certain domestic
subsidiaries  and are not callable until  February 1, 2003.  Interest is payable
semi-annually  and  during  the first two years can be paid in kind if free cash
flow, as


                                    Page 16
<PAGE>

defined  in the  Indenture,  falls  below  projected  levels.  The New Notes are
subordinated in right of payment to the payment of all senior indebtedness.  The
New Notes contain customary restrictive covenants, including among other things,
limitations on dividends and restricted  payments,  the incurrence of additional
indebtedness,  liens,  investments,  loans and advances, the sales of assets and
transactions with affiliates. SEE "RISKS AND UNCERTAINTIES" herein.

FRESH START ACCOUNTING.  The Company will record the  reorganization and related
transactions  using "fresh  start"  accounting as required by SOP 90-7 issued by
the American Institute of Certified Public  Accountants.  In accordance with SOP
90-7,  the  reorganization  value will be  allocated  to specific  tangible  and
identifiable  assets and liabilities.  The following  Selected  Consolidated Pro
Forma Financial Data (Unaudited)  reflect the Plan and fresh start accounting as
if the Plan was consummated on December 26, 1999.

                 SELECTED CONSOLIDATED PRO FORMA FINANCIAL DATA
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                      Adjustments                            Pro-Forma
                                             Pre-Fresh Start           To Record                            Fresh Start
                                              Balance Sheet             Plan Of          Fresh Start       Balance Sheet
                                            December 26, 1999         Confirmation       Adjustments     December 26, 1999
                                            -----------------         ------------       -----------     -----------------
<S>                                            <C>                <C>                   <C>                 <C>
Current assets                                 $      155,707     $     (17,656)(1)(3)  $          -        $      138,051
Long-term assets                                      213,913             1,222 (2)            7,564               222,699
Goodwill                                               30,900                 -              (30,900)                    -
                                            -----------------    ---------------       --------------      ---------------
Total assets                                   $      400,520     $     (16,434)        $    (23,336)       $      360,750
                                            =================    ===============       ==============      ===============
Current liabilities                            $       76,499     $      (5,048)(1)(3)  $     (3,508)       $       67,943
Liabilities subject to compromise                     406,723          (406,723)(1)(4)             -                     -
Long-term debt                                              -           164,507 (5)                -               164,507
Other long-term liabilities                             7,115                 -                    -                 7,115
                                            -----------------    ---------------       --------------      ---------------
Total liabilities                                     490,337          (247,264)              (3,508)              239,565

Shareholders equity (deficit)                         (89,817)          230,830 (6)          (19,828)              121,185
                                            -----------------    ---------------       --------------      ---------------
Total liabilities and shareholder's
     equity (deficit)                          $      400,520     $     (16,434)        $    (23,336)       $      360,750
                                            =================    ===============       ==============      ===============

------------------
<FN>
(1)      To  record  reduction of  cost to pay  certain  liabilities  subject to
compromise  and  reduction  of  certain  receivables  that were  offset  against
liabilities subject to compromise.

(2)      To record deferred financing costs of the Credit Facility.

(3)      To  record payment  of certain accrued professional fees related to the
bankruptcy.

(4)      To record  the extinguishment of  liabilities subject to compromise per
the Plan.

(5)      To record the issuance of the New Notes and borrowings under the Credit
Facility.

(6)      To record  the  issuance  of  11,891,000  shares of common stock at $10
per share,  issuance of 625,821 warrants,  gain from  extinguishment of debt and
certain fees arising from confirmation of the Plan.
</FN>
</TABLE>

CHAPTER 11 PROCEEDINGS

The Company has previously disclosed that P&G filed a lawsuit in 1994 against it
in the United States  District Court for the District of Delaware  alleging that
the Company's  "Ultra"  disposable baby diaper  products  infringed two of P&G's
dual cuff diaper patents.  The lawsuit sought injunctive relief, lost profit and
royalty  damages,  treble


                                    Page 17
<PAGE>

damages and attorneys'  fees and costs.  The Company denied  liability under the
patents and  counterclaimed  for patent  infringement and violation of antitrust
laws by P&G.  The  Company  also  disclosed  that if P&G were to  prevail on its
claims,  an award of all or a substantial  amount of the relief requested by P&G
could have had a material  adverse effect on the Company's  financial  condition
and results of operations.

On December 30, 1997, the District  Court issued a Judgment and Opinion  finding
that two of P&G's dual cuff diaper  patents were valid and  infringed by certain
of the Company's disposable diaper products,  while also rejecting the Company's
patent infringement claims against P&G. The District Court had earlier dismissed
the Company's antitrust  counterclaim on summary judgment. The Judgment entitled
P&G to damages based on sales of the Company's diapers containing the "inner-leg
gather" feature.  While the final damages number of approximately $178.4 million
was not entered by the District Court until June 2, 1998, the Company originally
estimated the liability and associated litigation costs to be approximately $200
million.  The amount of the award  resulted in  violation  of certain  covenants
under the  Company's  then-existing  bank  loan  agreements.  As a  result,  the
issuance of the Judgment and the  uncertainty it created caused an immediate and
critical liquidity issue for the Company.

On January 6, 1998, the Judgment was entered on the docket in Delaware in such a
manner  that P&G would have been able to begin  placing  liens on the  Company's
assets.  As a result,  the  Company  filed for  relief  under  Chapter 11 of the
Bankruptcy  Code on January 6, 1998.  None of the  Company's  subsidiaries  were
included in the Chapter 11 filing. The Chapter 11 filing was designed to prevent
P&G from  placing  liens on Company  property,  permit the Company to appeal the
Delaware  District  Court's  decision in the P&G case in an orderly  fashion and
give the Company the opportunity to resolve  liquidated and unliquidated  claims
against the Company, which arose prior to the Chapter 11 filing.

On February 2, 1999,  the Company  entered into a Settlement  Agreement with P&G
which fully and finally  settled all matters  related to the Delaware  Judgment,
the Company's appeal of the Delaware Judgment,  P&G's motion to find the Company
in  contempt  of the  Delaware  Judgment  and P&G's  proof of claim filed in the
Company's  Chapter 11  reorganization  proceeding.  The P&G  Approval  Order was
issued on August 6, 1999. The Equity Committee  appealed the P&G Approval Order.
See "ITEM 3: LEGAL PROCEEDINGS."

On October 26, 1995,  K-C filed a lawsuit  against the Company in U.S.  District
Court in Dallas,  Texas,  alleging infringement by the Company's products of two
K-C patents  relating  to dual cuffs.  The  lawsuit  sought  injunctive  relief,
royalty  damages,  treble  damages and  attorneys'  fees and costs.  The Company
denied liability under the patents and  counterclaimed  for patent  infringement
and violation of antitrust laws by K-C. In addition,  K-C subsequently  sued the
Company  on  another  patent  issued  to K-C  which  is  based  upon  a  further
continuation of one of the K-C dual cuff patents asserted in the case. That suit
was consolidated with the then-pending action.

On March 19, 1999,  the Company  entered into a  Settlement  Agreement  with K-C
which  fully and  finally  settled  all  matters  related  to the Texas  action,
including  the  Company's  counterclaims,  and K-C's proof of claim filed in the
Company's  Chapter 11  reorganization  proceeding.  The K-C  Approval  Order was
issued by the Bankruptcy Court on August 6, 1999. The Equity Committee  appealed
the K-C Approval Order. See "ITEM 3: LEGAL PROCEEDINGS."

On July 12, 1999, the Bankruptcy  Court  approved the Bidding  Procedures  Order
relating to the Wellspring  Transaction.  The Bidding  Procedures Order provided
for the  consideration  of competing  investment  proposals from other qualified
bidders  and  for  the  filing  by  the  Company  of  a   stand-alone   plan  of
reorganization. The Equity Committee appealed the Bidding Procedures Order.

On August 25, 1999,  with the support of the Creditors'  Committee,  the Company
filed the  Initial  Plan.  The  Initial  Plan  provided  an  alternative  to the
Wellspring  Transaction.  In accordance  with the Bidding  Procedures  Order, an
auction commenced on September 21, 1999. The auction continued  thereafter until
the Company, after consultation with the Committees,  P&G and K-C, determined to
conclude the auction on October 4, 1999. At the  conclusion of the auction,  the
Company,  after consultation with the Committees,  P&G and K-C,  determined that
Wellspring  had submitted the best bid. On October 15, 1999, the Company and the
Creditors'  Committee,  as  co-proponents,  jointly filed the Amended Plan which
incorporated  the  Wellspring  Transaction,  as modified  by the


                                    Page 18
<PAGE>

Company after consultation with its various creditor constituencies. The Amended
Plan  also  provided  that,  in the  event the  Wellspring  Transaction  was not
consummated,  the proponents  could have pursued  confirmation  of a stand-alone
plan of reorganization.

On or about  November 15, 1999,  the Company and the  Creditors'  Committee,  as
co-proponents,  filed  the Plan and  Disclosure  Statement  with the  Bankruptcy
Court. The Plan incorporated the Wellspring Transaction. By order dated November
18, 1999, the Bankruptcy Court approved the Disclosure Statement.  At such time,
the Bankruptcy  Court also approved  certain voting  procedures and  established
January 7, 2000 as the voting  deadline for the Plan and January 13, 2000 as the
date for a hearing to consider  confirmation of the Plan. A confirmation hearing
was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13,
2000, the Bankruptcy Court confirmed the Plan.

On January 28, 2000,  Paragon was  reorganized  pursuant to the Plan through the
consummation of the Wellspring Transaction.  As contemplated under the Plan, the
Equity  Committee has withdrawn  with  prejudice its appeals of the P&G Approval
Order,  the K-C Approval  Order and the Bidding  Procedures  Order.  See "RECENT
DEVELOPMENTS", "ITEM 3: LEGAL PROCEEDINGS

As a result of the Chapter 11 filing, the Company has incurred significant costs
for professional  fees. The Company was also required to pay certain expenses of
the  Committees,  including  professional  fees,  to the  extent  allowed by the
Bankruptcy  Court.  Pursuant to the Plan,  a reserve has been  established  from
which any  remaining  professional  fees and expenses  related to the Chapter 11
reorganization proceeding will be paid. See "ITEM 3: LEGAL PROCEEDINGS."

The  Company  has  previously  disclosed  that it had been  notified by the NYSE
during 1998 that as a result of the $200 million settlement  contingency related
to the P&G  litigation  and the  Company's  net  loss in 1997,  certain  minimum
listing requirements had not been maintained. Trading in the common stock of the
Company  on the NYSE was  suspended  prior to the  opening of trading on July 8,
1999. As of July 9, 1999, the OTCBB began publishing quotations of the Company's
common  stock under the symbol  PGNFQ.  As a result of the Plan,  on February 2,
2000, the OTCBB ceased  quotations of the Company's common stock. The Company is
in the process of  attempting  to qualify its new common stock for  quotation on
the OTCBB but cannot predict whether or when such quotation will commence.

The Company operates principally in two segments that are organized based on the
nature of the products  sold:  (i) infant care and (ii)  feminine care and adult
incontinence.  Each operating segment contains closely related products that are
unique to that  particular  segment.  The  results of Changing  Paradigms,  Inc.
("Changing  Paradigms"),  the  Company's  household  cleaners and air  freshener
business that was sold in 1998, and the Company's  international  investments in
joint  ventures  in  Mexico,  Argentina,  Brazil and China are  reported  in the
corporate and other segment.

YEAR ENDED DECEMBER 26, 1999 COMPARED TO YEAR ENDED DECEMBER 27, 1998

RESULTS OF OPERATIONS

A net loss of $28.4  million was incurred  during 1999 compared to a net loss of
$65.4 million during 1998. Included in the results for 1999 were $9.6 million of
bankruptcy  costs. The results in 1999 were also negatively  impacted by a price
concession made to an export customer to address product  acceptance  issues and
by $1.6 million in costs associated with cessation of  manufacturing  operations
at the Company's Canadian subsidiary, Paragon Trade Brands (Canada) Inc.'s ("PTB
Canada")  Brampton,  Ontario facility in June. The total of the bankruptcy costs
and plant closure costs was $6.9 million, net of the effect on income taxes. The
results  for 1999 were also  negatively  impacted  by a reserve of $6.2  million
taken against the Company's net deferred and other tax-related assets as well as
a  decrease  in the  expected  tax  benefit  of  $4.9  million  due  to  certain
non-deductible bankruptcy costs.

Included in the results for 1998 were accrued settlement  contingencies of $78.5
million  representing the balance of the estimated settlement costs of P&G's and
K-C's claims in the Company's  Chapter 11 reorganization  proceeding,  including
the settlement of the P&G patent judgment and the K-C Texas action. See "Notes 1
and 16


                                    Page 19
<PAGE>

of Notes to Consolidated  Financial  Statements" and "ITEM 3: LEGAL PROCEEDINGS"
herein.  Also  included in the results for 1998 were $6.3 million of  bankruptcy
costs and a $3.4 million  asset  impairment  writedown  related to the Company's
tampon manufacturing line. The total of the settlement contingencies, bankruptcy
costs and asset  impairment  writedown was $54.2  million,  net of the effect of
income taxes. The results in 1998 were also negatively  impacted by a reserve of
$32.6 million  taken  against the  Company's net deferred and other  tax-related
assets.

Excluding the settlement  contingencies,  bankruptcy costs, asset impairment and
tax-related  adjustments  discussed  above,  management  believes  that  reduced
volume, higher royalties and product costs, manufacturing  inefficiencies due to
the lower volume and start-up costs associated with new product  initiatives and
increased SG&A  expenditures all contributed to the larger loss in 1999 compared
to 1998.

Basic loss per share  during 1999 was $2.37  compared to basic loss per share of
$5.48 during 1998.  Excluding the effects of loss  contingencies,  manufacturing
closing costs and bankruptcy costs, net of tax, and the tax valuation  allowance
matters discussed above,  basic loss per share was $1.16 during 1999 compared to
basic earnings per share of $1.52 during 1998,  after  adjusting for contractual
interest charges in both years.

Infant care  operating  losses  were $11.5  million  during 1999  compared to an
operating  loss of $42.2  million  during 1998.  The $78.5 million of settlement
contingencies  in  1998,  discussed  above,   materially  impacted  infant  care
operating results.  Excluding the  contingencies,  infant care operating profits
were $36.3 million in 1998. Lower unit volume,  increased  royalties and product
costs, the price  concession and the cessation of manufacturing  discussed above
and  manufacturing  inefficiencies  due  to  lower  volume  and  start-up  costs
associated  with new  product  initiatives  all  contributed  to the infant care
operating   loss  in  1999   compared  to  the   operating   profit,   excluding
contingencies, in 1998.

Feminine care and adult incontinence  operating losses were $14.0 million during
1999  compared to operating  losses of $16.9 million  during 1998.  The improved
results were due to increased volume and cost management initiatives. Losses are
expected to continue until volume is significantly  increased to absorb existing
manufacturing capacity.

The  Company  experienced  greater  than  anticipated  operating  losses  in its
feminine  care and adult  incontinence  businesses  during 1999,  1998 and 1997.
While the Company  expects these losses to continue  near-term,  the Company has
developed a business plan that supports the realization of its investment in its
feminine care and adult incontinence business.  Accordingly, the Company has not
recorded  any   adjustments  in  its  financial   statements   relating  to  the
recoverability   of  the  operating  assets  of  the  feminine  care  and  adult
incontinence  business.  The  Company's  ability to recover  its  investment  is
dependent upon the successful execution of the Company's feminine care and adult
incontinence  business  plan now that the  Company  has exited  Chapter  11. The
Company  believes that with the  distractions  and  uncertainties  of Chapter 11
behind  it,  the  feminine  care and  adult  incontinence  business  will see an
increase in sales and improved  results.  There can be no  assurances,  however,
that such  improved  results  will be  realized.  See "RISKS AND  UNCERTAINTIES"
herein.

NET SALES

Overall net sales were $498.7  million  during 1999  compared to $535.2  million
reported in 1998.

Infant  care net sales  decreased  5.2  percent to $486.1  million  during  1999
compared to $512.8  million  during 1998.  Unit sales  decreased  6.9 percent to
3,176  million  units during 1999  compared to 3,413  million units during 1998.
Management  believes  that the decrease in sales was due to a number of reasons,
including  the  discontinuation  of shipments to a major  customer from mid-1998
until the third quarter of 1999 due to product  design issues,  certain  product
performance  issues experienced by the Company during the first half of 1999, as
well as increased  consumer  preference for premium priced  products,  increased
consumer  preference  for the  mechanical  closure  system offered by one of the
national brand competitors,  continued competitive pressures,  including loss of
certain customers to competitors, and the uncertainties related to the Company's
Chapter 11 proceedings.  In addition,  a price  concession was made to an export
customer during the first quarter of 1999 to address product acceptance issues.

                                    Page 20
<PAGE>

The Company  believes  that the product  performance  issues it has  experienced
throughout  1999  have  been  addressed.  In  addition,  shipments  to the major
customer that had been suspended in mid-1998 resumed during the third quarter of
1999 and are expected to return to normal  levels during 2000.  Volume  remained
under pressure during 1999 from discounts and promotional  allowances offered by
branded  manufacturers  and value  segment  competitors.  Infant care volume and
sales prices are expected to remain under  pressure due to the carryover  effect
of product performance and design issues and continued  competitive  initiatives
from both national  brand and store brand  competitors.  However,  the continued
roll-out of an improved Ultra diaper which  incorporates  stretch tabs and a new
hook and loop closure  system,  the  introduction of a new training pant product
and the launch of certain destination store brand product and marketing programs
had a  favorable  impact on volume in the last half of 1999 and are  expected to
continue to favorably impact results during 2000.

The Company  began to  implement a price  increase  of  approximately  5 percent
during the fourth  quarter of 1998 in response to price  increases  announced by
K-C and P&G. As a result,  excluding the effect of a price concession made to an
export  customer in the first  quarter of 1999  described  above,  average sales
prices during 1999 were higher compared to 1998. Pricing,  however,  will remain
under pressure due to competitive factors previously discussed.

During the fourth quarter of 1999, one of the Company's  major  customers  began
shifting a significant portion of the Company's existing volume to a competitor.
The  Company  expects  to  offset  the loss of this  business  with new  product
introductions  that began rollout during the third quarter of 1999 with the same
customer.  During  the fourth  quarter of 1999,  another  large  customer  began
shifting the Company's  diaper volume to another  store brand  competitor.  This
loss of business is expected to negatively impact results for 2000.

Feminine care and adult  incontinence  sales  increased to $12.6 million  during
1999 compared to $6.6 million  during 1998 due to the shipment of product to new
customers.  However,  the uncertainty  caused by the Company's chapter 11 filing
significantly  impacted the ability to attract  additional sales. See "RISKS AND
UNCERTAINTIES" herein.

Corporate  and other net sales of $15.8  million  during  1998 were  related  to
Changing Paradigms, which was sold in October of 1998.

COST OF SALES

Overall cost of sales during 1999 was $435.6 million  compared to $428.6 million
during 1998. As a percentage of net sales, cost of sales was 87.3 percent during
1999 compared to 80.1 percent during 1998.

Infant  care cost of sales was $409.9  million  during  1999  compared to $397.1
million during 1998. As a percentage of net sales, infant care cost of sales was
84.3 percent during 1999 compared to 77.4 percent in 1998.  Management  believes
that this  increase in costs as a percentage  of sales was due to  manufacturing
inefficiencies  due to lower  volume and new  product  rollouts,  increased  raw
material costs  associated with new products and higher royalties as a result of
the  settlement  and licensing  agreements  reached in the first quarter of 1999
with P&G and K-C. Product costs have increased  significantly in 1999 due to the
payment of  royalties to P&G and K-C,  increased  price and usage of the new SAP
and increased  product and  manufacturing  costs  associated with the continuing
roll-out of the  improved  Ultra  diaper  described  above.  The  royalties  and
increased  product costs are expected to continue  into the future.  The Company
anticipates that the inefficiencies associated with the product start-ups should
decrease during 2000.

Infant care raw material  prices,  primarily  pulp, were at similar price levels
during 1999 compared to 1998. SAP costs, however, increased during 1999 compared
to 1998. Pulp prices began to increase during the fourth quarter of 1999 and are
expected  to  increase  throughout  2000.  SAP costs are  expected  to  decrease
slightly  during the same period.  All other raw material  costs are expected to
remain at similar levels throughout 2000.

Infant care depreciation  costs were $25.1 million during 1999 compared to $25.8
million in 1998.

                                    Page 21
<PAGE>

Feminine care and adult incontinence cost of sales was $25.7 million during 1999
compared to $18.6 million  during 1998.  As a percentage  of net sales,  cost of
sales was 204.0 percent  during 1999 compared to 281.8 percent  during 1998. The
benefit of increased  volume and cost  management  efforts  helped to reduce the
cost as a percentage of net sales.  Depreciation costs were $4.1 million in 1999
compared to $4.7  million in 1998.  Overall  cost of sales is expected to remain
greater  than net  sales  until  volume  is  significantly  increased  to absorb
existing manufacturing capacity. See "RISKS AND UNCERTAINTIES" herein.

Corporate  and other  cost of goods  sold of $12.9  million  in 1998  relates to
Changing Paradigms, which was sold in October of 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

SG&A expenses were $83.4  million  during 1999 compared to $78.4 million  during
1998. As a percentage of net sales, these expenses were 16.7 percent during 1999
compared to 14.6 percent in 1998. The increase in SG&A is primarily attributable
to  an  increase  in  promotional   spending,   packaging  design  and  artwork,
information  technology and sales and marketing  expenditures.  Depreciation and
amortization  costs  included  in SG&A  increased  to $7.5  million  during 1999
compared  to  $3.9  million  during  1998.  This  increase   resulted  from  the
amortization of software and consulting costs associated with the implementation
of an enterprise  resource  planning system in the fourth quarter of 1998. These
increases were partially offset by lower incentive-based  compensation accruals,
outside sales commissions and non-bankruptcy related legal charges. Expenses are
expected to decrease in 2000  primarily  due to lower  promotional  spending and
packaging design and artwork.

RESEARCH AND DEVELOPMENT

Research and development expenses were $3.6 million during 1999 compared to $4.2
million  during 1998. The decrease is primarily due to lower baby diaper product
development and testing costs.

MANUFACTURING OPERATION CLOSING COSTS

As discussed  above,  $1.6 million in costs were incurred during 1999 related to
the  cessation of  manufacturing  operations at PTB Canada's  Brampton,  Ontario
facility during the second quarter. The costs were primarily severance and other
employee-related expenses.

INTEREST EXPENSE

Interest  expense  was $.5 million  during  1999 and 1998.  There were no direct
borrowings under the DIP Credit Facility during 1999 or 1998.

EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES

The equity in earnings of  unconsolidated  subsidiaries  was $2.3 million during
1999 compared to $4.1 million during 1998. The decrease in earnings reflects the
write-off of capitalized  start-up costs,  losses  associated with the Company's
China joint  venture  and losses  associated  with the  Company's  Brazil  joint
venture.

DIVIDEND INCOME

Dividend  income of $1.0 million was recorded in 1999 compared to $.9 million in
1998. The dividend  represented a distribution  from Mabesa,  an  unconsolidated
subsidiary accounted for using the cost method and included in the corporate and
other segment.

BANKRUPTCY COSTS

Bankruptcy  costs were $9.6 million  during 1999 compared to $6.3 million during
1998. These costs were primarily related to professional fees.

                                    Page 22
<PAGE>

INCOME TAXES

Income tax  benefit was $1.4  million in 1999  compared to income tax expense of
$8.1 million in 1998. In 1999, the Company recorded a reserve adjustment of $6.2
million against its net deferred and other tax-related  assets. The Company also
reduced  its tax  benefit by $4.9  million to account for the effects of certain
non-deductible  bankruptcy  costs.  In 1998,  the Company  recorded a reserve of
$32.6 million against its net deferred and other tax-related assets. The reserve
was  necessary  as  the  utilization  of the  Company's  loss  carryforwards  is
dependent   upon   sufficient   future   taxable   income  to  offset  the  loss
carryforwards.


YEAR ENDED DECEMBER 27, 1998 COMPARED TO YEAR ENDED DECEMBER 28, 1997

RESULTS OF OPERATIONS

A net loss of $65.4  million was incurred  during 1998 compared to a net loss of
$212.7 million in 1997. Included in the results for 1998 were accrued settlement
contingencies  of  $78.5  million  representing  the  balance  of the  estimated
settlement  costs  of  P&G's  and  K-C's  claims  in the  Company's  Chapter  11
reorganization  proceeding,  including the settlement of the P&G patent judgment
and the K-C Texas action. See "Notes 1 and 16 of Notes to Consolidated Financial
Statements" and "ITEM 3: LEGAL PROCEEDINGS" herein. Also included in the results
for  1998  was  $6.3  million  of  bankruptcy  costs  and a $3.4  million  asset
impairment  writedown  relating to the Company's tampon  manufacturing line that
was  taken  out  of  service  in  early  1998.   The  total  of  the  settlement
contingencies,  bankruptcy  costs  and  asset  impairment  writedown  was  $54.2
million,  net of the  effect  of income  taxes.  The  results  in 1998 were also
negatively  impacted by a reserve of $32.6  million  taken against the Company's
net deferred and other tax-related assets.

Included in the 1997 results was an estimated accrued settlement  contingency of
$200 million for the P&G patent  litigation  judgment and associated  litigation
costs.  See "Notes 1 and 16 of Notes to Consolidated  Financial  Statements" and
"ITEM 3: LEGAL PROCEEDINGS"  herein.  Also included in the results for 1997 were
asset  impairments  and other  write-offs  totaling $10.6 million related to the
write-off  of  software  and  consulting  costs  related to the  enterprise-wide
information  system  installation  and  discontinuation  of the Company's tampon
production.  The total of the loss contingency and asset  impairments was $129.5
million,  net of the  effect  of income  taxes.  The  results  in 1997 were also
negatively  impacted by a reserve of $100.2  million taken against the Company's
net deferred and other tax-related assets.

Basic  loss per  share in 1998 was  $5.48  compared  to basic  loss per share of
$17.86 in 1997.  Basic earnings per share was $1.52 in 1998 compared to $1.43 in
1997, excluding charges discussed above in both periods and bankruptcy costs and
adjusting for the Company's contractual interest charges in 1998.

Infant  care  operating  loss  totaled  $42.2  million  in 1998  compared  to an
operating  loss of $155.0  million  in 1997.  The $78.5  million  of  settlement
contingencies  in 1998 and the $200.0  million  settlement  contingency  in 1997
discussed above,  materially  impacted infant care operating results.  Excluding
these  contingencies,  infant care operating  profits were $36.3 million in 1998
compared to $45.0 million in 1997.  Reduced  volume and increased  SG&A were the
major factors contributing to this decline.

Feminine  care and adult  incontinence  operating  loss totaled $16.9 million in
1998  compared to an operating  loss of $23.7  million in 1997.  Operating  loss
includes asset impairments related to a tampon manufacturing  operation that was
shut  down in 1998 of $3.4  million  in 1998  and  $4.4  million  in  1997.  The
reduction  of  the  operating   loss  resulted  from   increased   volume,   the
discontinuation  of the  tampon  manufacturing  operation  and  cost  management
initiatives.

                                    Page 23
<PAGE>

NET SALES

Overall net sales were $535.2  million in 1998, a 4.8 percent  decrease from the
$562.0 million reported in 1997.

Infant  care net sales  decreased  5.9  percent to $512.8  million  from  $545.2
million in 1997.  Unit sales  decreased 7.5 percent to 3,413 million  diapers in
1998  compared  to 3,689  million  diapers in 1997.  The  decrease  in sales was
primarily due to  uncertainties  related to the Company's  Chapter 11 proceeding
and the temporary  discontinuation  of shipments to a customer during the second
half of the year due to product  design  issues  associated  with a new  product
rollout.   Volume   remained  under  pressure  from  discounts  and  promotional
allowances offered by branded manufacturers and value segment competitors and by
customer losses to store brand diaper competitors.

Excluding  the effect of a favorable  product mix,  average sales prices for the
Company's  products  during 1998 were lower  compared to 1997.  The  decrease in
prices was primarily due to the use of multi-packs by the branded  manufacturers
and value  segment  competitors,  competitive  pressure  from store brand diaper
competitors  and price  decreases  in Canada.  The Company  began to implement a
price increase of  approximately  5 percent during the fourth quarter of 1998 in
response to increases announced by K-C and P&G

Feminine  care and adult  incontinence  sales  increased to $6.6 million in 1998
from $4.3 million in 1997 due to the  initiation  of shipments of product to new
customers.  However,  the uncertainty  caused by the Company's Chapter 11 filing
significantly impacted the Company's ability to attract additional sales.

Corporate  and other net sales  increased  to $15.8  million  in 1998 from $12.5
million in 1997 and relate to Changing  Paradigms,  which was sold in October of
1998.

COST OF SALES

Overall cost of sales in 1998 was $428.6  million  compared to $454.9 million in
1997, a 5.8 percent  decrease.  As a percentage of net sales,  cost of sales was
80.1 percent in 1998 compared to 80.9 percent in 1997.

Infant care costs were  $397.1  million in 1998  compared  to $423.4  million in
1997, a decrease of 6.4 percent.  As a percentage of net sales, infant care cost
of sales  was 77.4  percent  in 1998  compared  to 77.8  percent  in 1997.  This
improvement  was primarily due to lower raw material costs,  improved  operating
efficiencies  and lower overhead costs. The lower costs were partially offset by
the sourcing of products from PMI under a supply contract and charges related to
royalties payable to P&G under a product conversion  agreement.  Costs were also
higher due to the product design costs associated with the Company's  conversion
to a single leg cuff diaper in June of 1998.

Infant care raw  material  costs,  primarily  pulp and SAP,  were at lower price
levels in 1998 compared to 1997.  Infant care labor costs were lower during 1998
compared to 1997.

Infant care labor costs were lower during 1998 compared to 1997. The lower costs
reflected increased  manufacturing  efficiencies  including the use of automated
packaging.  Infant care  overhead  costs were lower during 1998 compared to 1997
due to cost management efforts.

Infant  care  depreciation  costs were $25.8  million in 1998  compared to $29.1
million in 1997.

Feminine  care and adult  incontinence  cost of sales were $18.6 million in 1998
compared to $20.4 million in 1997, a decrease of 4.1 percent. As a percentage of
net sales,  cost of sales was 281.8 percent in 1998 compared to 451.2 percent in
1997.  Increased  volume,  lower labor and overhead  costs  resulting  from cost
management initiatives and the shut down of tampon-related  production equipment
were  offset by an increase in  depreciation  to $4.7  million in 1998 from $2.3
million in 1997.

                                    Page 24
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

SG&A expenses were $78.4 million in 1998 compared to $76.3 million in 1997. As a
percentage  of net sales,  these  expenses were 14.6 percent in 1998 compared to
13.6  percent in 1997.  The increase in costs is  primarily  attributable  to an
increase in trade  merchandising  expenses,  incentive-based  accruals,  selling
expenses and  information  system costs related to the Company's new information
system  installation,  which was part of the  Company's  Year  2000  remediation
project.  These increased  costs were partially  offset by lower legal expenses,
excluding bankruptcy costs, and packaging artwork and design costs.

RESEARCH AND DEVELOPMENT

Research and  development  expenses  were $4.2 million in 1998  compared to $5.1
million in 1997.  The decrease was  primarily  due to a reduction of infant care
product development and testing in the second half of 1998.

SETTLEMENT CONTINGENCIES

The  settlement  contingencies  of  $78.5  million  recorded  in 1998  represent
additional  accruals for the balance of the estimated  settlement costs of P&G's
and  K-C's  claims  in  the  Company's  Chapter  11  reorganization  proceeding,
including the  settlement  of the P&G patent  judgment and the K-C Texas action.
The settlement  contingency of $200 million in 1997  represented  the accrual of
the  estimated  liability  and  associated  litigation  costs  from the  adverse
judgment  in  the  P&G  patent  litigation.  See  "Notes  1 and 16 of  Notes  to
Consolidated Financial Statements" and "ITEM 3: LEGAL PROCEEDINGS" herein.

ASSET IMPAIRMENTS

Asset  impairments  were $3.4 million in 1998  compared to $9.4 million in 1997.
The 1998 asset  impairment  related  to the  Company's  feminine  care and adult
incontinence  business tampon  manufacturing line which was removed from service
in early  1998  and is  currently  held for  sale.  The 1997  asset  impairments
included a $5.0 million  write-off of software and associated  consulting  costs
related to the Company's enterprise-wide information system installation,  which
was charged to the  corporate  and other  segment.  The write-off was due to the
inability  of the  software  to  perform  as  represented  during  the  software
selection  process.  Also  included in 1997 was a write-down of $4.4 million for
the  shut  down  of  the  feminine   care  and  adult   incontinence   business'
tampon-related  production  equipment.  In conjunction with the shut down of the
tampon  manufacturing  operation  write-offs  of $.9 million  were taken for raw
material,  finished goods and spare-part  inventories which were charged to cost
of sales.

INTEREST EXPENSE

Interest  expense was $.5 million in 1998 compared to $4.7 million in 1997.  The
decrease  resulted from the suspension of interest on the Company's  prepetition
credit facilities due to the Chapter 11 filing.  There were no direct borrowings
under the DIP Credit Facility during 1998. 1997 included interest on approximate
average  borrowings  of $80.2  million under the  prepetition  revolving  credit
facility and lines of credit.

EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES

The equity in earnings of unconsolidated subsidiaries,  which is included in the
corporate and other  segment,  was $4.1 million in 1998 compared to $1.0 million
in 1997. The increase primarily  reflected improved operating results of PMI and
earnings of Stronger Corporation S.A.

DIVIDEND INCOME

Dividend  income of $.9 million was recorded in 1998 compared to $1.1 million in
1997. The dividend  represented a distribution  from Mabesa,  an  unconsolidated
subsidiary accounted for using the cost method and included in the corporate and
other segment.

                                    Page 25
<PAGE>

BANKRUPTCY COSTS

Bankruptcy  costs were $6.3  million  during  1998.  These costs were  primarily
related to professional fees.

INCOME TAXES

Income tax expense was $8.1 million in 1998 as the Company recorded a reserve of
$32.9 million against its net deferred and other tax-related assets. The reserve
was  necessary  as  the  utilization  of the  Company's  loss  carryforwards  is
dependent   upon   sufficient   future   taxable   income  to  offset  the  loss
carryforwards. See "FUTURE REALIZATION OF NET DEFERRED TAX ASSET."

LIQUIDITY AND CAPITAL RESOURCES

During  1999,  cash flow from  operations  was $6.4  million  compared  to $61.3
million  in 1998.  Cash flow was  negatively  impacted  by reduced  infant  care
operating profits and continues to be negatively impacted by operating losses in
the feminine care and adult  incontinence  business.  During 1998, cash flow was
positively   impacted  by  an  increase  of   approximately   $37.6  million  in
postpetition  accounts  payable and checks issued but not cleared.  During 1999,
cash flow was positively  impacted by a reduction in inventory and  receivables.
These  benefits  were  partially  offset by a reduction of checks issued but not
cleared. Cash flow was also positively impacted by $6.4 million of proceeds from
property  and  equipment  sales and $5.6  million  in  scheduled  repayments  of
advances to an unconsolidated subsidiary.

The cash produced from operations and cash and short-term  investments supported
capital  expenditures  of $27.7  million  and  $37.3  million  in 1999 and 1998,
respectively. These capital expenditures included approximately $1.7 million and
$9.0 million in 1999 and 1998, respectively, of computer software and consulting
costs related to the installation of a new business  information  system,  which
was the  primary  component  of the  Company's  Year  2000  remediation  efforts
discussed  below.  The  expenditures  during 1999 were primarily  related to the
addition of  increased  training  pant  capacity  and new product  enhancements.
Capital  spending is expected to total  approximately  $28.0 million during 2000
which the Company  expects will be funded  through a  combination  of internally
generated funds and borrowings under the Credit Facility.

Cash produced from  operations  and cash and  short-term  investments  supported
additional investments of $.8 million in the Company's Goodbaby joint venture in
China and $2.0 million in the Company's joint venture in Brazil.

Cash and  short-term  investments  decreased  from $22.6 million at December 27,
1998 to $11.7 million at December 26, 1999.

In connection  with the Chapter 11 filing,  on January 30, 1998,  the Bankruptcy
Court entered a Final Order  approving the DIP Credit Facility as provided under
the Revolving Credit and Guarantee  Agreement dated as of January 7, 1998, among
the Company,  as Borrower,  certain  subsidiaries of the Company, as guarantors,
and a bank group led by The Chase  Manhattan  Bank  ("Chase").  Pursuant  to the
terms of the DIP Credit  Facility,  as amended and restated as of June 14, 1999,
Chase and a syndicate of banks made available to the Company a revolving  credit
and letter of credit facility in an aggregate  principal  amount of $75 million.
The Company's  maximum  borrowing under the DIP Credit Facility could not exceed
the lesser of $75 million or an available  amount as  determined  by a borrowing
base  formulation.  The  borrowing  base  formulation  was  comprised of certain
specified  percentages  of eligible  accounts  receivable,  eligible  inventory,
equipment and personal and real property of the Company. The DIP Credit Facility
had a sublimit  of $10 million  for the  issuance of letters of credit.  The DIP
Credit Facility expired on January 28, 2000 in accordance with its terms and was
replaced with the Credit Facility.

At December 26, 1999, there were no outstanding  direct borrowings under the DIP
Credit  Facility.  The Company had an  aggregate  of $2.0  million in letters of
credit  issued under the DIP Credit  Facility at December 26, 1999.  See "Recent
Developments" and "Note 13 of Notes to Consolidated Financial Statements."

                                    Page 26
<PAGE>

On January 28, 2000 the Company  entered into the Credit  Facility.  The maximum
borrowing  under the Credit Facility may not exceed the lesser of $95 million or
an amount determined by a borrowing base formula.  The borrowing base formula is
comprised of certain  specified  percentages  of eligible  accounts  receivable,
eligible  inventory,  equipment  and personal  property and real property of the
Company.  The Credit Facility has a sub-limit of $15 million for the issuance of
letters of credit.

Borrowings  under the Credit  Facility  are secured by a security  interest  in,
pledge and lien on substantially  all of the Company's North American assets and
properties and the proceeds  thereof.  Borrowings  under the Credit Facility are
guaranteed  by certain  domestic  subsidiaries  and may be used to fund  working
capital  and  other  general  corporate  purposes  including   acquisitions  and
investments  in  existing  and new  international  joint  ventures.  The  Credit
Facility contains customary restrictive covenants, including among other things,
a prohibition on dividends,  limitations on the creation of additional liens and
indebtedness,  limitations  on  capital  expenditures,  investments,  loans  and
advances,  the sales of  assets  and  transactions  with  affiliates.  Financial
covenants  include the maintenance of minimum earnings before  interest,  taxes,
depreciation and amortization, fixed charges, coverage ratio, tangible net worth
and a maximum leverage ratio.

The Credit  Facility  provides that  borrowings  will bear interest at a rate of
1.50 percent in excess of Citibank's  base rate, or at the Company's  option,  a
rate of 2.50  percent  in excess of the  reserve  adjusted  eurodollar  rate for
interest  periods  of one,  two,  three or six  months.  After  March 31,  2001,
borrowing  rates  will be subject  to a pricing  grid  based upon the  Company's
leverage  ratio and could decrease by a maximum of .5 percent  and increase by a
maximum of .25 percent.  The Company will pay a commitment fee of .5 percent per
annum on the unused portion of the Credit Facility, a letter of credit fee equal
to 2.75  percent  per annum on the  average  outstanding  letters  of credit and
certain other fees.

On January  28,  2000,  the  Company  borrowed  approximately  $15.0  million to
consummate  the Plan. As of March 7, 2000, the Company had  approximately  $12.0
million of borrowings  and $2.0 million in letters of credit  outstanding  under
the Credit Facility. See "RISKS AND UNCERTAINTIES" AND "RECENT DEVELOPMENTS."

At December 28, 1997,  the Company  maintained a $150 million  revolving  credit
facility with a group of nine financial  institutions available through February
2001. At December 28, 1997,  borrowings  under this credit facility  totaled $70
million.  The  Company  also had  access  to  short-term  lines of  credit on an
uncommitted  basis with several major banks.  At December 28, 1997,  the Company
had approximately  $50 million in uncommitted lines of credit.  Borrowings under
these lines of credit totaled $12.8 million at December 28, 1997. As a result of
the Chapter 11 filing,  the Company was prohibited  from paying any  prepetition
liabilities without Bankruptcy Court approval. The Chapter 11 filing resulted in
a default  under the Company's  prepetition  revolving  credit  facility and its
borrowings  under  uncommitted  lines  of  credit.  See  "Note  16 of  Notes  to
Consolidated Financial Statements."

FUTURE REALIZATION OF NET DEFERRED TAX ASSET

The  Company  accounts  for income  taxes  based on the  liability  method  and,
accordingly, deferred income taxes are provided to reflect temporary differences
between financial and tax reporting.  Significant  components of deferred income
taxes include temporary  differences due to goodwill ($7.0 million) and reserves
not currently  deductible  ($116.2 million).  To realize the full benefit of the
deferred tax asset, the Company needs to generate  approximately  $353.6 million
in future  taxable  income  before  considering  the  availability  of carryback
periods,  if any. The Company  currently has fully reserved its net deferred tax
asset of $136.1 million. See "--Income Taxes."

YEAR 2000

The  "Year  2000  issue" is  generally  defined  as the  inability  of  computer
hardware,  software  and  embedded  systems to  properly  recognize  and process
date-related  information  for dates after  December 31, 1999. The Company began
its efforts to address this problem as early as 1995. The Company's efforts were
generally   separated  into  three  areas:  (i)  business   information  systems
("Business Systems"),  (ii) non-information  technology systems,  including real
estate facilities and manufacturing equipment  ("Infrastructure  Systems"),  and
(iii)  vendors,  suppliers,  customers  and third party  information  interfaces
("Third Party Dependencies").

                                    Page 27
<PAGE>

The Company  established  a formal "Y2K  Project  Office" to assess,  manage and
implement its Year 2000  activities.  The Company also established a formal "Y2K
Steering  Committee" to oversee the Company's  Year 2000 efforts,  including the
efforts of the Project Office. The Company also engaged Deloitte  Consulting/ICS
to assist with  implementation of certain Year 2000 related Business Systems and
the GartnerGroup to assist with its Year 2000 efforts for Infrastructure Systems
and Third Party Dependencies.  To date, the Company has experienced no Year 2000
issues.

THE COMPANY'S STATE OF READINESS

Most of the Year 2000 issues arising with respect to the Business Systems of the
Company were  addressed by replacement of the majority of those systems with SAP
R/3 enterprise resource planning software.  The SAP R/3 software was implemented
and operating at the Company's  corporate  headquarters  and in its U.S.  infant
care plants in early November of 1998 and is warranted to be Year 2000 compliant
by its manufacturer.  The SAP R/3  implementation  was designed to significantly
minimize any Year 2000 related  disruptions for  approximately 80 percent of the
Company's  Business  Systems at those  locations.  The  remaining  systems  were
remediated or replaced,  tested and  implemented  prior to the end of 1999. With
respect to  Business  Systems  that were not  addressed  by the  overall SAP R/3
implementation, the Company addressed certain issues with certain of its desktop
computer  operating systems.  Overall,  the Company remediated and tested all of
its critical Business Systems by the end of 1999.

The Company  engaged the  GartnerGroup  to  evaluate  and analyze the  Company's
overall Year 2000  preparedness.  The Company  received  formal reports from the
GartnerGroup  and  initiated  remediation/  replacement  procedures  for certain
processes and systems identified in such reports.

The Company also internally evaluated certain of its Infrastructure  Systems for
Year 2000 related problems.  These systems included the  manufacturing  capacity
for the Company's  products and therefore were critical to the Company's ability
to produce  products and realize  revenue from sales.  As part of the evaluation
process,  the  Company  surveyed  critical  machinery,   equipment  and  systems
suppliers,  and  significant  product and service  vendors for its material real
estate  facilities  and  security  systems.  Responses  to such  surveys did not
indicate any problems which, taken on their own, could have materially adversely
affected the Company's ability to manufacture products.

Year 2000 problems with respect to certain  material  customers  that would have
prevented  the taking or filling of orders for products or  interfered  with the
collections  process could have had a material impact on the Company's revenues.
Approximately  80 percent of the Company's orders for products are delivered via
electronic data interchange facilities ("EDI"). While the SAP R/3 implementation
was designed to address Year 2000 related  issues for Company  systems  required
for these EDI  exchanges,  the Company is not able to control the EDI facilities
of its  customers.  As a result,  the Company  surveyed its customer  base as to
their EDI  facilities and their overall Year 2000 state of  preparedness  during
the fourth quarter of 1998. The Company received survey responses from customers
who, in the  aggregate,  represented  more than 90 percent of its 1998 revenues.
The  Company  also  conducted  Year 2000  testing of EDI with  approximately  60
percent of those customers.  Neither the survey results nor the testing revealed
significant Year 2000 related problems which could have materially  impaired the
Company's  ability to conduct EDI exchanges  with its  customers,  although such
testing  should not be  considered a conclusive  indicator of how EDI  exchanges
will perform in the future.  The Company also prepared an inventory and surveyed
those vendors, service providers and raw materials suppliers that may have had a
material impact on the Company in the event of Year 2000 problems. Approximately
60  percent  of the  suppliers  surveyed  responded  and  did not  indicate  any
anticipated   Year  2000  problems  which,   taken  on  their  own,  could  have
significantly adversely affected operations critical to the Company's ability to
realize revenues.

Contingency  planning for  Business  Systems,  Infrastructure  Systems and Third
Party Dependencies was substantially completed during the first quarter of 1999.
This process attempted to address critical Year 2000 issues known to the Company
and other  unanticipated  (but reasonably  possible)  internal and external Year
2000 related events that may have a material impact on the Company's  ability to
conduct its operations.

                                    Page 28
<PAGE>

COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES

The total costs  associated  with  required  modifications  to address Year 2000
related  issues for the Company had a material  adverse  impact on the Company's
financial position.  The cost of the project through December 26, 1999 was $23.4
million,  all of which  was  related  to the SAP R/3  implementation.  It is not
possible to identify what portion of the total SAP R/3 cost is  attributable  to
the Year 2000  remediation.  The  Company  planned to  implement  an  enterprise
resource  planning  system for its  Business  Systems,  regardless  of Year 2000
issues, with respect to its former Business Systems.

All  statements  made herein  regarding the Company's Year 2000 efforts are Year
2000  Readiness  Disclosures  made  pursuant  to the Year 2000  Information  and
Readiness  Disclosure  Act and, to the extent  applicable,  are  entitled to the
protections of such act.

RISKS AND UNCERTAINTIES

INCREASED COSTS. As a part of the License  Agreements entered into in connection
with the  Company's  settlements  with P&G and K-C, the Company has incurred and
will continue to incur  significant added costs in the form of running royalties
payable to both  parties  for sales of the  licensed  diaper and  training  pant
products. While the Company believes that the royalties being charged by P&G and
K-C  under  their  respective  License  Agreements  are  approximately  the same
royalties that will be paid by the Company's  major store brand  competitors for
similar patent rights,  the royalties will have a material adverse impact on the
Company's  future  financial  condition and results of  operations.  While these
royalty costs have been partially  offset by projected raw material cost savings
related to the  conversion  to a dual cuff product,  the  Company's  overall raw
material costs have increased. These royalty costs have been partially offset by
price increases  announced by the Company in the fourth quarter of 1998 and will
continue  to be  offset to the  extent  such  price  increases  are  maintained.
Further,   the  Company's   operating  results  may  be  adversely  affected  by
anticipated increases in raw materials prices, primarily fluff pulp, in 2000.

In addition,  as a part of the License Agreement entered into in connection with
the K-C  Settlement  Agreement,  the  Company  has  changed to a new SAP for its
diapers and training pants which exhibits certain  performance  characteristics.
The Company  experienced  certain product  performance  issues which it believes
impacted  volume  for the  first  half of  1999.  The  Company  is  encountering
increased  product  costs due to the  increased  price and usage of the new SAP.
While the Company is working diligently with its SAP suppliers to develop a more
cost-effective  alternative,  the Company cannot predict at this time whether or
when the added  costs  will be fully  offset.  The  Company  expects  that these
increased  product  costs will have a material  adverse  impact on its financial
condition and results of operations for at least 2000 and potentially beyond.

PRICING.  In the fourth quarter of 1998 the Company implemented a price increase
of 5 percent.  A significant  part of this price increase was required to offset
the increased costs of certain of the Company's infant care product designs. The
Company  has  realized  some of the  benefit  of the  price  increase.  However,
competitive  factors have prevented and may continue to prevent the Company from
realizing the full benefit of the price increase. Additional price increases are
needed to fully  offset the added  royalty  cost to be  incurred  by the Company
pursuant to the P&G and K-C settlements  described above. Should the Company not
be able to realize future price increases,  its margins are expected to continue
to be negatively impacted.

VOLUME.  During the fourth quarter of 1999, one of the Company's major customers
began  shifting a  significant  portion of the  Company's  existing  volume to a
competitor.  The Company  expects to offset the loss of this  business  with new
product  introductions  that began rollout during the third quarter of 1999 with
the same  customer.  During the fourth  quarter of 1999,  another large customer
began  shifting the Company's  diaper volume to another store brand  competitor.
This loss of business is expected to negatively impact results for 2000.

REALIZATION  OF  INVESTMENT IN FEMININE  CARE AND ADULT  INCONTINENCE  BUSINESS.
Given the slow  start-up of the feminine care and adult  incontinence  business,
which  was  exacerbated  by the  Company's  Chapter  11  filing,  and  given the
resulting feminine care and adult incontinence  losses, the Company's ability to
recover its  investment  in such  business is highly  uncertain.  The  Company's
ability to recover its investment is dependent upon the


                                    Page 29
<PAGE>

successful  execution  of the  Company's  feminine  care and adult  incontinence
business plan now that the Company has exited  Chapter 11. The Company  believes
that  without  the  distractions  and  uncertainties  related to Chapter 11, the
feminine care and adult incontinence  business will see an increase in sales and
improved  results.  There can be no  assurances,  however,  that  such  improved
results will be realized.

BRANDED PRODUCT  INNOVATIONS.  Because of the emphasis on product innovations in
the disposable diaper, feminine care and adult incontinence markets, patents and
other  intellectual  property rights are an important  competitive  factor.  The
national branded  manufacturers  have sought to vigorously  enforce their patent
rights.  Patents held by the national branded manufacturers could severely limit
the Company's ability to keep up with branded product innovations by prohibiting
the Company from introducing products with comparable features. P&G and K-C have
also heavily  promoted diapers in the multi-pack  configuration.  These packages
offer a lower unit price to the retailer and  consumer.  It is possible that the
Company may continue to realize lower  selling  prices and/or lower volumes as a
result of these initiatives.

INCREASED  FINANCIAL  LEVERAGE.  In connection with the Plan, the Company issued
the New Notes. As a result of this increased  leverage,  the Company's principal
and interest obligations have increased  substantially.  The degree to which the
Company is leveraged  could  adversely  affect the  Company's  ability to obtain
additional  financing for working  capital,  acquisitions  or other purposes and
could make it more vulnerable to economic  downturns and competitive  pressures.
The Company's  increased  leverage could also adversely affect its liquidity and
its ability to fund capital expenditures,  as a substantial portion of available
cash from operations will have to be applied to meet debt service  requirements.
The  indenture  related to the New Notes (the  "Indenture")  provides  that,  if
certain  coverage  tests are not met,  interest  on the New Notes may be paid in
kind for the  first  two  years.  The  Indenture  contains  customary  financial
covenants restricting the payments of dividends, the repurchase of the Company's
stock,  the  issuance  of  additional  equity or the  incurrence  of  additional
indebtedness. Also in connection with the Plan, on January 28, 2000, the Company
entered  into the  Credit  Facility.  The  Credit  Facility  contains  customary
financial covenants.

Based upon anticipated improvements in the Company's operations and certain cost
savings  measures,  the Company  believes  that its cash flows from  operations,
borrowings  under the Credit  Facility and other sources of  liquidity,  will be
adequate to meet the Company's  anticipated  requirements  for working  capital,
capital expenditures, interest payments and scheduled principal payments for the
foreseeable  future.  There  can  be no  assurance,  however,  that  anticipated
improvements in operations and cost savings will be realized.  If the Company is
unable to generate  sufficient cash flows from operations in the future,  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 refinancing would
be possible or that any additional financing could be obtained on terms that are
favorable or acceptable to the Company.

MARKET FOR THE COMPANY'S COMMON STOCK. Pursuant to the Plan, Wellspring, and its
affiliates  purchased  11,516,405  shares,  or approximately 97 percent,  of the
Company's new common stock.  Approximately 178,365 shares, or 1.5 percent of the
new common stock, was distributed under the Plan to the Company's  then-existing
stockholders.  There is currently no  established  public trading market for the
Company's  common stock.  The Company is in the process of attempting to qualify
its new  common  stock for  quotation  on the  OTCBB.  There are no  assurances,
however,  when or whether  such  quotations  will be  published  on the OTCBB or
whether a trading market in the Company's new common stock will develop.

NEW ACCOUNTING STANDARDS

The  Financial   Accounting  Standards  Board  has  issued  Statement  No.  133,
"Accounting for Derivative  Instruments and Hedging  Activities,"  which must be
adopted  by  the  Company  in  fiscal  year  2001.  This  statement  establishes
accounting  and  reporting  standards  for  derivative  instruments  - including
certain  derivative  instruments  embedded in other  contracts - and for hedging
activities.  The Company is currently  evaluating the impact of the statement on
the Company's financial statements.

In March 1998, the American Institute of Certified Public Accountants  ("AICPA")
issued a  Statement  of  Position  98-1,  "Accounting  for the Costs of Computer
Software  Developed  or Obtained  for  Internal  Use." This


                                    Page 30
<PAGE>

statement requires capitalization of certain costs of internal-use software. The
Company  adopted this  statement in the quarter ended March 28, 1999, and it did
not have a material impact on the financial statements.

In April 1998, the AICPA issued a Statement of Position 98-5,  "Reporting on the
Costs of  Start-up  Activities."  This  statement  requires  that  the  costs of
start-up  activities and  organizational  costs be expensed as incurred.  Any of
these costs previously  capitalized by a company must be written off in the year
of adoption.  The Company  adopted this statement in the quarter ended March 28,
1999,  and the equity in earnings of  unconsolidated  subsidiaries  included $.5
million in charges as a result of the adoption of the statement.

INFLATION

Inflation  has  not  been a  significant  factor  in the  Company's  results  of
operations  in recent  years due to the modest  rate of price  increases  in the
United States and Canada.

FORWARD-LOOKING STATEMENTS

From time to time,  information provided by the Company,  statements made by its
employees  or  information  included  in its  filings  with the  Securities  and
Exchange  Commission  (including  the Annual  Report on Form  10-K) may  include
statements   that  are  not   historical   facts,   so-called   "forward-looking
statements."  The  words  "believes,"   "anticipates,"   "expects"  and  similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and  uncertainties  that could cause actual results
to differ  materially  from those  expressed  in the  Company's  forward-looking
statements.   Factors  which  could  affect  the  Company's  financial  results,
including but not limited to:  increased raw material  prices and product costs;
new product and packaging  introductions  by  competitors;  increased  price and
promotion pressure from competitors;  increased  financial  leverage;  year 2000
compliance  issues;  and patent  litigation,  are described herein.  Readers are
cautioned not to place undue reliance on the forward-looking  statements,  which
speak only as of the date hereof,  and which are made by management  pursuant to
the "safe harbor" provisions of the Private Securities  Litigation Reform Act of
1995. The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect events
or  circumstances  after  the  date  hereof  or to  reflect  the  occurrence  of
unanticipated events.


ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's market  risk-sensitive  instruments and foreign currency  exchange
rate risks do not subject the Company to material market risk exposures.



                                    Page 31
<PAGE>



ITEM 8:           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
                  PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES:

                                                                                                              PAGE

<S>                                                                                                             <C>
Responsibility for Financial Reporting                                                                          33

Report of Independent Public Accountants                                                                        34

Consolidated Statements of Operations for the three years in
         the period ended December 26, 1999                                                                     35

Consolidated Balance Sheets as of December 26, 1999 and
         December 27, 1998                                                                                      36

Consolidated Statements of Cash Flows for the three years in
         the period ended December 26, 1999                                                                     37

Consolidated Statements of Comprehensive Loss for the three years in
         the period ended December 26, 1999                                                                     38

Consolidated Statements of Changes in Shareholders' Deficit
         for the three years in the period ended December 26, 1999                                              39

Notes to Financial Statements                                                                                   40

Financial Statement Schedule

         Schedule II - Valuation and Qualifying Accounts                                                        66
</TABLE>





                                    Page 32
<PAGE>






                     RESPONSIBILITY FOR FINANCIAL REPORTING


Management is  responsible  for the  preparation  of the Company's  consolidated
financial  statements  appearing in this Annual Report. The financial statements
have been prepared in accordance with generally accepted  accounting  principles
and,  in the  opinion of  management,  present  fairly the  Company's  financial
position,  results  of  operations  and cash  flows.  The  financial  statements
necessarily  contain  amounts that are based on the best estimates and judgments
of management.

The Company maintains a system of internal controls which management believes is
adequate to provide reasonable  assurance as to the integrity and reliability of
the financial  statements,  the  protection of assets from  unauthorized  use or
disposition and the prevention and detection of fraudulent  financial reporting.
The  selection  and  training of  qualified  personnel,  the  establishment  and
communication of accounting and  administrative  policies and procedures,  and a
program of internal audit are important elements of these control systems.

The Company  maintains a strong  internal  auditing  program that  independently
assesses the  effectiveness  of the internal  controls and  recommends  possible
improvements   thereto.   Management  has  considered  the  internal   auditors'
recommendations  concerning  the Company's  system of internal  controls and has
taken actions that management  believes are  cost-effective in the circumstances
to respond appropriately to these recommendations.

The Audit  Committee  of the Board of  Directors  oversees  the  fulfillment  by
management of its  responsibilities  over financial controls and the preparation
of financial  statements.  The Committee meets regularly with representatives of
management and internal and external auditors to review accounting, auditing and
financial reporting matters.

As part of  their  audit of the  Company's  consolidated  financial  statements,
Arthur Andersen LLP considered the Company's system of internal  controls to the
extent they deemed necessary to determine the nature, timing and extent of their
audit tests.


/S/ ALAN J. CYRON

Alan J. Cyron
Executive Vice President & Chief Financial Officer




                                    Page 33
<PAGE>






                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of Paragon Trade Brands, Inc.:

We have audited the  accompanying  consolidated  balance sheets of Paragon Trade
Brands, Inc., a Delaware Corporation, and subsidiaries,  as of December 26, 1999
and December 27, 1998,  and the related  consolidated  statements of operations,
comprehensive loss, changes in shareholders'  deficit and cash flows for each of
the  three  years  in the  period  ended  December  26,  1999.  These  financial
statements  and the  schedule  referred to below are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and the schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Paragon Trade Brands, Inc. and
subsidiaries  as of December 26, 1999 and December 27, 1998,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 26, 1999, in conformity  with  accounting  principles  generally
accepted in the United States.

Our audit was made for the purpose of forming an opinion on the basic  financial
statements  taken as a whole.  The financial  statement  schedule  listed in the
index to  financial  statements  and  schedules  is  presented  for  purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.

Arthur Andersen LLP


/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
February 2, 2000
(Except for the matter  discussed in
the next to the last  paragraph of Note 16,
as to which the date is March 24, 2000.)



                                    Page 34
<PAGE>



                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                   ---------------------------------------------------------------------------
                                                   December 26, 1999         December 27, 1998               December 28, 1997
                                                   -----------------         -----------------               -----------------
<S>                                                   <C>                       <C>                            <C>
Sales, net of discounts and allowances                $498,656                  $535,207                       $     561,975
Cost of sales                                          435,611                   428,572                             454,911
                                                     ---------                 ---------                      --------------
Gross profit                                            63,045                   106,635                             107,064
Selling, general and administrative expense             83,366                    78,447                              76,347
Research and development expense                         3,644                     4,248                               5,063
Manufacturing operation closing costs                    1,555                         -                                   -
Asset impairments                                            -                     3,416                               9,442
Settlement contingencies (Notes 1 and 16)                    -                    78,500                             200,000
                                                     ---------                 ---------                      --------------
Operating loss                                         (25,520)                  (57,976)                           (183,788)
Equity in earnings of  unconsolidated subsidiaries       2,339                     4,077                                 953
Dividend income from unconsolidated subsidiary             992                       922                               1,055
Interest expense(1)                                        482                       450                               4,667
Other income, net                                        2,483                     2,437                               1,664
                                                     ---------                 ---------                      --------------
Loss before income taxes and bankruptcy costs          (20,188)                  (50,990)                           (184,783)
Bankruptcy costs                                         9,538                     6,302                                   -
Provision for (benefit from) income taxes               (1,350)                    8,091                              27,934
                                                     ---------                 ---------                      --------------
Net loss                                              $(28,376)                 $(65,383)                      $    (212,717)
                                                     =========                 =========                      ==============
Basic loss per common share                           $  (2.37)                 $  (5.48)                      $      (17.86)
                                                     =========                 =========                      ==============
Diluted loss per common share                         $  (2.37)                 $  (5.48)                      $      (17.86)
                                                     =========                 =========                      ==============
Dividends paid                                        $      -                  $      -                       $           -
                                                     =========                 =========                      ==============

---------------
<FN>
(1)  Contractual interest                              $5,626                    $5,836
                                                    =========                 =========
</FN>
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.



                                    Page 35
<PAGE>


                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                           CONSOLIDATED BALANCE SHEETS
                          (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            December 26, 1999            December 27, 1998
                                                                            -----------------            -----------------
<S>                                                                             <C>                         <C>
ASSETS
Cash and short-term investments                                                 $    11,685                 $    22,625
Receivables                                                                          85,976                      79,156
Inventories                                                                          48,744                      53,282
Current portion of deferred income taxes                                              5,557                       4,260
Prepaid expenses                                                                      3,745                       4,323
                                                                            -----------------            -----------------
     Total current assets                                                           155,707                     163,646
Property and equipment, net                                                         113,637                     106,200
Construction in progress                                                              6,525                      19,626
Assets held for sale                                                                  3,312                       4,691
Investment in unconsolidated subsidiary at cost                                      22,929                      22,743
Investment in and advances to unconsolidated
     subsidiaries, at equity                                                         56,215                      66,041
Goodwill                                                                             30,900                      32,819
Other assets, net                                                                    11,295                      13,521
                                                                            -----------------            -----------------
     Total assets                                                               $   400,520                 $   429,287
                                                                            =================            =================

LIABILITIES AND SHAREHOLDERS' DEFICIT
Checks issued but not cleared                                                   $     7,525                 $    12,433
Accounts payable                                                                     34,715                      32,416
Accrued liabilities                                                                  34,259                      33,646
                                                                            -----------------            -----------------
     Total current liabilities                                                       76,499                      78,495
Liabilities subject to compromise (Notes 1, 14 and 16)                              406,723                     406,859
Deferred compensation                                                                   211                           -
Deferred income taxes                                                                 6,904                       5,773
                                                                            -----------------            -----------------
     Total liabilities                                                              490,337                     491,127
                                                                            -----------------            -----------------

Commitments and contingencies (Notes 1, 16 and 17)

Shareholders' deficit:
Preferred stock:  authorized 10,000,000 shares,
     no shares issued, $.01 par value                                                     -                           -
Common stock:  authorized 25,000,000 shares,
     issued 12,388,464 and 12,378,616 shares, $.01 par value                            124                         124
Capital surplus                                                                     143,736                     143,918
Accumulated other comprehensive loss                                                 (1,213)                     (1,840)
Accumulated deficit                                                                (222,134)                   (193,758)
Less:  treasury stock, 438,750 and 429,696 shares, at cost                          (10,330)                    (10,284)
                                                                            -----------------            -----------------
     Total shareholders' deficit                                                    (89,817)                    (61,840)
                                                                            -----------------            -----------------
                                                                                $   400,520                 $   429,287
                                                                            =================            =================
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.




                                    Page 36
<PAGE>




                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                   ---------------------------------------------------------------------------
                                                          December 26, 1999       December 27, 1998       December 28, 1997
                                                          -----------------       -----------------       -----------------
<S>                                                           <C>                     <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                      $    (28,376)           $    (65,383)           $   (212,717)
Non-cash charges to earnings:
     Depreciation and amortization                                  37,160                  34,459                  35,514
     Deferred income taxes                                            (166)                   (343)                 36,464
     Equity in (earnings) loss of unconsolidated
         subsidiaries                                               (1,546)                 (2,807)                    615
     Write-down of assets                                              660                   3,408                   7,967
Changes in working capital:
     Accounts receivable                                             3,659                 (16,010)                 (5,430)
     Inventories and prepaid expenses                                5,116                 (12,230)                 (3,997)
     Accounts payable                                               (1,062)                 34,529                   3,238
     Accrued liabilities and loss contingency                          491                  85,255                 192,615
     Prepetition reclamation payment
         authorized by court                                          (546)                 (1,034)                      -
     Checks issued but not cleared                                  (4,908)                  3,058                    (858)
Other                                                               (4,037)                 (1,598)                    652
                                                          -----------------       -----------------       -----------------
     Net cash provided by operating activities                       6,445                  61,304                  54,063
                                                          -----------------       -----------------       -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment                            (25,993)                (28,283)                (49,420)
Proceeds from sale of property and equipment                         6,447                   3,435                  10,266
Proceeds from sale of Changing Paradigms, Inc.                         350                   5,163                       -
Repayment of advance to unconsolidated
     subsidiary, at equity                                           5,612                       -                       -
Investment in Grupo P.I. Mabe, S.A. de C.V.                           (186)                 (2,779)                 (3,433)
Investment in and advances to
     unconsolidated subsidiaries, at equity                         (2,760)                 (5,375)                (24,102)
Other                                                                 (855)                 (9,043)                 (9,104)
                                                          -----------------       -----------------       -----------------
     Net cash used by investing activities                         (17,385)                (36,882)                (75,793)
                                                          -----------------       -----------------       -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings                         -                    (921)                 14,185
Prepetition debt payment authorized by court                             -                  (1,867)                      -
Proceeds from U.S. bank credit facility                                  -                       -                  25,000
Repayments of U.S. bank credit facility                                  -                       -                 (25,000)
Sale of common stock                                                     -                       -                     239
                                                          -----------------       -----------------       -----------------
     Net cash provided (used) by financing
         activities                                                      -                  (2,788)                 14,424
                                                          -----------------       -----------------       -----------------
NET INCREASE (DECREASE) IN CASH AND
     SHORT TERM INVESTMENTS:                                       (10,940)                 21,634                  (7,306)
Cash and short-term investments at beginning
     of period                                                      22,625                     991                   8,297
                                                          -----------------       -----------------       -----------------
Cash and short-term investments at end of period              $     11,685            $     22,625            $        991
                                                          =================       =================       =================
Cash paid (received) during the year for:
     Interest (net of amounts capitalized)                    $        645            $      1,557            $      4,259
                                                          =================       =================       =================
     Income taxes                                             $        235            $         78            $     (4,242)
                                                          =================       =================       =================
     Bankruptcy costs                                         $      7,507            $      2,461            $          -
                                                          =================       =================       =================
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.



                                    Page 37
<PAGE>


                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                          (DOLLAR AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                   ---------------------------------------------------------------------------
                                                          December 26, 1999       December 27, 1998       December 28, 1997
                                                          -----------------       ------------------      ------------------
<S>                                                           <C>                      <C>                    <C>
Net loss                                                      $     (28,376)           $     (65,383)         $     (212,717)

Other comprehensive income (loss), net of tax
     Foreign currency translation adjustments(1)                        627                     (774)                   (452)
                                                          -----------------       ------------------      ------------------
Comprehensive loss                                            $     (27,749)           $     (66,157)         $     (213,169)
                                                          =================       ==================      ==================
------------------
<FN>
(1)      Tax expense (benefit)                                $         393            $        (485)         $         (283)
                                                          =================       ==================      ==================
</FN>
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.








                                    Page 38
<PAGE>



                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
                          (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             Accumulated
                                                                                Other
                                                                            Comprehensive        Retained        Treasury
                                          Common Stock   Capital Surplus         Loss             Deficit          Stock
                                          ------------   ---------------    -------------      ------------    -------------
<S>                                          <C>           <C>               <C>               <C>             <C>
BALANCE, December 29, 1996                   $   123       $   143,205       $     (614)       $     84,341    $    (12,350)
     Net loss                                      -                 -                -            (212,717)              -
     Issue common stock                            -             1,163                -                   -           2,255
     Translation adjustment                        -                 -             (452)                  -               -
                                          ------------   ---------------    -------------      ------------    -------------
BALANCE, December 28, 1997                       123           144,368           (1,066)           (128,376)        (10,095)
     Net loss                                      -                 -                -             (65,383)              -
     Issue common stock                            1               150                -                   -               -
     Translation adjustment                        -                 -             (774)                  -               -
     Restricted stock forfeiture                   -              (600)               -                   -            (189)
                                          ------------   ---------------    -------------      ------------    -------------
BALANCE, December 27, 1998                       124           143,918           (1,840)           (193,758)        (10,284)
     Net loss                                      -                 -                -             (28,376)              -
     Issue common stock                            -                28                -                   -               -
     Translation adjustment                        -                 -              627                   -               -
     Restricted stock forfeiture                   -              (210)               -                   -             (46)
                                          ------------   ---------------    -------------      ------------    -------------
BALANCE, December 26, 1999                   $    124      $   143,736       $   (1,213)       $   (222,134)    $   (10,330)
                                          ============   ===============    =============      ============    =============
</TABLE>

The following summarizes the changes in the number of shares of capital stock:

<TABLE>
<CAPTION>
                                                                               Common Stock              Treasury Stock
                                                                         --------------------------  -----------------------
<S>                                                                              <C>                        <C>
BALANCE, December 29, 1996                                                       12,288,293                 535,250
     Issue common stock - 1995 Incentive Compensation Plan                           36,655                       -
     Issue common stock - 1996 Non-Officer Employee
         Incentive Compensation Plan                                                 12,279                       -
     Issue common stock - Profit Sharing and Savings Plan                             3,597                (135,845)
     Issue common stock - Exercise of stock options                                   2,500                 (10,747)
                                                                                -----------                --------
BALANCE, December 28, 1997                                                       12,343,324                 388,658
     Issue common stock - Profit Sharing and Savings Plan                            35,292                       -
     Restricted stock forfeiture                                                          -                  41,038
                                                                                -----------                --------
BALANCE, December 27, 1998                                                       12,378,616                 429,696
     Issue common stock - Profit Sharing and Savings Plan                             9,848                       -
     Restricted stock forfeiture                                                          -                   9,054
                                                                                -----------                --------
BALANCE, December 26, 1999                                                       12,388,464                 438,750
                                                                                ===========                ========
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.



                                    Page 39
<PAGE>



                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
                             (DEBTOR-IN-POSSESSION)
                          NOTES TO FINANCIAL STATEMENTS
              (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE 1:       CHAPTER 11 PROCEEDINGS

On January 6, 1998,  Paragon Trade  Brands,  Inc.  ("Paragon" or the  "Company")
filed for relief  under  Chapter 11 of the United  States  Bankruptcy  Code (the
"Chapter 11 filing"),  in the United  States  Bankruptcy  Court for the Northern
District of Georgia.

The Procter & Gamble Company ("P&G") filed a lawsuit in 1994 against the Company
in the United States  District Court for the District of Delaware (the "Delaware
District  Court"),  alleging that the Company's  disposable baby diaper products
infringed two of P&G's dual cuff diaper patents.  The lawsuit sought  injunctive
relief, lost profit and royalty damages,  treble damages and attorneys' fees and
costs.  The Company denied  liability under the patents and  counterclaimed  for
patent infringement and violation of antitrust laws by P&G.

On December 30, 1997, the Delaware  District Court issued a Judgment and Opinion
finding that P&G's dual cuff diaper  patents were valid and infringed by certain
of the Company's disposable diaper products,  while also rejecting the Company's
patent  infringement claims against P&G. The Delaware District Court had earlier
dismissed the Company's antitrust counterclaim on summary judgment. The Judgment
entitled P&G to damages based on sales of the Company's  diapers  containing the
"inner-leg  gather"  feature.  While the final damages  number of  approximately
$178,400 was not entered by the Delaware  District Court until June 2, 1998, the
Company originally estimated the liability and associated litigation costs to be
approximately $200,000. The amount of the award resulted in violation of certain
covenants under the Company's  then-existing bank loan agreements.  As a result,
the issuance of the Judgment and the  uncertainty it created caused an immediate
and critical liquidity issue for the Company. The Chapter 11 filing was designed
to prevent P&G from  placing  liens on Company  property,  permit the Company to
appeal the  Delaware  District  Court's  decision  in the P&G case in an orderly
fashion  and  give  the  Company  the  opportunity  to  resolve  liquidated  and
unliquidated  claims  against  the  Company  which arose prior to the Chapter 11
filing.

On February 2, 1999,  the Company  entered into a Settlement  Agreement with P&G
which fully and finally  settled all matters  related to the Delaware  Judgment,
the Company's appeal of the Delaware Judgment,  P&G's motion to find the Company
in  contempt  of the  Delaware  Judgment  and P&G's  proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The P&G Settlement Agreement was
approved by the Bankruptcy  Court on August 6, 1999 (the "P&G Approval  Order").
The Official  Committee  of Equity  Security  Holders  (the "Equity  Committee")
appointed in the Chapter 11 reorganization proceeding to represent the Company's
stockholders appealed the P&G Approval Order. See Note 16.

On October 26, 1995, Kimberly-Clark  Corporation ("K-C") filed a lawsuit against
the Company in U.S. District Court in Dallas,  Texas,  alleging  infringement by
the Company's  products of two K-C patents  relating to dual cuffs.  The lawsuit
sought injunctive  relief,  royalty damages,  treble damages and attorneys' fees
and costs. The Company denied liability under the patents and counterclaimed for
patent  infringement  and violation of antitrust  laws by K-C. In addition,  K-C
subsequently  sued the  Company on another  patent  issued to K-C which is based
upon a further  continuation of one of the K-C dual cuff patents asserted in the
case. That suit was consolidated with the then-pending action.

On March 19, 1999,  the Company  entered into a  Settlement  Agreement  with K-C
which  fully and  finally  settled  all  matters  related  to the Texas  action,
including  the  Company's  counterclaims,  and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding. The K-C Settlement Agreement was
approved by the Bankruptcy  Court on August 6, 1999 (the "K-C Approval  Order").
The Equity Committee appealed the K-C Approval Order. See Note 16.

                                    Page 40
<PAGE>

On July 12, 1999, the Bankruptcy Court approved certain bidding  procedures,  an
expense  reimbursement  and a termination fee (the "Bidding  Procedures  Order")
relating  to  a  proposed   investment  by  Wellspring  Capital  Management  LLC
("Wellspring"),  a private investment company, to acquire the Company as part of
a plan of reorganization (the "Wellspring Transaction").  The Bidding Procedures
Order  provided for the  consideration  of competing  investment  proposals from
other qualified  bidders and for the filing by the Company of a stand-alone plan
of reorganization. The Equity Committee appealed the Bidding Procedures Order.

On August 25,  1999,  with the support of the  Official  Committee  of Unsecured
Creditors (the "Creditors'  Committee" and,  together with the Equity Committee,
the "Committees"),  the Company filed a stand-alone plan of reorganization  (the
"Initial  Plan")  with the  Bankruptcy  Court.  The  Initial  Plan  provided  an
alternative  to the  Wellspring  Transaction.  In  accordance  with the  Bidding
Procedures  Order,  an auction  commenced  on September  21,  1999.  The auction
continued thereafter until the Company,  after consultation with the Committees,
P&G and K-C,  determined  to  conclude  the  auction on October 4, 1999.  At the
conclusion of the auction, the Company,  after consultation with the Committees,
P&G and K-C,  determined  that Wellspring had submitted the best bid. On October
15, 1999, the Company and the Creditors'  Committee,  as co-proponents,  jointly
filed an  amendment to the Plan (the  "Amended  Plan")  which  incorporated  the
Wellspring  Transaction,  as modified by the Company after consultation with its
various  creditor  constituencies.  The Amended Plan also provided  that, in the
event the Wellspring Transaction was not consummated,  the proponents could have
pursued confirmation of a stand-alone plan of reorganization.

On or about  November 15, 1999,  the Company and the  Creditors'  Committee,  as
co-proponents,  filed a Second Amended Plan of  Reorganization  (as subsequently
modified through January 13, 2000, the "Plan") and related Disclosure  Statement
(as subsequently modified through November 18, 1999, the "Disclosure Statement")
with the Bankruptcy Court. The Plan incorporated the Wellspring Transaction.  By
order dated  November 18, 1999,  the  Bankruptcy  Court  approved the Disclosure
Statement.  At such time,  the  Bankruptcy  Court also approved  certain  voting
procedures and  established  January 7, 2000 as the voting deadline for the Plan
and January 13, 2000 as the date for a hearing to consider  confirmation  of the
Plan. A  confirmation  hearing was held by the  Bankruptcy  Court on January 13,
2000. By Order dated January 13, 2000, the Bankruptcy Court confirmed the Plan.

On January 28, 2000,  Paragon was  reorganized  pursuant to the Plan through the
consummation of the Wellspring Transaction.  As contemplated under the Plan, the
Equity  Committee has withdrawn  with  prejudice its appeals of the P&G Approval
Order, the K-C Approval Order and the Bidding Procedures Order.

As a result of the Chapter 11 filing, the Company has incurred significant costs
for professional  fees. The Company was also required to pay certain expenses of
the  Committees,  including  professional  fees,  to the  extent  allowed by the
Bankruptcy  Court.  Pursuant to the Plan,  a reserve has been  established  from
which any  remaining  professional  fees and expenses  related to the Chapter 11
reorganization proceeding will be paid. See Note 16.

The Chapter 11 filing did not include the  Company's  wholly owned  subsidiaries
including Paragon Trade Brands (Canada) Inc., ("PTB Canada"), PTB International,
Inc.,  ("PTBI"),  PTB Acquisition Sub, Inc.,  Paragon Trade Brands FSC, Inc. and
Changing Paradigms, Inc. ("Changing Paradigms"), which was sold in October 1998.
The following information  summarizes the combined results of operations for the
years ended December 26, 1999,  December 27, 1998 and December 28, 1997, as well
as the combined balance sheets as of December 26, 1999 and December 27, 1998 for
these subsidiaries.  This information has been prepared on the same basis as the
consolidated financial statements.

<TABLE>
<CAPTION>
                                              DECEMBER 26, 1999            DECEMBER 27, 1998            DECEMBER 28, 1997
                                              -----------------            -----------------            -----------------
<S>                                        <C>                          <C>                          <C>
Sales, net of discounts and allowances     $         25,565             $         55,338             $         53,523
Gross profit                               $          1,714             $         10,161             $          8,649
Earnings before income taxes               $          1,967             $         10,034             $          4,814
Net earnings                               $          2,354             $          7,277             $          4,121

                                    Page 41
<PAGE>

                                              DECEMBER 26, 1999            DECEMBER 27, 1998
                                              -----------------            -----------------
Current assets                             $          5,612             $         17,863
Non-current assets                         $         59,477             $         54,734
Current liabilities                        $          1,840             $          5,700
Non-current liabilities                    $          3,306             $          8,495
</TABLE>


NOTE 2:       BASIS  OF PRESENTATION  AND SUMMARY OF  SIGNIFICANT ACCOUNTING AND
              REPORTING POLICIES

BASIS OF PRESENTATION AND RELATED INFORMATION

Paragon is the leading  manufacturer of store brand infant disposable diapers in
North  America.  Paragon  manufactures  a line of premium and  economy  diapers,
training pants,  and feminine care and adult  incontinence  products,  which are
distributed throughout North America, primarily through grocery and food stores,
mass merchandisers,  warehouse clubs, toy stores and drug stores that market the
products  under  their own  store  brand  names.  Paragon  has also  established
international  joint  ventures  in Mexico,  Argentina,  Brazil and China for the
manufacture and sale of infant disposable  diapers and other absorbent  personal
care products.

The  consolidated  financial  statements  include the accounts of Paragon  Trade
Brands,  Inc.  and its wholly  owned  subsidiaries,  PTB  Canada  and PTBI.  All
significant intercompany transactions and accounts have been eliminated.

The consolidated financial statements were prepared in conformity with generally
accepted  accounting   principles  and  necessarily  include  amounts  based  on
management's  estimates  and  assumptions.  The  estimates  and  assumptions  of
management  affect the  reported  amounts of assets,  liabilities,  revenues and
expenses,  including  disclosures  regarding  contingent assets and liabilities.
Actual  results  may  differ  from those  reported  due to these  estimates  and
assumptions.

The Company uses a 52/53-week  year.  The fiscal years ended  December 26, 1999,
December 27, 1998 and December 28, 1997 include 52 weeks.

CASH AND SHORT-TERM INVESTMENTS

For purposes of cash flow and fair value reporting,  short-term investments with
original  maturities  of 90 days or less  are  considered  as cash  equivalents.
Short-term  investments are stated at cost, which  approximates  fair value. The
obligation for outstanding checks is reflected as checks issued but not cleared.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The  Company  estimates  that  the  fair  value  of  its  financial  instruments
approximate their carrying values as of the balance sheet dates,  other than the
guarantees of PTBI discussed  below.  The Company has determined  that it is not
practicable  to determine  the fair value of such  guarantees.  Accordingly,  no
separate disclosure of fair value is made.

NONCASH TRANSACTIONS

During the fiscal years ended  December  26, 1999 and  December  27,  1998,  the
Company  issued  9,848 and 35,292,  respectively,  shares of common stock to key
management  and  employees  through the Paragon  Retirement  Investment  Savings
Management  Plan (the "PRISM Plan") and its Profit Sharing and Savings Plan. See
Note 8.

                                    Page 42
<PAGE>

INVENTORIES

Inventories  are stated at the lower of cost or  market.  Cost  includes  labor,
materials and production  overhead.  The last-in,  first-out  ("LIFO") method is
used to cost domestic pulp and diaper-related  finished goods  inventories.  The
first-in,  first-out ("FIFO") method is used to cost all other inventories.  Had
the  FIFO  method  been  used to cost  the  domestic  pulp  and  finished  goods
inventories,  the  amounts at which they are stated  would have been  $3,883 and
$346 greater at December 26, 1999 and  December 27, 1998,  respectively.  During
1999,  the  Company  liquidated  certain  LIFO  inventories.  The effect of this
liquidation was to decrease loss before taxes by approximately $136.

PROPERTY AND EQUIPMENT

Paragon's  property  accounts  are  maintained  on an  individual  asset  basis.
Betterments  and  replacements  of major  units  are  capitalized.  Maintenance,
repairs and minor  replacements  are expensed.  Depreciation  is provided on the
straight-line method at rates based upon estimated useful lives as follows:

     Buildings                                                20 to 40 years
     Building improvements                                    10 years
     Machinery, equipment, furniture and fixtures             2 to 10 years

The cost and related  depreciation  of property  sold or retired is removed from
the property and  allowance  for  depreciation  accounts and the gain or loss is
recorded.

PATENTS AND TRADEMARKS

The Company  operates in a  commercial  field in which  patents  relating to the
products,  processes,  apparatus  and  materials  are more numerous than in many
other  fields.  The Company  takes  careful  steps in  designing,  producing and
selling its products to avoid  infringing any valid patents of its  competitors.
However,  there can be no assurance that the Company will not be challenged with
respect to patents in the future (see Notes 1 and 16).

Purchased  patents and trademarks are amortized on a straight-line  basis over a
five-year life. In 1999, the Company  acquired a  non-exclusive,  fully paid-up,
irrevocable  worldwide  license  to the  Tracy  patent  for  $500.  See Note 16.
Amortization expense for such patent license was $50 for the year ended December
26, 1999.  In 1997,  the Company  evaluated  the  remaining  value of one of the
purchased patents and wrote-off the entire amount of $255.  Amortization expense
was $676  for the  year  ended  December  28,  1997,  including  the  write-off.
Accumulated amortization was $5,573 and $5,523 at December 26, 1999 and December
27, 1998, respectively.

INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

On January 26, 1996,  the Company  through PTBI  completed  the purchase of a 15
percent interest in Grupo P.I. Mabe, S.A. de C.V. ("Mabesa"), the second largest
manufacturer of infant  disposable  diapers in Mexico,  for $15,300 in cash plus
additional  consideration  based on Mabesa's  future  financial  results through
2001.  The Company also  acquired an option to purchase an additional 34 percent
interest in Mabesa at a contractually  determined price. In 1999, 1998 and 1997,
based on Mabesa's prior year's  financial  results,  the Company paid additional
consideration  of $200,  $2,800 and  $3,400,  respectively.  The  investment  is
carried at cost in the accompanying consolidated balance sheets.

The Company  also owns a 49 percent  interest in  Paragon-Mabesa  International,
S.A. de C.V. ("PMI"). The investment is accounted for using the equity method.

On August 26, 1997, PTBI purchased a 49 percent interest in Stronger Corporation
S.A.  ("Stronger"),   a  financial  investment  corporation  incorporated  under
Uruguayan  law. An affiliate of Mabesa owns the  remaining 51 percent.  Stronger
has been used to establish  joint  ventures in  Argentina  and Brazil and can be
used to establish additional Latin American joint ventures.  In each of 1998 and
1999, the Company made additional  capital  contributions to Stronger of $2,000.
The investment is accounted for using the equity method.

                                    Page 43
<PAGE>

On August 26, 1997,  Stronger  acquired 70 percent of Serenity  S.A.,  the third
largest diaper manufacturer in Argentina, for approximately $11,600 in cash plus
additional  consideration  based on Serenity's  future financial results through
2000.  Stronger  also  acquired an option to purchase  the  remaining 30 percent
interest in  Serenity  by 2002 at a  contractually  determined  exercise  price.
Serenity  manufactures  infant  disposable  diapers,  sanitary napkins and adult
incontinence products in two facilities.  PTBI advanced $5,700 to Stronger,  its
pro-rata share of the purchase price, and paid additional  consideration of $600
in 1998.  Stronger paid the 1999 additional  consideration.  PTBI has guaranteed
Stronger's additional  consideration obligation which is estimated not to exceed
an aggregate of $1,200 in 2000.

On November  10, 1997,  Stronger  acquired 99 percent of the  disposable  diaper
business of MPC Productos para Higiene Ltda.  ("MPC") for approximately  $10,500
in cash from Cremer S.A., a Brazilian  textile  manufacturer.  MPC is engaged in
the manufacture,  distribution, and sale of disposable diapers, skin lotions for
children and other personal care products. PTBI advanced $5,100 to Stronger, its
pro-rata share of the purchase price in 1997.

The  investment in Stronger  exceeds the  underlying  net assets by $5,873.  The
difference is being amortized over a 20-year life.

In 1998,  Paragon  established  Goodbaby Paragon  Hygienic  Products Co. Ltd., a
manufacturing  and  marketing  joint  venture  in China with  Goodbaby  Group of
Kunshan City and First Shanghai  Investment of Hong Kong. Paragon purchased a 40
percent  interest in the joint  venture with Goodbaby  Group and First  Shanghai
Investment at 30 percent  each.  Initial  registered  capital of the venture was
approved by the  Chinese  government  at  $15,000,  to be funded over a two-year
period. A joint venture business license was approved by the Chinese  government
on December  31, 1997.  Groundbreaking  for a new factory took place in February
1998. The joint venture began production and  distribution of infant  disposable
diapers in October 1998.  Paragon made capital  contributions  of $4,000 in 1998
and $800 in 1999.

There have been no dividend  distributions to the Company from PMI,  Stronger or
Goodbaby.  The Company  received a dividend  distribution of $992 from Mabesa in
the year ended  December  26,  1999.  The  Company  recorded a dividend  of $922
declared by Mabesa in the year ended  December  27, 1998 which was paid in 1999.
The Company  received a dividend  distribution of $1,055 from Mabesa in the year
ended December 28, 1997.

GOODWILL

On February 8, 1996, the Company  completed the purchase of substantially all of
the  assets  of Pope &  Talbot,  Inc.'s  disposable  diaper  business.  Goodwill
represents  the excess of the cost of these  assets  over their  estimated  fair
value at the date of acquisition and is amortized on a straight-line  basis over
20 years.  Management continually evaluates whether events or circumstances have
occurred  that  indicate  the  remaining  useful  life of  goodwill  may warrant
revision or that the remaining  balance of goodwill may not be realizable.  When
factors indicate that goodwill should be evaluated for possible impairment,  the
Company compares an estimate of the related business segment's  undiscounted net
cash flow over the remaining life of the related  goodwill to determine  whether
the goodwill is recoverable.

Amortization  expense  was $1,919 each for the years ended  December  26,  1999,
December 27, 1998 and December 28, 1997, respectively.  Accumulated amortization
was  $7,492  and  $5,573  as  of  December  26,  1999  and  December  27,  1998,
respectively.

OTHER ASSETS - SOFTWARE

The primary  component of other assets is capitalized  software and  development
costs.  During  1998,  the Company  implemented  SAP R/3  software at  corporate
headquarters and in its U.S. infant care plants.

The  SAP  -R/3  software  and  development   costs  are  being  amortized  on  a
straight-line  basis over a 10-year life.  Other software and development  costs
related to the project are being primarily  amortized on a  straight-line  basis
over a one- to three-year life. Amortization expense was $3,028 and $442 for the
years ended December 26,


                                    Page 44
<PAGE>

1999 and December 27, 1998,  respectively.  Accumulated  amortization was $3,470
and $442 at December 26, 1999 and December 27, 1998, respectively.

TREASURY STOCK

In July 1995,  the Board of Directors  authorized  the  repurchase  of up to 1.0
million shares of the Company's outstanding common stock.  Purchases may be made
periodically in the open market or in privately-negotiated  transactions over an
extended  period of time,  if and when  management  believes  market  conditions
warrant.  During the fiscal years ended December 26, 1999 and December 27, 1998,
the Company  acquired 9,054 and 41,038 shares,  respectively,  through  employee
forfeiture of restricted stock.

SIGNIFICANT CUSTOMER

During the years ended  December  26,  1999,  December 27, 1998 and December 28,
1997,  the  percentages  of net  sales to an  individual  customer  whose  sales
represent  in excess of 10 percent of net sales were 25 percent,  19 percent and
15  percent,  respectively.  These  sales  consisted  primarily  of infant  care
products.

REVENUE RECOGNITION

Revenue  is  recognized  when  goods  are  delivered  and  title  has  passed to
customers.

INCOME TAXES

The  Company  accounts  for income  taxes  based on the  liability  method  and,
accordingly, deferred income taxes are provided to reflect temporary differences
between  financial and tax reporting.  Deferred tax assets and  liabilities  are
measured  based on enacted  tax laws and rates  without  anticipation  of future
changes. Effects on deferred taxes of enacted changes in tax laws are recognized
in income for financial statement purposes in the period of enactment.

As of  December  26,  1999,  there  were  approximately  $20,985  of  cumulative
undistributed  earnings of the Company's  foreign  subsidiaries  and investments
accounted  for by the equity  method.  U.S.  taxes have not been provided for on
these earnings.  Under existing law,  undistributed  earnings are not subject to
U.S. tax until distributed as dividends.  Any future earnings are intended to be
indefinitely  reinvested in these  operations.  Furthermore,  any taxes that are
paid to foreign  governments on such future earnings may be used, in whole or in
part, as credits against the U.S. tax on any distributions from such earnings.

Income  taxes have been  provided  for all items  included  in the  consolidated
statements  of  operations,  regardless  of the  period  when such items will be
deductible  for  tax  purposes.  The  principal  temporary  differences  between
financial  and tax  reporting  arise from  tax-basis  goodwill  and reserves not
currently deductible.

FOREIGN CURRENCY

Non-U.S.   assets  and  liabilities  are  translated  into  U.S.  dollars  using
period-end exchange rates. Revenues and expenses are translated at average rates
during the period.

PROFIT SHARING AND 401(K) PLANS

Paragon has both a defined contribution profit sharing plan and a 401(k) savings
plan,  known as the PRISM Plan,  covering most of its  employees.  As amended in
1999, the Prism Plan provides for employee 401(k)  deferrals as well as employer
contributions  for retirement and profit sharing.  Prism Plan  participants  are
fully  vested with  respect to  employer  profit  sharing  and 401 (k)  matching
contributions  made  prior to March  1,  1999,  after  three  years of  service.
Employee  contributions  and employer  retirement  contributions  after March 1,
1999,  vest  immediately.  Contributions  to  the  Prism  Plan  are  based  on a
percentage  of employees'  wages.  Prism Plan expense for the fiscal years ended
December  26, 1999,  December 27, 1998 and December 28, 1997 was $2,936,  $2,589
and $1,141, respectively.

                                    Page 45
<PAGE>

NEW ACCOUNTING STANDARDS

The Financial  Accounting Standards Board ("FASB") has issued Statement No. 133,
"Accounting for Derivative  Instruments and Hedging  Activities,"  which must be
adopted in the Company's fiscal year 2001. This statement establishes accounting
and  reporting   standards  for  derivative   instruments  -  including  certain
derivative instruments embedded in other contracts - and for hedging activities.
The Company is currently evaluating the impact of the statement on the Company's
financial statements.

In March 1998, the American Institute of Certified Public Accountants  ("AICPA")
issued a  Statement  of  Position  98-1,  "Accounting  for the Costs of Computer
Software  Developed  or Obtained  for  Internal  Use." This  statement  requires
capitalization  of certain costs of internal-use  software.  The Company adopted
this  statement  in the  quarter  ended  March 28,  1999,  and it did not have a
material impact on the financial statements.

In April 1998, the AICPA issued a Statement of Position 98-5,  "Reporting on the
Costs of  Start-up  Activities."  This  statement  requires  that  the  costs of
start-up  activities and  organizational  costs be expensed as incurred.  Any of
these costs previously  capitalized by a company must be written off in the year
of adoption.  The Company  adopted this statement in the quarter ended March 28,
1999, and the equity in earnings of unconsolidated subsidiaries included $500 in
charges as a result of the adoption of the statement.


NOTE 3:       MANUFACTURING OPERATION CLOSING COSTS

On April 30,  1999,  the Company  announced  that its Canadian  subsidiary,  PTB
Canada,  would cease  manufacturing  infant disposable  diapers at its Brampton,
Ontario  facility.  The  Company  announced  that  the  facility  would  curtail
manufacturing  operations  over a few weeks'  period of time  while the  Company
transitioned  its  Canadian  customers to its  Harmony,  Pennsylvania  facility.
Manufacturing  operations  ceased  during  June and  resulted  in  severing  the
employment of  approximately  110 employees.  The Company expects to utilize the
Brampton diaper making equipment in its U.S.  operations and placed the Brampton
facility for sale in the fourth  quarter of 1999.  For the period ended December
26, 1999, the  consolidated  statements of operations  include $1,555 of pre-tax
charges as a result of  cessation of  manufacturing  operations.  The  following
summarizes  amounts accrued and costs incurred for the period ended December 26,
1999:

<TABLE>
<CAPTION>
                                                                               Amount             Costs          Balance
                                                                               Accrued          Incurred        Remaining
                                                                          --------------     --------------   ------------
<S>                                                                        <C>                <C>              <C>
Employee severance and related items..............................         $   1,400          $   1,365        $     35
Asset write-downs.................................................               155                155               -
                                                                          --------------     --------------   ------------
                                                                           $   1,555          $   1,520        $     35
                                                                          ==============     ==============   ============
</TABLE>


NOTE 4:       ASSET IMPAIRMENTS

There were no asset  impairments  for the year ended  December 26,  1999.  Asset
impairments  were  $3,416 and $9,442 for the years ended  December  27, 1998 and
December 28, 1997, respectively.

The asset  impairment for the year ended December 27, 1998 represented a further
write down of the  tampon-related  manufacturing  equipment that was shutdown in
early 1998.  The  equipment has been written down to estimated net selling price
and is  categorized  as assets  held for sale on the  accompanying  consolidated
balance sheet.

The asset  impairments  for the year ended  December  28, 1997  include a $5,000
write-off of software and associated  consulting  costs related to the Company's
enterprise-wide  information system  installation.  The write off was due to the
inability  of the  software  to  perform  as  represented  during  the  software
selection process. The asset impairments also include a write-down of $4,442 for
the shutdown of the tampon-related  manufacturing equipment at the feminine care
products  operation.  Also  included in the  shut-down  of the tampon  producing

                                    Page 46
<PAGE>

operation  were  write-offs  of  $900  for  raw  material,  finished  goods  and
spare-part  inventories  which were  charged to cost of sales for the year ended
December 28, 1997.

The  Company  experienced  operating  losses  in its  feminine  care  and  adult
incontinence  business  since 1996 and expects  these  losses to continue in the
near-term.  The  Company  has  developed  a  business  plan  that  supports  the
realization  of its  investment  in its  feminine  care and  adult  incontinence
business.  Accordingly,  the Company has not  recorded  any  adjustments  in its
financial  statements  relating to the recoverability of the operating assets of
the feminine care and adult  incontinence  business.  The  Company's  ability to
recover  its  investment  is  dependent  upon its  successful  execution  of the
Company's  feminine  care  and  adult  incontinence  business  plan now that the
Company  has  emerged  from  Chapter  11.  The  Company  believes  that with the
distractions  and  uncertainties  related to Chapter 11 behind it, the  feminine
care and adult incontinence  business will see an increase in sales and improved
results.


NOTE 5:       OTHER INCOME, NET

Other income was $3,475, $2,437 and $1,664 in 1999, 1998 and 1997, respectively,
and consisted primarily of interest income from PMI.


NOTE 6:       BANKRUPTCY COSTS

Bankruptcy  costs  were  directly  associated  with  the  Company's  Chapter  11
reorganization proceeding and consisted of the following:

<TABLE>
<CAPTION>
                                                                                Year Ended
                                                            ----------------------------------------------------
                                                               December 26, 1999           December 27, 1998
                                                            ------------------------    ------------------------

<S>                                                              <C>                          <C>
Professional fees                                                $         9,061              $        6,772
Amortization of DIP credit facility deferred
      financing costs                                                        616                         813
Other                                                                        156                         160
Interest Income                                                             (295)                     (1,443)
                                                            ------------------------    ------------------------
                                                                  $        9,538              $        6,302
                                                            ========================    ========================
</TABLE>


NOTE 7:       INCOME TAXES

Taxes on income are based on earnings (losses) before taxes as follows:

<TABLE>
<CAPTION>
                                               December 26, 1999           December 27, 1998         December 28, 1997
                                            ------------------------     -----------------------     -----------------------
<S>                                          <C>                          <C>                        <C>
Domestic                                     $       (28,441)             $       (62,239)           $       (188,784)
Foreign                                               (1,285)                       4,947                       4,001
                                            ------------------------     -----------------------     -----------------------
                                             $       (29,726)             $       (57,292)           $       (184,783)
                                            ========================     =======================     =======================
</TABLE>


                                    Page 47
<PAGE>

Provisions for (benefits from) income taxes include the following:

<TABLE>
<CAPTION>
                                               December 26, 1999           December 27, 1998         December 28, 1997
                                            ------------------------     -----------------------     -----------------------
<S>                                             <C>                          <C>                         <C>
Federal:
     Current                                    $       (744)                $      4,647                $     (6,594)
     Deferred                                              0                          967                      33,494
                                            ------------------------     -----------------------     -----------------------
                                                        (744)                       5,614                      26,900
                                            ------------------------     -----------------------     -----------------------
State:
     Current                                            (138)                         598                      (1,197)
     Deferred                                              0                          161                         833
                                            ------------------------     -----------------------     -----------------------
                                                        (138)                         759                        (364)
                                            ------------------------     -----------------------     -----------------------
Foreign:
     Current                                            (333)                       2,096                       1,803
     Deferred                                           (135)                        (378)                       (405)
                                            ------------------------     -----------------------     -----------------------
                                                        (468)                       1,718                       1,398
                                            ------------------------     -----------------------     -----------------------

                                                $     (1,350)                $      8,091                $     27,934
                                            ========================     =======================     =======================
</TABLE>

A reconciliation  between the federal  statutory rate and the effective tax rate
follows:

<TABLE>
<CAPTION>
                                               December 26, 1999           December 27, 1998         December 28, 1997
                                            ------------------------     -----------------------     -----------------------
<S>                                               <C>                         <C>                          <C>
Expected benefit at the statutory rate            $   (10,404)                $   (20,052)                 $    (64,674)
State income taxes, net of  federal tax
     benefit                                           (1,040)                     (2,005)                       (6,640)
Undistributed earnings of subsidiaries                   (892)                       (983)                          215
Nondeductible bankruptcy expenses                       4,940                           -                             -
Change in valuation allowance                           6,181                      32,585                        99,052
All other, net                                           (135)                     (1,454)                          (19)
                                            ------------------------     -----------------------     -----------------------
                                                  $    (1,350)                $     8,091                  $     27,934
                                            ========================     =======================     =======================
</TABLE>


                                    Page 48
<PAGE>

Net  deferred  tax  liabilities  at December 26, 1999 and December 27, 1998 were
$1,346 and $1,513,  respectively.  The amounts  recorded  primarily  reflect the
following: (1) reserves not currently deductible and (2) deferred tax assets due
to the enactment of the Omnibus Budget  Reconciliation Act of 1993, which allows
amortization of intangibles,  including goodwill.  Net deferred income taxes are
attributable to the following temporary differences:

<TABLE>
<CAPTION>
                                                              December 26, 1999           December 27, 1998
                                                           ------------------------     -----------------------
<S>                                                            <C>                          <C>
Intangible assets                                              $     (1,857)                $     (1,992)
                                                           ------------------------     -----------------------
     Deferred tax liabilities                                        (1,857)                      (1,992)
                                                           ------------------------     -----------------------

Depreciation/amortization                                            (4,495)                      (1,737)
Goodwill                                                              6,992                        7,168
Reserves not currently deductible                                   116,272                      113,465
Package design costs                                                  2,198                        2,045
Land                                                                    389                          392
Net operating loss carryforwards                                      3,369                        3,057
Credit carryforwards                                                  8,768                        9,045
All other, net                                                        3,158                       (1,038)
                                                           ------------------------     -----------------------
     Deferred tax assets                                            136,652                      132,397
                                                           ------------------------     -----------------------
Deferred tax assets valuation allowance                            (136,141)                    (131,918)
                                                           ------------------------     -----------------------
     Total deferred taxes, net                                 $     (1,346)                $     (1,513)
                                                           ========================     =======================
</TABLE>

The Company has recorded a valuation  allowance with respect to its net deferred
tax assets as realization is dependent upon sufficient future taxable income.


NOTE 8:       LONG-TERM  INCENTIVE,  DEFERRED  COMPENSATION,  PROFIT SHARING AND
              PENSION PLANS, INCLUDING 401(K)

LONG-TERM INCENTIVE PLANS

The Company's Long-Term  Incentive  Compensation Plan ("LTIC Plan") and its 1995
Incentive  Compensation  Plan ("1995 Plan") are administered by the Compensation
Committee of the Board of Directors.  In February 1996, the Company  adopted its
1996 Non-Officer  Employee  Incentive  Compensation Plan ("1996 Plan"). The 1996
Plan is administered by an  Administrative  Committee  appointed by the Board of
Directors. The LTIC, 1995 and 1996 Plans are designed to link management rewards
with the long-term interests of Paragon's stockholders.  Given the uncertainties
related to the Company's  Chapter 11 filing,  the Compensation  Committee of the
Company's Board of Directors decided in early 1998 to suspend the grant of stock
option  awards  or  stock   appreciation   rights  ("SARs")  until  the  Company
successfully  emerged  from  Chapter  11. As a result,  no  options or SARs were
granted in 1998 or 1999.

RESTRICTED STOCK GRANTS

9,054 and 41,038 shares of restricted stock previously granted under the various
plans were  forfeited by employees  during the years ended December 26, 1999 and
December 27, 1998, respectively.  The 1995 and 1996 Plans provide that a maximum
of 150,000 and 250,000 shares, respectively,  are available for grant thereunder
as  restricted  shares or other  stock  based  awards.  Compensation  expense is
recorded for the stock grants at their discounted amounts.  Compensation expense
(income)  recorded  for the fiscal years ended  December 26, 1999,  December 27,
1998 and  December  28,  1997 was  $(256),  $(788) and $856,  respectively.  The
weighted  average fair value per share of stock  granted was $17.50 for the year
ended December 28, 1997.  The weighted  average fair value per share at the date
of grant of stock  forfeited for the years ended  December 26, 1999 and December
27, 1998 was $28.25 and $19.20, respectively.

                                    Page 49
<PAGE>

STOCK OPTIONS AND SARS

The LTIC,  1995 and 1996 Plans have a maximum of  800,000,  450,000  and 400,000
shares  available,  respectively,  for  grant as stock  options  or SARs.  Stock
options, when granted to key management, are granted at amounts that approximate
market value at the date of the grant.  Awards,  when made,  vest 25 percent per
year for four years and have a term of 10 years.  The  Company  will also have a
maximum of 100,000  shares  available  for grant under the Stock Option Plan for
Non-Employee  Directors  ("Director  Plan") proposed to be adopted by the Board.
Other than the  initial  awards,  stock  options  are  proposed to be awarded to
directors  at amounts  that  approximate  market value at the date of the grant.
Awards vest 100 percent after one year and have a term of 10 years.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company applies APB Opinion 25 in accounting for stock options granted under
the 1995, LTIC and Director Plans.  Accordingly,  no compensation  cost has been
recognized  for these plans in 1999,  1998 or 1997. Had  compensation  cost been
recognized  on the basis of fair value  pursuant to FASB  Statement No. 123, net
loss and loss per share would have been affected as follows:

<TABLE>
<CAPTION>
                                               December 26, 1999           December 27, 1998            December 28, 1997
                                               -----------------           -----------------            -----------------
<S>                                             <C>                          <C>                        <C>
NET LOSS
--------
     As reported                                $     (28,376)               $     (65,383)             $    (212,717)
     Pro forma                                  $     (27,963)               $     (65,646)             $    (213,265)

BASIC LOSS PER COMMON SHARE
---------------------------
     As reported                                $       (2.37)               $       (5.48)             $      (17.86)
     Pro forma                                  $       (2.34)               $       (5.50)             $      (17.90)

DILUTED LOSS PER COMMON SHARE
-----------------------------
     As reported                                $       (2.37)               $       (5.48)             $      (17.86)
     Pro forma                                  $       (2.34)               $       (5.50)             $      (17.90)
</TABLE>


The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes  multiple option pricing model with the following  assumptions
for the year ended  December 27, 1997:  a range of risk-free  interest  rates of
6.15 - 6.43 percent was used; a dividend yield of 0.0 percent;  and an estimated
volatility of 40 percent.

                                    Page 50
<PAGE>

Following is a summary of the status of the 1995, LTIC and Director Plans during
the years ended December 26, 1999, December 27, 1998 and December 28, 1997.

<TABLE>
<CAPTION>
                                    December 26, 1999                December 27, 1998                December 28, 1997
                              ------------------------------   ------------------------------   ------------------------------
                                                 Weighted                         Weighted                         Weighted
                                 Number          Average          Number          Average          Number          Average
                                   of            Exercise           of            Exercise           of            Exercise
                                 Shares           Price           Shares           Price           Shares            Price
                              -------------    -------------   -------------    -------------   -------------    -------------
<S>                               <C>              <C>             <C>              <C>             <C>
Outstanding,
     beginning of period          699,491          $20.45          774,935          $20.46          735,932          $21.00
Granted                                 -               -                -               -           91,000          $16.42
Exercised                               -               -                -               -           13,247          $18.03
Forfeited                          52,824          $18.83           75,444          $20.54           38,750          $22.10
                              -------------                    -------------                    -------------
Outstanding, end of period        646,667          $20.58          699,491          $20.45          774,935          $20.46
                              =============                    =============                    =============
Options exercisable
     end of period                602,167          $20.68          569,407          $20.96          518,103          $21.18
                              =============                    =============                    =============
Weighted average
     fair value of
     options granted
     during the period                 -                                -                        $     8.95
                              =============                    =============                    =============
</TABLE>


Following is a summary of the status of options granted under the 1995, LTIC and
Director Plans at December 26, 1999:

<TABLE>
<CAPTION>
                                              Outstanding Options                                  Exercisable Options
                        ---------------------------------------------------------------       -------------------------------
                                          Weighted Average
                                             Remaining                                                            Weighted
Exercise Price                              Contractual             Weighted Average                               Average
   Range                  Number            Life (Years)             Exercise Price             Number          Exercise Price
--------------          ----------        ----------------          ----------------          ----------        --------------
<S>                        <C>                   <C>                     <C>                    <C>                 <C>
$12.69-$16.44              207,947               5.93                    $14.50                 177,947             $14.18
$19.00-$22.13              237,500               3.10                    $19.72                 237,500             $19.72
$22.25-$31.13              201,220               4.96                    $27.87                 186,720             $28.11
                        -----------                                                          -----------
$12.69-$31.13              646,667               4.59                    $20.58                 602,167             $20.68
                        ===========                                                          ===========
</TABLE>


                                    Page 51
<PAGE>

The following summarizes  transactions  involving SARs granted to key management
during the years ended:

<TABLE>
<CAPTION>
                                      December 26, 1999                 December 27, 1998                December 28, 1997
                                -------------------------------    -----------------------------    ----------------------------
                                                   Weighted                          Weighted                        Weighted
                                   Number           Average           Number          Average         Number          Average
                                     of            Exercise             of           Exercise           of           Exercise
                                    SARs             Price             SARs            Price           SARs            Price
                                -------------    --------------    -------------    ------------    -----------     ------------
<S>                                <C>               <C>              <C>               <C>           <C>              <C>
Outstanding, beginning of
     period                        150,740           $20.19           235,660           $20.35        121,330          $24.32
Granted                                  -                -                 -                -        122,330          $16.64
Forfeited                           48,832           $20.11            84,920           $20.63          8,000          $23.82
                                -------------                      -------------                    -----------
Outstanding, end of period         101,908           $20.23           150,740           $20.19        235,660           $20.35
Exercisable, end of period          68,913           $20.88            61,917           $21.26         28,585           $24.28
</TABLE>

SARs, when granted,  are granted at amounts that approximate market value at the
date of the grant.  Awards,  when made,  vest 25 percent per year for four years
and have a term of 10 years.  Compensation expense (income) is recorded based on
the   period-ending   stock  price  in  relation  to  the  SAR  exercise  price.
Compensation  income  recorded in 1998 and 1997 was $184 and $34,  respectively.
Redemption of the SARs, when exercised, will be in cash.

DEFERRED COMPENSATION PLAN

The Company adopted the Paragon Trade Brands,  Inc.  Deferred  Compensation Plan
("DCP")  in  April  1997.  The  DCP  was  an  unfunded,  non-qualified  deferred
compensation  plan under which eligible  employees of the Company and members of
the Board of Directors could elect, on a voluntary basis, to defer  compensation
until  retirement  or  termination  from  the  Company  or the  Board.  Eligible
participants   were  selected  for  participation  by  a  committee  (the  "Plan
Committee") which consisted of the Board or a committee  appointed by the Board.
As of December  31, 1997,  the DCP was  terminated  and no further  compensation
deferrals were permitted under the DCP.

PROFIT SHARING AND 401(K) PLANS

To further encourage the ownership of common stock by all employees, the Company
maintains  the PRISM Plan that offers both profit  sharing and 401(k)  features.
For the year ended December 26, 1999, profit sharing  contributions were made in
cash.  There were no profit  sharing  contributions  made during the fiscal year
ended  December 27, 1998.  Profit sharing  contributions  made during the fiscal
year ended December 28, 1997  consisted of 110,520  shares of common stock.  For
the years ended  December 26, 1999 and December 27, 1998,  the Company's  401(k)
contributions   consisted   of  9,848  and  35,292   shares  of  common   stock,
respectively,  and cash. The Company's 401(k) contributions  consisted of 28,915
shares of common stock and cash for the year ended December 28, 1997.


NOTE 9:       RECEIVABLES

Receivables consist of the following:
<TABLE>
<CAPTION>
                                                                December 26, 1999                 December 27, 1998
                                                                -----------------                 -----------------
<S>                                                             <C>                                <C>
Accounts receivable - trade                                     $     68,011                       $     71,079
Current portion of advances to subsidiary                             11,059                                  -
Other receivables                                                     20,705                             16,777
                                                                -----------------                 -----------------
                                                                      99,775                             87,856
Less:  Allowance for doubtful accounts                               (13,799)                            (8,700)
                                                                -----------------                 -----------------
Net receivables                                                 $     85,976                       $     79,156
                                                                =================                 =================
</TABLE>


                                    Page 52
<PAGE>

NOTE 10:      INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                               December 26, 1999                  December 27, 1998
                                                               -----------------                  -----------------
<S>                                                             <C>                                <C>
LIFO:
       Raw materials - pulp                                     $         83                       $        232
       Finished goods                                                 25,235                             31,417
FIFO:
       Raw materials - other                                           7,995                              7,346
       Materials and supplies                                         21,890                             20,924
                                                               -----------------                  -----------------
                                                                      55,203                             59,919
       Reserve for excess and obsolete
          Items                                                       (6,459)                            (6,637)
                                                               -----------------                  -----------------
Net Inventories                                                 $     48,744                       $     53,282
                                                               =================                  =================
</TABLE>


NOTE 11:      PROPERTY AND EQUIPMENT

Property and equipment, at cost, are as follows:

<TABLE>
<CAPTION>
                                                              December 26, 1999                  December 27, 1998
                                                              -----------------                  -----------------
<S>                                                           <C>                                <C>
Land                                                          $       3,443                      $       3,715
Buildings and improvements                                           39,038                             40,150
Machinery and equipment                                             248,927                            227,433
                                                              -----------------                  -----------------
                                                                    291,409                            271,298
Less:  Allowance for depreciation                                  (177,772)                          (165,098)
                                                              -----------------                  -----------------
Net property and equipment                                    $     113,637                      $     106,200
                                                              =================                  =================
</TABLE>


NOTE 12:      ACCRUED LIABILITIES

Accrued liabilities are as follows:

<TABLE>
<CAPTION>
                                                              December 26, 1999                  December 27, 1998
                                                              -----------------                  -----------------
<S>                                                           <C>                                <C>
Payroll - wages and salaries, incentive awards,
     retirement, vacation and severance pay                    $      8,369                       $     16,977
Coupons and promotions                                                8,214                              5,994
Royalties                                                             8,225                                718
Other                                                                 9,451                              9,957
                                                              -----------------                  -----------------
Total                                                          $     34,259                       $     33,646
                                                              =================                  =================
</TABLE>


NOTE 13:      BANK CREDIT FACILITIES

On January 30,  1998,  the  Bankruptcy  Court  entered a final order (the "Final
Order")  approving the Credit Agreement (the "DIP Credit  Facility") as provided
under the Revolving  Credit and Guaranty  Agreement dated as of January 7, 1998,
among  the  Company,  as  borrower,  certain  subsidiaries  of  the  Company  as
guarantors,  and The Chase Manhattan Bank, as agent  ("Chase").  Pursuant to the
terms of the DIP Credit  Facility,  as amended and restated as of June 14, 1999,
Chase and a syndicate of banks made available to the Company a revolving  credit

                                    Page 53
<PAGE>

and letter of credit facility in an aggregate  principal amount of $75,000.  The
Company's  maximum  borrowing under the DIP Credit Facility could not exceed the
lesser of $75,000 or an  available  amount as  determined  by a  borrowing  base
formula.   The  borrowing  base  formula  is  comprised  of  certain   specified
percentages of eligible accounts receivable,  eligible inventory,  equipment and
personal  and real  property  of the  Company.  The DIP  Credit  Facility  had a
sublimit  of $10,000  for the  issuance  of  letters  of credit.  The DIP Credit
Facility  expired  on  January  28,  2000 in  accordance  with its terms and was
replaced with the Credit Facility defined herein.

At December 26,1999,  there were no outstanding  direct borrowings under the DIP
Credit  Facility.  The Company had an  aggregate  of $2,000 in letters of credit
issued under the DIP Credit Facility at December 26, 1999.

On January  28, 2000 the  Company  and  certain  subsidiaries  of the Company as
guarantors  entered into a three-year  $95,000  financing  facility (the "Credit
Facility")  with a bank group led by Citicorp  USA,  Inc. as Agent.  The maximum
borrowing  under the Credit  Facility may not exceed the lesser of $95,000 or an
amount  determined by a borrowing  base formula.  The borrowing  base formula is
comprised of certain  specified  percentages  of eligible  accounts  receivable,
eligible  inventory,  equipment  and personal  property and real property of the
Company.  The Credit  Facility  has a sub-limit  of $15,000 for the  issuance of
letters of credit.

Borrowings  under the Credit  Facility  are secured by a security  interest  in,
pledge and lien on substantially  all of the Company's North American assets and
properties and the proceeds  thereof.  Borrowings  under the Credit Facility are
guaranteed  by certain  domestic  subsidiaries  and may be used to fund  working
capital  and  other  general  corporate  purposes  including   acquisitions  and
investments  in  existing  and new  international  joint  ventures.  The  Credit
Facility contains customary restrictive covenants, including among other things,
a prohibition on dividends,  limitations on the creation of additional liens and
indebtedness,  limitations  on  capital  expenditures,  investments,  loans  and
advances,  the sales of  assets  and  transactions  with  affiliates.  Financial
covenants  include the maintenance of minimum earnings before  interest,  taxes,
depreciation and amortization, fixed charges, coverage ratio, tangible net worth
and a maximum leverage ratio.

The Credit  Facility  provides that  borrowings  will bear interest at a rate of
1.50 percent in excess of Citibank's  base rate, or at the Company's  option,  a
rate of 2.50  percent  in excess of the  reserve  adjusted  eurodollar  rate for
interest  periods  of one,  two,  three or six  months.  After  March 31,  2001,
borrowing  rates  will be subject  to a pricing  grid  based upon the  Company's
leverage  ratio and could decrease by a maximum of  .5 percent and increase by a
maximum of .25 percent.  The Company will pay a commitment fee of .5 percent per
annum on the unused portion of the Credit Facility, a letter of credit fee equal
to 2.75  percent  per annum on the  average  outstanding  letters  of credit and
certain other fees.

On January 28, 2000, the Company  borrowed  approximately  $15,000 to consummate
the  Plan.  As of March  7,  2000  the  Company  had  approximately  $12,000  of
borrowings  and  $2,000 in  letters  of  credit  outstanding  under  the  Credit
Facility.

At  December  28,  1997,  the Company  maintained  a $150,000  revolving  credit
facility with a group of nine financial  institutions available through February
2001.  At December  28,  1997,  borrowings  under this credit  facility  totaled
$70,000.  Interest  was at  fixed  or  floating  rates  based  on the  financial
institution's  cost of funds.  Paragon Trade Brands (Canada) Inc. has guaranteed
obligations  under this  revolving  credit  facility.  At December 28, 1997, the
Company had  approximately  $50,000 in uncommitted  lines of credit.  Borrowings
under these lines of credit totaled $12,800 at December 28, 1997. The Chapter 11
filing resulted in a default under the Company's  prepetition  revolving  credit
facility and its borrowings under uncommitted lines of credit.

The terms of the revolving  credit  facility and the short-term  lines of credit
above provided that a voluntary  filing of a Chapter 11 petition would result in
an event of  default  on such  indebtedness.  Amounts  outstanding  under  these
facilities   are  reflected  as   Liabilities   Subject  to  Compromise  in  the
accompanying consolidated balance sheet as of December 26, 1999 and December 27,
1998.  As a result of its Chapter 11 filing,  the Company  was  prohibited  from
paying  any  prepetition   liabilities   without   Bankruptcy   Court  approval.
Accordingly,  no interest  expense was recorded with respect to prepetition debt
balances in the accompanying  financial  statements for the period subsequent to
January 6, 1998.

                                    Page 54
<PAGE>

Paragon  Trade Brands  (Canada)  Inc.  entered  into a new $3,000 Cdn  operating
credit facility with a financial institution dated February 11, 1998. Borrowings
under the prior Canadian  revolving credit facility were repaid in full with the
proceeds  from  borrowings  under the new Canadian  operating  credit  facility.
Borrowings  under  this  Canadian  operating  credit  facility  were  secured by
substantially  all of  Paragon  Trade  Brands  (Canada)  Inc.'s  assets and bore
interest at a rate of 1 percent over the financial institution's prime rate. The
Company  did  not  guaranty  borrowings  under  the  Canadian  operating  credit
facility.  The maximum  borrowings under the Canadian  operating credit facility
were  limited to the lesser of $3,000 Cdn or 75 percent of Paragon  Trade Brands
(Canada) Inc.'s trade accounts receivable.  This Canadian operating facility was
cancelled in September 1999.


NOTE 14:      LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise under the Company's reorganization  proceeding
include substantially all current and long-term unsecured debt as of the date of
the  Chapter  11  filing.  Pursuant  to the  Bankruptcy  Code,  payment of these
liabilities  may not be made  except  pursuant  to a plan of  reorganization  or
Bankruptcy   Court  order  while  the   Company   continues   to  operate  as  a
debtor-in-possession. The Company received approval from the Bankruptcy Court to
pay or  otherwise  honor  certain of its  prepetition  obligations  including  a
portion of short-term  borrowings,  claims subject to  reclamation  and employee
wages, benefits and expenses.

Liabilities subject to compromise are comprised of the following:

<TABLE>
<CAPTION>
                                                                     December 26, 1999            December 27, 1998
                                                                     -----------------            -------------------
<S>                                                                     <C>                         <C>
Accrued settlement contingencies                                        $     278,500               $     278,500
Bank debt                                                                      81,397                      81,397
Accounts payable                                                               39,510                      39,752
Accrued liabilities                                                             5,920                       5,920
Deferred compensation                                                           1,396                       1,290
                                                                     -----------------            -------------------
                                                                        $     406,723               $     406,859
                                                                     =================            ===================
</TABLE>


NOTE 15:      RELATED PARTY TRANSACTIONS

The  Company has entered  into  various  agreements  with its  subsidiaries  and
affiliates to sell certain diaper making equipment and purchase a portion of its
diaper  needs.  Prices for the  various  transactions  are  established  through
negotiations  between  the  related  parties.  The  following  is a  summary  of
significant transactions and balances with its subsidiaries and affiliates as of
or for the years ended  December  26,  1999,  December 27, 1998 and December 28,
1997:

PMI

Pursuant to the Joint  Venture  Agreement  dated  January  26, 1996  whereby the
Company acquired a 49 percent interest in PMI, the Company agreed to sell to PMI
certain diaper manufacturing  equipment,  finance the construction of a building
and purchase a portion of its diaper needs from PMI.

<TABLE>
<CAPTION>
                                           December 26, 1999            December 27, 1998            December 28, 1997
                                           -----------------            -----------------            -----------------
<S>                                        <C>                          <C>                          <C>
Sale of equipment                          $              -             $              -             $            194
Purchase of diapers from PMI               $         72,724             $         67,346             $         40,823
Due from PMI                               $         45,181             $         43,381             $         39,725
Due to PMI                                 $         12,047             $          7,340             $          5,313
</TABLE>

The amounts due from PMI are primarily for equipment purchased, the financing of
the building  construction  and working capital  funding.  They are evidenced by
interest-bearing  promissory notes and corresponding  Purchase Loan and Security
Agreements.  The notes bore an  interest  rate of 10 percent  until  December 1,
1997. The notes


                                    Page 55
<PAGE>

currently  bear an interest  rate of  approximately  7 percent.  The amounts due
under these agreements are reflected as either receivables or investments in and
advances to unconsolidated  subsidiaries,  at equity on the accompanying balance
sheets  depending  upon  their  maturities.  Amounts  due to PMI are  carried as
accounts  payable and  liabilities  subject to  compromise  on the  accompanying
balance sheets.

MABESA

The Company has purchased certain diaper product needs from Mabesa and also sold
excess diaper making equipment to Mabesa.

<TABLE>
<CAPTION>
                                              December 26, 1999            December 27, 1998            December 28, 1997
                                              -----------------            -----------------            -----------------
<S>                                            <C>                          <C>                          <C>
Sale of equipment                              $           517              $             -              $         4,843
Purchase of diapers from Mabesa                $           154              $         1,733              $         2,196
Due from Mabesa                                $            10              $         2,732              $         3,623
Due to Mabesa                                  $           318              $           312              $           119
</TABLE>

The  amounts  due  from  Mabesa  for  equipment   purchased  are  classified  as
receivables on the balance  sheets.  The amounts due to Mabesa are classified as
accounts  payable and  liabilities  subject to  compromise  on the  accompanying
balance sheets.

MPC

The Company has sold certain diaper making equipment to MPC.

<TABLE>
<CAPTION>
                                              December 26, 1999            December 27, 1998            December 28, 1997
                                              -----------------            -----------------            -----------------
<S>                                            <C>                          <C>                          <C>
Sale of equipment and technology
     transfer                                  $             -              $             -              $         2,400
Due from MPC                                   $           287              $           287              $         2,000
</TABLE>

The amounts  due from MPC are  classified  as  receivables  on the  accompanying
balance sheets.

GOODBABY

The Company has sold certain diaper making equipment to Goodbaby.

<TABLE>
<CAPTION>
                                              December 26, 1999            December 27, 1998            December 28, 1997
                                              -----------------            -----------------            -----------------
<S>                                            <C>                          <C>                          <C>
Sale of equipment                              $             -              $             -              $         2,415
Due from Goodbaby                              $           722              $         1,182              $         2,710
</TABLE>

The amounts due from Goodbaby are classified as receivables on the  accompanying
balance sheets.

At December 26, 1999 and December  27, 1998,  the Company had deferred  gains on
the sales of  equipment  of $3,647 and  $3,927,  respectively.  These  gains are
amortized to income over the depreciable life of the equipment.


NOTE 16:      LEGAL PROCEEDINGS

THE PROCTER & GAMBLE COMPANY V. PARAGON TRADE BRANDS, INC. - P&G filed a lawsuit
in January 1994 in the  Delaware  District  Court  alleging  that the  Company's
"Ultra"  infant  disposable  diaper  products  infringed  two of P&G's dual cuff
diaper patents.  The lawsuit sought injunctive  relief,  lost profit and royalty
damages,  treble


                                    Page 56
<PAGE>

damages and attorneys'  fees and costs.  The Company denied  liability under the
patents and  counterclaimed  for patent  infringement and violation of antitrust
laws by P&G. In March 1996, the Delaware District Court granted P&G's motion for
summary judgment to dismiss the Company's antitrust counterclaim.  The trial was
completed in February 1997, the parties submitted  post-trial briefs and closing
arguments  were  conducted  on October 22,  1997.  Legal fees and costs for this
litigation were significant.

On December 30, 1997, the Delaware  District Court issued a Judgment and Opinion
finding that P&G's dual cuff patents were valid and infringed, while at the same
time finding the Company's patent to be invalid, unenforceable and not infringed
by P&G's  products.  Judgment  was  entered  on  January  6,  1998.  Damages  of
approximately  $178,400 were entered  against  Paragon by the Delaware  District
Court on June 2, 1998.  At the same time,  the Delaware  District  Court entered
injunctive  relief  agreed upon by P&G and the Company.  On August 4, 1998,  the
Company filed with the Federal  Circuit  Court of Appeals its amended  notice of
appeal.  The appeal was fully  briefed,  and oral  argument  was  scheduled  for
February 5, 1999.

The Judgment had a material adverse effect on the Company's  financial  position
and its results of operations. As a result of the District Court's Judgment, the
Company  filed for relief under  Chapter 11 of the  Bankruptcy  Code,  11 U.S.C.
Section 101 et seq.,  in the United  States  Bankruptcy  Court for the  Northern
District of Georgia (Case No. 98-60390) on January 6, 1998.

P&G filed alleged claims in the Company's Chapter 11  reorganization  proceeding
ranging from  approximately  $2,300,000  (without  trebling) to $6,500,000 (with
trebling), which included a claim of $178,400 for the Delaware Judgment.

On February 2, 1999,  the Company  entered into a Settlement  Agreement with P&G
which fully and finally  settled all matters  related to the Delaware  Judgment,
the Company's appeal of the Delaware Judgment,  P&G's motion to find the Company
in  contempt  of the  Delaware  Judgment  and P&G's  proof of claim filed in the
Company's  Chapter 11  reorganization  proceeding.  The P&G  Approval  Order was
issued on August 6, 1999. As a part of the P&G  settlement,  Paragon granted P&G
an allowed unsecured prepetition claim of $158,500 and an allowed administrative
claim of $5,000.  As a part of the settlement,  the Company entered into License
Agreements  for the U.S.  and  Canada,  which  are  exhibits  to the  Settlement
Agreement,  with respect to certain of the patents  asserted by P&G in its proof
of claim, including those asserted in the Delaware action. The U.S. and Canadian
patent rights licensed by the Company permitted the Company to convert to a dual
cuff baby diaper  design.  The product  conversion is complete.  In exchange for
these  rights,  the  Company  pays P&G  running  royalties  on net  sales of the
licensed  products  equal  to  2  percent  through  October  2005,  .75  percent
thereafter  through October 2006 and .375 percent  thereafter through March 2007
in the U.S.;  and 2 percent  through  October 2008 and 1.25  percent  thereafter
through December 2009 in Canada. The Settlement  Agreement also provides,  among
other  things,  that P&G will  grant the  Company  and/or its  affiliates  "most
favored licensee" status with respect to patents owned by P&G on the date of the
Settlement  Agreement or for which an  application  was pending on that date. In
addition,  the Company has agreed with P&G that prior to  litigating  any future
patent  dispute,  the parties  will engage in good faith  negotiations  and will
consider  arbitrating  the dispute before  resorting to  litigation.  The Equity
Committee appealed the P&G Approval Order.

The Company believes that the royalty rates being charged by P&G,  together with
royalties to be paid to K-C  described  herein,  have had, and will  continue to
have, a material adverse impact on the Company's future financial  condition and
results of operations.

Under the terms of the P&G Settlement Agreement,  the Company has withdrawn with
prejudice its appeal of the Delaware  Judgment to the Federal  Circuit,  and P&G
has withdrawn with  prejudice its motion in Delaware  District Court to find the
Company in contempt of the Delaware Judgment. In addition, pursuant to the terms
of the Plan, the Equity Committee has withdrawn with prejudice its appeal of the
P&G Approval Order.

KIMBERLY-CLARK  CORPORATION V. PARAGON TRADE BRANDS, INC. - On October 26, 1995,
K-C filed a lawsuit  against the Company in the U.S.  District  Court in Dallas,
Texas,  alleging  infringement  by the  Company's  products  of two K-C  patents
relating to dual cuffs. The lawsuit sought injunctive  relief,  royalty damages,
treble damages and attorneys' fees and costs. The Company denied liability under
the  patents  and  counterclaimed  for  patent  infringement  and


                                    Page 57
<PAGE>

violation of antitrust laws by K-C. Several pre-trial motions were filed by each
party,  including a motion for summary judgment filed by K-C with respect to the
Company's antitrust  counterclaim and a motion for summary judgment filed by the
Company on one of the patents  asserted by K-C. In  addition,  K-C  subsequently
sued the Company on another  patent  issued to K-C which is based upon a further
continuation  of one of the K-C dual cuff  patents  asserted  in the case.  That
action was consolidated  with the then-pending  action.  Legal fees and costs in
connection with this litigation were significant.

As a result of the  Company's  Chapter 11  filing,  the  proceedings  in the K-C
litigation were stayed.  The Bankruptcy  Court issued an order on April 10, 1998
permitting,  among  other  things,  a partial  lifting  of the stay to allow the
issuance of the special  master's  report on the items under his  consideration.
K-C  filed  with  the  Bankruptcy  Court a  motion  for  reconsideration  of the
Bankruptcy  Court's April 10, 1998 order, which was denied on June 15, 1998. K-C
has  appealed  this  denial of  reconsideration  to the  District  Court for the
Northern District of Georgia. The Company objected to K-C's appeal and sought to
have it dismissed. K-C also filed a motion with the District Court in Atlanta to
withdraw the  reference  (the  "Withdrawal  Motion") with respect to all matters
pertaining to its proof of claim from the jurisdiction of the Bankruptcy  Court.
By order executed  February 18, 1999, the appeal,  the Withdrawal Motion and the
Company's  motion to dismiss the appeal were  dismissed  by the  District  Court
without  prejudice to the right of either party within sixty days to re-open the
actions if a settlement was not consummated.

The Company has previously  disclosed  that had K-C prevailed on its claims,  an
award of all or a substantial  portion of the relief requested by K-C could have
had a material  adverse  effect on the  Company's  financial  condition  and its
results of operations.

K-C filed alleged claims in the Company's Chapter 11  reorganization  proceeding
ranging from  approximately  $893,000  (without  trebling) to  $2,300,000  (with
trebling).

On March 19, 1999,  the Company  entered into a  Settlement  Agreement  with K-C
which  fully and  finally  settled  all  matters  related  to the Texas  action,
including  the  Company's  counterclaims,  and K-C's proof of claim filed in the
Company's  Chapter 11  reorganization  proceeding.  The K-C  Approval  Order was
issued by the  Bankruptcy  Court on August 6,  1999.  Under the terms of the K-C
Settlement  Agreement,  the Company granted K-C an allowed unsecured prepetition
claim of $110,000 and an allowed  administrative  claim of $5,000.  As a part of
the  settlement,  the Company  entered into License  Agreements for the U.S. and
Canada,  which are  exhibits to the  Settlement  Agreement,  with respect to the
patents  asserted by K-C in the Texas action.  The patent rights licensed by the
Company from K-C permitted the Company to convert to a dual cuff diaper  design.
The product  conversion is complete.  In exchange for these patent  rights,  the
Company pays K-C annual running  royalties on net sales of the licensed products
in the U.S. and Canada equal to: 2.5 percent of the first  $200,000of  net sales
of the covered  diaper  products  and 1.5 percent of such net sales in excess of
$200,000 in each calendar year  commencing  January 1999 through  November 2004.
The  Company  has agreed to pay a minimum  annual  royalty  for diaper  sales of
$5,000,  but amounts due on the running  royalties  will be offset  against this
minimum.  The Company also pays K-C running  royalties of 5 percent of net sales
of covered  training pant products for the same period,  but there is no minimum
royalty for training pants. As part of the settlement, the Company has granted a
royalty-free  license to K-C for three  patents  which the  Company in the Texas
action claimed K-C infringed.

The Company  believes that the overall  effective  royalty rate that the Company
will pay to K-C,  together with royalties to be paid to P&G described above, has
had,  and will  continue to have,  a material  adverse  impact on the  Company's
future financial condition and results of operations.

As a part of the K-C License Agreement, K-C has agreed not to sue the Company on
two of K-C's patents  related to the use of  superabsorbent  polymer  ("SAP") in
diapers  and  training  pants,  so long as the Company  uses SAP which  exhibits
certain  performance  characteristics  (the  "SAP  Safe  Harbor").  The  Company
experienced  certain product  performance  issues the Company  believes may have
been related to the SAP the Company initially  converted to in December of 1998.
In  February  1999,  the  Company  converted  to  a  new  SAP.  The  Company  is
encountering increased product costs due to the increased price and usage of the
new SAP.  While the  Company is working  diligently  with its SAP  suppliers  to
develop a more  cost-effective  alternative  which is still  within the SAP Safe
Harbor,  the Company cannot predict at this time whether or when the added costs
will be fully offset.  The


                                    Page 58
<PAGE>

Company expects that these increased  product costs will have a material adverse
impact on its financial  condition  and results of operations  for at least 2000
and potentially beyond.

On  October  29,  1999,  in  accordance  with the  terms  of the K-C  Settlement
Agreement,  K-C dismissed  with  prejudice its complaint in the Texas action and
the Company  dismissed with prejudice its  counterclaims in the Texas action. On
November 4, 1999, K-C filed a stipulation  dismissing with prejudice its related
filings  in the  Georgia  District  Court.  On  November  2, 1999,  the  parties
exchanged mutual releases pursuant to the Settlement Agreement.  In addition, as
contemplated  under the Plan, the Equity  Committee has withdrawn with prejudice
its appeal of the K-C Approval Order.

IN RE PARAGON TRADE BRANDS,  INC. -- As described  above,  on December 30, 1997,
the  Delaware  District  Court  issued a Judgment  and Opinion in the  Company's
lawsuit  with P&G  finding  that two of P&G's  diaper  patents  were  valid  and
infringed by the Company's "Ultra" disposable baby diapers, while also rejecting
the Company's  patent  infringement  claim against P&G.  Judgment was entered on
January 6, 1998.  While a final  damages  number was not entered by the Delaware
District  Court  until  June 2,  1998,  the  Company  originally  estimated  the
liability and associated  litigation  costs to be  approximately  $200,000.  The
amount of the  award  resulted  in  violation  of  certain  covenants  under the
Company's bank loan  agreements.  As a result,  the issuance of the Judgment and
the uncertainty it created caused an immediate and critical  liquidity issue for
the Company which necessitated the Chapter 11 filing.

Subsequently,  damages of approximately $178,400 were entered against Paragon by
the  Delaware  District  Court on June 2, 1998.  At the same time,  the Delaware
District Court entered injunctive relief agreed upon by P&G and the Company.

The Chapter 11 filing prevented P&G from placing liens on the Company's  assets,
permitted  the Company to appeal the Delaware  District  Court's  decision in an
orderly fashion and afforded the Company the  opportunity to resolve  liquidated
and unliquidated  claims against the Company which arose prior to the Chapter 11
filing.

On February 2, 1999,  the Company  entered into a Settlement  Agreement with P&G
which fully and finally  settled all matters  related to the Delaware  Judgment,
the Company's appeal of the Delaware Judgment,  P&G's motion to find the Company
in  contempt  of the  Delaware  Judgment  and P&G's  proof of claim filed in the
Company's Chapter 11 reorganization proceeding.

On March 19, 1999,  the Company  entered into a  Settlement  Agreement  with K-C
which  fully and  finally  settled  all  matters  related  to the Texas  action,
including  the  Company's  counterclaims,  and K-C's proof of claim filed in the
Company's Chapter 11 reorganization proceeding.

On July 12, 1999, the Bankruptcy Court issued the Bidding  Procedures Order. The
Bidding Procedures Order provided for the consideration of competing  investment
proposals from qualified bidders in addition to Wellspring and for the filing by
the Company of a  stand-alone  plan of  reorganization.  The Bidding  Procedures
Order  provided for the  consideration  of competing  investment  proposals from
other qualified  bidders and for the filing by the Company of a stand-alone plan
of reorganization. The Equity Committee filed a motion for amended findings with
respect to the  Bankruptcy  Court's July 12, 1999 order.  The  Bankruptcy  Court
denied the Equity Committee's  motion. The Equity Committee appealed the Bidding
Procedures Order.

On August 25, 1999,  with the support of the Creditors'  Committee,  the Company
filed the Initial Plan with the  Bankruptcy  Court.  The Initial Plan provided a
stand-alone plan alternative to the Wellspring  Transaction.  In accordance with
the  Bankruptcy  Court-approved  auction  procedures,  an auction  commenced  on
September 21, 1999. The auction  continued  thereafter until the Company,  after
consultation with the Creditors' Committee,  the Equity Committee,  P&G and K-C,
determined to conclude the auction on October 4, 1999. At the  conclusion of the
auction,  the Company,  after  consultation with the Creditors'  Committee,  the
Equity Committee, P&G and K-C, determined that Wellspring had submitted the best
bid.  On  October  15,  1999,  the  Company  and the  Creditors'  Committee,  as
co-proponents,  jointly filed the Amended Plan which incorporated the Wellspring
Transaction,  as  modified by the Company  after  consultation  with its various
creditor  constituencies.  The Amended Plan also


                                    Page 59
<PAGE>

provided  that,  in the  event  the  proposed  Wellspring  transaction  was  not
consummated,  the proponents  could have pursued  confirmation  of a stand-alone
plan of reorganization.

On or about  November 15, 1999,  the Company and the  Creditors'  Committee,  as
co-proponents,  filed  the Plan and  Disclosure  Statement  with the  Bankruptcy
Court. The Plan incorporated the Wellspring Transaction. By order dated November
18, 1999, the Bankruptcy Court approved the Disclosure Statement.  At such time,
the Bankruptcy  Court also approved  certain voting  procedures and  established
January 7, 2000 as the voting  deadline for the Plan and January 13, 2000 as the
date for a hearing to consider  confirmation of the Plan. A confirmation hearing
was held by the Bankruptcy Court on January 13, 2000. By Order dated January 13,
2000, the Bankruptcy Court confirmed the Plan.

On January 28, 2000,  Paragon was  reorganized  pursuant to the Plan through the
consummation of the Wellspring Transaction.  As contemplated under the Plan, the
Equity  Committee has withdrawn  with  prejudice its appeals of the P&G Approval
Order, the K-C Approval Order and the Bidding Procedures Order.

TRACY PATENT - The Company  previously  received  notice from a Ms. Rhonda Tracy
that Ms. Tracy believed the Company's diapers infringe a patent issued in August
1998 to Ms. Tracy (U.S. Patent No. 5,797,824). The Company responded, based upon
advice of its independent  patent counsel,  that it believes its products do not
infringe any valid claim of Ms. Tracy's  patent.  On April 29, 1999, the Company
received  notice  that Ms.  Tracy had filed suit in the United  States  District
Court for the Northern  District of Illinois  against K-C,  Tyco  International,
Ltd.,  Drypers  Corporation  and a number of the Company's  customers,  alleging
infringement  of her patent.  The  Company was not named as a defendant  in this
suit.  Rather, Ms. Tracy indicated in her April 29, 1999 letter that the Company
would be sued upon completion of the current suit.

The  Company  and Ms.  Tracy  entered  into a  Settlement  Agreement,  which was
approved by the  Bankruptcy  Court on  December  8, 1999,  pursuant to which the
Company paid Ms. Tracy $500 in exchange  for a release from  liability  from any
claims under Ms.  Tracy's  patent for the Company,  its  Affiliates,  as defined
therein,  and retailers who sell  products  manufactured  by the Company and its
Affiliates.  Under the terms of the Settlement Agreement, Ms. Tracy also granted
a  nonexclusive,  fully paid-up,  irrevocable,  worldwide  license to permit the
Company and its Affiliates to make,  have made,  lease,  use,  import,  offer to
sell,  and sell  disposable  absorbent  products  under the terms of Ms. Tracy's
patent.  This  license  also extends to retailers to the extent they are selling
products manufactured by the Company and its Affiliates.

KIMBERLY-CLARK  WORLDWIDE,  INC. V. PARAGON  TRADE  BRANDS,  INC. - On March 20,
2000,  Kimberly-Clark  Worldwide,  Inc. ("K-C") filed suit in the U.S.  District
Court in Delaware  against the Company for  allegedly  infringing  a certain K-C
patent  related to a method and  apparatus  for  attaching a graphic  patch to a
disposable  absorbent  garment.  The suit seeks injunctive  relief,  unspecified
treble  damages,  interest  and  attorneys'  fees and  expenses.  The Company is
currently evaluating the suit.

OTHER  -- The  Company  is also a party  to  other  legal  activities  generally
incidental to its activities. Although the final outcome of any legal proceeding
or dispute is subject to a great many variables and cannot be predicted with any
degree of certainty,  the Company presently believes that any ultimate liability
resulting  from any or all legal  proceedings or disputes to which it is a party
will not have a material adverse effect on its financial condition or results of
operations.


NOTE 17:      COMMITMENTS

Paragon has operating lease agreements for certain facilities that expire during
the years 2000 through 2005.  Future minimum lease payments required under these
non-cancelable  operating leases are: $265 in 2000, $79 in 2001, $19 in 2002, $8
in 2003  and $21 in 2004 and  thereafter.  Rental  expense  for  facilities  and
equipment was $2,607,  $2,676 and $3,015 for the years ended  December 26, 1999,
December 27, 1998 and December 28, 1997, respectively.

                                    Page 60
<PAGE>

Commitments  for capital  expenditures  as of December 26, 1999 are $552.  Other
Company commitments include purchase commitments for raw materials at prevailing
market rates. In April 1998, the Company entered into an agreement with Clariant
International  Ltd.  (subsequently  purchased  by BASF  Corporation)  whereby it
agreed,  subject  to  certain  limitations,  to  purchase  100  percent  of  its
requirements of SAP through December 31, 2001.


NOTE 18:      NET LOSS PER COMMON SHARE

Following is a  reconciliation  of the numerators and  denominators of the basic
and diluted loss per common share:

<TABLE>
<CAPTION>
                                                                                       Year Ended
                                                         -----------------------------------------------------------------
                                                         December 26, 1999       December 27, 1998       December 28, 1997
                                                         -----------------       -----------------       -----------------
<S>                                                       <C>                     <C>                     <C>
Net loss                                                  $    (28,376)           $    (65,383)           $   (212,717)
                                                          =============           =============           =============

Weighted average number of common shares
     used in basic EPS (000's)                                  11,950                  11,937                  11,913
Effect of dilutive securities:
     Stock options (000's)                                           -                       -                       -
                                                         -----------------       -----------------      -----------------
Weighted average number of common
     shares and potentially dilutive
     common shares in diluted EPS (000's)                       11,950                  11,937                  11,913
                                                          =============           =============           =============
Basic loss per common share                               $      (2.37)           $      (5.48)           $     (17.86)
Diluted loss per common share                             $      (2.37)           $      (5.48)           $     (17.86)
</TABLE>

Options  to  purchase  646,667,  699,491  and  313,612  shares of  common  stock
outstanding  during the years ended  December  26,  1999,  December 27, 1998 and
December 28, 1997,  respectively,  were not included in the calculation  because
the options'  exercise  price was greater  than the average  market price of the
common shares.

Diluted and basic  earnings per share are the same for the years ended  December
26, 1999,  December 27, 1998 and  December 28, 1997 because the  computation  of
diluted earnings per share was anti-dilutive.


NOTE 19:      SEGMENT REPORTING

The Company operates principally in two segments that are organized based on the
nature of the products  sold:  (i) infant care and (ii)  feminine care and adult
incontinence.  Each operating segment contains closely related products that are
unique to that  particular  segment.  The results of Changing  Paradigms,  Inc.,
which  was  disposed  of  in  October  1998,  and  the  Company's  international
investment in joint ventures in Mexico, Argentina, Brazil and China are reported
in  the  corporate  and  other  segment.  Identifiable  assets  included  in the
corporate  and  other  segment  include   deferred  tax  assets,   international
investments in joint ventures and cash and other financial  instruments  managed
by  the  corporate  treasury   department.   Inter-segment  net  sales  are  not
significant. Segment accounting policies are the same as those described in Note
2.

Management  evaluates the  performance of its operating  segments  separately to
individually  monitor the different  factors  impacting  financial  performance.
Segment  operating  profit  is  comprised  of net  sales  less cost of sales and
selling,  general  and  administrative  expense.  Loss  contingencies  and asset
impairments are recorded in the appropriate operating segment.

Certain  administrative  expenses common to all operating segments are currently
allocated  to the infant  care  operating  segment.  International  investments,
financial  costs,  such as interest  income and  expense,  and income  taxes are
managed by, and recorded in, the corporate and other operating segment.

Corporate  and  other  capital  expenditures  include  substantially  all of the
Company's   spending  for  Year  2000  and   information   technology.   Related
depreciation and amortization is allocated to each operating segment.

                                    Page 61
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Feminine
                                                                                 Care/Adult       Corporate/
1999                                                           Infant Care      Incontinence         Other           Total
----                                                         -------------    --------------    --------------   -------------
<S>                                                          <C>              <C>               <C>              <C>
   Net sales                                                 $     486,086    $      12,570     $            -   $     498,656
   Operating loss                                                  (11,532)         (13,988)                 -         (25,520)
   Equity in earnings of unconsolidated subsidiaries                     -                -              2,339           2,339
   Dividend income from unconsolidated subsidiary                        -                -                992             992
   Interest expense                                                      -                -                482             482
   Other income                                                          -                -              2,483           2,483
   Earnings (loss) before income taxes and bankruptcy costs        (11,532)         (13,988)             5,332         (20,188)
   Identifiable assets                                             227,808           41,712             51,856         321,376
   Investments in unconsolidated subsidiaries                            -                -             79,144          79,144
   Capital expenditures                                             20,292              641              6,748          27,681
   Depreciation and amortization                                    33,042            4,118                  -          37,160
</TABLE>


<TABLE>
<CAPTION>
                                                                                  Feminine
                                                                                 Care/Adult       Corporate/
1998                                                           Infant Care      Incontinence         Other           Total
----                                                         -------------    --------------    --------------   -------------
<S>                                                          <C>              <C>               <C>            <C>
   Net sales                                                 $     512,759    $       6,608     $       15,840   $     535,207
   Operating profit (loss)                                         (42,209)(1)      (16,916)(2)          1,149         (57,976)
   Equity in earnings of unconsolidated subsidiaries                     -                -              4,077           4,077
   Dividend income from unconsolidated subsidiary                        -                -                922             922
   Interest expense                                                      -                -                450             450
   Other income                                                          -                -              2,437           2,437
   Earnings (loss)before income taxes and bankruptcy costs         (42,209)         (16,916)             8,135         (50,990)
   Identifiable assets                                             245,772           39,614             55,117         340,503
   Investments in unconsolidated subsidiaries                            -                -             88,784          88,784
   Capital expenditures                                             23,542            1,256             11,655          36,453
   Depreciation and amortization                                    29,536            4,742                181          34,459
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Feminine
                                                                                 Care/Adult       Corporate/
1997                                                           Infant Care      Incontinence         Other           Total
----                                                         -------------    --------------    --------------   -------------
<S>                                                          <C>              <C>               <C>              <C>
   Net sales                                                 $     545,225    $       4,264     $       12,486    $     561,975
   Operating loss                                                 (154,989)(3)      (23,721)(4)         (5,078)(5)     (183,788)
   Equity in earnings of unconsolidated subsidiaries                     -                -                953              953
   Interest expense                                                      -                -              4,667            4,667
   Other income                                                          -                -              1,664            1,664
   Earnings (loss) before income taxes                            (154,989)         (23,721)            (6,073)        (184,783)
   Identifiable assets                                             234,707           45,540             22,087          302,334
   Investments in unconsolidated subsidiaries                            -                -             73,808           73,808
   Capital expenditures                                             31,607           12,415             11,013           55,035
   Depreciation and amortization                                    33,127            2,294                 93           35,514

------------------
<FN>
(1)      Includes $78,500 accrued settlement contingency for estimated settlement costs.

                                    Page 62
<PAGE>

(2)      Includes asset impairment of $3,408 related to tampon-related machinery.

(3)      Includes $200,000 accrued settlement contingency for P&G patent litigation.

(4)      Includes asset impairment of $4,442 related to tampon-related machinery.

(5)      Includes $5,000 write-off of software and associated consulting.
</FN>
</TABLE>


The  following  table  presents  net sales by  country  based on the  country of
origin, including exports from such countries:

<TABLE>
<CAPTION>
                                      1999             1998             1997
                                    ----------       ----------      -----------
<S>                                 <C>              <C>             <C>
United States                       $  473,091       $  497,919      $   521,487
Canada                                  25,565           37,288           40,488
                                    ----------       ----------      -----------
Consolidated                          $498,656         $535,207         $561,975
                                    ==========       ==========      ===========
</TABLE>

The following table presents net property, plant and equipment, including assets
held for sale, based on location of the asset:

<TABLE>
<CAPTION>
                                      1999             1998             1997
                                    ----------       ----------      -----------
<S>                                 <C>              <C>             <C>
United States                       $  112,336       $  106,705      $   123,313
Canada                                   4,613            4,186            6,143
                                    ----------       ----------      -----------
Consolidated                          $116,949         $110,891         $129,456
                                    ==========       ==========      ===========
</TABLE>


NOTE 20:      SUBSEQUENT EVENTS

REORGANIZATION.  On January 28,  2000,  the Company  emerged  from Chapter 11 as
contemplated  under the Plan.  All  pre-petition  obligations  were  discharged.
Pursuant to the Plan, Wellspring purchased 11,516,405 shares or approximately 97
percent of the common stock of the reorganized  Company for a cash  contribution
of $115,200..  Under the Plan,  general unsecured  creditors of the Company were
entitled  to a pro-rata  distribution  of  $115,400  cash and  $146,000 of 11.25
percent  senior  subordinated  notes.  A total of  178,365  shares  and  625,821
warrants to purchase additional shares of the Company's new common stock will be
distributed to holders of old common stock under the Plan.  Common  stockholders
of record as of January  13, 2000 will  receive  .0149  shares of the  Company's
newly issued  common stock for each share of the  Company's old common stock and
 .0524 warrants. The warrants are transferable,  have an exercise price of $18.91
per share and  expire on January  28,  2010.  General  unsecured  creditors  and
stockholders  of record as of January  13, 2000 are  entitled  to receive  their
pro-rata share of the proceeds, if any, of certain litigation claims that remain
with the estate and which will be prosecuted  on their behalf by the  litigation
claims representative appointed under the Plan.

CREDIT FACILITY: On January 28, 2000 the Company and certain subsidiaries of the
Company,  as guarantors,  entered into a Credit Facility with Citicorp USA, Inc.
as agent ("Citicorp") and a syndicate of banks for a revolving credit and letter
of credit  facility for up to $95,000.  The maximum  borrowing  under the Credit
Facility  may not exceed the  lesser of  $95,000  or an amount  determined  by a
borrowing  base  formula.  The  borrowing  base  formula is comprised of certain
specified  percentages  of eligible  accounts  receivable,  eligible  inventory,
equipment  and personal  property and real  property of the Company.  The Credit
Facility has a sub-limit of $15,000 for the issuance of letters of credit.

Borrowings  under the Credit  Facility  are secured by a security  interest  in,
pledge and lien on substantially  all of the Company's North American assets and
properties and the proceeds  thereof.  Borrowings  under the Credit Facility are
guaranteed  by certain  domestic  subsidiaries  and may be used to fund  working
capital  and  other  general  corporate  purposes  including   acquisitions  and
investments  in  existing  and new  international  joint  ventures.  The


                                    Page 63
<PAGE>

Credit Facility contains restrictive covenants,  including among other things, a
prohibition on dividends,  limitations  on the creation of additional  liens and
indebtedness,  limitations  on  capital  expenditures,  investments,  loans  and
advances,  the sales of  assets  and  transactions  with  affiliates.  Financial
covenants  include the maintenance of minimum earnings before  interest,  taxes,
depreciation and amortization, fixed charges, coverage ratio, tangible net worth
and a maximum leverage ratio.

The Credit  Facility  provides that  borrowings  will bear interest at a rate of
1.50 percent in excess of Citibank's  base rate, or at the Company's  option,  a
rate of 2.50  percent  in excess of the  reserve  adjusted  eurodollar  rate for
interest  periods  of one,  two,  three or six  months.  After  March 31,  2001,
borrowing  rates  will be subject  to a pricing  grid  based upon the  Company's
leverage  ratio and could decrease by a maximum of  .5 percent and increase by a
maximum of .25 percent.  The Company will pay a commitment fee of .5 percent per
annum on the unused portion of the Credit Facility, a letter of credit fee equal
to 2.75  percent  per annum on the  average  outstanding  letters  of credit and
certain other fees.

On January 28, 2000, the Company  borrowed  approximately  $15,000 to consummate
the Plan.

SENIOR  SUBORDINATED  NOTES.  On January 28,  2000,  the Company  issued the New
Notes. The New Notes are guaranteed by certain domestic subsidiaries and are not
callable until February 1, 2003.  Interest is payable  semi-annually  and during
the first two  years  can be paid in kind if free  cash flow as  defined  in the
Indenture falls below projected levels.  The New Notes are subordinated in right
of payment to the  payment of all  senior  indebtedness.  The New Notes  contain
customary restrictive  covenants,  including among other things,  limitations on
dividends and restricted  payments,  the incurrence of additional  indebtedness,
liens,  investments,  loans and advances,  the sales of assets and  transactions
with affiliates.

FRESH START ACCOUNTING:  The Company will record the  reorganization and related
transactions using "fresh start" accounting as required by Statement of Position
90-7  ("SOP  90-7")  issued  by  the  American  Institute  of  Certified  Public
Accountants.  In  accordance  with SOP 90-7,  the  reorganization  value will be
allocated to specific  tangible and  identifiable  assets and  liabilities.  The
following Selected Consolidated Pro Forma Financial Data (Unaudited) reflect the
Plan and fresh start  accounting as if the Plan was  consummated on December 26,
1999.


                 SELECTED CONSOLIDATED PRO FORMA FINANCIAL DATA
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                      Adjustments                            Pro-Forma
                                             Pre-Fresh Start           To Record                            Fresh Start
                                              Balance Sheet             Plan Of          Fresh Start       Balance Sheet
                                            December 26, 1999         Confirmation       Adjustments     December 26, 1999
                                            -----------------         ------------       -----------     -----------------
<S>                                            <C>                <C>                   <C>                 <C>
Current assets                                 $      155,707     $     (17,656)(1)(3)  $          -        $      138,051
Long-term assets                                      213,913             1,222 (2)            7,564               222,699
Goodwill                                               30,900                 -              (30,900)                    -
                                            -----------------    ---------------       --------------      ---------------
Total assets                                   $      400,520     $     (16,434)        $    (23,336)       $      360,750
                                            =================    ===============       ==============      ===============
Current liabilities                            $       76,499     $      (5,048)(1)(3)  $     (3,508)       $       67,943
Liabilities subject to compromise                     406,723          (406,723)(1)(4)             -                     -
Long-term debt                                              -           164,507 (5)                -               164,507
Other long-term liabilities                             7,115                 -                    -                 7,115
                                            -----------------    ---------------       --------------      ---------------
Total liabilities                                     490,337          (247,264)              (3,508)              239,565

Shareholders equity (deficit)                         (89,817)          230,830 (6)          (19,828)              121,185
                                            -----------------    ---------------       --------------      ---------------
Total liabilities and shareholder's
     equity (deficit)                          $      400,520     $     (16,434)        $    (23,336)       $      360,750
                                            =================    ===============       ==============      ===============

                                    Page 64
<PAGE>

------------------
<FN>
(1)      To  record  reduction of  cost to pay  certain  liabilities  subject to
compromise  and  reduction  of  certain  receivables  that were  offset  against
liabilities subject to compromise.

(2)      To record deferred financing costs of the Credit Facility.

(3)      To  record payment  of certain accrued professional fees related to the
bankruptcy.

(4)      To record  the extinguishment of  liabilities subject to compromise per
the Plan.

(5)      To record the issuance of the New Notes and borrowings under the Credit
Facility.

(6)      To record  the  issuance  of  11,891,000  shares of common stock at $10
per share,  issuance of 625,821 warrants,  gain from  extinguishment of debt and
certain fees arising from confirmation of the Plan.
</FN>
</TABLE>


NOTE 21:      QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 26, 1999

                                                                    First           Second           Third            Fourth
                                                               --------------   --------------  ---------------  ---------------
<S>                                                            <C>              <C>             <C>              <C>
     Net sales                                                 $     126,244    $     117,848   $      128,507   $      126,057
     Gross profit                                                     16,707           14,468           18,307           13,563
     Net loss                                                         (7,219)          (8,385)          (5,235)          (7,537)
     Basic and diluted loss per common share                   $        (.60)   $        (.70)  $         (.44)   $        (.63)
     Price Range of the Company's common stock:
         High                                                  $        6.19    $        3.50   $         1.13    $         .54
         Low                                                   $        2.06    $        1.00   $          .17    $         .16
</TABLE>


<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 27, 1998
                                                                    First           Second           Third            Fourth
                                                               --------------   --------------  ---------------  ---------------
<S>                                                            <C>              <C>             <C>              <C>
     Net sales                                                 $     138,297    $     126,991   $      136,993   $      132,926
     Gross profit                                                     27,498           24,647           27,912           26,578
     Net earnings (loss)                                               6,006            3,369            4,024          (78,782)
     Basic and diluted earnings (loss) per common
         share                                                 $         .50    $         .28   $          .34   $        (6.59)
     Price Range of the Company's common stock:
         High                                                  $       20.25    $        6.81   $         4.63   $         3.63
         Low                                                   $        4.19    $        2.63   $         2.63   $         1.75
</TABLE>





                                    Page 65
<PAGE>



                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
            FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 26, 1999
                          (DOLLAR AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                             Balance at       Charged         Deductions       Balance at
                                                              Beginning          to              From            End of
Description                                                   of Period       Earnings         Reserve           Period
----------------------------------------------------         -----------     -----------     ------------      -----------
<S>                                                           <C>            <C>             <C>               <C>
Reserve deducted from related assets:
     Doubtful accounts - accounts receivable

         1999.......................................          $    8,700     $    5,031      $        68       $    13,799
                                                              ==========     ==========      ============      ===========
         1998.......................................          $    6,535     $    3,787      $    (1,622)      $     8,700
                                                              ==========     ==========      ============      ===========
         1997.......................................          $    7,637     $     (587)     $      (515)      $     6,535
                                                              ==========     ==========      ============      ===========

     Excess and obsolete items - inventories

         1999.......................................          $    6,637     $   11,098      $   (11,276)      $     6,459
                                                              ==========     ==========      ============      ===========
         1998.......................................          $    7,397     $    3,000      $    (3,760)      $     6,637
                                                              ==========     ==========      ============      ===========
         1997.......................................          $    7,803     $    6,140      $    (6,546)      $     7,397
                                                              ==========     ==========      ============      ===========
</TABLE>



                                    Page 66
<PAGE>



ITEM 9:       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE

None.


                                    PART III

ITEM 10:      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The following table sets forth certain information regarding the Company's Board
of Directors:

<TABLE>
<CAPTION>
                Name                   Age                                   Principal Occupation
    ------------------------          ------     -----------------------------------------------------------------------------
    <S>                               <C>        <C>
    Bobby V. Abraham                  58         Chief Executive Officer, Paragon Trade Brands, Inc.
    David W. Cole                     52         President, Torbitt & Castleman Company, Inc.
    Greg S. Feldman                   43         Managing Partner, Wellspring Capital Management LLC
    David C. Mariano                  37         Partner, Wellspring Capital Management LLC
    James R. McManus                  66         Chief Executive Officer, Beachside Capital Partners, L.L.C.
    Thomas F. Ryan, Jr.               58         Private Investor
    J. Dale Sherratt                  61         Managing General Partner, Wellfleet Investments
    Carl M. Stanton                   31         Principal, Wellspring Capital Management LLC
    Thomas J. Volpe                   64         Senior Vice President, Financial Operations,
                                                   The Interpublic Group of Companies
</TABLE>


BOBBY V.  ABRAHAM  has been a director  and the Chief  Executive  Officer of the
Company since its initial public  offering in February 1993,  served as Chairman
of the Company's  Board of Directors  from August 1993 to January 2000,  and was
appointed to the Executive Committee of the Board of Directors in February 2000.

DAVID W. COLE was  appointed  a director  of the  Company as of January 28, 2000
pursuant to the provisions of the Plan.  Mr. Cole currently  serves as President
of Torbitt & Castleman Company,  Inc., a consumer food products manufacturer and
supplier. Mr. Cole formerly served as the Company's President from 1993 to 1999.

GREG S.  FELDMAN was  appointed a director of the Company as of January 28, 2000
pursuant to the provisions of the Plan.  Mr. Feldman is the Managing  Partner of
Wellspring  Capital Management LLC, a private equity fund management company and
has been affiliated with Wellspring  since January 1995. Mr. Feldman also serves
as a director of The Hockey Company, a sporting goods manufacturer,  Lionel LLC,
a  manufacturer  and marketer of model trains and  accessories  and Far and Wide
Travel Corporation, a leading tour operator.

DAVID C. MARIANO was  appointed a director of the Company as of January 28, 2000
pursuant  to the  provisions  of the Plan.  Mr.  Mariano  was  appointed  to the
Executive and Compensation  and Governance  Committees of the Board of Directors
in  February  2000  and  serves  as  Chair of the  Compensation  and  Governance
Committee.  Mr.  Mariano is a Partner in Wellspring  Capital  Management  LLC, a
private  equity fund  management  company and is also a director of Far and Wide
Travel  Corporation.  Prior to joining  Wellspring in November 1997, Mr. Mariano
was a Managing Director of The Blackstone Group LP, an investment banking firm.

JAMES R. MCMANUS was  appointed a director of the Company as of January 28, 2000
pursuant  to the  provisions  of the  Plan.  Mr.  McManus  is  currently  CEO of
Beachside  Capital,  LLC,  a private  investment  company  which he  founded  in
September  1997.  Mr.  McManus  previously  served as CEO of Marketing  Corp. of
America  from its  founding in March 1971 to September  1999.  Mr.  McManus also
serves as a director of Family Time.Com,  an internet content company,  and is a
trustee of Northwestern University and Carnegie Hall, Inc.

                                    Page 67
<PAGE>

THOMAS F. RYAN,  JR. was  appointed  a director of the Company as of January 28,
2000 pursuant to the provisions of the Plan. Mr. Ryan was appointed to the Audit
Committee of the Board of Directors  in February  2000.  Mr. Ryan is currently a
private  investor.  Mr. Ryan formerly  served as President of the American Stock
Exchange, a national securities  exchange,  from October 1995 to April 1999, and
as Chairman of Kidder,  Peabody & Co., Inc., a securities trading and investment
firm, from January 1995 to October 1995.

J. DALE  SHERRATT was appointed a director of the Company as of January 28, 2000
pursuant to the  provisions  of the Plan.  Mr.  Sherratt  was  appointed  to the
Executive Committee of the Board of Directors in February 2000. Mr. Sherratt has
been the  Managing  General  Partner of  Wellfleet  Investments,  a health  care
investment  company,  since May 1992. Mr.  Sherratt serves as a Trustee of Mass.
Financial Services, a mutual fund company.

CARL M.  STANTON was  appointed a director of the Company as of January 28, 2000
pursuant  to the  provisions  of the Plan.  Mr.  Stanton  was  appointed  to the
Executive,  Audit and  Compensation  and  Governance  Committees of the Board of
Directors  in  February  2000.  Mr.  Stanton  will  serve as Chair of the  Audit
Committee.   Mr.  Stanton  currently  is  a  Principal  in  Wellspring   Capital
Management,  LLC,  a  private  equity  fund  management  company  and  has  been
affiliated with Wellspring since1998.  Prior to joining Wellspring,  Mr. Stanton
was a  Principal  with  Dimeling,  Schreiber  &  Park,  a  private  equity  fund
management company from 1994 to December 1998

THOMAS J. VOLPE was  appointed  a director of the Company as of January 28, 2000
pursuant to the  provisions  of the Plan.  Mr. Volpe was  appointed to the Audit
Committee in February  2000. Mr. Volpe has served as the Senior Vice President -
Financial  Operations for The  Interpublic  Group of Companies since March 1986.
Mr.  Volpe also  serves as a director  of American  Technical  Ceramics,  Inc, a
capacitor  manufacturer,  and Alliance  Atlantic,  Inc., a movie and  television
production and distribution company.

EXECUTIVE OFFICERS

The  following  table sets forth  certain  information  regarding  the Company's
executive officers:

<TABLE>
<CAPTION>
                Name                   Age                                         Position
    ------------------------------    ------     -----------------------------------------------------------------------------
    <S>                               <C>        <C>
    Bobby V. Abraham                  58         Chief Executive Officer
    Alan J. Cyron                     47         Executive Vice President, Chief Financial Officer and Treasurer
    Robert E. McClain                 50         Executive Vice President - Sales and Marketing
    Christine I. Oliver               42         Executive Vice President - Customer Management
    John R. Cook                      58         Vice President - Technical Support
    Catherine O. Hasbrouck            35         Vice President, General Counsel and Secretary
    Stanley Littman                   59         Vice President - Technology and Materials
    Jeffrey S. Schoen                 39         Vice President - Manufacturing
    Kathy L. Evenson                  40         Director, Human Resources
</TABLE>


BOBBY V.  ABRAHAM  has been a director  and the Chief  Executive  Officer of the
Company since its initial public  offering in February 1993 and was the Chairman
of the Company's Board of Directors from August 1993 to January 2000.

ALAN J. CYRON has been the Executive Vice President, Chief Financial Officer and
Assistant   Secretary  of  the  Company  since  February  1997.  Mr.  Cyron  was
reappointed  Treasurer in December 1999. From April 1995 until February 1997, he
served as the Company's  Vice  President and as Treasurer  from May through July
1995.  Prior to joining the Company,  Mr.  Cyron served as Managing  Director of
Chemical Securities,  Inc., a subsidiary of Chemical Banking Corp., from January
1992 through March 1995.

                                    Page 68
<PAGE>

ROBERT E. MCCLAIN was appointed  Executive  Vice President - Sales and Marketing
in January  1998.  Prior to that time,  Mr.  McClain had served as the Company's
President of Sales from March 1997, and as Vice President - Business Development
from September 1996 to March 1997.  Before joining the Company,  Mr. McClain was
the Senior Vice  President,  Sales and Marketing for Nice Pak Products from 1992
to September 1996.

CHRISTINE I. OLIVER was appointed Executive Vice President - Customer Management
in June 1999.  Ms.  Oliver also  currently  serves as President of Paragon Trade
Brands (Canada) Inc., a wholly owned subsidiary of the Company and has served in
that position since October 1997. From February 1993 to October 1997, Ms. Oliver
served as Vice-President-Manufacturing for Paragon Trade Brands (Canada) Inc.

JOHN R. COOK has been Vice  President - Technical  Support of the Company  since
1998.  Prior to that time,  Mr. Cook served as the  Company's  Vice  President -
Quality Management from 1994 to 1998.

CATHERINE O. HASBROUCK has been Vice President, General Counsel and Secretary of
the  Company  since  June 1996.  Prior to joining  the  Company,  Ms.  Hasbrouck
practiced  law as an  associate  with the law firm of Troutman  Sanders LLP from
January 1992 to June 1996. Ms. Hasbrouck has resigned effective March 15, 2000.

STANLEY  LITTMAN  has been Vice  President -  Technology  and  Materials  of the
Company since September 1998. Prior to that time, Mr. Littman served the Company
as Vice  President - Supply  Management  (November  1997 to September  1998) and
Director,  Supply Management (April 1996 through October 1997). Prior to joining
the Company,  Mr.  Littman was employed by Fiberweb,  a nonwovens  manufacturing
company, as Research Director, Medical Fabrics, from 1992 to 1996.

JEFFREY S. SCHOEN was appointed Vice President - Manufacturing of the Company in
March 1999. Prior to that time, Mr. Schoen served the Company as a Plant Manager
at two of its manufacturing facilities from 1994 to March 1999.

KATHY L. EVENSON was  appointed  Director,  Human  Resources  for the Company in
April 1998.  Prior to that time,  Ms.  Evenson  served the Company as  Director,
Compensation  and Benefits from February  1998 to April 1998,  Compensation  and
Benefits  Manager June 1995 to February 1998, and Supervisor,  Compensation  and
Benefits from June 1994 to June 1995.


ITEM 11:      EXECUTIVE COMPENSATION

The following table discloses  information  concerning the compensation of those
persons who were,  at December  26,  1999,  the last day of the  Company's  1999
fiscal year, the Company's Chief Executive  Officer,  the four other most highly
compensated  executive  officers on that date and two executive  officers of the
Company who had resigned their  positions prior to December 26, 1999 (the "named
executive officers").


                                    Page 69
<PAGE>


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                           LONG-TERM
                                                   ANNUAL COMPENSATION                COMPENSATION AWARDS
                                                   -------------------                -------------------
                                                                      OTHER          RESTRICTED    SECURITIES
                                                                      ANNUAL           STOCK       UNDERLYING        ALL OTHER
         NAME AND            FISCAL                   BONUS        COMPENSATION       AWARD(S)      OPTIONS/        COMPENSATION
    PRINCIPAL POSITION        YEAR      SALARY($)   ($)(1)(2)        ($)(3)            ($)(4)        SARS(#)          ($)(5)
    ------------------        ----      ---------   ---------   ---------------     ------------     -------          ------
<S>                           <C>        <C>           <C>              <C>                  <C>      <C>              <C>
Bobby V. Abraham........      1999       500,006             0               0               0             0            14,988
  Chief Executive Officer     1998       519,237       561,004               0               0             0           234,191
                              1997       500,006             0               0               0        30,000           104,885

David W. Cole(6)........      1999       228,923             0               0               0             0            13,292
  President                   1998       269,537       224,400           9,230               0             0            18,143
                              1997       304,954             0          13,985               0        20,000             3,146

Alan J. Cyron...........      1999       225,000             0               0               0             0            12,668
  Executive Vice              1998       228,422       210,375               0               0             0            16,318
  President and               1997       206,612             0           4,615               0        15,000             3,158
  Chief Financial Officer

Arrigo D. Jezzi(7)......      1999        73,558             0               0               0             0           473,146
  Executive Vice              1998       224,423       210,375               0               0             0            18,289
  President,  Operations,     1997       173,679             0          32,179               0        10,000             4,250
  Technology and
  International

Robert E. McClain ......      1999       210,000             0               0               0             0            13,447
  Executive Vice              1998       177,355       196,350               0               0             0            12,974
  President, Sales and
  Marketing

Christine I. Oliver(8)..      1999       244,277             0               0               0             0            24,428
  Executive Vice
  President, Customer
  Management

Catherine O. Hasbrouck(9)     1999       150,000        40,000               0               0             0            10,911
  Vice President, General
  Counsel and Secretary

------------------
<FN>
(1) As a result of the  Company's  performance  in fiscal 1997,  no annual bonus
payment was made to any of the named executive officers for 1997.

(2) In addition to amounts earned under the Company's Annual Bonus program,  Mr.
McClain  earned a sales  bonus in the amount of $71,210  in 1998.  In 1999,  Ms.
Hasbrouck  received  a bonus  of  $40,000  in  connection  with  settlement  and
compromise of certain  claims filed in the Company's  Chapter 11  reorganization
proceeding.

(3) Messrs.  Cole  and  Cyron  received  tax  gross-up   payments  in  1997  for
reimbursements  by the  Company  of  taxable  relocation  expenses  incurred  in
connection  with their  relocation in 1996 from  Washington to Georgia.  Amounts
paid to Mr.  Jezzi  include  $14,365  for  reimbursement  of taxable  relocation
expenses, $6,904 for reimbursement of nontaxable relocation expenses and $10,190
for tax gross-up  payments,  each made in connection with his relocation in 1997
from Pennsylvania to Georgia. Included in such taxable and nontaxable relocation
expenses  reported above for Mr. Jezzi were $6,583 in payment of moving expenses
and $9,873  reimbursement  for loss on the sale of his  Pennsylvania  residence.
Messrs.  Abraham,  Cole and Cyron  recognized


                                    Page 70
<PAGE>

income in 1997 in the amounts of $84,721, $13,748 and $24,825,  respectively, on
the difference  between the price paid for shares of the Company's  common stock
purchased in lieu of the 1996 bonus and the fair market value of those shares on
the date of purchase.

(4) Restricted  stock  reported  herein is  valued at the  closing  price of the
Common Stock as reported on the New York Stock  Exchange,  Inc.  (the "NYSE") on
the date of grant.  Restricted stock awards are forfeitable and vest, generally,
in either two or three equal annual installments from the date of grant, subject
to acceleration in the event of certain mergers or consolidations  involving the
Company,  a sale, lease,  exchange or other transfer of all or substantially all
of the Company's  assets,  or a liquidation or dissolution of the Company.  Such
awards may be granted at up to a 20%  discount to the market price of the Common
stock on the date of award.  Dividends  are payable on  restricted  stock at the
same rate payable to all stockholders. A restricted stock award in the amount of
$49,750 was made in 1996 in  recognition  of Mr.  Cyron's  efforts in connection
with the investment in Mabesa, and such award vested 33.4% on February 19, 1997,
33.3% on February 19, 1998 and 33.3% on February 19, 1999.

    Under ordinary  circumstances,  recipients of  restricted stock are able  to
pay the tax  liability  arising  upon vesting out of the proceeds of the sale of
Company stock. Since the filing of the Company's Chapter 11 proceeding, however,
certain corporate  insiders have been unable to trade in the Company's stock. As
a result, on January 31, 1999 and February 18, 1999, in order to avoid incurring
a tax  liability  in  connection  with the vesting of certain  restricted  stock
awards,  Mr.  Abraham  forfeited  4,887  shares  awarded  February  1,  1994 and
scheduled  to vest on February 1, 1999,  and 2,500 shares  awarded  February 19,
1996 and scheduled to vest on February 19, 1999;  and on February 18, 1999,  Mr.
Cole forfeited  1,666 shares awarded  February 19, 1996 and scheduled to vest on
February 19, 1999.

(5) The  amounts  shown  for  fiscal  1999   represent:   (i)   matching  401(k)
contributions under the Paragon Retirement Savings Investment Management Program
(the "PRISM Plan") in the amounts of $2,308,  $1,108,  $1,038,  $1,038, $767 and
$692 for  Messrs.  Abraham,  Cole,  Cyron,  Jezzi,  McClain  and Ms.  Hasbrouck,
respectively;  (ii) retirement contributions under the PRISM Plan in the amounts
of $4,800 for each of Messrs.  Abraham,  Cole,  Cyron,  Jezzi,  McClain  and Ms.
Hasbrouck;  (iii)  profit  sharing  contributions  under the  PRISM  Plan in the
amounts of $7,880, $6,830, $7,880 and $5,419 for Messrs. Abraham, Cyron, McClain
and Ms. Hasbrouck,  respectively;  (iv) employee and spouse contributions in the
amounts  of  $14,999.64  and  $9,427.95,   respectively   under  the  Registered
Retirement  Savings Plan (the "RRSP") for Ms. Oliver; (v) payments in the amount
of $450,000 and $17,308 for severance and accrued vacation, respectively, to Mr.
Jezzi  pursuant to his  Employment  Contract;  and (vi) payment in the amount of
$7,385 for accrued vacation to Mr. Cole upon his resignation.

(6) Mr. Cole resigned effective as of December 8, 1999.

(7) Mr. Jezzi resigned effective as of April 15, 1999.

(8) Ms. Oliver is a Canadian citizen and is compensated in Canadian Dollars. The
components of Ms. Oliver's  compensation are reported in Canadian  dollars.  The
rate for  conversion  of  Canadian  dollars to United  States  dollars  for 1999
averaged US .67 per Canadian dollar.

(9) Ms. Hasbrouck has resigned effective as of March 15, 2000.
</FN>
</TABLE>

1999 OPTION GRANTS AND EXERCISES

There were no option  grants under any of the Company's  incentive  compensation
plans  in  1999.  SEE  "BOARD   COMPENSATION   COMMITTEE   REPORT  ON  EXECUTIVE
COMPENSATION: LONG-TERM INCENTIVES," BELOW.

                                    Page 71
<PAGE>

The following table provides information on the aggregated  option/SAR exercises
by named  executive  officers  in 1999  and the  value  of the  named  executive
officers'  unexercised  options/SARs  at  December  26,  1999.  Pursuant  to the
Company's  Plan  of  Reorganization,   all  outstanding  options  were  canceled
effective January 28, 2000. No new options have been granted.

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                                       AND
                          FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                               NUMBER OF SECURITIES
                                                               UNDERLYING UNEXERCISED               NUMBER OF SECURITIES
                                OPTION/SAR                            OPTIONS AT                   UNDERLYING UNEXERCISED
                                EXERCISES                          FISCAL YEAR-END(#)            SARS AT FISCAL YEAR END(#)
                                ---------                  ------------------------------      ------------------------------
                                SHARES
                               ACQUIRED
                                  ON          VALUE
            NAME               EXERCISE      REALIZED      EXERCISABLE      UNEXERCISABLE      EXERCISABLE      UNEXERCISABLE
            ----               --------      --------      -----------      -------------      -----------      -------------
<S>                                   <C>        <C>         <C>               <C>                <C>               <C>
Bobby V. Abraham...........           0          0           229,160           22,500                  0                0
David W. Cole..............           0          0           132,500                0                  0                0
Alan J. Cyron..............           0          0            38,750           11,250                  0                0
Arrigo D. Jezzi............           0          0                 0                0                  0                0
Robert E. McClain..........           0          0                 0                0             12,500            7,500
Christine I. Oliver........           0          0             3,340                0              3,000            2,000
Catherine O. Hasbrouck.....           0          0            12,500            7,500                  0                0
</TABLE>

<TABLE>
<CAPTION>
                                     VALUE OF UNEXERCISED
                                IN-THE -MONEY OPTIONS/SARS AT
                                    FISCAL YEAR-END($)(1)
                                    ---------------------


            NAME               EXERCISABLE      UNEXERCISABLE
            ----               -----------      -------------
<S>                                 <C>               <C>
Bobby V. Abraham...........         0                 0
David W. Cole..............         0                 0
Alan J. Cyron..............         0                 0
Arrigo D. Jezzi............         0                 0
Robert E. McClain..........         0                 0
Christine I. Oliver........         0                 0
Catherine O. Hasbrouck.....
                                    0                 0

---------------
<FN>
(1) The value of the  options/SARs  on December 26, 1999 is based on the average
of the high and low sales  price per share of the Common  Stock as quoted on the
NASDAQ Over-the-Counter Bulletin Board on December 23, 1999 ($.235). None of the
outstanding options or SARs were in the money at December 26, 1999.
</FN>
</TABLE>

                                    Page 72
<PAGE>

COMPENSATION OF DIRECTORS

FEES.  Directors  who are  employees  of the Company do not receive any fees for
their  services as  directors.  As of February 23, 2000,  directors  who are not
employees  of the Company are paid an annual  retainer of $20,000 for serving on
the Board of Directors.  Each nonemployee director receives an additional fee of
$1,250 per day for  attending  each meeting of the Board of Directors and $1,000
for  attending  each  meeting  of a  committee  of the  Board  of  Directors.  A
nonemployee  director  serving as a committee  chairman  receives an  additional
$2,500 per annum.

OPTIONS.  The  Company's  Stock  Option  Plan  for  Nonemployee  Directors  (the
"Director  Plan") was suspended by the previous Board during the pendancy of the
Company's Chapter 11 reorganization proceeding. As such, no options were granted
to directors  under the Director Plan in 1999. At the closing of the  Wellspring
Transaction,  the Plan  Implementation  Committee  of the Board of  Directors of
reorganized  Paragon  elected to terminate the Director  Plan.  The new Board of
Directors intends to qualify a stock option plan for nonemployee directors which
would  provide that  directors  who are not employees of the Company may receive
grants of options to purchase Common Stock under such a plan. It is contemplated
that  under  such  a  plan  each  nonemployee  director  would  be  eligible  to
automatically  receive an option to purchase 3,000 shares of Common Stock on the
first  business day following  his or her initial  election as a director of the
Company,  at an  exercise  price of $10.00 per share,  and  thereafter  would be
eligible to receive  annually,  on the first  business day following the date of
each annual meeting of stockholders of the Company,  an option to purchase 3,000
shares of Common Stock at its then fair market value.

EMPLOYMENT   CONTRACTS,   TERMINATION   OF   EMPLOYMENT   AND  CHANGE-IN-CONTROL
ARRANGEMENTS

CONFIRMATION  RETENTION  PLAN FOR TOP  EIGHT  EXECUTIVES.  In August  1998,  the
Company received  Bankruptcy  Court approval of its Confirmation  Retention Plan
for  Top  Eight  Executives  (the  "Confirmation  Retention  Plan"),  which  had
previously been adopted by the Compensation  Committee of the Company's Board of
Directors (the  "Committee").  The  Confirmation  Retention Plan was designed to
provide  additional  incentive for the Company's  eligible  executives to remain
with  the  Company   through  the   conclusion  of  the  Company's   Chapter  11
reorganization  proceeding and to ensure their continued  dedication and efforts
without undue concern for their personal  financial and  employment  security in
order to expedite the Company's  emergence from Chapter 11. In  particular,  the
Confirmation  Retention  Plan  includes a bonus that was payable to the eligible
executives  upon  emergence  from  Chapter  11 (the  "Confirmation  Bonus")  and
enhanced severance protection, as described below.

In  conjunction  with the  Confirmation  Retention  Plan,  each of the  eligible
executives of the Company,  including Mr. Abraham and certain of the other named
executive  officers,  entered into Employment  Agreements with the Company which
provide,  among other things,  that those executives are eligible to participate
in the Confirmation  Retention Plan. These Employment  Agreements  supersede any
prior employment agreement that any of those executives had with the Company.

Under the Confirmation  Retention Plan, the Company paid Confirmation Bonuses in
cash  totaling  an  aggregate   $2,160,000  to  the  eligible   executives  upon
consummation of its plan of reorganization.

The  Confirmation  Retention Plan also contains a severance  program pursuant to
which an eligible executive shall be entitled to receive severance benefits from
the Company equal to two times base salary,  plus a continuation of benefits for
two years, upon a Board Requested  Termination,  Resignation for Good Reason, or
upon a termination based on Permanent Disability or death (each such capitalized
term as defined in the  Confirmation  Retention  Plan).  In  general,  severance
benefits shall be paid in a lump sum on the last day of employment. No severance
benefits  shall  be  paid  upon  a  termination  for  Cause  or  upon  voluntary
termination of employment  for any reason other than very limited  circumstances
specified in the Confirmation  Retention Plan. Under the Confirmation  Retention
Plan, an executive may voluntarily  resign and still receive severance  benefits
if (i) the  Company  does  not  make an  offer  to the  executive  of  continued
employment  of at least  one  additional  year  during  the  tenth  month  after
confirmation  of a plan of  reorganization;  (ii) the Company  does make such an
offer,  but such offer  contains terms that would provide the executive with the
option to  Resign  for Good  Reason;  or (iii) the  executive  Resigns  for Good
Reason.  Should  the  Company  make  an  offer  to the  executive  of  continued
employment  of at least  one  additional  year  during  the  tenth  month  after
confirmation  of a plan,  which offer does not contain  terms that would


                                    Page 73
<PAGE>

provide  the  executive  with the  option to  Resign  for Good  Reason,  and the
executive  resigns anyway,  then the executive shall receive a lump sum equal to
only one times the executive's base salary upon  termination of employment.  The
remainder of the severance benefits shall be paid in 12 monthly installments and
shall be reduced in an amount equal to the salary  compensation  received by the
executive due to other employment, including fees from consulting services.

In addition to the above, the terms of the individual employment agreements with
the eligible executives also require that each executive  diligently perform all
acts and duties and furnish such services as are customary for the position that
such executive  holds.  Each of the eligible  executives must also comply with a
noncompete provision contained in their respective  employment  agreements which
runs  during the tenure of the  executive's  employment  and for a period of two
years thereafter.  Each of the eligible executives was also required, as part of
their  respective  employment  agreements,   to  enter  into  a  confidentiality
agreement with the Company.  A breach by the executive of his or her obligations
under either the  employment  agreement or the  confidentiality  agreement  will
result  in a  forfeiture  of  the  executive's  rights  under  their  employment
agreement  and  will  make  the  executive  ineligible  to  participate  in  the
Confirmation Retention Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the fiscal year ended  December 26, 1999,  members of the Committee  were
Adrian D.P.  Bellamy  (Chairman),  Thomas B. Boklund and Robert L. Schuyler.  No
executive  officers  or  employees  of the  Company  served on the  Compensation
Committee in 1999.  Members of the  Compensation  and Governance  Committee,  as
reconstituted   in  February  2000  following   consummation  of  the  Company's
reorganization proceedings, are David C. Mariano (Chairman) and Carl M. Stanton.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Committee,  as noted above, is composed  entirely of nonemployee  directors.
The Committee is responsible for  establishing and  administering  the Company's
executive compensation programs.

COMPENSATION POLICIES

The  Committee  establishes  compensation  according  to the  following  guiding
principles:

(a) Compensation  should  be directly  linked to  the  Company's  operating  and
financial performance.

(b) Total  compensation  should be  competitive  when  compared to  compensation
levels of  executives  of  companies  against  which the  Company  competes  for
management.

(c) Performance - related  pay  should  be  a  significant  component  of  total
compensation,  placing a substantial portion  of an executive's  compensation at
risk.

COMPENSATION PRACTICES

Compensation  for  executives  has  historically  included  base salary,  annual
bonuses and  long-term  incentive  awards,  including  stock  options,  SARs and
restricted  stock awards.  Consistent with the above  principles,  a substantial
proportion of executive  compensation has depended on Company performance and on
enhancing stockholder value.

BASE SALARY. The Company has historically used externally-developed compensation
surveys  to  assign  a  competitive  salary  range  to each  salaried  position,
including executive positions.  The companies included in the survey in the past
have been selected by the Company's outside compensation consultants and include
companies  engaged in nondurable  manufacturing  with annual revenues of between
$400 million and $1 billion.  The Committee is in the process of commissioning a
new salary survey for its use in evaluating executive  compensation levels going
forward.

                                    Page 74
<PAGE>

In the past,  the  Committee has set actual base salary levels for the Company's
executives  based on  recommendations  by management.  The Committee  intends to
continue this practice,  focusing primarily on the executive's performance,  the
executive's  position in the salary range,  the  executive's  experience and the
Company's salary budget.

ANNUAL BONUS. The Company employs a formal system for developing measures of and
evaluating  executive  performance.  Bonuses are  determined  with  reference to
quantitative  measures  established by the Committee each year. At the beginning
of each year, the Committee also approves  performance  targets  relating to the
quantitative  measures  that, if achieved,  will establish a bonus pool equal to
the sum of the individual target bonuses for all executives.  The Committee also
establishes  performance  targets that could result in a range of bonus  payouts
from a minimum of zero to a maximum bonus payout of 200 percent of target bonus.
At the end of the year,  Company  performance,  as compared to the  quantitative
measures  described  above,  determines the bonus pool for the executive  group.
Target  bonuses for  individual  executives are in the range of 25 percent to 60
percent of base  salary.  The  Committee  retains the  discretion  to adjust any
individual bonus if deemed appropriate.

In the event Company performance exceeds the performance targets established for
the maximum 200 percent bonus payout, the bonus pool is funded in excess of such
200 percent payout. Such excess bonus funding is retained by the Company and may
be paid out, at the  Committee's  discretion,  in any year in which  performance
targets  are not  achieved,  if the  Committee  determines  such event to be the
result of factors unrelated to management performance.

In 1999,  the  quantitative  measure  for bonus  payments  was  earnings  before
interest, taxes,  depreciation and amortization ("EBITDA").  There was no upward
limit on the maximum possible bonus payout. The Company's  performance in fiscal
1999  did  not  meet  the  minimum  quantitative   measures  and  the  Committee
accordingly did not award any bonuses.

As a result of the Chapter 11 filing,  and in  recognition  of the need to drive
the operating  performance of the Company and to incent employees to remain with
the Company  throughout the course of the Chapter 11  proceeding,  the Committee
altered the Company's existing incentive  compensation  plans. The revised plans
include (i) a retention  incentive for employees of the Company,  other than the
top eight executives,  following the Chapter 11 filing and (ii) the Confirmation
Retention  Plan  described  above.  These  revised  plans were  approved  by the
Bankruptcy  Court in August 1998. As a result of the Company's exit from Chapter
11 on January 28, 2000, all retention  bonuses  approved by the Bankruptcy Court
in August 1998 have been paid.

For 2000, the Committee has determined that the  quantitative  measure for bonus
payments will again be EBITDA.  The plan will provide  minimum and target payout
levels. There is no upward limit on the maximum payout level.

LONG-TERM  INCENTIVES.  Long-term  incentives  are  designed to link  management
reward with the long-term interests of the Company's stockholders. Through 1997,
the Committee  granted stock options,  stock  appreciation  rights  ("SARs") and
restricted  stock as long-term  incentives.  Individual  stock option awards and
SARs  were  based on level of  responsibility,  the  Company's  stock  ownership
objectives  for  management  and  upon  the  Company's  performance  versus  the
financial  performance  objectives  set each  year  for the  annual  bonus  plan
described above.

In 1998, the Committee determined, in connection with the Confirmation Retention
Plan described  above,  that in light of the  uncertainties  associated with the
Chapter 11 process,  the Company should discontinue future stock option, SAR and
restricted  stock awards until its  emergence  from Chapter 11 and, as such,  no
options,  SARs or restricted stock awards were granted to employees for 1999. As
part of the Company's exit from Chapter 11 on January 28, 2000, all  outstanding
stock options have been  canceled.  As a further part of the  Company's  Plan of
Reorganization,  a new stock  option  plan for  executives  was  approved by the
Bankruptcy  Court.  While  the  Committee   anticipates  granting  options  upon
completion of the salary  survey  described  above,  no options have been issued
under this plan to date.

                                    Page 75
<PAGE>

Section  162(m) of the Internal  Revenue Code of 1986,  as amended (the "Code"),
limits the Company's ability to deduct compensation in excess of $1 million paid
during a tax year to the Chief Executive Officer and the four other highest paid
executive officers of the Company. Certain performance-based compensation is not
subject to such deduction limit. The Company intends,  at the appropriate  time,
to qualify stock option and SAR awards for the "performance-based"  exception to
the $1 million  limitation  on  deductibility  and  otherwise  to  maximize  the
deductibility of executive compensation while retaining the discretion necessary
to compensate  executive officers in a manner  commensurate with performance and
the competitive market of executive talent.

CHIEF EXECUTIVE OFFICER COMPENSATION

Mr.  Abraham  has served as the  Company's  Chief  Executive  Officer  since its
initial public offering in February 1993. Prior to such time, Mr. Abraham was in
charge of the Company's operations as a division of Weyerhaeuser.  Mr. Abraham's
base salary was realigned in 1996 from prior year levels to $500,000.

Given the Company's  operating  performance in 1999, Mr. Abraham did not receive
an annual incentive bonus. Mr. Abraham did participate in the Confirmation Bonus
payable under the Confirmation Retention Plan described above, receiving a bonus
of  $1,061,690  on January 28,  2000.  This bonus will be reported as income for
2000. SEE "--CONFIRMATION RETENTION PLAN FOR TOP EIGHT EXECUTIVES."

As discussed above, the Committee discontinued the use of annual grants of stock
options,  SARs and restricted  stock as incentive  compensation  for Mr. Abraham
while the  Company  was subject to Chapter 11  protection.  In the past,  annual
stock option grants were  determined  by reference to the external  compensation
survey data discussed  above,  as well as the Company's  performance  versus the
financial  performance  objectives  set each  year  for the  annual  bonus  plan
described  above.  It is  anticipated  that future  stock  option  grants to Mr.
Abraham will be based on similar indicators.

COMPENSATION COMMITTEE


David C. Mariano, Chairman
Carl M. Stanton




                                    Page 76
<PAGE>


STOCK PRICE PERFORMANCE GRAPH

Set forth below is a line graph  comparing  the  cumulative  total return on the
Common  Stock  during the period  beginning  on December  25, 1994 and ending on
December  26, 1999,  the last day of the  Company's  1999 fiscal year,  with the
cumulative  total  return on the  Standard & Poor's  500 Index and the  combined
Value  Line  Household  Products  and  Toiletries/Cosmetics   Indices  (weighted
equally).  The comparison  assumes $100 was invested on December 25, 1994 in the
Common  Stock,  the  Standard  & Poor's  500 Index and the  combined  Value Line
Household Products and Toiletries/Cosmetics  Indices and assumes reinvestment of
dividends.  The stock price  performance  shown on the graph is not  necessarily
indicative of future price performance.

[GRAPHIC OBJECT OMITTED]

                                                PERFORMANCE GRAPH DATA POINTS

<TABLE>
<CAPTION>
                                                                   CUMULATIVE TOTAL RETURN AS OF:
                                                                   ------------------------------
NAME                                      25-DEC-94      31-DEC-95     29-DEC-96     28-DEC-97     27-DEC-98      26-DEC-99
----                                      ---------      ---------     ---------     ---------     ---------      ---------
<S>                                         <C>           <C>           <C>           <C>            <C>           <C>
PARAGON TRADE BRANDS, INC.                  100.00        176.42        226.42         97.17          16.04          1.74
Combined Value Line                         100.00        136.49        183.18        252.71         285.65        319.70
  Household Products and
  Toiletries/Cosmetics Indices
Standard & Poor's 500                       100.00        137.58        169.17        225.61         290.09        351.13

------------------
<FN>
(1) Tambrands,  Inc.  ("Tambrands")  was a  member of the  Combined  Value  Line
Household Products and Toiletries/Cosmetics Indices ("Peer Group") for the years
1994-1996.  Tambrands  was acquired by P&G during 1997 and total return data for
1997 is not  available.  Tambrands  was  removed  from the Value Line  Household
Products and Toiletries/Cosmetics Indices as of 1997.
</FN>
</TABLE>

                                    Page 77
<PAGE>

(2) First  Brands  Corp. ("First  Brands"), General  Housewares  Corp  ("General
Housewares") and Rubbermaid,  Incorporated  ("Rubbermaid")  were each members of
the Combined  Value Line  Household  Products and  Toiletries/Cosmetics  Indices
("Peer Group") for the years 1994 through 1998. First Brands, General Housewares
and Rubbermaid were acquired by or merged with The Clorox Co., CCPC  Acquisition
Corp. and Newell Co.,  respectively,  during 1999 and total return data for 1999
is not available.  First Brands,  General Housewares and Rubbermaid were removed
from the Value Line Household  Products and  Toiletries/Cosmetics  Indices as of
1999.


ITEM 12:      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth the beneficial  ownership of the common stock as
of February 29,  2000,  by (a) each  stockholder  known by the Company to be the
beneficial  owner of more than 5 percent of the common stock,  (b) the Company's
directors,  (c) the Company's named executive  officers,  as defined herein, and
(d) all the Company's directors and executive officers,  as a group. Each of the
named persons and members of the group has sole voting and investment power with
respect to the shares shown, except as otherwise stated.

<TABLE>
<CAPTION>
                                                                                BENEFICIAL OWNERSHIP
                                                                                --------------------
                                                              AMOUNT AND NATURE OF                     PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER                          BENEFICIAL OWNERSHIP                    OUTSTANDING
------------------------------------                          --------------------                    -----------
<S>                                                                <C>                                   <C>
PTB Acquisition Company, LLC
Wellspring Capital Partners II, LP and
Wellspring Capital Management LLC..................                11,516,405 (1)                        96.85%
620 Fifth Avenue, Suite 216
New York, NY  10020-1579

Co-Investment Partners, L.P........................                 2,401,953 (1)                        20.2%
660 Madison Avenue
New York, NY  10021

Ontario Teachers' Pension Plan Board...............                 2,401,953 (1)                        20.2%
5650 Yonge Street
North York, Ontario M2M 4H5, Canada

Bobby V. Abraham...................................                     3,568 (2)                          *
David W. Cole......................................                     1,123 (3)                          *
Greg S. Feldman....................................                         0                              0
David C. Mariano...................................                         0                              0
James R. McManus...................................                         0                              0
Thomas F. Ryan, Jr.................................                         0                              0
J. Dale Sherratt...................................                         0                              0
Carl M. Stanton....................................                         0                              0
Thomas J. Volpe....................................                         0                              0
Alan J. Cyron......................................                     1,556 (4)                          *
Arrigo D. Jezzi....................................                       101 (5)                          *
Robert E. McClain..................................                         1 (6)                          *
Christine I. Oliver................................                         6 (7)                          *
Catherine O. Hasbrouck.............................                        17 (8)                          *
All directors and executive officers as a group
(19 persons) ......................................                     7,046 (9)                          *

                                    Page 78
<PAGE>

------------------
<FN>
* Represents holdings of less than 1%.

(1) PTB Acquisition Company, LLC (of which Wellspring Capital Partners II, LP is
the  sole  member),   an  affiliate  of  Wellspring   Capital   Management  LLC,
(collectively,  "Wellspring"),  agreed to acquire  substantially  all of the new
common stock of the Company as part of the Company's plan of reorganization (the
"Wellspring Transaction").

    Prior to the consummation of the Wellspring Transaction, Wellspring assigned
assigned (i) its right to purchase  approximately  20.2% of the new common stock
of the Company to Co-Investment  Partners,  L.P. ("CIP"),  and (ii) its right to
purchase approximately a further 20.2% of the new common stock of the Company to
Ontario  Teachers'  Pension Plan Board  ("Ontario").  Pursuant to the Wellspring
Transaction,   Wellspring,   CIP  and  Ontario  purchased,   in  the  aggregate,
approximately  96.8% of the new common  stock  (the  "Investor  Shares")  issued
pursuant to the Plan on January  28,  2000 for a purchase  price equal to $10.00
per share of new common stock, or approximately $115 million, in cash.

    After giving effect to the assignment by Wellspring  of its rights under the
Stock Purchase Agreement as described above,  Wellspring invested  approximately
$67 million,  which funds were provided by Wellspring  Capital Partners II, L.P.
from  funds  contributed  by  its  limited  and  general  partners,  to  acquire
approximately  56.5% of the new common  stock,  CIP invested  approximately  $24
million,  which funds were  provided by its  limited  and general  partners,  to
acquire  approximately  20.2%  of the new  common  stock  and  Ontario  invested
approximately  $24  million,  which  funds came from the  pension  fund which it
manages, to acquire approximately 20.2% of the new common stock.

    Pursuant  to  proxies  given  on  January  28,  2000  by  CIP  and  Ontario,
Wellspring  has sole voting power to vote all of the Investor  Shares and shared
dispositive  power  with  respect  to  all of the  Investor  Shares.  Therefore,
Wellspring may be deemed to beneficially own these shares of new common stock.

(2)  Includes  Warrants to purchase  2,778  shares of common stock at $18.91 per
share, exercisable immediately and expiring January 28, 2010.

(3)  Includes  Warrants  to  purchase  874 shares of common  stock at $18.91 per
share, exercisable immediately and expiring January 28, 2010.

(4)  Includes  Warrants to purchase  2,778  shares of common stock at $18.91 per
share, exercisable immediately and expiring January 28, 2010.

(5)  Mr.  Jezzi  resigned  effective  April  1,  1999.  Mr. Jezzi's  Section  16
reporting  obligation  terminated  shortly  following his  resignation  from the
Company.  Information  reported is based on Mr.  Jezzi's final Form 4 filed with
the SEC for April 1999 and the  assumption  that such shares of old common stock
were  exchanged  for shares of new common  stock and  Warrants  pursuant  to the
Company's Plan of Reorganization.  Includes 79 Warrants to purchase 2,778 shares
of common  stock at $18.91  per  share,  exercisable  immediately  and  expiring
January 28, 2010.

(6)  Includes  Warrants to purchase 1 share of common stock at $18.91 per share,
exercisable immediately and expiring January 28, 2010.

(7) Includes  Warrants to purchase 5 shares of common stock at $18.91 per share,
exercisable immediately and expiring January 28, 2010.

(8) Ms. Hasbrouck has resigned  effective March 15, 2000.  Includes  Warrants to
purchase 13 shares of common stock at $18.91 per share,  exercisable immediately
and expiring January 28, 2010.

(9) Includes  Warrants to purchase  5,487  shares  of common stock at $18.91 per
share, exercisable immediately and expiring January 28, 2010.
</FN>
</TABLE>

                                    Page 79
<PAGE>

ITEM 13:      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.


                                     PART IV

ITEM 14:      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

         Report of Independent Public Accountants

         Consolidated Statements of Operations for the three years in
         the period ended December 26, 1999

         Consolidated Balance Sheets as of December 26, 1999 and
         December 27, 1998

         Consolidated Statements of Cash Flows for the three years in
         the period ended December 26, 1999

         Consolidated Statements of Comprehensive Loss for the three years in
         the period ended December 26, 1999

         Consolidated  Statements  of Changes in  Shareholders'  Deficit for the
         three years in the period ended December 26, 1999

         Notes to Financial Statements

         Financial Statement Schedule:
         Schedule II:  Valuation and Qualifying Accounts

(b)      Report on Form 8-K  dated  November 19, 1999  regarding the  Bankruptcy
Court approval of the Company's Disclosure Statement.

(c)      EXHIBITS
<TABLE>
<CAPTION>
         EXHIBIT                 DESCRIPTION
         -------                 -----------
         <S>                     <C>
         Exhibit 3.1             Amended and Restated Certificate of Incorporation of Paragon Trade Brands, Inc.

         Exhibit 3.2             Amended and Restated By-Laws of Paragon Trade Brands, Inc., as amended through January 28,
                                 2000

         Exhibit 4.1             Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit 3.1)

         Exhibit 10.1            Asset Transfer Agreement, dated as of January 26, 1993, by and between Weyerhaeuser and
                                 Paragon(1)

         Exhibit 10.2            Intellectual Property Agreement, dated as of February 2, 1993, between
                                 Weyerhaeuser and Paragon(1)

         Exhibit 10.3            License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)

                                    Page 80
<PAGE>

         Exhibit 10.4            Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)

         Exhibit 10.5            Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson
                                 and Johnson, as amended(1)

         Exhibit 10.6            Letter Supply Agreement between Weyerhaeuser and Paragon dated as of  October 22, 1997(2)

         Exhibit 10.7*           Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham(3)

         Exhibit 10.8*           Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole(3)

         Exhibit 10.9*           Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron(3)

         Exhibit 10.10*          Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick)
                                 Jezzi(3)

         Exhibit 10.11*          Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain(3)

         Exhibit 10.12*          Employment Agreement, dated as of August 11, 1998, between Paragon and Catherine O.
                                 Hasbrouck(3)

         Exhibit 10.13*          Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins(3)

         Exhibit 10.14*          Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary
                                 Plan Description(3)

         Exhibit 10.15*          Paragon Trade Brands, Inc. Stock Option Plan

         Exhibit 10.16           Credit Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. as Borrower
                                 and The Lenders and Issuers Party Hereto and Citicorp USA, Inc. as Administrative Agent and
                                 Salomon Smith Barney as Arranger

         Exhibit 10.16.1         Pledge and Security Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc.
                                 and Each Other Grantor from Time to Time Party Hereto and Citicorp USA, Inc. as
                                 Administrative Agent

         Exhibit 10.17           Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V.
                                 Abraham and Gary M. Arnts(1)

         Exhibit 10.18           Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands, Inc.,
                                 PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(4)

         Exhibit 10.19**         Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
                                 Paragon Trade Brands, Inc.(5)

         Exhibit 10.20**         Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade
                                 Brands, Inc.(6)

                                    Page 81
<PAGE>

         Exhibit 10.21           Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
                                 dated as of October 1, 1996(7)

         Exhibit 10.22           Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and
                                 The Procter & Gamble Company(8)

         Exhibit 10.23           U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
                                 and Paragon Trade Brands, Inc. (8)

         Exhibit 10.24           Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
                                 Company and Paragon Trade Brands, Inc. (8)

         Exhibit 10.25           U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
                                 and Paragon Trade Brands, Inc. (8)

         Exhibit 10.26           Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
                                 Company and Paragon Trade Brands, Inc. (8)

         Exhibit 10.27           Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and
                                 Paragon Trade Brands, Inc. (8)

         Exhibit 10.28           License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
                                 as of March 15, 1999(8)

         Exhibit 10.29           License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
                                 as of March 15, 1999(8)

         Exhibit 10.30           Modified Second Amended Plan of Reorganization(9)

         Exhibit 10.31           Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade
                                 Brands, Inc., dated as of November 16, 1999(10)

         Exhibit 10.32           Shareholders' Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, LLC,
                                 Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other
                                 Shareholders, dated as of January 28, 2000

         Exhibit 10.33           Registration Rights Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company,
                                 Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other
                                 Shareholders, dated as of January 28, 2000

         Exhibit 10.34           Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January
                                 28, 2000(11)

         Exhibit 10.35           First Supplemental Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005,
                                 dated as of January 28, 2000(11)

         Exhibit 11              Computation of Per Share Earnings (See Note 18 to Financial Statements)

         Exhibit 21.1            Subsidiaries of the Company(8)

         Exhibit 23.1            Consent of Independent Public Accountants

         Exhibit 27              Financial Data Schedule (for SEC use only)


                                    Page 82
<PAGE>

------------------
<FN>
*Management  contract  or  compensatory  plan  or  arrangement.   **Confidential
treatment has been requested as to a portion of this document.

(1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 26, 1993.

(2) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 28, 1997.

(3) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 27, 1998.

(4) Incorporated by reference  from Paragon Trade Brands,  Inc.'s Current Report
on Form 8-K, dated as of February 8, 1996.

(5) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.

(6) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 28, 1998.

(7) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 29, 1996.

(8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 27, 1998.

(9)  Incorporated by reference from Paragon Trade Brands,  Inc.'s current report
on Form 8-K dated January 13, 2000.

(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Application for
Qualification  of Indenture  Under the Trust  Indenture Act of 1939 on Form T-3,
filed with the Commission on January 26, 2000.

(11) Incorporated by reference from Paragon Trade Brands,  Inc.'s current report
on Form 8-K dated January 28, 2000.
</FN>
</TABLE>




                                    Page 83
<PAGE>


                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) 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 on this 27th day of March,
2000.

                                              PARAGON TRADE BRANDS, INC.


                                              By:        /S/  BOBBY V. ABRAHAM
                                                         -----------------------
                                                         Bobby V. Abraham
                                                         Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on this 27th day of March, 2000.


/S/  BOBBY V. ABRAHAM                                 /S/  DAVID W. COLE
------------------------------------                  ------------------
Bobby V. Abraham                                      David W. Cole
Chief Executive Officer                               Director

/S/  ALAN J. CYRON                                    /S/  GREG S. FELDMAN
--------------------------------------------          --------------------
Alan J. Cyron                                         Greg S. Feldman
Executive Vice President and Chief                    Director
  Financial Officer (Principal Financial Officer)
                                                      /S/  DAVID C. MARIANO
                                                      ---------------------
/S/  GARY M. ARNTS                                    David C. Mariano
--------------------------------------------          Director
Gary M. Arnts
Vice President and Controller                         /S/  JAMES R. MCMANUS
  (Principal Accounting Officer)                      ---------------------
                                                      James R. McManus
                                                      Director

                                                      /S/  THOMAS F. RYAN, JR.
                                                      ------------------------
                                                      Thomas F. Ryan, Jr.
                                                      Director

                                                      /S/  J. DALE SHERRATT
                                                      ---------------------
                                                      J. Dale Sherratt
                                                      Director

                                                      /S/  CARL M. STANTON
                                                      --------------------
                                                      Carl M. Stanton
                                                      Director

                                                      /S/  THOMAS J. VOLPE
                                                      --------------------
                                                      Thomas J. Volpe
                                                      Director



                                    Page 84
<PAGE>



                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
         EXHIBIT                 DESCRIPTION
         -------                 -----------
         <S>                     <C>
         Exhibit 3.1             Amended and Restated Certificate of Incorporation of Paragon Trade Brands, Inc.

         Exhibit 3.2             Amended and Restated By-Laws of Paragon Trade Brands, Inc., as amended through January 28,
                                 2000

         Exhibit 4.1             Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit 3.1)

         Exhibit 10.1            Asset Transfer Agreement, dated as of January 26, 1993, by and between Weyerhaeuser and
                                 Paragon(1)

         Exhibit 10.2            Intellectual Property Agreement, dated as of February 2, 1993, between
                                 Weyerhaeuser and Paragon(1)

         Exhibit 10.3            License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)

         Exhibit 10.4            Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)

         Exhibit 10.5            Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser and Johnson
                                 and Johnson, as amended(1)

         Exhibit 10.6            Letter Supply Agreement between Weyerhaeuser and Paragon dated as of  October 22, 1997(2)

         Exhibit 10.7*           Employment Agreement, dated as of August 11, 1998, between Paragon and Bobby V. Abraham(3)

         Exhibit 10.8*           Employment Agreement, dated as of August 11, 1998, between Paragon and David W. Cole(3)

         Exhibit 10.9*           Employment Agreement, dated as of August 11, 1998, between Paragon and Alan J. Cyron(3)

         Exhibit 10.10*          Employment Agreement, dated as of August 11, 1998, between Paragon and Arrigo D. (Rick)
                                 Jezzi(3)

         Exhibit 10.11*          Employment agreement, dated as of August 11, 1998, between Paragon and Robert E. McClain(3)

         Exhibit 10.12*          Employment Agreement, dated as of August 11, 1998, between Paragon and Catherine O.
                                 Hasbrouck(3)

         Exhibit 10.13*          Employment Agreement, dated as of August 11, 1998, between Paragon and Kevin P. Higgins(3)

         Exhibit 10.14*          Paragon Trade Brands, Inc. Confirmation Retention Plan for Top Eight Executives and Summary
                                 Plan Description(3)

         Exhibit 10.15*          Paragon Trade Brands, Inc. Stock Option Plan


                                    Page 85
<PAGE>

         Exhibit 10.16           Credit Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc. as Borrower
                                 and The Lenders and Issuers Party Hereto and Citicorp USA, Inc. as Administrative Agent and
                                 Salomon Smith Barney as Arranger

         Exhibit 10.16.1         Pledge and Security Agreement dated as of January 28, 2000 Among Paragon Trade Brands, Inc.
                                 and Each Other Grantor from Time to Time Party Hereto and Citicorp USA, Inc. as
                                 Administrative Agent

         Exhibit 10.17           Indemnification Agreements, dated as of February 2, 1993, between Weyerhaeuser and Bobby V.
                                 Abraham and Gary M. Arnts(1)

         Exhibit 10.18           Asset Purchase Agreement dated December 11, 1995 by and among Paragon Trade Brands, Inc.,
                                 PTB Acquisition Sub, Inc., Pope & Talbot, Inc. and Pope & Talbot, Wis., Inc.(4)

         Exhibit 10.19**         Sales Contract, dated as of January 30, 1996, between Hoechst Celanese Corporation and
                                 Paragon Trade Brands, Inc.(5)

         Exhibit 10.20**         Sales Contract, dated as of April 30, 1998, between Clariant Corporation and Paragon Trade
                                 Brands, Inc.(6)

         Exhibit 10.21           Lease Agreement between Cherokee County, South Carolina and Paragon Trade Brands, Inc.,
                                 dated as of October 1, 1996(7)

         Exhibit 10.22           Settlement Agreement, dated as of February 2, 1999 between Paragon Trade Brands, Inc. and
                                 The Procter & Gamble Company(8)

         Exhibit 10.23           U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
                                 and Paragon Trade Brands, Inc. (8)

         Exhibit 10.24           Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
                                 Company and Paragon Trade Brands, Inc. (8)

         Exhibit 10.25           U.S. License Agreement, dated as of February 2, 1999 between The Procter & Gamble Company
                                 and Paragon Trade Brands, Inc. (8)

         Exhibit 10.26           Canadian License Agreement, dated as of February 2, 1999 between The Procter & Gamble
                                 Company and Paragon Trade Brands, Inc. (8)

         Exhibit 10.27           Settlement Agreement, dated as of March 19, 1999 between Kimberly-Clark Corporation and
                                 Paragon Trade Brands, Inc. (8)

         Exhibit 10.28           License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
                                 as of March 15, 1999(8)

         Exhibit 10.29           License Agreement Between Kimberly-Clark Corporation and Paragon Trade Brands, Inc., dated
                                 as of March 15, 1999(8)

         Exhibit 10.30           Modified Second Amended Plan of Reorganization(9)

         Exhibit 10.31           Stock Purchase Agreement by and Between PTB Acquisition Company LLC and Paragon Trade
                                 Brands, Inc., dated as of November 16, 1999(10)


                                    Page 86
<PAGE>


         Exhibit 10.32           Shareholders' Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company, LLC,
                                 Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other
                                 Shareholders, dated as of January 28, 2000

         Exhibit 10.33           Registration Rights Agreement Among Paragon Trade Brands, Inc., PTB Acquisition Company,
                                 Co-Investment Partners, L.P., Ontario Teachers Pension Plan Board and Certain Other
                                 Shareholders, dated as of January 28, 2000

         Exhibit 10.34           Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005, dated as of January
                                 28, 2000(11)

         Exhibit 10.35           First Supplemental Indenture for $182,000,000 11.25% Senior Subordinated Notes due 2005,
                                 dated as of January 28, 2000(11)

         Exhibit 11              Computation of Per Share Earnings (See Note 18 to Financial Statements)

         Exhibit 21.1            Subsidiaries of the Company(8)

         Exhibit 23.1            Consent of Independent Public Accountants

         Exhibit 27              Financial Data Schedule (for SEC use only)

------------------
<FN>
*Management  contract  or  compensatory  plan  or  arrangement.
**Confidential treatment has been requested as to a portion of this document.

(1) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 26, 1993.

(2) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 28, 1997.

(3) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 27, 1998.

(4)  Incorporated by reference from Paragon Trade Brands,  Inc.'s Current Report
on Form 8-K, dated as of February 8, 1996.

(5) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.

(6) Incorporated by reference from Paragon Trade Brands, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 28, 1998.

(7) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 29, 1996.

(8) Incorporated by reference from Paragon Trade Brands, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 27, 1998.

(9)  Incorporated by reference from Paragon Trade Brands,  Inc.'s current report
on Form 8-K dated January 13, 2000.

(10) Incorporated by reference from Paragon Trade Brands, Inc.'s Application for
Qualification  of Indenture  Under the Trust  Indenture Act of 1939 on Form T-3,
filed with the Commission on January 26, 2000.

                                    Page 87
<PAGE>

(11) Incorporated by reference from Paragon Trade Brands,  Inc.'s current report
on Form 8-K dated January 28, 2000.
</FN>
</TABLE>


                                    Page 88