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 28, 1997

                                       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: (770) 300-4000

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

         TITLE OF EACH CLASS           NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.01 per share           New York Stock Exchange
   Series A participating Cumulative             New York Stock Exchange
    Preferred Stock Purchase Rights

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

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 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. [ ]

As of February 27, 1998, there were 11,921,956 shares of the Registrant's Common
Stock  outstanding,  and  the  aggregate  market  value  of such  stock  held by
nonaffiliates  of the Registrant was $60,354,902  (based on the closing price on
the New York Stock Exchange).

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's  Proxy Statement  relating to the Annual Meeting of
Stockholders  to be held May 11, 1998, are  incorporated  by reference into Part
III of this report.

                                                        Exhibit Index on Page 51
<PAGE>


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


                                   PART I 
                                                                           PAGE

Item 1:    BUSINESS                                                          1

Item 2:    PROPERTIES                                                        7

           EXECUTIVE OFFICERS                                                8

Item 3:    LEGAL PROCEEDINGS                                                 9

Item 4:    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               10

                                     PART II

Item 5:    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
           STOCKHOLDER MATTERS                                               10

Item 6:    SELECTED FINANCIAL DATA                                           11

Item 7:    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS                                             12

Item 8:    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                       22

Item 9:    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE                                              46

                                    PART III

Item 10:   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                46

Item 11:   EXECUTIVE COMPENSATION                                            46

Item 12:   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT    46

Item 13:   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                    47

                                     PART IV

Item 14:   EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K    47


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<PAGE>
                                          
                                     PART I

ITEM 1:    BUSINESS

GENERAL

Paragon Trade Brands, Inc., (the "Company") is the leading manufacturer of store
brand  infant  disposable  diapers in the  United  States  and  Canada.  Paragon
manufactures a line of premium and economy  diapers,  training  pants,  feminine
care and adult  incontinence  products,  household  cleaners  and air  freshener
products  which  are  distributed  throughout  the  United  States  and  Canada,
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. 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.

On February 9, 1996, the Company  completed the purchase of substantially all of
the assets of Pope & Talbot,  Inc.'s  disposable  diaper business.  The purchase
price of $63.5 million was paid in a combination of cash and stock.  The Company
closed all the acquired disposable diaper operations in 1996. A major portion of
the  manufacturing  equipment has been sold. The remaining  equipment and plants
are being held for sale.  In 1996 the Company  took a charge of $8.1 million for
the costs of integration  and  write-downs of duplicate  equipment  owned by the
Company prior to the purchase transaction.

REORGANIZATION CASE

The Company has previously  disclosed that The Procter & Gamble Company  ("P&G")
had  filed a claim  against  it in the  United  States  District  Court  for the
District of Delaware, alleging that the Company's "Ultra" disposable baby diaper
products  infringe two of P&G's  inner-leg  gather  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 has also disclosed that if P&G were to prevail on its claims,  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  District  Court issued a Judgment and Opinion  which
found, in essence,  two of P&G's diaper patents to be valid and infringed by 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 entitles P&G
to damages  based on sales of the  Company's  diapers  containing  the inner-leg
gather feature.  While the final damages number has not been  adjudicated by the
District Court,  the Company  estimates 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.

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, thereby protecting all
stakeholders'  interests.  The  Company is  currently  operating  as a debtor in
possession under the Bankruptcy Code.

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,  the subsidiaries of the
Company,  as  guarantors,  and a bank  group  led by The  Chase  Manhattan  Bank
("Chase").  Pursuant  to the terms   


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<PAGE>

of  the  DIP  Credit  Facility,  Chase  has  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
may not exceed the lesser of $75 million or an available amount as determined by
a borrowing base  formulation.  The borrowing  base  formulation 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  has a sublimit of $10  million for the  issuance of letters of
credit.  The DIP Credit Facility  expires on the earlier of July 7, 1999, or the
date  of  entry  of an  order  by the  Bankruptcy  Court  confirming  a plan  of
reorganization.

The United States Trustee for the Northern  District of Georgia has appointed an
Official  Committee of Unsecured  Creditors (the  "Committee") for the Company's
Chapter 11 filing. The role of the Committee  includes,  among other things: (i)
consultation  with the Company  concerning the  administration of the Chapter 11
case, and (ii) participation in the formulation of a plan of reorganization.  In
discharging these  responsibilities,  the Committee has standing to raise issues
with the  Bankruptcy  Court  relating  to the  business  of the  Company and the
conduct  and course of the  Chapter 11 case.  The  Company  is  required  to pay
certain expenses of the Committee,  including  professional  fees, to the extent
allowed by the Bankruptcy Court.

As a result of the Chapter 11 filing,  the Company is prohibited from paying any
pre-petition  liabilities  without  Bankruptcy  Court  approval.  The Chapter 11
filing resulted in a default under its  pre-petition  revolving credit facility.
Pursuant to the Bankruptcy  Code, the Company can seek Bankruptcy Court approval
for the rejection of executory  contracts or unexpired  leases,  including  real
property  leases.  Any such rejection may give rise to a pre-petition  unsecured
claim for damages arising therefrom.

Substantially  all  liabilities  outstanding  as of the date of the  Chapter  11
filing are subject to resolution under a plan of reorganization to be voted upon
by the Company's  creditors  and  shareholders  and confirmed by the  Bankruptcy
Court.  Schedules were filed by the Company on March 3, 1998 with the Bankruptcy
Court setting forth the assets and  liabilities of the Company as of the date of
the  Chapter  11  filing,  as shown by the  Company's  accounting  records.  The
Bankruptcy  Court will set a date by which  creditors must file proofs of claims
which arose prior to the Chapter 11 filing.

The ability of the Company to effect a successful reorganization will depend, in
significant   part,   upon  the  Company's   ability  to  formulate  a  plan  of
reorganization  that is approved by the Bankruptcy Court and meets the standards
for plan confirmation  under the Bankruptcy Code. In a Chapter 11 reorganization
plan,  the rights of the Company's  creditors and  shareholders  may be altered.
Investment  in stock of the  Company,  therefore,  should be  regarded as highly
speculative.

The Company is unable to predict at this time when it will  emerge from  Chapter
11  protection.  See "Notes 1, 11 and 13 of Notes to Financial  Statements"  and
"ITEM 3: LEGAL PROCEEDINGS" herein.

PRODUCTS

The Company manufactures  several diaper product lines: a premium-quality  Ultra
line,  an  economy  line  ("Economy")  and a  Supreme  line.  The  Company  also
manufactures  a line  of  training  pants.  Ultra  diaper  sales  accounted  for
approximately 81 percent,  78 percent and 76 percent of the Company's total unit
sales in 1997,  1996 and 1995,  respectively.  Economy diaper units  represented
approximately 9 percent, 12 percent,  and 17 percent of the Company's total unit
sales in fiscal years 1997,  1996 and 1995,  respectively.  The Supreme  product
represented  approximately 5 percent, 4 percent,  and 2 percent of the Company's
total unit sales in fiscal  years 1997,  1996 and 1995,  respectively.  Training
pant sales represented approximately 4 percent of the Company's total unit sales
over the same periods.

The Company's  Ultra diaper  combines  fluff pulp with  super-absorbent  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 the  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.  Additionally,  the  Company
continued its agreement with Jim Henson Productions, Inc., pursuant to which the
Company  reproduces the Muppet Babies(R)


                                       2
<PAGE>

cartoon characters on the "tape landing zone" of its Ultra diapers. In late 1996
and 1997, the Company  introduced an improved Ultra diaper which  incorporates a
cloth-like backsheet and breathable side panels.

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  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.

The  Company's  Supreme  diaper  product has a thin pad, a hook and loop closure
system and a soft, cloth-like nonwoven outer cover in response to the Huggies(R)
Supremes product introduced by Kimberly-Clark Corporation ("K-C").

In 1996, the Company began  manufacturing  a line of feminine care products that
includes 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.

PRODUCT DEVELOPMENT

To enhance  the  Company's  objective  of  providing  its trade  customers  with
premium-quality  store  brand  disposable  diapers 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 disposable diaper
market,  other  than the  national  branded  manufacturers.  The  Company  spent
approximately  $5.1  million,  $4.2  million and $3.6  million on  research  and
development in fiscal years 1997, 1996 and 1995, 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 enforce  vigorously their patent rights. See "ITEM
3: LEGAL  PROCEEDINGS".  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  incontinence  product features and
manufacturing processes.

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,   represented   an  aggregate  of
approximately 15 percent, 13 percent and 11 percent of total net sales in fiscal
years  1997,  1996  and  1995,  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,  9 percent and 6 percent of net sales were to trade customers in Canada
in fiscal years 1997, 1996 and 1995, 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")  for  $15.3  million  in cash plus
additional  consideration  based on Mabesa's  future  financial  results through
2001.  In 1997,  based on Mabesa's  1996  financial  results,  the Company  paid
additional  consideration of $3.4 million.  The Company also acquired the option
to  purchase an  additional  34 percent  interest  in Mabesa at a  contractually
determined price.



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<PAGE>


In  addition,  PTBI  acquired a 49 percent  interest for $1.6 million in cash in
Paragon-Mabesa  International  ("PMI"), a joint venture that has developed a new
manufacturing  facility in Tijuana,  Mexico.  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 basically all of PMI's production for sale to U.S. retail 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
will be used to establish additional Latin American joint ventures.

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 earn-out  payments based on Serenity's  future financial  results over
the next three years. 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  and has an  approximate  market
share of 13 percent. PTBI advanced $5.7 million to Stronger,  its pro-rata share
of the  purchase  price,  and has  guaranteed  the earn-out  payments  which are
estimated not to exceed an aggregate of $3.3 million through 2000.

On November 10, 1997,  Stronger  acquired 100 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.

Paragon recently  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 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 and the Company
anticipates  that production and  distribution  will begin in the second half of
1998.

RAW MATERIALS

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

The primary raw material used in the production of disposable diapers is SAP. In
early 1996, the Company  entered into an agreement  with Clariant  International
Ltd. (successor of Hoechst Celanese  Corporation) whereby it agreed,  subject to
certain limitations,  to purchase 100 percent of its requirements of SAP through
December  31, 1998.  Fluff pulp,  a product  made from wood  fibers,  is another
primary raw material.  The Company  extended the fluff pulp supply contract with
Weyerhaeuser Company  ("Weyerhaeuser") whereby it agreed to purchase 100 percent
of its requirements of bleached  chemical fluff pulp through August 31, 1998, at
prices  as  favorable  as  those  Weyerhaeuser   charges  other  North  American
disposable  diaper  manufacturers  for similar grade pulp. The Company  believes
that alternative sources for each of these raw materials are readily available.

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 may be adversely affected by increases in these raw
material prices.




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<PAGE>

COMPETITION-Disposable Diapers

National Branded Manufacturers

The principal bases 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 1997, 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 63 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  37 percent of unit
volume in 1997,  is highly  competitive.  The  Company  includes  the  following
products in the value  segment:  store brands,  control  labels,  P&G's Luvs(R),
Drypers(R), Fitti(R), and all other regional brands.

In total,  P&G is the dominant  manufacturer  in the U.S.  diaper  market,  with
approximately 39 percent market share. P&G manufactures two brands:  Pampers(R),
its premium brand with  approximately  25 percent  market share,  and Luvs,  its
value brand with 14 percent market share.  Luvs was repositioned  from a premium
brand to a value brand in November 1994. K-C  manufactures the number one diaper
brand, Huggies, with approximately 35 percent market share. K-C does not offer a
value  brand,  but  supplies  some store brand  training  pants within the value
segment.

Price has become the  significant  variable in the  competitive  strategy of the
national branded companies in the past three years. P&G, in particular, has been
very  aggressive in reducing prices in the market in pursuit of market share. In
November 1994, P&G announced a major price  reduction;  prices were  effectively
reduced on Pampers by 2.5 percent and on Luvs by 11 percent.  K-C responded with
similar  pricing  actions.  All other diaper  manufacturers  have been forced to
reduce  their  prices to remain  competitive.  During  1997,  pricing  pressures
continued  due to the existence of a new store brand  competitor  and a shift of
volume to mass merchants who aggressively  sold  multi-packs.  These multi-packs
sell at prices 10 to 15 percent below the branded convenience count package.

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,  their ability to achieve greater automation and manufacturing speed due
to fewer variations in product and packaging, and their ability to charge higher
prices.  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
competing  effectively  on the basis of price,  even in an environment of rising
raw material prices.

Product  quality and  innovation  have also been a critical basis 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.

K-C has been more active than P&G in  introducing  new products in recent years.
K-C was first to market with a  disposable  training  pant  product  line and an
inner-leg  gather feature.  P&G followed K-C with a training pant product almost
five years later. In January 1994, K-C introduced  Huggies Supremes,  a new line
of "super premium" or supreme diapers with Velcro(R)  closures  instead of tapes
and a soft nonwoven outer cover,  priced at a 20 percent premium per diaper, and
in mid-1995,  K-C added a nonwoven  backsheet on its Huggies brand  diapers.  In
September  1994, P&G introduced a new stretch waist feature on its Pampers brand
diaper. In 1996, K-C and P&G introduced a breathable diaper.



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<PAGE>


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,  and to the extent
that the Company is unable to introduce comparable products, it could experience
a decline in net sales and net earnings.

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 1997, the Company initiated 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.  The value segment is  characterized  by excess
capacity and vigorous price competition. The Company's largest competitor in the
value segment is P&G with its Luvs brand. The next largest competitor is Drypers
Corp.,  which  consolidated  its three  regional  brands into one national value
brand, Drypers, in 1994. K-C produces store brand training pants.

The Company  seeks to compete  against  other  value  segment  manufacturers  by
emphasizing  research and development  and maintaining 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.

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  1997,  the  national  branded
manufacturers  accounted for  approximately 88 percent of all U.S. feminine care
and  approximately 70 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.
A privately-held  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 1997 and does not
expect these businesses to break even until some time in 1999.

EMPLOYEES

At December 28, 1997, the Company had approximately  1,102 full-time  employees,
including 912 employees located at its five 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").



                                       6
<PAGE>


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
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.

IMPORTANT FACTORS REGARDING 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  such  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:  the  Company's  Chapter  11  filing;
increased  raw  material  prices;  new product and  packaging  introductions  by
competitors;  increased  price and  promotion  pressure  from  competitors;  new
competitors in the market;  year 2000 compliance  issues; and patent litigation,
are described  herein.  Readers are cautioned not to place undue reliance on the
Company's  forward-looking  statements,  which speak only as of the date hereof.
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 2:    PROPERTIES

As of December 28, 1997,  the Company  operated five  manufacturing  facilities,
with  plants  located  in  the  United  States  at  Macon,   Georgia;   Harmony,
Pennsylvania;  Gaffney,  South  Carolina;  and  Waco,  Texas;  and in  Canada at
Brampton, Ontario. The Company owns four of its manufacturing facilities.

The following table  summarizes the physical  properties that were in use by the
Company in its operations at December 28, 1997:


<TABLE>
<CAPTION>
                                                APPROXIMATE
                                                   SIZE                            NUMBER OF
          LOCATION                 USE          (SQ. FEET)      OWNED/LEASED       MACHINES
  -------------------------  ----------------  --------------  ----------------  --------------
  <S>                        <C>                  <C>              <C>                <C>
  Brampton, Ontario          Manufacturing         76,000           Owned             3
  Gaffney, South Carolina    Manufacturing        213,000          Leased             7
  Harmony, Pennsylvania      Manufacturing        173,000           Owned             9
  Macon, Georgia             Manufacturing        308,000           Owned             9
  Newnan, Georgia            Held for Lease       222,000          Leased             --
  Norcross, Georgia          Headquarters          69,000           Owned             --
  Oneonta, New York          Held for Sale         93,000           Owned             --
  Porterville, California    Held for Sale         69,000           Owned             --
  Waco, Texas                Manufacturing        151,000           Owned             7
</TABLE>


                                       7
<PAGE>

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            56     Chief Executive Officer and Chairman of the Board
     David W. Cole               49     President and Chief Operating Officer
     Alan J. Cyron               45     Executive Vice President and Chief Financial Officer
     Catherine O. Hasbrouck      33     Vice President, General Counsel and Secretary
     Arrigo D. Jezzi             50     Executive Vice President - Operations, Technology and
                                        International
     Robert E. McClain           48     Executive Vice President - Sales and Marketing
</TABLE>

BOBBY V.  ABRAHAM  has been a director  and the Chief  Executive  Officer of the
Company since its initial public offering in February 1993, has been Chairman of
the Company's  Board of Directors  since August 1993 and served as the Company's
President from its inception until November 1993. Prior to the Company's initial
public  offering in February  1993,  Mr.  Abraham had been the  President of the
Personal Care Products  Division of Weyerhaeuser  since February 1988. From 1986
until February 1988, Mr. Abraham served as Vice President and General Manager of
the Personal Care Products Division of Weyerhaeuser.

DAVID W. COLE has been the President and Chief Operating  Officer of the Company
since his  appointment  by the Board of Directors on November 1, 1993.  Prior to
assuming his current  responsibilities,  Mr. Cole had since February 1993 served
as Executive Vice President and Chief Operating Officer.  Prior to the Company's
initial  public  offering in February 1993, Mr. Cole had been Vice President and
General Manager of the Personal Care Products  Division of Weyerhaeuser from May
1990 to November  1993, and Executive Vice President of Sales from 1989 to 1990.
Prior to joining  Weyerhaeuser  in 1989,  Mr.  Cole  served as Director of Field
Sales with Cadbury USA, a division of Cadbury  Schweppes PLC, and its successor,
Hershey Chocolate Company.

ALAN J. CYRON has been the Executive Vice President, Chief Financial Officer and
Assistant  Secretary of the Company since  February 28, 1997.  Prior to assuming
his current  responsibilities,  Mr. Cyron had since April 4, 1995, served as its
Vice President,  Chief  Financial  Officer and as its Treasurer from May through
July 1995. Prior to joining the Company,  Mr. Cyron served as Managing  Director
of Chemical  Securities,  Inc.  (January  1992  through  March  1995),  Managing
Director of Chemical Bank (June 1991 to January 1992), and Managing  Director of
Chemical New York Corp. -- USA, Inc. (June 1981 to June 1991),  all subsidiaries
of Chemical Banking Corp.

CATHERINE  O.  HASBROUCK  has been  the  Vice  President,  General  Counsel  and
Secretary of the Company since June 3, 1996.  Prior to joining the Company,  Ms.
Hasbrouck  practiced law as an associate with the law firms of Troutman  Sanders
LLP  (January  1992 to June  1996)  and  Winthrop,  Stimson,  Putnam  &  Roberts
(September 1989 to January 1992).

ARRIGO D. JEZZI was appointed Executive Vice President - Operations,  Technology
and  International  in January 1998. Prior to that time, Mr. Jezzi served as the
Company's  Executive  Vice President  International  Business  Development  from
December 1997 to January  1998.  Mr. Jezzi also has served the Company as Senior
Vice  President -  International  Business  Development  from  February  1997 to
December 1997,  and as Vice  President - Materials and Technology  from November
1995 to February  1997.  Before  joining the  Company,  Mr.  Jezzi was a private
consultant  from August 1994 to November  1995,  and was the Vice  President for
Research Development and Quality Assurance at Confab, Inc.
from January 1993 to August 1994.

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



                                       8
<PAGE>


ITEM 3:    LEGAL PROCEEDINGS

THE PROCTER & GAMBLE  COMPANY V. PARAGON TRADE BRANDS,  INC. - P&G filed a claim
in January  1994 in the  District  Court for the  District of Delaware  that the
Company's  "Ultra"  disposable  baby  diaper  products  infringe  two  of  P&G's
inner-leg gather 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  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  have  been and will  continue  to be
significant.

In December  1997,  the  Delaware  District  Court issued a Judgment and Opinion
finding  that  P&G's  patents  are 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.  While a final damages
number has not been entered by the District  Court,  the Company  estimates  the
liability and associated  litigation costs to be approximately $200 million. The
Judgment has had a material adverse effect on the Company's  financial  position
and its results of  operations.  The Company has filed with the District Court a
motion for a new trial or to alter or amend the  Judgment.  The Company has also
filed its  Notice of Appeal  with the  Federal  Circuit  Court of  Appeals.  The
Company  intends to vigorously  pursue its motion in the District Court, as well
as the appeal of the District Court's decision.

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.

As a result of the Company's Chapter 11 filing,  further  proceedings in the P&G
litigation  were stayed.  By orders  entered on January 15, 1998 and February 4,
1998,  respectively,  the Bankruptcy Court lifted the stay to permit the Company
to pursue its motion  for a new trial or to alter or amend the  judgment  in the
District  Court  and to  pursue  its  appeal.  P&G  has  filed a  motion  in the
Bankruptcy Court seeking to have the automatic stay lifted in order to allow P&G
to seek  injunctive  relief and an accounting for damages.  The Company  opposed
P&G's motion.

It is possible  that the Company may be subject to similar  patent claims on its
diaper products sold in other countries.  The Company is unable to determine the
amount of any such claims at this time.

KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. -- 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
inner-leg gathers. The lawsuit seeks injunctive relief, royalty damages,  treble
damages and attorneys'  fees and costs.  The Company has denied  liability under
the patents and has  counterclaimed  for patent  infringement  and  violation of
antitrust laws by K-C. In October 1996, K-C filed a motion for summary  judgment
with respect to the Company's antitrust counterclaim along with a motion to stay
discovery pending  resolution of such motion for summary judgment.  On April 18,
1997, K-C filed a motion for summary judgment of  noninfringement of two patents
asserted by the Company and a motion for partial summary judgment construing the
claims of one of the K-C  patents-in-suit.  On November  22,  1996,  the Company
filed a motion to amend its antitrust  counterclaim and on June 13, 1997 filed a
motion for summary  judgment on one of the patents asserted by K-C. In addition,
K-C has sued the  Company  on another  patent  issued to K-C which is based upon
further continuation of one of the K-C patents asserted in the case. That action
has been consolidated with the pending action. The Court has appointed a special
master  to  rule on the  various  pending  motions.  Legal  fees  and  costs  in
connection with this litigation have been and will be significant.

As a result of the  Company's  Chapter 11  filing,  the  proceedings  in the K-C
litigation  have been  stayed.  K-C has filed a motion in the  Bankruptcy  Court
seeking to have the automatic stay lifted in order to permit the  proceedings in
Dallas to  continue.  The  Company  opposed  K-C's  motion at a hearing  held on
February 11,  1998.  The  Bankruptcy  Court has  continued  the hearing on K-C's
motion until March 30, 1998. See "--IN RE PARAGON TRADE BRANDS, INC." below.



                                       9
<PAGE>


Should K-C prevail on its claims,  award of all or a substantial  portion of the
relief  requested by K-C could have a material  adverse  effect on the Company's
financial condition and its results of operations. Based on the advice of patent
counsel,  the Company has taken the position that the Company's  products do not
infringe any valid patent asserted by K-C.

IN RE PARAGON TRADE BRANDS,  INC. -- As described  above,  and as described more
fully under "BUSINESS:  REORGANIZATION CASE," on December 30, 1997, the Delaware
District  Court issued a Judgment and Opinion in the Company's  lawsuit with P&G
which found,  in essence,  two of P&G's diaper patents to be valid and infringed
by the  Company's  "Ultra"  disposable  baby diapers,  while also  rejecting the
Company's  patent  infringement  claims  against  P&G.  Judgment  was entered on
January 6, 1998.  While a final damages  number has not been  adjudicated by the
District Court,  the Company  estimates 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 entry of the  Judgment  and the  uncertainty  it created  caused an
immediate and critical  liquidity issue for the Company which  necessitated  the
Chapter 11 filing.

The Chapter 11 filing  prevented P&G from placing liens on the Company's  assets
and affords the Company the opportunity to resolve  liquidated and  unliquidated
claims against the Company,  which arose prior to the Chapter 11 filing, thereby
protecting all stakeholders'  interests. The Company is currently operating as a
debtor in possession under the Bankruptcy Code.

On January 30, 1998,  the Company  received  Bankruptcy  Court approval of a $75
million  financing  facility  with  The  Chase  Manhattan  Bank.  This  facility
supplements  the Company's  cash on hand and operating cash flow and permits the
Company to continue to operate its business in the ordinary  course.  Legal fees
and costs in  connection  with the  Chapter 11 filing will be  significant.  See
"BUSINESS:  REORGANIZATION  CASE"  and  "Note  11  of  the  Notes  to  Financial
Statements."

The Company is unable to predict at this time when it will  emerge from  Chapter
11 protection.

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,
except for the  Chapter 11 filing and the P&G and K-C matters  discussed  above,
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

No matters were submitted to vote of security  holders during the fourth quarter
of the 1997 fiscal year.


                                     PART II

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

As of  February  27,  1998,  there were 274  holders of record of the  Company's
common stock.  The Company has not paid dividends on its common stock. 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's  common  stock is  listed  on the New York  Stock
Exchange, Inc. The Company's DIP facility prohibits the Company from paying cash
dividends.  See  "Note  16 of  Notes  to  Financial  Statements"  regarding  the
quarterly  high and low price range of the Company's  common stock.  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 28,
1997.



                                       10
<PAGE>


ITEM 6:    SELECTED FINANCIAL DATA

(Dollar amounts in millions, except per share data)

<TABLE>
<CAPTION>
                                     1997           1996         1995         1994         1993
                                --------------- ------------- ------------ ------------ ------------
<S>                              <C>              <C>           <C>          <C>          <C>
EARNINGS STATEMENT DATA(1)
Net Sales                        $  562.0         $  581.9      $  518.8     $ 578.6      $  562.9
EBITDA(2)                        $   62.5         $   91.5      $   46.2     $  73.6      $   71.8
Operating profit (loss)          $ (183.8)(3)     $   35.7(4)   $   (3.6)(5) $  42.5      $   49.3
Net earnings (loss)              $ (212.7)(3)(6)  $   21.1(4)   $   (3.4)(5) $  25.0      $   45.9(7)

PER SHARE DATA(1)
Basic earnings (loss) per share  $ (17.86)(3)(6)  $   1.76(4)   $   (.29)(5) $  2.16      $   3.97(8)

BALANCE SHEET DATA(1)
Total assets                     $  376.1         $  373.1      $  266.7     $ 275.4      $  244.2
Long-term debt                   $   70.0         $   70.0             -     $   6.0             -
Shareholders' equity             $    5.0         $  214.7      $  191.7     $ 195.7      $  167.1

OTHER DATA(1)
Capital spending                 $   49.4         $   48.9      $   17.4     $  74.9      $   55.4(8)
Depreciation and amortization    $   35.5         $   38.8      $   36.0     $  31.1      $   22.5
Units sold (millions)               3,689            3,761         3,378       3,595         3,435

<FN>
(1)     See Notes 1 and 2 of Notes to Financial Statements.

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

(3)  Includes  loss  contingency  of $200 for the  adverse  judgment in a patent
litigation with The Procter & Gamble Company 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.

(4)  Includes  costs for the  integration  of Pope & Talbot,  Inc.'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.

(5) 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.

(6) Includes a $100.2 reserve against deferred tax assets.

(7)  Reflects the benefit to income of $15.6  relating to deferred  taxes due to
the enactment of the Omnibus Budget Reconciliation Act of 1993.

(8)     1993 on a pro forma basis.
</FN>
</TABLE>


                                       11
<PAGE>

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

OVERVIEW

The Company has previously  disclosed that The Procter & Gamble Company  ("P&G")
had  filed a claim  against  it in the  United  States  District  Court  for the
District of Delaware, alleging that the Company's "Ultra" disposable baby diaper
products  infringe two of P&G's  inner-leg  gather  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 has also disclosed that if P&G were to prevail on its claims,  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  District  Court issued a Judgment and Opinion  which
found, in essence,  two of P&G's diaper patents to be valid and infringed by 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 entitles P&G
to damages  based on sales of the  Company's  diapers  containing  the inner-leg
gather feature.  While the final damages number has not been  adjudicated by the
District Court,  the Company  estimates 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.

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, thereby protecting all
stakeholders'  interests.  The  Company is  currently  operating  as a debtor in
possession under the Bankruptcy Code.

The Company is unable to predict at this time when it will  emerge from  Chapter
11  protection.  See "Notes 1, 11 and 13 of Notes to Financial  Statements"  and
"ITEM 3: LEGAL PROCEEDINGS" herein.

YEAR ENDED DECEMBER 28, 1997 VS. YEAR ENDED DECEMBER 29, 1996

RESULTS OF OPERATIONS

A net loss of $212.7 million was incurred during 1997 compared with net earnings
of $21.1  million in 1996.  Included in the results for 1997 was an accrued loss
contingency  of  $200.0  million  for the P&G  patent  litigation  judgment  and
associated  litigation  costs.  See  "Notes  1 and  13  of  Notes  to  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 tax assets.

Included in the results in 1996 were charges of $10.6 million, net of the effect
of income taxes,  associated with  integrating the acquisition of Pope & Talbot,
Inc.'s  disposable  diaper business  ("P&T") and costs to relocate the corporate
headquarters to Atlanta.  Excluding  charges discussed here and in the preceding
paragraph,  net earnings in 1997 were $17.0 million compared to $31.7 million in
1996.  This  decrease in profits in 1997  compared to 1996 was  primarily due to
continued  price  pressure  in  the  baby  diaper  business,   operating  losses


                                       12
<PAGE>

associated with the feminine care and adult incontinence businesses, sourcing of
products from Paragon-Mabesa International,  S.A. de C.V. ("PMI") under a supply
contract and legal costs associated with patent litigation with P&G and K-C. See
"ITEM 3: LEGAL  PROCEEDINGS."  These negative  impacts were partially  offset by
lower overall raw material prices, lower trade merchandising  expenses and lower
manufacturing overhead in the baby diaper business.

Basic loss per share in 1997 was $17.86  compared to basic earnings per share of
$1.76 in 1996.  Basic earnings per share were $1.43 in 1997 compared to $2.64 in
1996, excluding the charges discussed above for both periods.

Basic  earnings  per share of $1.43  and  $2.64 in 1997 and 1996,  respectively,
excluding  charges  discussed  above,  included  a net  loss of $.95  and  $.41,
respectively,  related to the feminine care and adult  incontinence  businesses.
The  Company  experienced  greater  than  anticipated  operating  losses  in the
feminine  care and  adult  incontinence  businesses  and does not  expect  these
businesses to break even until sometime in 1999.

NET SALES

Net sales were $562.0  million in 1997, a 3.4 percent  decrease  from the $581.9
million  reported in 1996.  Diaper unit sales  decreased  1.9 percent from 3,689
million diapers in 1997 compared to 3,761 million diapers in 1996. Volume in the
first  half  of  1997  was  negatively   impacted  by  increased  discounts  and
promotional   allowances  by  the  branded   manufacturers   and  value  segment
competitors,  especially the use of multi packs. Multi packs represent a package
configuration  that  provides the consumer 2, 3 or 4 times the amount of diapers
found  in  a  standard  convenience  count  package.  Volume  was  also  further
negatively impacted during the same period by product  improvements added by the
branded  manufacturers.  Volume  during the second  half of 1997 was  positively
impacted by the rollout of the Company's  breathable  baby diaper  product which
increased the competitiveness of the Company's products.  Volume,  however,  was
negatively  impacted  during the second  half of the year by the loss of a major
account in Canada to a store brand competitor.  In 1998, volume will continue to
be pressured by increased  discounts and  promotional  allowances by the branded
manufacturers and value segment competitors, especially through the use of multi
packs.  Volume may also be negatively  impacted by uncertainties  related to the
Chapter 11 filing.

Excluding the effect of a more favorable  product mix, average baby diaper sales
prices during 1997 decreased approximately 5.0 percent compared to 1996, despite
price increases  associated with reduced count packages on some of the Company's
products.  The decrease in prices was primarily  due to the increased  discounts
and  promotional  allowances  discussed  above,  the use of  multi  packs by the
branded  manufacturers and value segment  competitors and the existence of a new
competitor to the store brand baby diaper business. The negative trend in prices
is  expected  to  continue  throughout  1998 and may be further  impacted by the
uncertainties related to the Chapter 11 filing.
See "Risks and Uncertainties."

COST OF SALES

Cost of sales in 1997 was $454.9  million  compared to $449.9 million in 1996, a
1.1  percent  increase.  As a  percentage  of net sales,  cost of sales was 80.9
percent in 1997 compared to 77.3 percent in 1996. Cost of sales in 1996 included
$5.4 million in charges for costs  primarily  associated with the integration of
the P&T acquisition  into the Company's  existing  business.  As a percentage of
sales,  excluding  such charges,  cost of sales was 76.4 percent in 1996.  Costs
were higher in 1997 compared to 1996 primarily due to costs  associated with the
feminine care and adult businesses, sourcing of products from PMI under a supply
contract,  a higher cost product mix and higher product design costs  associated
with the breathable  baby diaper product  introduction.  These higher costs were
partially offset by lower overall raw material and packaging costs.  Baby diaper
manufacturing costs, including depreciation, were also lower in 1997 compared to
1996.

Pulp prices were  approximately  7 percent lower in 1997 compared to 1996.  Pulp
prices are expected to remain  relatively flat during the first half of 1998 and
increase  modestly during the second half of 1998.  Packaging  costs,  including
bags and corrugated  boxes,  were also lower in 1997 compared to 1996. Other raw
material prices were generally at similar price levels in 1997 compared to 1996,
except for those  materials  associated  with the higher  product  design  costs
associated with the breathable baby diaper product.



                                       13
<PAGE>

Baby diaper labor costs were lower in 1997 compared to 1996. The higher costs of
inefficiencies related to the new product rollouts during the first half of 1997
were more than offset by improved  operating  results  during the second half of
the year.  Baby diaper overhead costs,  excluding the charges  discussed  below,
were lower  during 1997  compared to 1996 due to the closure  during 1996 of the
manufacturing  facilities acquired from P&T and cost management efforts. Overall
labor costs were higher in 1997 compared to 1996 due to the costs related to the
feminine care and adult  incontinence  businesses.  Overall  overhead costs were
lower in 1997 compared to 1996 as reductions  in baby diaper  overhead  exceeded
the added costs related to the feminine care and adult businesses.  During 1996,
$2.9  million of charges  were  incurred to support the  integration  of the P&T
acquisition.

Baby diaper depreciation costs, excluding charges discussed below, were lower in
1997 compared to 1996.  The decrease is partially due to the closure during 1996
of the acquired P&T  facilities.  Depreciation  costs were higher in 1996 due to
accelerated   depreciation   attributable  to  obsolescence  caused  by  product
innovations.  The decreased baby diaper  depreciation  during 1997 was partially
offset by increased  depreciation  costs  associated  with the feminine care and
adult  incontinence  businesses.  During  1996,  $1.6  million of  charges  were
incurred due to the accelerated  depreciation of existing company equipment that
was to be replaced by equipment acquired from P&T.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses ("SG&A") were $76.3 million in 1997
compared to $92.2 million in 1996. As a percentage of net sales,  these expenses
were 13.6  percent in 1997  compared to 15.8  percent in 1996.  Included in 1996
were charges of $11.7  million,  of which $9.0 million  related to the corporate
headquarters  relocation  to  Atlanta,  including  severance,  outplacement  and
relocation expenses.  The charges also included $2.7 million in costs associated
with the integration of the P&T acquisition.

Excluding the charges  discussed above, SG&A expenses were $76.3 million in 1997
compared to $80.5 million in 1996. As a percentage of net sales these  expenses,
excluding  the charges,  were 13.6  percent in 1997  compared to 13.8 percent in
1996.  The  decrease in costs is primarily  attributable  to a decrease in trade
merchandising  expenses,  lower incentive-based  compensation accruals and lower
bad debt expenses. These decreases were partially offset by an increase in legal
expenses,  packaging artwork and design and information  system costs. The lower
trade   merchandising   expenses  are   primarily   related  to  a  decrease  in
coupon-related expenses.

The increase in legal expenses is related to the P&G and K-C patent  litigation.
While legal  expenses,  excluding  bankruptcy  related  costs,  are  expected to
decrease  moderately in 1998 from 1997 levels,  they are expected to continue at
higher than normal levels until the  litigation is resolved.  See "ITEM 3: LEGAL
PROCEEDINGS."  Information system costs were higher in 1997 compared to 1996 and
are expected to remain at higher levels for the foreseeable  future. The Company
expects to begin testing of an  enterprise-wide  information system in the third
quarter and installation  during the fourth quarter of 1998.  Packaging  artwork
and design costs were higher during 1997 compared to 1996 as a result of product
rollouts  and  changes in package  counts.  Lower  incentive-based  compensation
accruals resulted from lower operating results for 1997 compared to 1996.

RESEARCH AND DEVELOPMENT

Research and development  ("R&D") expenses were $5.1 million in 1997 compared to
$4.2  million in 1996.  The  increase  is  primarily  attributable  to a general
increase in baby diaper product development activity and increased feminine care
and adult incontinence business activity.

DIVIDEND INCOME

Dividend   income  was  $1.1  million  in  1997.  The  dividend   represented  a
distribution from Mabesa, an unconsolidated subsidiary accounted for on the cost
method.



                                       14
<PAGE>

LOSS CONTINGENCY

The loss  contingency  of $200  million in 1997  represents  the  accrual of the
estimated liability and associated litigation costs from the adverse judgment in
the  Procter  &  Gamble  patent  litigation.  See  "Notes  1 and 13 of  Notes to
Financial Statements" and "ITEM 3: LEGAL PROCEEDINGS" herein.

ASSET IMPAIRMENTS

Asset  impairments were $9.4 million in 1997. There were no asset impairments in
1996. The 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.  The write-off was due to the inability of the software to
perform as represented  during the software  selection  process.  The Company is
currently  evaluating its options,  including legal action, to recover the costs
of the software and  consulting.  Also included in 1997 was a write-down of $4.4
million  for the shut down of the  tampon-related  production  equipment  at the
feminine care products  operation.  Also included in the shut down of the tampon
manufacturing  operation  were  write-offs  of $.9  million  for  raw  material,
finished goods and spare-part inventories which were charged to cost of sales.

INTEREST EXPENSE

Interest  expense was $4.7 million in 1997 compared to $2.9 million in 1996. The
increase resulted from higher average borrowings during 1997.

OTHER INCOME

Other  income was $1.7  million in 1997  compared  to $.6  million in 1996.  The
increase  reflects higher  interest income from loans to PMI, an  unconsolidated
subsidiary accounted for on the equity method.

INCOME TAXES

Income tax expense was $27.9  million in 1997 as the Company  recorded a reserve
of $100.2 million against its net deferred tax assets.  The reserve is 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."

YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 25, 1995

RESULTS OF OPERATIONS

Net earnings  were $21.1  million  during 1996  compared with a net loss of $3.4
million in 1995.  Included in the results in 1996 were charges of $10.6 million,
net of the effect of income taxes, primarily associated with integrating the P&T
acquisition  and  costs to  relocate  the  corporate  headquarters  to  Atlanta.
Included in the results in 1995 were  restructuring  and other costs  related to
the closure of the Company's La Puente, California plant, corporate headquarters
staff reductions, and other charges totaling $8.9 million, net of the effects of
income taxes.  Excluding these restructuring and other charges,  net earnings in
1996 were $31.7 million  compared to net earnings in 1995 of $5.4  million.  The
increased profit in 1996,  excluding the P&T integration and Atlanta  relocation
charges, was primarily due to higher volumes as a result of the P&T acquisition,
lower raw  material  costs and a more  favorable  product mix  compared to 1995.
These  improvements  in  volumes,  costs  and mix  were  partially  offset  by a
substantial increase in trade merchandising expenses, lower sales prices and the
costs to start up the feminine care business.

Basic  earnings per share in 1996 were $1.76  compared to a basic loss per share
of $.29 in 1995.  Basic  earnings per share were $2.64 in 1996 compared to basic
earnings  per  share of $.46 in 1995,  excluding  the  restructuring  and  other
charges for both periods.



                                       15
<PAGE>

NET SALES

Net sales were $581.9  million in 1996, a 12.2 percent  increase from the $518.8
million  reported in 1995.  Diaper unit sales  increased  11.3  percent to 3,761
million  diapers in 1996 from 3,378 million  diapers in 1995. The reason for the
increase in unit volume was the P&T acquisition in February 1996.  Excluding the
impact of the P&T acquisition, volume would have been lower during 1996 compared
to 1995. Volume was negatively  impacted by increased  discounts and promotional
allowances  by branded  and value  segment  manufacturers.  Volume  was  further
negatively impacted by product improvements added by branded manufacturers.

Average sales prices decreased  approximately 3.5 percent during 1996, excluding
the effect of a more favorable product mix. The decrease in prices was primarily
due to  increased  discounts  and  promotional  allowances  in response to price
reductions and promotions by branded and value segment manufacturers.

COST OF SALES

Cost of sales in 1996 was $449.9  million  compared to $439.8 million in 1995, a
2.3  percent  increase.  As a  percentage  of net sales,  cost of sales was 77.3
percent in 1996  compared to 84.8 percent in 1995.  1996 results  included  $5.4
million of charges for costs  primarily  associated  with the integration of the
P&T acquisition  into the Company's  existing  business.  These charges included
accelerated   depreciation  of  certain  existing  assets,  costs  of  equipment
dismantling  and movement  and  employee  relocation  costs.  1995  included $.6
million  of  costs  associated  with  the La  Puente  plant  closure  and  asset
write-downs.  As a percentage of net sales,  excluding  these  charges,  cost of
sales was 76.4 percent in 1996 compared to 84.7 percent in 1995. The lower costs
were  primarily  a result of lower raw  material  costs  including  pulp,  super
absorbent  polymer and  packaging.  These lower costs were offset,  in part,  by
higher costs  associated with a more favorable  product mix and costs associated
with the feminine care business startup.

Pulp prices were  approximately  33.0 percent lower in 1996 compared to the same
period  in 1995.  Pulp  prices,  which  had  increased  during  1995,  decreased
significantly   during  1996.   Super  absorbent   polymer  costs  also  dropped
significantly in 1996 compared to 1995. Other raw material prices were generally
at similar price levels in 1996 compared to 1995.

Labor costs were at similar  levels in 1996 as compared to 1995,  excluding  the
feminine care business startup. Costs were negatively impacted during the fourth
quarter of 1996 by  inefficiencies  related to a new diaper product  rollout and
reduced  production  levels associated with a planned decrease in finished goods
inventory.

Plant overhead costs,  excluding the charges discussed below, were higher during
1996  compared  to 1995.  Costs  were  lower in 1996 due to the La Puente  plant
closure at the end of  February  1995,  but were  offset by  increases  in plant
overhead  resulting from the P&T manufacturing  facilities  acquired in February
1996 that remained in production and costs related to the feminine care business
startup. During 1996, $2.9 million of charges were primarily incurred to support
the integration of the P&T acquisition.  These charges were primarily related to
the cost of equipment dismantling and movement and employee relocation discussed
above.

Depreciation  costs,  excluding the charges  discussed  below,  were at slightly
higher  levels  in 1996  compared  to the  same  period  of  1995.  Depreciation
increased due to P&T  facilities  acquired in February 1996 that remained  open,
the feminine care business startup and  acceleration of depreciation  related to
new product enhancements and changes in equipment configuration. These increases
were  partially  offset by the  closure of the La Puente  facility at the end of
February  1995.  During 1996,  $1.6 million of charges were  incurred due to the
accelerated  depreciation of existing Company equipment that will be replaced by
equipment acquired from P&T.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

SG&A was  $92.2  million  in 1996  compared  to  $68.0  million  in  1995.  As a
percentage  of net sales,  these  expenses were 15.8 percent in 1996 compared to
13.1 percent in 1995.  Included in 1996 were charges of $11.7 million,  of which
$9.0  million  related to the  corporate  headquarters  relocation  to  Atlanta,
including  severance,  outplacement  and relocation  expenses.  The charges also
included  $2.7  million  in costs  associated  with the  integration  of the P&T
acquisition.  These  integration  costs were  primarily  for customer  packaging


                                       16
<PAGE>


conversion and to establish bad debt reserves consistent with Company practices.
Included in 1995 were charges of $2.2 million for the corporate  staff reduction
and acceleration of software amortization.

Excluding the charges  discussed above, SG&A expenses were $80.5 million in 1996
compared  to $65.8  million  in 1995,  and as a  percentage  of net sales  these
expenses  were 13.8  percent  in 1996  compared  to 12.7  percent  in 1995.  The
increase  in  expenses  is  largely   attributable   to  an  increase  in  trade
merchandising  expenses.  The  increase in trade  merchandising  expenses  was a
result  of the  increased  volume  due  to the  P&T  acquisition  and  increased
promotions  discussed  above.  Expenses  were  also  higher  in 1996  due to the
amortization of goodwill associated with the P&T acquisition,  the feminine care
business startup and increased incentive-based compensation.  Information system
costs increased in the second half of 1996 as the Company began  installation of
a new enterprise  information system. These increases were partially offset by a
decrease in legal expenses.  Packaging related  expenses were also lower in 1996
compared to 1995.

RESEARCH AND DEVELOPMENT

R&D  expenses  were $4.2 million in 1996  compared to $3.6 million in 1995.  R&D
expenses  increased  due to the feminine  care  business  start up and increased
product development costs in the fourth quarter of 1996.

ASSET IMPAIRMENTS

Asset  impairments  were $2.9 million in 1995. The charges were primarily due to
the cancellation of capital projects.

OTHER INCOME/EXPENSE

Other  income was $.6  million in 1996  compared  to expense of $1.0  million in
1995. The income in 1996 was primarily due to interest income from loans to PMI,
a  subsidiary  accounted  for on the  equity  method.  The  expense  in  1995 is
primarily related to legal settlement costs.

RESTRUCTURING

1995 results included a restructuring  charge of $8.1 million for the closure of
the La Puente, California diaper making facility. The purpose of the closure was
to lower  costs to help  offset  competitive  pricing  pressures  from  national
branded  manufacturers  and rising material prices.  The closure of the facility
was expected to generate approximately $17 million per year in savings that were
partially offset by increased costs of freight and distribution.  The closure of
the plant occurred at the end of February 1995.

The  restructuring  plan  included  reallocation  of production to the remaining
diaper facilities, and the sale of the diaper making equipment and manufacturing
facility. As of the end of 1996 the equipment and building were sold.

The primary elements of the restructuring charge were: $3.4 million in severance
and employee related charges for  approximately  310 employees;  $2.6 million in
asset write-downs,  primarily diaper making equipment,  to estimated fair market
value and removal costs; and $1.9 million in anticipated  carrying costs for the
facility.  The charges did not include  anticipated gains, if any, from the sale
of assets.

The restructuring  charge included $2.2 million in non-cash charges due to asset
write-offs.  The remaining $5.9 million has been paid. The restructuring plan is
complete.

LIQUIDITY AND CAPITAL RESOURCES

During  1997,  cash flow from  operations  was $54.1  million  compared to $68.3
million for 1996. The decrease in cash flow was primarily due to lower operating
results  caused  by  price  competition  in the  baby  diaper  business  and the
operating losses at the feminine care and adult incontinence businesses.



                                       17
<PAGE>

Working  capital,  exclusive of cash,  short-term  borrowings,  current deferred
taxes and the loss contingency of $200 million,  increased $20 million. This was
primarily  due to an increase in  receivables  and  inventories  combined with a
reduction in accrued liabilities.

The   increase  in   receivables   resulted   from  the  sale  of  equipment  to
unconsolidated  subsidiaries  and an increase in refundable  income  taxes.  The
increase in inventories  resulted from an increase in finished goods in the baby
diaper  business.  The  decrease  in accrued  liabilities  primarily  reflects a
reduction in incentive-based  compensation accruals, coupon related liabilities,
and income taxes payable.  Cash flow was also favorably  impacted by the Company
issuing stock to settle certain payroll liabilities.

The cash  produced  from  operations  supported  capital  expenditures  of $55.0
million,   including   approximately  $5.6  million  of  computer  software  and
consulting  costs,  in 1997 compared to $48.9 million in 1996. The  expenditures
were primarily in support of the baby diaper business,  specifically new product
enhancements and diaper packaging technology,  and to support the entry into the
adult incontinence business. Capital spending is expected to total approximately
$39.0  million  during  1998  and will  include  further  expenditures  for auto
packaging technology,  product enhancement and a company-wide information system
upgrade.

During the third  quarter of 1997,  the Company  utilized its credit  facilities
described below to acquire, through Stronger Corporation S.A. ("Stronger"), a 34
percent  interest  in  Serenity,  S.A.,  the  third  largest  disposable  diaper
manufacturer in Argentina,  for $5.7 million and earn-out payments over the next
three years which are partially based on  performance.  The Company also made an
additional  payment of $3.4  million to Mabesa as an earn-out  payment  based on
1996 performance.  In the fourth quarter of 1997 the Company utilized its credit
facilities to acquire,  through  Stronger,  a 49 percent interest in MPC Hygenic
Products,  Ltda., a subsidiary of Cremer,  S.A. of Brazil for $5.1 million.  The
Company also utilized its credit  facilities to fund an increase in loans to PMI
during 1997. The investments  were partially offset by $10.3 million in proceeds
from assets held for sale.

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 is prohibited  from paying any  pre-petition
liabilities without Bankruptcy Court approval. The Chapter 11 filing resulted in
a default under its  pre-petition  revolving  credit  facility.  See "Note 11 of
Notes to Financial Statements."

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,  the 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 has 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 may not exceed the lesser of $75 million or an available
amount as  determined  by a  borrowing  base  formulation.  The  borrowing  base
formulation 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 has a sublimit of $10 million for the issuance
of letters of credit.  The DIP Credit Facility expires on the earlier of July 7,
1999, or the date of entry of an order by the Bankruptcy Court confirming a plan
of reorganization.

Obligations under the DIP Credit Facility are secured by the security  interest,
pledge and lien on substantially  all of the Company's assets and properties and
the  proceeds  thereof,  granted  pursuant  to the Final  Order  under  Sections
364(c)(2) and 364(c)(3) of the Bankruptcy Code.  Borrowings under the DIP Credit
Facility may be used to fund  working  capital and for other  general  corporate
purposes.  The DIP Credit Facility  contains  restrictive  covenants,  including
among  other  things,  limitations  on the  creation  of  additional  liens  and
indebtedness,  limitations on capital expenditures,  limitations on transactions
with affiliates including  investments,  loans and advances, the sale of assets,
and the maintenance of minimum  earnings before interest,  taxes,  depreciation,
amortization and  reorganization  items, as well as a prohibition on the payment
of dividends.



                                       18
<PAGE>

The DIP Credit Facility provides that advances made will bear interest at a rate
of 0.5 percent per annum in excess of Chase's  Alternative  Base Rate, or at the
Company's  option,  a rate of 1.5  percent  per annum in  excess of the  reserve
adjusted London  Interbank  Offered Rate for the interest periods of one, two or
three months.  The Company pays a commitment fee of 0.5 percent per annum on the
unused portion thereof, a letter of credit fee equal to 1.5 percent per annum of
average outstanding letters of credit and certain other fees.

The Company may utilize, in accordance with certain covenants limits, its credit
facility for continued investments in its foreign  subsidiaries.  The DIP credit
facility in combination  with  internally  generated  funds is anticipated to be
adequate  to  finance  these   investments   and  the  Company's   1998  capital
expenditures. See "Note 11 of Notes to 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 ($9.9 million) and reserves
not currently  deductible  ($85.8  million).  To realize the full benefit of the
deferred tax asset, the Company needs to generate  approximately $258 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
$99.3 million. See "--Income Taxes"

YEAR 2000

The Company began planning its year 2000 remediation  strategy in 1995. Based on
the  assessment of the Company's  information  technology  personnel and outside
professionals,  the Company  determined  that it would be necessary to replace a
significant  portion of its information  technology platform and to modify other
computer  and  computer-controlled  systems and systems with  embedded  computer
chips (collectively, the Company's "systems") so that its information technology
platform  and systems  properly  utilize  date-related  data as the year 2000 is
approached  and reached.  Management  presently  believes  that with the planned
conversion  to new  software  and  hardware  and the  planned  modifications  to
existing  software  and  hardware,  the  effects  of the year 2000 issue will be
mitigated.  However,  if such conversions and modifications are not made, or are
not completed on a timely basis, or if software vendor representations as to the
ability of their  products to properly  handle year 2000 data prove untrue,  the
year 2000 issue could have a material  impact on the  operations of the Company,
which in turn could have a material  adverse impact on the Company's  results of
operations and financial condition.

The Company is in the process of initiating  formal  communications  with all of
its significant  suppliers and is developing a communications plan for its large
customers  to  determine  the extent to which the Company may be  vulnerable  to
those third parties'  failure to remediate  their own year 2000 issue.  However,
there can be no guarantee that the systems of other  organizations  on which the
Company's  systems  rely or the  Company's  operations  depend  will  be  timely
converted, or that a failure to convert by another organization, or a conversion
that is  incompatible  with the  Company's  systems,  would not have a  material
adverse effect on the Company.

The  Company's  primary  vehicle  to  replace  a  significant   portion  of  its
information  technology  platform and systems so that such  platform and systems
can properly utilize date-related data prior to, during and beyond the year 2000
is known  internally  as the APEX Project.  As a part of the APEX  Project,  the
Company has  purchased  SAP R/3  enterprise  resource  planning  software and is
actively  involved in the  implementation  of the  software.  This software will
replace  current core business  transaction  systems with the equivalent SAP R/3
functionality.  SAP  America,  Inc.  has  warranted  that the R/3  software  can
properly utilize date-related data prior to, during and beyond the year 2000.

The Company plans to utilize both  internal and external  resources to reprogram
or replace,  test and implement software and other components of its systems for
year 2000  modifications.  The Company has targeted a  completion  date for year
2000  work  on  critical   business   applications  of  June  30,  1999.  System
applications  have been scheduled for  replacement and  modification  based on a
risk-adjusted  priority, to ensure critical programs are adequately completed in
time to allow for extended  testing.  The projected  remaining  cost of the year
2000 project is currently  estimated at  approximately  $15 million and is being
funded through  operating cash flow. As


                                       19
<PAGE>

of December 28, 1997,  approximately $4 million had been spent on the assessment
of and initial efforts in connection with the year 2000 project, the purchase of
software and hardware and the development of and initial work on the remediation
plan.

The costs of the  project  and the date on which the  Company  plans to complete
year  2000  modifications,  however,  are  based on  management's  and  external
consultants' best estimates,  which were derived utilizing numerous  assumptions
of future events  including the continued  availability of certain  internal and
external  resources,  the  representations of several software vendors as to the
ability  of their  products  to  properly  handle  year 2000 data,  third  party
modification  plans and other factors.  However,  there can be no guarantee that
these estimates will be achieved and the actual results could differ  materially
from those plans.  Specific  factors that might cause such material  differences
could include,  but are not limited to, the  availability  and cost of personnel
trained in this area,  the ability to locate and replace or correct all relevant
computer codes,  the inability to control third party  modification  plans,  and
similar uncertainties.

RISKS AND UNCERTAINTIES

As a result of the adverse judgment in the P&G patent litigation, the Company is
required to modify its current diaper design. Pursuant to an agreement with P&G,
the Company has until July 6, 1998 to complete  the  conversion  to a new diaper
design.  At the end of this conversion  period,  the Company will be required to
pay P&G a 2 percent  royalty on net sales of the  current  diapers  manufactured
during  the  conversion  period.  This 2 percent  royalty  will have a  material
adverse effect on future results of operations.  While the Company has developed
an  alternative  diaper  design  which,  based on the advice of two  independent
patent firms,  it believes  does not infringe any valid  patent,  if the Company
were unable to convert to the new design in a timely manner,  or if customers do
not accept the alternative  design,  it could have a material  adverse effect on
the operations of the Company,  which,  in turn,  would have a material  adverse
effect on the Company's financial condition and results of operations. See "ITEM
3: LEGAL PROCEEDINGS."

The ability of the Company to effect a successful reorganization will depend, in
significant   part,   upon  the  Company's   ability  to  formulate  a  Plan  of
Reorganization  that is approved by the Bankruptcy Court and meets the standards
for plan confirmation  under the Bankruptcy Code. In a Chapter 11 reorganization
plan,  the rights of the Company's  creditors and  shareholders  may be altered.
Investment  in stock of the  Company,  therefore,  should be  regarded as highly
speculative.  As a result of the  Chapter  11  filing,  the  Company  will incur
significant costs for professional fees as the reorganization plan is developed.
The Company is also required to pay certain  expenses of the Official  Committee
of Unsecured  Creditors,  including  professional fees, to the extent allowed by
the Bankruptcy Court.

The Company is unable to predict at this time when it will  emerge from  Chapter
11 protection. See "ITEM 1: BUSINESS: REORGANIZATION CASE."

P&G has recently announced a baby diaper product innovation  involving skin care
ingredients.  The Company is  currently  assessing  its response to this product
innovation.  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.

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: the  Company's  Chapter 11 filing;  increased raw
material  prices;  new  product  and  packaging  introductions  by  competitors;
increased price and promotion pressure from competitors;  new competitors in the
market;  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


                                       20
<PAGE>

as of the date hereof.  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.

SUBSEQUENT EVENT

Paragon  recently  established 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 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 and it is anticipated  that production and  distribution  will begin in the
second half of 1998.

NEW ACCOUNTING STANDARD

In February 1997, the Financial  Accounting Standards Board issued SFAS No. 128,
"Earnings  per Share,"  effective  for fiscal years and interim  periods  ending
after  December  15,  1997.  The  adoption  of this  statement  did  not  have a
significant impact on the Company's results of operations.

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.



                                       21
<PAGE>

ITEM 8:    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
                  PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES:

                                                                           PAGE
Responsibility for Financial Reporting                                      23

Report of Independent Public Accountants                                    24

Consolidated Earnings (Loss) Statements for the three years in
         the period ended December 28, 1997                                 25

Consolidated Balance Sheets as of December 28,1997 and
         December 29, 1996                                                  26

Consolidated Statements of Cash Flows for the three years in
         the period ended December 28, 1997                                 27

Consolidated Statements of Changes in Shareholders' Equity
         for the three years in the period ended December 28, 1997          28

Notes to Financial Statements                                               29

Financial Statement Schedule                                                46

         Schedule II - Valuation and Qualifying Accounts






                                       22
<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,  comprised  entirely of outside
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,  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.



Alan J. Cyron
Executive Vice President & Chief Financial Officer





                                       23
<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 28, 1997
and December  29,  1996,  and the related  consolidated  statements  of earnings
(loss),  changes  in  shareholders'  equity and cash flows for each of the three
years in the period ended December 28, 1997. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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 28, 1997 and December 29, 1996,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 28, 1997,  in  conformity  with  generally  accepted  accounting
principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern. As more fully described in Notes 1 and
13 to the accompanying financial statements,  on December 30, 1997, the District
Court for the District of Delaware  issued a judgment  and opinion  finding that
the Company's  diaper  products  infringe  certain patents held by The Proctor &
Gamble  Company.  The Company  has  recorded  estimated  damages and legal costs
related to this matter of $200,000,000 in the accompanying financial statements.
After giving effect to this  contingency,  as of December 28, 1997,  the Company
had a working capital deficit of $173,896,000 and total shareholders'  equity of
$4,954,000. In addition, as described in Note 1, on January 6, 1998, the Company
filed a voluntary  petition for relief under  Chapter 11 of the U.S.  Bankruptcy
Code.  These matters  raise  substantial  doubt about the  Company's  ability to
continue  as a going  concern.  Management's  plans in regard to these  matters,
including its intent to appeal the judgment  referred to above and its intent to
file a plan of  reorganization  that will be acceptable to the Bankruptcy  Court
and the Company's creditors,  are also described in Notes 1 and 13. In the event
a plan of reorganization is accepted, continuation of the business thereafter is
dependent on the Company's ability to achieve successful future operations.  The
accompanying financial statements do not include any adjustments relating to the
recoverability  and  classification of recorded asset amounts or the amounts and
classification  of  liabilities  that might be  necessary  should the Company be
unable to continue as a going concern.

Our audit was made for the purpose of forming an opinion on the basic  financial
statements  taken as a whole.  The  schedule  listed in the  index to  financial
statements and schedules is the  responsibility of the Company's  management and
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


Atlanta, Georgia
March 20, 1998



                                       24
<PAGE>

                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
                     CONSOLIDATED EARNINGS (LOSS) STATEMENTS
              (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                      Year Ended
                                            --------------------------------------------------------------
                                            December 28, 1997      December 29, 1996     December 31, 1995
                                            -----------------      -----------------     -----------------
<S>                                           <C>                  <C>                   <C>   
Sales, net of discounts and allowances        $    561,975          $     581,929         $     518,776

Cost of sales                                      454,911                449,885               439,846
                                            -----------------      -----------------     -----------------
Gross profit                                       107,064                132,044                78,930

Selling, general and administrative expense         76,347                 92,212                68,037
   
Research and development expense                     5,063                  4,163                 3,562

Asset impairments                                    9,442                      -                 2,875

Restructuring                                            -                      -                 8,059
                                            
Loss contingency (Notes 1 and 13)                  200,000                      -                     -
                                            -----------------      -----------------     -----------------
Operating profit (loss)                           (183,788)                35,669                (3,603)

Equity in earnings of  unconsolidated                  953                    423                     -
    subsidiaries

Dividend income from unconsolidated                  1,055                      -                     -
    subsidiary

Interest expense                                     4,667                  2,864                   952

Other income (expense), net                          1,664                    581                  (958)
                                            -----------------      -----------------     -----------------
Earnings (loss) before income taxes               (184,783)                33,809                (5,513)

Provision for (benefit from) income taxes           27,934                 12,687                (2,076)
                                            -----------------      -----------------     -----------------
Net earnings (loss)                           $   (212,717)         $      21,122         $      (3,437)
                                            =================      =================     ================= 
Basic earnings (loss) per common share        $     (17.86)          $       1.76         $        (.29)
                                            =================      =================     =================            
Diluted earnings (loss) per common share      $     (17.86)          $       1.74         $        (.29)
                                            =================      =================     ================= 
Dividends paid                                $         -           $           -         $           -
                                            =================      =================     ================= 
</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.




                                       25
<PAGE>

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


<TABLE>
<CAPTION>
                                                           December 28, 1997      December 29, 1996
                                                           -----------------      -----------------
<S>                                                             <C>                    <C>      
ASSETS
Cash and short-term investments                                 $     991              $   8,297
Receivables                                                        70,616                 56,888
Inventories                                                        48,257                 44,055
Current portion of deferred income taxes                            1,800                 10,575
Prepaid expenses                                                      697                    957
                                                           ------------------     -----------------
     Total current assets                                         122,361                120,772
Property and equipment                                            118,383                116,338
Construction in progress                                           11,154                 10,117
Assets held for sale                                               11,073                 14,421
Patents and trademarks                                                  -                    676
Deferred income taxes                                                   -                 26,293
Investment in unconsolidated subsidiary at cost                    19,964                 16,531
Investment in and advances to unconsolidated
     subsidiaries, at equity                                       53,844                 29,484
Goodwill                                                           34,739                 36,658
Other assets                                                        4,624                  1,800
                                                           ------------------     -----------------
     Total assets                                               $ 376,142              $ 373,090
                                                           ==================     =================

LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings                                           $  14,185              $       -
Checks issued but not cleared                                       9,375                 10,233
Accounts payable                                                   40,305                 37,067
Accrued liabilities                                                32,392                 38,495
Accrued  loss contingency (Notes 1 and 13)                        200,000                      -
                                                           ------------------     -----------------
     Total current liabilities                                    296,257                 85,795
Long-term debt                                                     70,000                 70,000
Deferred compensation                                               1,275                    330
Deferred income taxes                                               3,656                  2,260
                                                           ------------------     -----------------
     Total liabilities                                            371,188                158,385

Commitments and contingencies (Notes 1, 13 and 14)

Shareholders' equity:
Preferred stock:  authorized 10,000,000 shares, no                      -                      -
     shares issued, $.01 par value
Common stock:  authorized 25,000,000 shares,
     issued  12,343,324 and 12,288,293, $.01 par                      123                    123
     value
Capital surplus                                                   144,368                143,205
Foreign currency translation adjustment                            (1,066)                  (614)
Retained earnings (deficit)                                      (128,376)                84,341
Less:  treasury stock, 388,658 and 535,250 shares,         
     at cost                                                      (10,095)               (12,350)
                                                           ------------------     -----------------
     Total shareholders' equity                                     4,954                214,705
                                                           ------------------     -----------------
         Total liabilities and shareholders' equity              $ 376,142              $ 373,090
                                                           ==================     =================
</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.


                                       26
<PAGE>

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

<TABLE>
<CAPTION>
                                                                      Year Ended
                                               --------------------------------------------------------
                                               December 28, 1997   December 29, 1996  December 31, 1995
                                               -----------------   -----------------  -----------------
<S>                                                 <C>                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings (loss)                                 $ (212,717)         $ 21,122           $ (3,437)
Non-cash charges to earnings:
   Depreciation and amortization                        35,514            38,828             35,992
   Deferred income taxes                                36,464             1,656                515
   Write-down of assets                                  7,967                69              4,788
Changes in working capital:
   Accounts receivable                                  (5,430)          (12,300)             1,450
   Inventories and prepaid expenses                     (3,997)            8,117             (6,184)
   Accounts payable                                      3,238              (224)             5,902
   Accrued liabilities and loss contingency            192,615            11,777              4,646
   Checks issued but not cleared                          (858)                1                 84
Other                                                    1,267              (757)            (1,196)
                                               -----------------   -----------------  ----------------- 
   Net cash provided by operating activities            54,063            68,289             42,560
                                               -----------------   -----------------  ----------------- 
CASH FLOWS FROM INVESTING ACTIVITIES:

Expenditures for property and equipment                (49,420)          (48,867)           (17,433)
Proceeds from sale of property and equipment            10,266             3,822                111
Acquisition of Pope & Talbot, Inc.'s disposable
   diaper business assets                                   -           (56,963)                  -
Investment in Grupo P.I. Mabe, S.A. de C.V.             (3,433)          (15,908)                 -
Investment in and advances to
    unconsolidated subsidiaries, at equity             (24,102)          (11,033)                 -
Other                                                   (9,104)           (1,731)               173
                                               -----------------   -----------------  ----------------- 
   Net cash used by investing activities               (75,793)         (130,680)           (17,149)
                                               -----------------   -----------------  ----------------- 
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase (decrease) in short-term borrowings        14,185            (1,760)            (6,382)
Proceeds from U.S. bank credit facility                 25,000            85,000              2,000
Repayments of U.S. bank credit facility                (25,000)          (15,000)            (8,000)
Sale of common stock                                       239               641                  -
Purchases of treasury stock                                  -           (10,083)            (3,823)
                                               -----------------   -----------------  -----------------
    Net cash provided (used) by financing
     activities                                         14,424            58,798            (16,205)
                                               -----------------   -----------------  ----------------- 
NET INCREASE (DECREASE) IN CASH                         (7,306)           (3,593)             9,206

Cash at beginning of period                              8,297            11,890              2,684
                                               -----------------   -----------------  ----------------- 
Cash at end of period                               $      991          $  8,297           $ 11,890
                                               =================   =================  =================
Cash paid (received) during the year for:

   Interest (net of amounts capitalized)            $    4,259          $  2,961           $    586
                                               =================   =================  =================
   Income taxes                                     $   (4,242)         $ 15,189           $   (646)
                                               =================   =================  =================
</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.


                                       27
<PAGE>

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

<TABLE>
<CAPTION>
                                                             Foreign     Retained
                                    Common      Capital     Currency     Earnings      Treasury
                                    Stock       Surplus    Translation    (loss)         Stock
                                  ----------  ----------  ------------- ------------  -----------
<S>                                 <C>        <C>           <C>         <C>            <C>    
BALANCE, December 25, 1994          $   116    $ 129,741     $  (834)    $  66,656      $     -
   Net loss                               -            -           -        (3,437)           -
   Issue common stock                     3        2,981           -             -          113
   Translation adjustment                 -            -         173             -            -
   Purchase of treasury stock             -            -                         -       (3,823)    
                                  ----------  ----------  ------------- ------------  -----------
BALANCE, December 31, 1995              119      132,722        (661)       63,219       (3,710)
   Net earnings                           -            -           -        21,122            -
   Issue common stock                     4       10,483           -             -        1,443
   Translation adjustment                 -            -          47             -            -
   Purchase of treasury stock             -            -           -             -      (10,083)
                                  ----------  ----------  ------------- ------------  -----------
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)
                                  ==========  ==========  ============= ============  =========== 
</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 25, 1994                                          11,623,221                   -
Issue common stock - 1995 Incentive Compensation Plan                   78,744                   -
Issue common stock - Profit Sharing and Savings Plan                   149,539              (7,578)
Purchase of treasury stock                                                   -             252,900
                                                               ---------------------  --------------------
BALANCE, December 31, 1995                                          11,851,504             245,322
Issue common stock - Pope & Talbot disposable diaper business          387,800                   -
Issue common stock - 1995 Incentive Compensation Plan                   26,157              (3,000)
Issue common stock - 1996 Non-Officer Employee Incentive
   Compensation Plan                                                         -             (30,000)
Issue common stock - Profit Sharing and Savings Plan                         -             (54,372)
Issue common stock - Exercise of stock options                          22,832             (10,500)
Purchase of treasury stock                                                   -             387,800
                                                               ---------------------  --------------------
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
                                                               =====================  ====================
</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.


                                       28
<PAGE>

                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
                          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 Company is currently operating as a debtor in possession under the
Bankruptcy Code.

The Procter & Gamble  Company  ("P&G") had filed a claim  against the Company in
the United States District Court for the District of Delaware, alleging that the
Company's disposable baby diaper products infringe two of P&G's inner-leg gather
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  District  Court issued a Judgment and Opinion  which
found, in essence,  two of P&G's diaper patents to be valid and infringed by 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 entitles P&G
to damages  based on sales of the  Company's  diapers  containing  the inner-leg
gather feature.  While the final damages number has not been  adjudicated by the
District Court,  the Company  estimates 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.  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.

Substantially  all  liabilities  outstanding  as of the date of the  Chapter  11
filing are subject to resolution under a plan of reorganization to be voted upon
by the Company's  creditors  and  shareholders  and confirmed by the  Bankruptcy
Court.  Schedules were filed by the Company on March 3, 1998 with the Bankruptcy
Court setting forth the assets and  liabilities of the Company as of the date of
the  Chapter  11  filing,  as shown by the  Company's  accounting  records.  The
Bankruptcy  Court will set a date by which  creditors must file proofs of claims
which arose prior to the Chapter 11 filing.

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
the United States and Canada. Paragon manufactures a line of premium and economy
diapers,   training  pants,  feminine  care  and  adult  incontinence  products,
household cleaners and air freshener  products which are distributed  throughout
the United States and Canada,  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 and Brazil 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,  Paragon Trade Brands (Canada)
Inc. and Paragon Trade Brands  International,  Inc.  ("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


                                       29
<PAGE>

disclosures  regarding  contingent  assets and  liabilities.  Actual results may
differ from those reported due to these estimates and assumptions.

The Company uses a 52 to 53-week year.  The fiscal years ended December 28, 1997
and December 29, 1996 include 52 weeks.  The fiscal year ended December 31, 1995
includes 53 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.

FINANCIAL INSTRUMENTS - FOREIGN CURRENCY FORWARD CONTRACTS

The Company  occasionally enters into forward contracts to hedge certain foreign
currency  denominated purchase commitments for periods consistent with the terms
of the underlying transactions. While the forward contracts affect the Company's
results  of  operations,  they do so  only in  connection  with  the  underlying
transactions.  Gains and  losses on these  contracts  are  deferred  and  offset
exchange gains and losses on the transactions  hedged.  At December 28, 1997 and
December 29, 1996, the Company did not have any forward  contracts  outstanding.
The Company's other off-balance sheet risks are not material.

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. Accordingly, no
separate disclosure of fair value is made.

NONCASH TRANSACTIONS

During the fiscal years ended  December  28, 1997 and  December  29,  1996,  the
Company issued 188,376 and 113,529, respectively,  shares of common stock to key
management and employees through the Company's Long-Term Incentive  Compensation
Plan and its Profit  Sharing  and Savings  Plan (see Note 6). The balance  sheet
effect of  issuing  these  shares of common  stock  was a  decrease  in  accrued
liabilities of $3,354 and $2,919, respectively,  and an increase in equity by an
equal amount without the use of cash.

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 $509 and $602
greater at December 28, 1997 and December 29, 1996,  respectively.  During 1996,
the Company  liquidated  certain  LIFO  inventories  that were carried at higher
costs  prevailing in prior years. The effect of this liquidation was to decrease
earnings before taxes by approximately $1,100.

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.


                                       30
<PAGE>

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 Note 13).

Purchased  patents and trademarks are amortized on a straight-line  basis over a
five- to ten-year  life. 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.  Amortization  expense  was $501 and  $456 for the  years  ended
December 29, 1996 and December 31, 1995, respectively.  Accumulated amortization
was $5,523 and $4,847 at December 28, 1997 and  December 29 1996,  respectively.
All purchased patents were fully amortized as of December 28, 1997.

INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

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")  for $15,300 in cash plus  additional
consideration  based on Mabesa's future financial results through 2001. In 1997,
based  on  Mabesa's  1996  financial   results,   the  Company  paid  additional
consideration  of $3,400.  The Company  also  acquired the option to purchase an
additional 34 percent  interest in Mabesa at a contractually  determined  price.
The investment is carried at cost in the accompanying balance sheet.

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
will be  used  to  establish  additional  Latin  American  joint  ventures.  The
investment is accounted for using the equity method.

On August 26, 1997, Stronger acquired 70 percent of Serenity S.A.  ("Serenity"),
the third largest diaper manufacturer in Argentina, for approximately $11,600 in
cash plus earn-out  payments based on Serenity's  future financial  results over
the next three years. 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 has guaranteed  earn-out  payments
estimated not to exceed $3,300 through 2000.

On November 10, 1997,  Stronger  acquired 100 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.

The  investment in Stronger  exceeds the  underlying  net assets by $6,406.  The
difference is being amortized over a 40 year life.

There have been no dividend  distributions  to the Company from PMI or Stronger.
The Company  received a dividend  distribution of $1,055 from Mabesa in the year
ended December 28, 1997. There was no dividend  distribution from Mabesa for the
year ended December 29, 1996.

GOODWILL

On February 8, 1996, the Company  completed the purchase of substantially all of
the assets of Pope & Talbot, Inc.'s ("P&T") 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


                                       31
<PAGE>

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 and $1,735 for the years ended December 28, 1997
and December 29, 1996,  respectively.  Accumulated  amortization  was $3,654 and
$1,735 as of December 28, 1997 and December 29, 1996, 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 year ended December 29, 1996, the Company repurchased
387,800 shares at a cost of $10,083.  The Company reissued 135,845 and 87,322 of
these shares  through its Long-Term  Incentive  and Profit  Sharing Plans in the
years ended December 28, 1997 and December 29, 1996,  respectively.  The Company
reissued 10,747 and 10,500 shares for the exercise of stock options in the years
ended December 28, 1997 and December 29, 1996, respectively (see Note 6).

SIGNIFICANT SALES

During the years ended  December  28,  1997,  December 29, 1996 and December 31,
1995,  the  percentages  of net  sales to an  individual  customer  whose  sales
represent  in excess of 10 percent of net sales were 15 percent,  13 percent and
11 percent, respectively.

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  28,  1997,  there  were  approximately  $10,077  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
earnings  (loss)  statements,  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

Effective February 2, 1993, Paragon adopted both a defined  contribution  profit
sharing  plan and a 401(k)  savings  plan  covering  most of its  employees.  On
October 1, 1993, the two plans were merged,  amended and restated into one plan,
the Paragon Trade Brands,  Inc. Profit Sharing and Savings Plan. The name of the
plan was changed by  resolution  of the Board of Directors  in December  1995 to
Paragon  Retirement  Investment  Savings 


                                       32
<PAGE>

Management  Plan  ("PRISM").   The  plan  provides  for  both  employer-matching
contributions based on voluntary salary deferrals of employees and discretionary
employer  contributions.  Plan  participants  are fully  vested with  respect to
employer contributions after three years of service. Employee contributions vest
immediately.  Contributions  to the plan are based on various levels of employee
participation.  Plan  expense for the fiscal  years  ended  December  28,  1997,
December  29,  1996  and  December  31,  1995 was  $1,141,  $2,607  and  $1,475,
respectively.

NEW ACCOUNTING STANDARD

In February 1997, the Financial  Accounting Standards Board issued SFAS No. 128,
"Earnings  per Share,"  effective  for fiscal years and interim  periods  ending
after  December  15,  1997.  The  adoption  of this  statement  did  not  have a
significant impact on the Company's results of operations.

RECLASSIFICATIONS

Certain   reclassifications  have  been  made  to  the  prior  years'  financial
statements to conform them to the current year's presentation.

NOTE 3:    ASSET IMPAIRMENTS

Asset  impairments  were $9,442 and $2,875 for the years ended December 28, 1997
and December 31, 1995,  respectively.  There were no asset  impairments  for the
year ended December 29, 1996.

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. The equipment has been written down to estimated net selling
price and is  categorized  as assets  held for sale on the balance  sheet.  Also
included in the shut down of the tampon  producing  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 asset impairments for the year ended December 31, 1995 were primarily due to
the cancellation of capital projects.

NOTE 4:    OTHER INCOME (EXPENSE), NET

Other  income  was $1,664 and $581 in 1997 and 1996,  respectively  compared  to
other expense of $958 in 1995.  The primary  increase in income in 1997 and 1996
was due to  interest  income  from PMI.  The expense in 1995 was due to one-time
charges, including legal settlement costs.



                                       33
<PAGE>

NOTE 5:    INCOME TAXES

Taxes on income are based on earnings (losses) before taxes as follows:
<TABLE>
<CAPTION>

                                     December 28, 1997      December 29, 1996      December 31, 1995
                                     -------------------    -------------------    -------------------
<S>                                  <C>                    <C>                    <C>             
 Domestic                            $    (188,784)         $      22,035          $      (7,453)
 Foreign                                     4,001                 11,774                  1,940
                                     -------------------    -------------------    -------------------
                                     $    (184,783)         $      33,809          $      (5,513)
                                     ===================    ===================    ===================
</TABLE>

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

<TABLE>
<CAPTION>
                                     December 28, 1997      December 29, 1996      December 31, 1995
                                     -----------------      -----------------      -----------------
<S>                                      <C>                    <C>                     <C>
Federal:
      Current                            $  (6,594)             $  8,651                $  (2,162)
      Deferred                              33,494                (1,098)                      68
                                     -----------------      -----------------      -----------------
                                            26,900                 7,553                   (2,094)
                                     -----------------      -----------------      ----------------- 
State:
      Current                               (1,197)                1,496                     (702)
      Deferred                                 833                  (200)                     194
                                     -----------------      -----------------      -----------------
                                              (364)                1,296                     (508)
                                     -----------------      -----------------      -----------------
Foreign:
      Current                                1,803                 1,578                      273
      Deferred                                (405)                2,260                      253
                                     -----------------      -----------------      -----------------
                                             1,398                 3,838                      526
                                     -----------------      -----------------      -----------------
                                         $  27,934              $ 12,687                $  (2,076)
                                     =================      =================      ================= 
</TABLE>


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

<TABLE>
<CAPTION>
                                      December 28, 1997      December 29, 1996     December 31, 1995
                                      -----------------      -----------------     -----------------
<S>                                      <C>                    <C>                    <C>
Expected provision at the
    statutory rate                       $  (64,674)            $  11,833              $ (1,930)
State income taxes, net of
    federal tax benefit                      (6,640)                1,319                  (330)
Research and experimental credit                 -                    (50)                  (75)
Change in valuation allowance                99,052                   (78)                 (199)
Foreign dividend previously taxed               369                     -                     -
All other, net                                (173)                  (337)                  458
                                     -----------------      -----------------      -----------------
                                         $   27,934             $  12,687              $ (2,076)
                                     =================      =================      ================= 
</TABLE>

Net deferred tax assets (liabilities) at December 28, 1997 and December 29, 1996
were $(1,856) and $34,608,  respectively. The amounts recorded primarily reflect
the  following:  (1) the tax effects of a step-up in the tax basis of the assets
of  Paragon  as a  result  of the  February  2,  1993  transfer  to  Paragon  of
substantially  all the  assets and  liabilities  of the  Weyerhaeuser  Company's
disposable diaper business and (2) deferred tax assets due


                                       34
<PAGE>

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 28, 1997       December 29, 1996
                                                -----------------       -----------------
<S>                                                <C>                    <C>        
Intangible Assets                                  $   (2,127)            $   (2,260)
                                                -----------------       -----------------
     Deferred tax liabilities                          (2,127)                (2,260)
                                                -----------------       -----------------

Depreciation/amortization                                 389                 11,151
Goodwill                                                9,902                 10,851
Reserves not currently deductible                      85,814                 10,503
Package design costs                                    2,099                  1,970
Land                                                      393                    407
All other, net                                          1,007                  2,267
                                                -----------------       -----------------
     Deferred tax assets                               99,604                 37,149
                                                -----------------       -----------------
Deferred tax assets valuation allowance               (99,333)                  (281)
                                                -----------------       -----------------
     Total deferred taxes, net                     $   (1,856)            $   34,608
                                                =================       =================
</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 6:   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  shareholders.  Currently,  long-term
incentives  are provided  through grants of stock  options,  stock  appreciation
rights ("SARs") and restricted  stock.  Given the  uncertainties  related to the
Company's Chapter 11 filing,  the Compensation  Committee of the Company's Board
of Directors has voted to suspend the grant of stock option awards or SARs until
the Company successfully emerges from Chapter 11.

RESTRICTED STOCK GRANTS

In 1997,  restricted shares of common stock were issued at a discounted value in
lieu of  some  or all of cash  bonuses  for  key  employees,  at the  employee's
discretion.  In 1996,  restricted  shares  of  common  stock  were  issued  at a
discounted  value in lieu of all of the cash  bonuses  for the  Chief  Executive
Officer,  President and Chief Financial  Officer for services  rendered in 1995.
Also in 1996,  restricted  shares of common stock were granted to key employees,
not  eligible  for  stock  options  or SAR  grants,  as  part  of the  corporate
headquarters  relocation to Atlanta.  During the fiscal years ended December 28,
1997, and December 29, 1996, there were 12,279 and 30,000 shares of common stock
issued under the 1996 Plan as restricted shares, respectively. During the fiscal
years ended  December  28, 1997 and  December  29,  1996,  there were 36,655 and
29,157  shares of common  stock,  respectively,  issued under the 1995 Plan,  as
restricted and bonus shares. The restricted shares are  non-transferable for two
years.  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 recorded for the fiscal years
ended December 28, 1997,  December 29, 1996 and December 31, 1995 was $856, $800
and $651,  respectively.  The  weighted  average  fair  value per share of stock
granted was $17.50 and $24.52 for the years ended December 28, 1997 and December
29, 1996, respectively.


                                       35
<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 also has a maximum
of  100,000  shares  available  for  grant  under  the  Stock  Option  Plan  for
Non-Employee Directors ("Director Plan"). Stock options are 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 1997,  1996 or 1995. Had  compensation  cost been
recognized  on the basis of fair value  pursuant to FASB  Statement No. 123, net
earnings  (loss) and  earnings  (loss) per share  would  have been  affected  as
follows:

<TABLE>
<CAPTION>
                                     December 28, 1997       December 29, 1996    December 31, 1995
                                     -----------------       -----------------    -----------------
<S>                                  <C>                     <C>                  <C>
NET EARNINGS (LOSS)
    As reported                      $       (212,717)       $        21,122      $         (3,437)
    Pro forma                        $       (213,265)       $        20,486      $         (3,808)

BASIC EARNINGS (LOSS) PER SHARE
    As reported                      $         (17.86)       $          1.76      $          (0.29)
    Pro forma                        $         (17.90)       $          1.70      $          (0.32)
                                     
DILUTED EARNINGS (LOSS) PER SHARE
    As reported                      $         (17.86)       $           1.74     $          (0.29)
    Pro forma                        $         (17.90)       $           1.68     $          (0.32)
</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 years ended December 28, 1997,  December 29, 1996 and December 31, 1995:
a range of  risk-free  interest  rates of 6.15 - 6.43  percent  was used for the
years ended  December  28,  1997,  and  December  29, 1996; a range of risk-free
interest  rates of 5.24 - 5.69 percent was used for the year ended  December 31,
1995;  a dividend  yield of 0.0  percent  was used for all three  years;  and an
estimated  volatility  of 40 percent  was used for the year ended  December  28,
1997, and 44 percent was used for the years ended December 29, 1996 and December
31, 1995, respectively.


                                       36
<PAGE>

Following is a summary of the status of the 1995, LTIC and Director Plans during
the years ended December 28, 1997, December 29, 1996 and December 31, 1995.

<TABLE>
<CAPTION>
                            December 28, 1997           December 29, 1996           December 31, 1995
                        --------------------------  --------------------------  --------------------------
                                       Weighted                    Weighted                    Weighted
                                        Average                     Average                    Average
                         Number of     Exercise      Number of     Exercise      Number of     Exercise
                          Shares         Price        Shares         Price        Shares         Price
                        ------------  ------------  ------------  ------------  ------------   -----------
<S>                       <C>            <C>          <C>            <C>          <C>             <C>
Outstanding,
   beginning of period    735,932        $21.00       703,678        $20.40       570,770         $23.34
Granted                    91,000         16.42        89,000         24.78       220,150          13.73
Exercised                  13,247         18.03        33,332         19.00             -            -
Forfeited                  38,750         22.10        23,414         20.30        87,242          22.78
Expired                         -             -             -             -             -             -
                        ----------------------------------------------------------------------------------
Outstanding, end of
   period                 774,935        $20.46       735,932        $21.00       703,678         $20.40
                          =======                     =======                     =======
Options exercisable
   end of period          518,103        $21.18       368,361        $21.53       233,057         $22.27
                          =======                     =======                     =======
Weighted average
   fair value of options
   granted during the
   period                 $  8.95                     $ 14.05                     $  7.63
                          =======                     =======                     =======
</TABLE>
                                       

Following is a summary of the status of options granted under the 1995, LTIC and
Director Plans at December 28, 1997:

<TABLE>
<CAPTION>
                                      Outstanding Options                            Exercisable Options
                     -----------------------------------------------------       ---------------------------
                                  Weighted Average                                              Weighted
 Exercise Price                 Remaining Contractual     Weighted Average                       Average
     Range           Number         Life (Years)          Exercise Price         Number       Exercise Price  
----------------     ------     ---------------------     ----------------       ------      --------------
 <S>                 <C>                <C>                     <C>              <C>             <C>   
 $12.69-$16.44       261,323            7.91                    $14.55            95,904         $13.79
 $17.13-$24.38       319,830            5.37                    $20.25           306,247         $20.19
 $24.88-$31.13       193,782            6.87                    $28.76           115,952         $29.93
                     -------                                                     -------
 $12.69-$31.13       774,935            6.61                    $20.46           518,103         $21.18
                    =========                                                   =========
</TABLE>

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

<TABLE>
<CAPTION>
                                              December 28, 1997                   December 29, 1996
                                        -------------------------------     ------------------------------
                                         Number           Weighted           Number          Weighted
                                           of              Average             of             Average
                                          SARs         Exercise Price         SARs        Exercise Price
                                        ----------     ----------------     ---------     ----------------
<S>                                       <C>                 <C>            <C>                 <C>              
Outstanding, beginning of period          121,330             $24.32               -                  -
Granted                                   122,330             $16.64         121,330             $24.32
Forfeited                                   8,000             $23.82                                  -
                                            -----                           --------
Outstanding, end of period                235,660             $20.35         121,330             $24.32
Exercisable, end of period                 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  is  recorded  based on the
period-ending  stock price in relation to the SAR exercise  price.  Compensation
expense recorded in 1997 and 1996 was $(34) and $220, respectively.
Redemption of the SARs, when exercised, will be in cash.


                                       37
<PAGE>

DEFERRED COMPENSATION PLAN

The Company adopted the Paragon Trade Brands,  Inc.  Deferred  Compensation Plan
("DCP")  in  April  1997.  The  DCP  is  an  unfunded,   non-qualified  deferred
compensation  plan under which eligible  employees of the Company and members of
the Board of Directors may elect, on a voluntary  basis,  to defer  compensation
until  retirement  or  termination  from  the  Company  or the  Board.  Eligible
participants   are  selected  for   participation  by  a  Committee  (the  "Plan
Committee") which consists of the Board or a committee appointed by the Board.

Eligible  participants  may elect to defer up to 50 percent of their annual base
salary, up to 100 percent of their annual bonus or, in case of the directors, up
to 100 percent of their  director  fees. A participant  is fully vested in their
elective  deferrals.  If a  participant  is employed at the end of the  calendar
year,  the  Company  will credit the  participant's  account 50 percent of their
elective  deferrals not to exceed 25 percent of the  participants  combined base
salary and annual bonus for the calendar year.  Participants become fully vested
in the Company contribution after five years of service with the Company.

Participants,  at the discretion of the Plan  Committee,  may request that their
account be invested in one or more  Measurement  Funds,  which are chosen by the
Plan Committee and are based on one or more mutual funds. To the extent that the
request is approved by the Plan Committee, the funds credited to a participant's
account will be adjusted to reflect gain, loss, income and expense as though the
account had actually been invested in such  Measurement  Funds.  In this regard,
the Company  also adopted in April 1997 a so called  "rabbi  trust" known as the
Paragon Trade Brands,  Inc.  Deferred  Compensation  Plan Master Trust Agreement
(the "Trust Agreement") with Wachovia Bank, N.A. as Trustee which is intended to
serve as a funding  vehicle for the DCP.  However,  as of December 28, 1997, the
Company had not transferred any funds to the Trustee under the Trust  Agreement.
As of December 31, 1997,  no further  compensation  deferrals  will be permitted
under  the DCP.  The  expense  recorded  for the DCP was $247 in the year  ended
December 28, 1997.

PROFIT SHARING AND 401(K) PLANS

To further encourage the ownership of common stock by all employees, the Company
maintains the PRISM Plan, formerly known as the Profit Sharing and Savings Plan,
that  offers  both  profit   sharing  and  401(k)   features.   Profit   sharing
contributions made during the fiscal years ended December 28, 1997, December 29,
1996 and December 31, 1995  consisted of 110,527,  29,613 and 118,387  shares of
common stock, respectively.  For the year ended December 28, 1997, the Company's
401(k)  contributions  consisted of cash and 28,915 shares of common stock.  The
Company's 401(k)  contributions  consisted of 24,759 and 38,730 shares of common
stock for the years ended December 29, 1996 and December 31, 1995, respectively.

PENSION PLAN

The  defined  benefit  retirement  plan for hourly  employees  at the  Company's
California  plant was terminated  effective June 30, 1995 (see Note 17). Paragon
no longer sponsors any defined benefit  retirement  plans. At December 31, 1995,
substantially  all  liabilities  were  settled  under the plan  through lump sum
distributions  or purchased  non-participating  annuities.  The settlement  loss
recognized due to termination of the plan was $1,037.

The actuarial  cost method used in determining  pension  expense for the defined
benefit plan was the projected unit credit method.  Net pension  expense for the
year ended December 31, 1995 was $41.



                                       38
<PAGE>
NOTE 7:    RECEIVABLES

Receivables consist of the following:
<TABLE>
<CAPTION>
                                                  December 28, 1997            December 29, 1996
                                                  -----------------            -----------------
<S>                                                 <C>                          <C>       
Accounts receivable - trade                         $   52,583                   $   51,634
Other receivables                                       24,568                       12,891
                                                  -----------------            -----------------
                                                        77,151                       64,525
Less:  Allowance for doubtful accounts                  (6,535)                      (7,637)
                                                  -----------------            -----------------
Net receivables                                     $   70,616                   $   56,888
                                                  =================            =================
</TABLE>

The increase in other receivables  primarily represents the sale of equipment to
unconsolidated  subsidiaries  (Note 12) and an  increase  in  refundable  income
taxes.

NOTE 8:    INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                 December 28, 1997           December 29, 1996
                                                 -----------------           -----------------
<S>                                                <C>                         <C>
LIFO:
      Raw materials - pulp                         $      381                  $      407
      Finished goods                                   25,770                      21,090
FIFO:
      Raw materials - other                             8,561                       9,131
      Materials and supplies                           20,942                      21,230
                                                 -----------------           -----------------
                                                       55,654                      51,858
      Reserve for excess and obsolete
          items                                        (7,397)                     (7,803)
                                                 -----------------           -----------------
Net Inventories                                    $   48,257                  $   44,055
                                                 =================           =================
</TABLE>

NOTE 9:    PROPERTY AND EQUIPMENT

Property and equipment, at cost, are as follows:

<TABLE>
<CAPTION>
                                                 December 28, 1997           December 29, 1996
                                                 -----------------           -----------------
<S>                                                <C>                         <C>       
Land                                               $    3,741                  $    3,757
Buildings and improvements                             40,191                      36,702
Machinery and equipment                               226,951                     229,289
                                                 -----------------           -----------------
                                                      270,883                     269,748
Less:   Allowance for depreciation                   (152,500)                   (153,410)
                                                 -----------------           -----------------
Net property and equipment                         $  118,383                  $  116,338
                                                 =================           =================
</TABLE>

NOTE 10:   ACCRUED LIABILITIES

Accrued liabilities are as follows:

<TABLE>
<CAPTION>
                                                 December 28, 1997           December 29, 1996
                                                 -----------------           -----------------
<S>                                                <C>                         <C>
Payroll - wages and salaries, incentive
    awards, retirement, vacation and
    severance pay                                  $   10,375                  $   14,975
Coupons outstanding                                     3,824                       6,230
Integration/relocation reserves                         2,575                       5,943
Income taxes payable - current                            195                       1,327
Other                                                  15,423                      10,020
                                                 -----------------           -----------------
Total                                              $   32,392                  $   38,495
                                                 =================           =================
</TABLE>

                                       39
<PAGE>

NOTE 11:   BANK CREDIT FACILITIES

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.  Borrowings  under this credit facility are reflected as long-term debt
in the accompanying balance sheets. Interest is at fixed or floating rates based
on the financial  institution's  cost of funds.  The Company is also required to
maintain certain financial covenants under the agreement.  At December 28, 1997,
Paragon Trade Brands (Canada) Inc. maintained a Cdn $5,000 revolving term credit
facility, guaranteed by the Company, available through October 1998. At December
28, 1997, borrowings under this credit facility totaled $1,385. Borrowings under
this facility are reflected as short-term borrowings in the accompanying balance
sheets.  Interest  is  at  fixed  or  floating  rates  based  on  the  financial
institution's cost of funds.

The  Company  also has access to  short-term  lines of credit on an  uncommitted
basis  with  several  major  banks.  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.  Borrowings  under these
lines of credit are  reflected  as  short-term  borrowings  in the  accompanying
balance sheets.

For the fiscal years ended December 28, 1997, December 29, 1996 and December 31,
1995, interest expense, net of amounts capitalized, was $4,667, $2,864 and $952,
respectively. Capitalized interest for the fiscal years ended December 28, 1997,
December  29,  1996 and  December  31,  1995,  totaled  $784,  $1,064  and $218,
respectively.  Interest expense includes interest on borrowings, credit facility
fees and amortization of deferred financing costs.

The Company has  determined  that, as of the balance  sheet dates,  the carrying
amount of  borrowings  under the credit  facilities  and credit lines  described
above  approximates  fair value.  This is based on the frequent  updating of the
market-based interest rates charged on these borrowings.

The terms of the revolving credit  facility,  revolving term credit facility and
the  short-term  lines of credit  provide that a voluntary  filing of Chapter 11
results in an event of default on such indebtedness.  As a result of its Chapter
11 filing,  the Company is prohibited from paying any  pre-petition  liabilities
without Bankruptcy Court approval.  Substantially all liabilities outstanding as
of the date of the Chapter 11 filing are subject to  resolution  under a plan of
reorganization  to be voted on by the Company's  creditors and  shareholders and
confirmed by the Bankruptcy Court.

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,  the subsidiaries of the Company as guarantors,
and The Chase Manhattan Bank, as agent  ("Chase").  Pursuant to the terms of the
DIP Credit Facility,  Chase has made available to the Company a revolving credit
and letter of credit facility in an aggregate  principal amount of $75,000.  The
Company's  maximum  borrowing  under the DIP Credit  Facility may not exceed the
lesser of $75,000 or an  available  amount as  determined  by a  borrowing  base
formulation.  The borrowing base  formulation 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  has a
sublimit  of $10,000  for the  issuance  of  letters  of credit.  The DIP Credit
Facility  expires on the  earlier  of July 7,  1999,  or the date of entry of an
order by the Bankruptcy Court confirming a plan of reorganization

Obligations under the DIP Credit Facility are secured by the security  interest,
pledge and lien on substantially  all of the Company's assets and properties and
the  proceeds  thereof,  granted  pursuant  to the Final  Order  under  Sections
364(c)(2) and 364(c)(3) of the Bankruptcy Code.  Borrowings under the DIP Credit
Facility may be used to fund  working  capital and for other  general  corporate
purposes.  The DIP Credit Facility  contains  restrictive  covenants,  including
among  other  things,  limitations  on the  creation  of  additional  liens  and
indebtedness,  limitations on capital expenditures,  limitations on transactions
with affiliates including  investments,  loans and advances, the sale of assets,
and the maintenance of minimum  earnings before interest,  taxes,  depreciation,
amortization and  reorganization  items, as well as a prohibition on the payment
of dividends.

The DIP Credit Facility provides that advances made will bear interest at a rate
of 0.5 percent per annum in excess of Chase's  Alternative  Base Rate, or at the
Company's  option,  a rate of 1.5  percent  per annum in  excess


                                       40
<PAGE>

of the reserve adjusted London  Interbank  Offered Rate for the interest periods
of one, two or three  months.  The Company pays a commitment  fee of 0.5 percent
per annum on the  unused  portion  thereof,  a letter of credit fee equal to 1.5
percent per annum of average  outstanding  letters of credit and  certain  other
fees.

NOTE 12:   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 for
the years ended December 28, 1997 and December 29, 1996:

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 28, 1997      December 29, 1996        December 31, 1995
                                   -----------------      -----------------        -----------------
<S>                                <C>                    <C>                      <C>
Sale of equipment                  $         194          $      14,650            $      2,828
Purchase of diapers from PMI       $      40,823          $      11,860            $          -
Due from PMI                       $      39,725          $      27,857            $      3,481
Due to PMI                         $       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 an
interest-bearing  promissory note and  corresponding  Purchase Loan and Security
Agreements. The amounts due under these agreements are carried as investments in
and advances to  unconsolidated  subsidiaries,  at equity on the balance  sheet.
Amounts due to PMI are carried as accounts  payable on the balance sheet.  Loans
due from PMI are evidenced by interest-bearing  promissory notes. The notes bore
an interest rate of 10 percent until December 1, 1997. The notes  currently bear
an interest rate of approximately 7 percent. The Company believes that this rate
represents the fair market rate for comparable loans of similar terms.

MABESA

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

<TABLE>
<CAPTION>
                                                       December 28, 1997       December 29, 1996
                                                       -----------------       -----------------
<S>                                                           <C>                   <C>

Sale of equipment                                             $4,843                $      -
Purchase of diapers from Mabesa                               $2,196                $      -
Due from Mabesa                                               $3,623                $      -
Due to Mabesa                                                 $  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 on the balance sheets.  Depending on the expected payment terms
under the  purchase  agreements,  certain  amounts due bear an interest  rate of
approximately 7 percent. The Company believes that this rate represents the fair
market rate for comparable sales with similar terms.



                                       41
<PAGE>

MPC

The Company has sold certain diaper making equipment to MPC.

                                                      December 28, 1997
                                                      -----------------
Sale of equipment and technology transfer                     $2,400
Due from MPC                                                  $2,000

The amounts due from MPC for equipment  purchased are  classified as receivables
on the balance  sheets.  The loan to MPC bears an interest  rate of LIBOR plus 4
percent. The Company believes that this rate represents the fair market rate for
comparable sales with similar terms.

At December 28, 1997,  the Company had deferred  gains on the sales of equipment
of $4,583.  These gains will be amortized to income over the depreciable life of
the equipment.

NOTE 13:   LEGAL PROCEEDINGS

THE PROCTER & GAMBLE  COMPANY V. PARAGON TRADE BRANDS,  INC. - P&G filed a claim
in January  1994 in the  District  Court for the  District of Delaware  that the
Company's  "Ultra"  disposable  baby  diaper  products  infringe  two  of  P&G's
inner-leg gather 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  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  have  been and will  continue  to be
significant.

In December  1997,  the  Delaware  District  Court issued a Judgment and Opinion
finding  that  P&G's  patents  are 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.  While a final damages
number has not been entered by the District  Court,  the Company  estimates  the
liability and associated  litigation costs to be approximately $200 million. The
Judgment has had a material adverse effect on the Company's  financial  position
and its results of  operations.  The Company has filed with the District Court a
motion for a new trial or to alter or amend the  Judgment.  The Company has also
filed its  Notice of Appeal  with the  Federal  Circuit  Court of  Appeals.  The
Company  intends to vigorously  pursue its motion in the District Court, as well
as the appeal of the District Court's decision.

As a result of the District Court's Judgment, the Company filed for relief under
Chapter 11 of the United States  Bankruptcy Code in the United States Bankruptcy
Court for the Northern District of Georgia on January 6, 1998.

As a result of the Company's Chapter 11 filing,  further  proceedings in the P&G
litigation  were stayed.  By orders  entered on January 15, 1998 and February 4,
1998,  respectively,  the Bankruptcy Court lifted the stay to permit the Company
to pursue its motion  for a new trial or to alter or amend the  judgment  in the
District  Court  and to  pursue  its  appeal.  P&G  has  filed a  motion  in the
Bankruptcy Court seeking to have the automatic stay lifted in order to allow P&G
to seek  injunctive  relief and an accounting for damages.  The Company  opposed
P&G's motion.

It is possible  that the Company may be subject to similar  patent claims on its
diaper products sold in other countries.  The Company is unable to determine the
amount of any such claims at this time.

KIMBERLY-CLARK CORPORATION V. PARAGON TRADE BRANDS, INC. -- 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
inner-leg gathers. The lawsuit seeks injunctive relief, royalty damages,  treble
damages and attorneys'  fees and costs.  The Company has denied  liability under
the patents and has  counterclaimed  for patent  infringement  and  violation of
antitrust laws by K-C. In October 1996, K-C filed a motion for summary  judgment
with respect to the Company's antitrust counterclaim along with a motion to stay
discovery pending  resolution of such motion for summary judgment.  On April 18,
1997, K-C filed a motion for summary judgment of


                                       42
<PAGE>

noninfringement  of two patents asserted by the Company and a motion for partial
summary  judgment  construing the claims of one of the K-C  patents-in-suit.  On
November  22,  1996,   the  Company  filed  a  motion  to  amend  its  antitrust
counterclaim  and on June 13, 1997 filed a motion for summary judgment on one of
the patents  asserted by K-C. In  addition,  K-C has sued the Company on another
patent issued to K-C which is based upon further  continuation of one of the K-C
patents asserted in the case. That action has been consolidated with the pending
action.  The Court has appointed a special master to rule on the various pending
motions.  Legal fees and costs in connection  with this litigation have been and
will be significant.

As a result of the  Company's  Chapter 11  filing,  the  proceedings  in the K-C
litigation  have been  stayed.  K-C has filed a motion in the  Bankruptcy  Court
seeking to have the automatic stay lifted in order to permit the  proceedings in
Dallas to  continue.  The  Company  opposed  K-C's  motion at a hearing  held on
February 11,  1998.  The  Bankruptcy  Court has  continued  the hearing on K-C's
motion until March 30, 1998.

Should K-C prevail on its claims,  award of all or a substantial  portion of the
relief  requested by K-C could have a material  adverse  effect on the Company's
financial condition and its results of operations. Based on the advice of patent
counsel,  the Company has taken the position that the Company's  products do not
infringe any valid patent asserted by K-C.

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,
except for the  Chapter 11 filing and the P&G and K-C matters  discussed  above,
will not have a material adverse effect on its financial condition or results of
operations.

NOTE 14:   COMMITMENTS

Paragon has operating lease agreements for certain facilities that expire during
the four years 1998 through 2001.  Future minimum lease payments  required under
these  noncancelable  operating  leases are: $265 in 1998,  $184 in 1999, $63 in
2000 and $19 in 2001.  Rental  expense for  facilities and equipment was $3,015,
$2,967 and $2,013 for the years ended  December 28, 1997,  December 29, 1996 and
December 31, 1995, respectively.

Commitments for capital  expenditures as of December 28, 1997 are $6,105.  Other
Company commitments include purchase commitments for raw materials at prevailing
market rates. In early 1996, the Company entered into an agreement with Clariant
International  Ltd.  (successor  of  Hoechst  Celanese  Corporation)  whereby it
agreed,  subject  to  certain  limitations,  to  purchase  100  percent  of  its
requirements of SAP through  December 31, 1998.  Fluff pulp, a product made from
wood fibers,  is another  primary raw material.  The Company  extended the fluff
pulp supply contract with Weyerhaeuser whereby it agreed to purchase 100 percent
of its requirements of bleached  chemical fluff pulp through August 31, 1998, at
prices  as  favorable  as  those  Weyerhaeuser   charges  other  North  American
disposable  diaper  manufacturers  for similar grade pulp. The Company  believes
that alternative sources for each of these raw materials are readily available.

As a result of the Chapter 11 filing,  the Company is prohibited from paying any
pre-petition liabilities.  Pursuant to the Bankruptcy Code, the Company can seek
Bankruptcy Court approval for the rejection of executory  contracts or unexpired
leases,  including real property  leases.  Any such rejection may give rise to a
pre-petition unsecured claim for damages arising therefrom.



                                       43
<PAGE>

NOTE 15:   NET EARNINGS PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                                                       Year Ended
                                               --------------------------------------------------------
                                               December 28, 1997  December 29, 1996   December 31, 1995
                                               -----------------  -----------------   -----------------
    <S>                                            <C>                 <C>                <C>

    Net earnings (loss)                            $(212,717)          $  21,122          $   (3,437)
                                                   ==========          =========          ===========
    Weighted average number of common
        shares used in basic EPS (000's)              11,913              12,022              11,725
    Effect of dilutive securities:
        Stock options (000's)                              -                 139                   -
                                               -----------------  -----------------   -----------------
    Weighted number of common shares
        and dilutive potential common stock
        in diluted EPS (000's)                        11,913              12,161              11,725
                                                    =========          =========          ===========
    Basic earnings (loss) per common share          $ (17.86)          $    1.76          $     (.29)
                                                    =========          =========          ===========
    Diluted earnings (loss) per common share        $ (17.86)          $    1.74          $     (.29)
                                                    =========          =========          ===========
</TABLE>


Options  to  purchase  313,612,  223,987  and  517,028  shares of  common  stock
outstanding  during the years ended  December  28,  1997,  December 29, 1996 and
December 31, 1995,  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
28, 1997 and December 31, 1995 because the  computation of diluted  earnings per
share was anti-dilutive.

NOTE 16:   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

FISCAL YEAR ENDED DECEMBER 28, 1997

<TABLE>
<CAPTION>
                                                     First        Second        Third         Fourth
                                                   ---------    ----------    ---------     ----------
      <S>                                            <C>          <C>           <C>           <C>     
      Net sales                                      $ 135,685    $  135,819    $ 154,066     $136,405
 
      Gross profit                                      27,838        23,929       28,601       26,696

      Net earnings (loss)                                3,802         2,652        5,761     (224,932)

      Basic earnings (loss) per share of
           common stock                              $     .32    $      .22    $     .48     $ (18.82)

      Diluted earnings (loss) per share of
           common stock                              $     .32    $      .22    $     .48     $ (18.82)

      Price Range of the Company's common stock:
           High                                      $   30.00    $    18.00    $   19.13     $  23.50
           Low                                       $   14.88    $    15.25    $   15.38     $  17.50
</TABLE>


                                       44
<PAGE>

FISCAL YEAR ENDED DECEMBER 29, 1996

<TABLE>
<CAPTION>
                                                     First        Second        Third         Fourth
                                                   ---------    ----------    ---------     ----------
      <S>                                          <C>          <C>           <C>           <C>     
      Net sales                                    $ 137,214    $  150,717    $ 151,549     $ 142,449

      Gross profit                                    24,453        37,646       39,929        30,016

      Net earnings (loss)                               (600)        5,368       10,486         5,868

      Basic earnings (loss) per share of
           common stock                            $    (.05)   $      .44    $     .87     $     .49

      Diluted earnings (loss) per share of
           common stock                            $    (.05)   $      .44    $     .86     $     .48

      Price Range of the Company's common stock:
           High                                    $   26.50    $    25.13    $   24.00     $   29.25
           Low                                     $   19.88    $    20.00    $   18.38     $   23.25
</TABLE>

NOTE 17:   RESTRUCTURING

On January 24, 1995, the Company  announced it was  restructuring its operations
by closing  its diaper  manufacturing  facility  in La  Puente,  California  and
reallocating  diaper production to its remaining four facilities.  The La Puente
plant was closed at the end of February and resulted in severing the  employment
of  approximately  310 employees.  At December 29, 1996, there were no remaining
assets on the balance  sheet as the  facility and related  production  equipment
have been sold. For the year ended December 31, 1995, the consolidated statement
of loss included $8,059 of pretax restructuring charges as a result of the plant
closure.  These  charges  did not  include  gains  from the sale of  assets.  At
December 29, 1996, the restructuring plan was complete.

NOTE 18:   SUBSEQUENT EVENT

On December  31,  1997 the Company  completed  the  acquisition  of its share of
Goodbaby  Paragon  Hygenic  Products  Ltd., a joint venture in China.  The joint
venture partners are Goodbaby Group and First Shanghai  Investment of Hong Kong.
Paragon maintains a 40 percent  ownership  position in the venture with Goodbaby
Group and First  Shanghai  Investment  at 30 percent  each.  Initial  registered
capital of the venture was approved at $15 million, to be funded over a two year
period.  For the year ended  December 28, 1997 the Company had a  receivable  of
$2,400  recorded for the sale of equipment to the joint venture.  The receivable
was paid in January 1998.



                                       45
<PAGE>

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                   PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
            FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 1997
                          (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

           1997............................      $  7,637     $   (587)    $    (515)     $   6,535
                                              ============  ===========   ============   ============
           1996............................      $  5,866     $  2,965     $  (1,194)     $   7,637
                                              ============  ===========   ============   ============
           1995............................      $  5,885     $    958     $    (977)     $   5,866
                                              ============  ===========   ============   ============
      Excess and obsolete items - inventories

           1997............................      $  7,803     $  6,140     $  (6,546)     $   7,397
                                              ============  ===========   ============   ============
           1996............................      $  5,051     $  6,841     $  (4,089)     $   7,803
                                              ============  ===========   ============   ============
           1995............................      $  5,830     $  6,223     $  (7,002)     $   5,051
                                              ============  ===========   ============   ============
</TABLE>

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

The  information  as to the  Company's  directors  appearing  under the  caption
"Election of Director and Director  Information" in the Proxy Statement relating
to the Annual Meeting of Stockholders to be held May 11, 1998 is incorporated by
reference into this report.  The  information  under the caption  "Section 16(a)
Beneficial  Ownership  Reporting  Compliance"  with  respect  to  the  Company's
directors and executive  officers in the Proxy Statement  relating to the Annual
Meeting of  Stockholders  to be held May 11, 1998 is  incorporated  by reference
into this report.  The  information  as to the Company's  executive  officers is
included in Part I hereof  under the caption  "Executive  Officers"  in reliance
upon  General  Instruction  G to Form 10-K and  Instruction  3 to Item 401(b) of
Regulation S-K.

ITEM 11:   EXECUTIVE COMPENSATION

The information set forth under the caption "Director Compensation" in the Proxy
Statement  relating  to the Annual  Meeting of  Stockholders  to be held May 11,
1998, and the information  under the caption  "Executive  Compensation"  in such
Proxy Statement relating to executive officers'  compensation is incorporated by
reference into this report.

ITEM 12:   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  set forth under the  caption  "Security  Ownership  of Certain
Beneficial Owners and Management" in the Proxy Statement  relating to the Annual
Meeting of  Stockholders to be held on May 11, 1998 is incorporated by reference
into this report.



                                       46
<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 SCHEDULES

         Report of Independent Public Accountants

         Consolidated Balance Sheets as of December 28,1997 and December 29, 
         1996

         Consolidated  Earnings (Loss)  Statements for  the three  years  in the
         period ended  December 28, 1997

         Consolidated  Statements  of  Changes in  Shareholders'  Equity for the
         three years in the period ended December 28, 1997

         Consolidated Statements of Cash Flows for the three years in the period
         ended December 28, 1997

         Notes to Financial Statements

         Schedule II:  Valuation and Qualifying Accounts

(b)     The registrant filed  no Reports  on Form 8-K  during the fiscal quarter
        ended December 28, 1997.

<TABLE>
<CAPTION>
(c)     EXHIBITS

        <S>                <C>
        Exhibit 3.1        Certificate of Incorporation of Paragon Trade Brands, Inc. 4

        Exhibit 3.2        By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995 5

        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       Critical Supply Agreement, dated as of February 2, 1993, between
                           Weyerhaeuser and Paragon 1

        Exhibit 10.6.1     Letter Supply Agreement between Weyerhaeuser and Paragon dated as of
                           October 22, 1997



                                       47
<PAGE>

        Exhibit 10.7*      Stock Option Plan for Non-Employee Directors 1

        Exhibit 10.8*      Annual Incentive Compensation Plan 1

        Exhibit 10.9*      1993 Long-Term Incentive Compensation Plan 1

        Exhibit 10.10*     Amended and Restated Employment Agreement, dated as of August 5, 1997,
                           between Paragon and Bobby V. Abraham 9

        Exhibit 10.11*     Amended and Restated Employment Agreement, dated as of August 5, 1997,
                           between Paragon and David W. Cole 9

        Exhibit 10.12*     Employment Agreement, dated as of August 5, 1997, between Paragon and Alan
                           J. Cyron 9

        Exhibit 10.13*     Employment Agreement, dated as of August 5, 1997, between Paragon and
                           Catherine O. Hasbrouck 9

        Exhibit 10.14*     Employment Agreement, dated as of August 5, 1997, between Paragon and
                           Stanley L. Bulger 9

        Exhibit 10.15*     1995 Incentive Compensation Plan 5

        Exhibit 10.16      Amended and Restated Credit Agreement, dated as of February 6, 1996 7

        Exhibit 10.16.1    Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement, dated as of
                           February 6, 1996 8

        Exhibit 10.17      Revolving Canadian Credit Facility and Parent Guarantee 2

        Exhibit 10.18      Indemnification Agreements, dated as of February 2, 1993, between
                           Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts 1

        Exhibit 10.19      Rights Agreement dated December 14, 1994 between Paragon Trade Brands,
                           Inc. and Chemical Bank, as Rights Agent 3

        Exhibit 10.20      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. 6

        Exhibit 10.21**    Sales Contract, dated as of January 30, 1996, between Hoechst Celanese
                           Corporation and Paragon Trade Brands, Inc. 7

        Exhibit 10.22      Lease Agreement between Cherokee County, South Carolina and Paragon Trade
                           Brands, Inc., dated as of October 1, 1996 8

        Exhibit 11         Computation of Per Share Earnings (See Note 15 to Financial Statements)

        Exhibit 21.1       Subsidiaries of the Company

        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.


                                       48
<PAGE>

**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  Quarterly  Report
on Form 10-Q for the quarter ended June 26, 1994.  

3 Incorporated  by reference from Paragon Trade Brands,  Inc.'s  Current  Report
on Form 8-K,  dated as of  December  14,  1994. 

4 Incorporated  by  reference  from  Paragon Trade Brands,  Inc.'s Annual Report
on Form  10-K for the  fiscal  year  ended  December  25,  1994.  

5 Incorporated  by reference from Paragon Trade Brands, Inc.'s Quarterly  Report
on Form 10-Q for the quarter ended June 25, 1995.  

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

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

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

9 Incorporated by reference from Paragon Trade Brands, Inc.'s  Quarterly  Report
on Form  10-Q for the  quarter  ended September 28, 1997.
</FN>
</TABLE>

                                       49
<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,
1998.

                                                   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, 1998.



             /S/ BOBBY V. ABRAHAM
        ----------------------------
        Bobby V. Abraham
        Chairman and Chief Executive Officer


             /S/ ALAN J. CYRON
        ----------------------------
        Alan J. Cyron
        Executive Vice President and Chief Financial Officer
          (Principal Financial Officer)


             /S/ GARY M. ARNTS
        ----------------------------
        Gary M. Arnts
        Vice President and Controller
          (Principal Accounting Officer)


             /S/ ADRIAN D.P. BELLAMY
        ----------------------------
        Adrian D.P. Bellamy
        Director


             /S/ THOMAS B. BOKLUND
        ----------------------------
        Thomas B. Boklund
        Director


             /S/ ROBERT L. SCHUYLER
        ----------------------------
        Robert L. Schuyler
        Director




                                       50
<PAGE>




<TABLE>
<CAPTION>
                                  EXHIBIT INDEX
  

        EXHIBIT            DESCRIPTION
        -------            -----------
        <S>                <C>
        Exhibit 3.1        Certificate of Incorporation of Paragon Trade Brands, Inc. 4

        Exhibit 3.2        By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995 5

        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       Critical Supply Agreement, dated as of February 2, 1993, between
                           Weyerhaeuser and Paragon 1

        Exhibit 10.6.1     Letter Supply Agreement between Weyerhaeuser and Paragon dated as of
                           October 22, 1997

        Exhibit 10.7*      Stock Option Plan for Non-Employee Directors 1

        Exhibit 10.8*      Annual Incentive Compensation Plan 1

        Exhibit 10.9*      1993 Long-Term Incentive Compensation Plan 1

        Exhibit 10.10*     Amended and Restated Employment Agreement, dated as of August 5, 1997,
                           between Paragon and Bobby V. Abraham 9

        Exhibit 10.11*     Amended and Restated Employment Agreement, dated as of August 5, 1997,
                           between Paragon and David W. Cole 9

        Exhibit 10.12*     Employment Agreement, dated as of August 5, 1997, between Paragon and Alan
                           J. Cyron 9

        Exhibit 10.13*     Employment Agreement, dated as of August 5, 1997, between Paragon and
                           Catherine O. Hasbrouck 9

        Exhibit 10.14*     Employment Agreement, dated as of August 5, 1997, between Paragon and
                           Stanley L. Bulger 9

        Exhibit 10.15*     1995 Incentive Compensation Plan 5

        Exhibit 10.16      Amended and Restated Credit Agreement, dated as of February 6, 1996 7

        Exhibit 10.16.1    Amendment Agreement, dated December 13, 1996, to Amended and Restated Credit Agreement, dated as of
                           February 6, 1996 8


                                       51
<PAGE>

        Exhibit 10.17      Revolving Canadian Credit Facility and Parent Guarantee 2

        Exhibit 10.18      Indemnification Agreements, dated as of February 2, 1993, between
                           Weyerhaeuser and Bobby V. Abraham and Gary M. Arnts 1

        Exhibit 10.19      Rights Agreement dated December 14, 1994 between Paragon Trade Brands,
                           Inc. and Chemical Bank, as Rights Agent 3

        Exhibit 10.20      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. 6

        Exhibit 10.21**    Sales Contract, dated as of January 30, 1996, between Hoechst Celanese
                           Corporation and Paragon Trade Brands, Inc. 7

        Exhibit 10.22      Lease Agreement between Cherokee County, South Carolina and Paragon Trade
                           Brands, Inc., dated as of October 1, 1996 8

        Exhibit 11         Computation of Per Share Earnings (See Note 15 to Financial Statements)

        Exhibit 21.1       Subsidiaries of the Company

        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  Quarterly  Report
on Form 10-Q for the quarter ended June 26, 1994.  

3 Incorporated  by reference from Paragon Trade Brands,  Inc.'s  Current  Report
on Form 8-K,  dated as of  December  14,  1994. 

4 Incorporated  by  reference  from  Paragon Trade Brands,  Inc.'s Annual Report
on Form  10-K for the  fiscal  year  ended  December  25,  1994.  

5 Incorporated  by reference from Paragon Trade Brands, Inc.'s Quarterly  Report
on Form 10-Q for the quarter ended June 25, 1995.  

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

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

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

9 Incorporated by reference from Paragon Trade Brands, Inc.'s  Quarterly  Report
on Form  10-Q for the  quarter  ended September 28, 1997.
</FN>
</TABLE>



                                       52