SETTLEMENT AGREEMENT


               This Settlement Agreement is made and entered into as of February
2, 1999, between Paragon Trade Brands, Inc., a Delaware corporation,  debtor and
debtor in  possession  ("Paragon"),  and The Procter & Gamble  Company,  an Ohio
corporation ("P&G").


                              W I T N E S S E T H:

               WHEREAS, Paragon and P&G  are partie  to an action  entitled  THE
PROCTER & GAMBLE  COMPANY V. PARAGON TRADE  BRANDS, INC., C.A.  No. 94-16 (LON),
filed in  the United States  District Court for  the District of  Delaware  (the
"Action"), in which, among other things (a) an  Opinion and  Judgment was issued
on December 30, 1997, and  entered on the  court's docket on January 6, 1998, in
favor of P&G and against Paragon; a Money Judgment was  entered on June 2, 1998;
and a Permanent Injunction was entered on June 2, 1998 (collectively, the "Final
Judgment"); and (b) an Opinion and Order was entered on August 4, 1998  (as more
fully defined below, the "Rule 59 Denial"), denying Paragon's motion pursuant to
Fed. R. Civ. P. 59;

               WHEREAS, Paragon has  appealed both  the Final  Judgment  and the
Rule 59 Denial;

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

               WHEREAS,  on or about  June 5,  1998,  P&G filed a proof of claim
(the  "Bankruptcy  Claim") in Paragon's  chapter 11 case asserting,  among other
things,  both unsecured  prepetition  claims in excess of $1.8 billion  (without
trebling) and unsecured administrative claims in excess of $300 million (without
trebling)  against  Paragon in  respect of  Paragon's  alleged  infringement  of
certain P&G patents;

               WHEREAS,  P&G served a motion,  dated  September 22, 1998, in the
United  States  District  Court for the  District of  Delaware  for a finding of
contempt  against  Paragon  regarding the Permanent  Injunction  entered by that
court on June 2, 1998, which motion Paragon is opposing;

               WHEREAS,  Paragon and P&G have agreed to  effectuate a settlement
of the claims and disputes relating to the Bankruptcy Claim and as otherwise set
forth in the Ancillary  Agreements  (as defined  below) in  accordance  with the
terms and conditions set forth herein; and

<PAGE>

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

               NOW, THEREFORE, for good and valuable consideration, and in order
to settle  the  Bankruptcy  Claim and as  otherwise  set forth in the  Ancillary
Agreements,    and   to   facilitate   Paragon's   expeditious   and   effective
reorganization, the parties hereto agree as follows:

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

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

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

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

               1.4. "Allowed Claim" means any Claim (a) proof of which was filed
within the applicable period of limitation fixed by the Bankruptcy Court and (i)
as to which no objection to the allowance thereof has been interposed within the
applicable  period of limitation  fixed by the  Bankruptcy  Code, the Bankruptcy
Rules,  order of the Bankruptcy  Court,  or any plan of  reorganization  for the
Debtor, or (ii) as to which an objection has been interposed, to the extent such
Claim has been allowed by a Final Order,  (b) if no proof of which was so filed,
which has been listed by the Debtor in its  schedules of assets and  liabilities
filed with the Bankruptcy  Court (as amended from time to time) as liquidated in
amount and not disputed or contingent  as to liability,  or (c) arising from the
recovery of property under section 550 or 553 of the Bankruptcy Code and allowed
in accordance with section 502(h) of the Bankruptcy Code.


                                      -2-
<PAGE>

               1.5. "Ancillary Agreements" means the P&G Licenses annexed hereto
as  Exhibit  A, the  Paragon  Release  annexed  hereto as Exhibit B, and the P&G
Release annexed hereto as Exhibit C.

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

               1.7.  "Bankruptcy  Claim" shall have the meaning ascribed to such
term in the fourth "WHEREAS" clause of this Settlement Agreement.

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

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

               1.10. "Bankruptcy Court Approval Order" means an order (which may
be a Confirmation  Order) of the  Bankruptcy  Court  approving  this  Settlement
Agreement and the Ancillary Agreements pursuant to, INTER ALIA,  Bankruptcy Rule
9019 and Bankruptcy Code sections 105, 363, 365, 1123 and/or 1129.

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

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

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

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

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


                                      -3-
<PAGE>

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

               1.17.  "Contempt  Motion"  means The  Procter & Gamble  Company's
Motion For A Finding Of Contempt  Against  Paragon  Trade  Brands,  Inc.,  dated
September 22, 1998,  which,  by Order dated September 24, 1998, was filed by P&G
in the Delaware District Court on January 8, 1999.

               1.18.  "Creditors'  Committee"  means the  Official  Committee of
Unsecured  Creditors  in the Chapter 11 Case,  as appointed by the Office of the
United States Trustee for the Northern  District of Georgia,  Atlanta  Division,
and reconstituted from time to time.

               1.19.  "Debtor" means Paragon.

               1.20.  "Delaware District Court" means the United States District
Court for the District of Delaware.

               1.21. "Effective Date" means the first Business Day that the Plan
becomes   effective  in  accordance  with  its  terms  by  the  commencement  of
distributions thereunder.

               1.22. "Entity" means an entity as such term is defined in section
101(15) of the Bankruptcy Code (including  defined terms used in such section of
the Bankruptcy Code).

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

               1.24.  "Federal Circuit Court" means the  United States  Court of
Appeals for the Federal Circuit.

               1.25.  "Final  Judgment" shall have the meaning  ascribed to such
term in the first "WHEREAS" clause of this Settlement Agreement.

               1.26.  "Final Order" means an order or judgment of the Bankruptcy
Court,  as  entered  on the  docket in the  Chapter  11 Case,  that has not been
reversed, stayed, modified or amended and as to which the time to appeal or seek
review,  rehearing,  reargument  or  certiorari  has  expired and as to which no
appeal or petition for review,  rehearing,  reargument,  stay or  certiorari  is
pending,  or as to which any right to appeal or to seek certiorari,  review,  or
rehearing has been waived,  or, if an appeal,  reargument,  petition for review,
certiorari or rehearing has been sought, the order or judgment of the Bankruptcy
Court  that has been  affirmed  by the  highest  court to which  the  order  was
appealed  or from which the  reargument,  review or  rehearing  was  sought,  or
certiorari has been denied,  and as to which the time to take any further appeal
or seek further reargument,  


                                      -4-
<PAGE>

review or rehearing  has expired; PROVIDED, HOWEVER, that  for purposes  of this
Settlement  Agreement,  the  Bankruptcy  Court  Approval  Order  approving  this
Settlement Agreement  and allowing  the P&G Allowed  Unsecured Claim and the P&G
Allowed  Administrative  Expense  Claim (each as  defined in Section 2.1 of this
Settlement Agreement) shall be  deemed a Final Order upon the  occurrence of the
Effective Date.

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

               1.28.  "Paragon Release" means the general release annexed hereto
as Exhibit B.

               1.29.  "Parties" means  Paragon and  P&G,  and  their  respective
successors and assigns, collectively.

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

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

               1.32.  "P&G Allowed  Claims"  shall have the meaning  ascribed to
such term in Section 2.1 of this Settlement Agreement.

               1.33.  "P&G Licenses" means the license agreements annexed hereto
as Exhibit A.

               1.34.  "P&G Patents"  means the  patents identified  on Exhibit D
hereto.

               1.35.  "P&G Release" means the general release annexed  hereto as
Exhibit C.

               1.36.  "Rule 59 Denial"  means that certain  Opinion and Order of
the Delaware  District  Court,  both entered August 4, 1998,  denying  Paragon's
Motion for a New Trial or, in the  Alternative,  for the Court to Alter or Amend
Its Judgment pursuant to Federal Rule of Civil Procedure 59.

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

        2.     ALLOWED AMOUNT AND TREATMENT OF P&G CLAIMS.

               2.1. ALLOWED AMOUNT OF CLAIMS. P&G shall be granted on account of
its agreements hereunder and account of, and in full settlement and satisfaction
of, the Bankruptcy  Claim, two Allowed Claims in the Chapter 11 Case as follows:
(a) an Allowed Claim 


                                      -5-
<PAGE>

(the "P&G Allowed  Unsecured  Claim") in an  amount equal  to the sum of (i) one
hundred  fifty  eight  million five  hundred  thousand  dollars  and  zero cents
($158,500,000.00)  plus (ii) to the extent permitted in  accordance with Section
2.3  of  this  Settlement  Agreement,  interest  on   the  principal  amount  of
$158,500,000.00  from April 15,  1999 and  through and  including  the Effective
Date;  and (b) an Allowed  Claim  (the "P&G  Allowed  Administrative  Claim" and
together with the P&G Allowed  Unsecured Claim, the "P&G Allowed Claims")) in an
amount equal to the sum of five million dollars and zero cents  ($5,000,000.00).
For  purposes of the  preceding  clause  (a)(ii),  interest  shall accrue at six
percent (6%) on a per annum 365 day year basis.

               2.2.  TREATMENT  OF THE  P&G  ALLOWED  UNSECURED  CLAIM.  The P&G
Allowed  Unsecured  Claim shall be treated as a prepetition,  general  unsecured
claim under the Plan.  Nothing  contained  herein shall in any way limit,  or be
construed to limit, P&G's rights to object to the classification or treatment of
the P&G Allowed  Unsecured  Claim under the Plan;  provided,  however,  that P&G
shall not contest the status or priority of the P&G Allowed Unsecured Claim as a
prepetition, general unsecured claim.

               2.3.   LIMITATION  ON  THE  PAYMENT  OF  POSTPETITION   INTEREST.
Notwithstanding  anything  to the  contrary  set  forth in  Section  2.1 of this
Settlement  Agreement,  the P&G Allowed  Unsecured Claim shall include  interest
calculated  in  accordance  with Section  2.1(a)(ii)  above only if (a) the Plan
provides for the payment of postpetition  interest to substantially  all holders
of Allowed  Claims  against  Paragon that arose or accrued prior to the Petition
Date, or (b) Kimberly-Clark Corporation receives interest on its Allowed Claims,
if any, against Paragon that arose or accrued prior to the Petition Date.

               2.4. TREATMENT OF THE P&G ALLOWED  ADMINISTRATIVE  CLAIM. The P&G
Allowed  Administrative  Claim shall be afforded  treatment under the Plan as an
Administrative  Expense Claim in accordance  with section  1129(a)(9)(A)  of the
Bankruptcy Code; PROVIDED, HOWEVER, that if the Effective Date does not occur on
or before July 1, 1999,  then Paragon shall pay to P&G one million eight hundred
thousand   dollars   and  zero  cents   ($1,800,000.00)   of  the  P&G   Allowed
Administrative Claim on July 1, 1999.

        3. STAY AND WITHDRAWAL OF THE APPEAL.

               3.1. Upon execution of this Settlement Agreement, Paragon and P&G
shall file a joint motion in the Federal  Circuit  requesting that the Appeal be
stayed pending entry of a Final Order approving the Settlement Agreement.

               3.2.  As soon as  reasonably  practicable  (but in no event later
than five (5) Business Days) after the Bankruptcy Court Approval Order becomes a
Final Order,  Paragon shall, with P&G's written consent,  and with each party to
bear its own costs on appeal, withdraw the Appeal with prejudice.


                                      -6-
<PAGE>

               3.3. Neither Party shall seek to vacate the Final Judgment.

               3.4. As provided in the P&G Licenses, P&G shall waive any and all
rights to sue  (including,  but not limited to, actions to enjoin and/or recover
damages from) Paragon from making, having made with the prior written consent of
P&G,  using,  offering  for sale or selling  Licensed  Products (as such term is
defined in the P&G Licenses) in the United States or Canada,  provided:  (a) the
P&G Licenses have not been  terminated by either  Paragon or P&G; (b) Paragon is
in full compliance with the material terms of this Settlement  Agreement and the
Ancillary  Agreements and is current in meeting its material  obligations to pay
the running  royalties  under the  respective  P&G Licenses;  and (c) Paragon is
otherwise in full  compliance  with the  material  terms of the  respective  P&G
Licenses. As soon as reasonably practicable (but in no event later than five (5)
Business Days) after the date of execution of this Settlement Agreement, Paragon
and P&G shall file a joint motion in the Delaware District Court requesting that
the  Permanent  Injunction  referenced in the first  "WHEREAS"  clause hereof be
modified  for the  purpose  of  permitting  Paragon's  sale of its  products  in
accordance with the terms of the P&G Licenses.

        4.     STAY AND WITHDRAWAL OF THE CONTEMPT MOTION.

               4.1. Upon execution of this Settlement Agreement,  P&G shall file
a letter  motion in the Delaware  District  Court  requesting  that the Contempt
Motion  be  stayed  pending  entry of a Final  Order  approving  the  Settlement
Agreement.

               4.2.  As soon as  reasonably  practicable  (but in no event later
than five (5) Business Days) after the Bankruptcy Court Approval Order becomes a
Final Order, P&G shall withdraw the Contempt Motion with prejudice.

        5.     DISCONTINUANCE OF CURRENT ULG DIAPER.  Paragon shall  discontinue
its manufacture  of the product annexed  hereto as Exhibit E (the "ULG  Diaper")
as soon as commercially  reasonable.  Commencing  January 7, 1999, Paragon shall
be required  to pay to P&G  royalties at the agreed  upon rate and in accordance
with the terms and conditions set forth in the P&G Licenses.

        6.     LICENSES.

               6.1.  Contemporaneously  with the  execution  of this  Settlement
Agreement,  P&G shall  execute  and  deliver to Paragon  the P&G  Licenses.  The
provisions of this Section 6 shall be deemed a part of each of the P&G Licenses.
The P&G Licenses  shall be effective as of January 7, 1999;  PROVIDED,  THAT, if
the Bankruptcy  Court Approval Order is not obtained on or before July 31, 1999,
then the P&G Licenses  shall be terminable  by P&G in accordance  with the terms
set forth therein.


                                      -7-
<PAGE>

               6.2. P&G represents,  warrants and covenants that the P&G Patents
are the only patents owned by P&G in the United States,  Canada, Mexico, Brazil,
Argentina  or  China  (collectively,  including  any  territories  of any of the
foregoing, the "Approved Countries"), or as to which P&G has any right to assert
or prosecute  against an alleged infringer in the Approved  Countries,  that P&G
asserts have been infringed by products of Paragon  and/or its Affiliates  made,
used or sold in the  Approved  Countries  as of the  date of  execution  of this
Settlement  Agreement.  P&G further represents,  warrants and covenants that (a)
P&G shall not seek to assert or prosecute the P&G Patents or any claims relating
to  patents  or  patent  applications  pending,   including   continuations  and
continuations-in-part, owned or assertable by P&G as of the date of execution of
this Settlement Agreement,  or any reissues or reexaminations of such patents or
patent  applications (the "Additional P&G Patents"),  in the Approved  Countries
with respect to the  manufacture,  use or sale of any products by Paragon and/or
its  Affiliates  up to and  including  the date of execution of this  Settlement
Agreement,  and (b) P&G shall not seek to assert  Additional P&G Patents against
either  Paragon  and/or  its  Affiliates  after  the date of  execution  of this
Settlement Agreement with respect to the manufacture, use or sale of the product
designs  attached as exhibits to the P&G Licenses  (collectively,  the "Approved
Products") in any Approved  Country in which Paragon or its Affiliates  have the
right to  make,  use or sell  the  Approved  Products  under  the P&G  Licenses.
Notwithstanding  the  foregoing,  P&G shall be entitled  to assert or  prosecute
against  Paragon  and/or its Affiliates (i) claims related to the P&G Patents or
the  Additional  P&G  Patents in any  Approved  Country in which  Paragon or its
Affiliates  do not have the  right to make,  use or sell the  Approved  Products
under the P&G Licenses with respect to any Approved Products manufactured,  used
or sold after the date of execution of this  Settlement  Agreement,  (ii) claims
related to either the P&G Patents or the  Additional  P&G Patents in any country
or  territory  not  included   within  the  definition  of  Approved   Countries
(collectively,  the  "Non-Approved  Countries")  with respect to any products of
Paragon  and/or  its  Affiliates  manufactured,  used or sold  after the date of
execution of this  Settlement  Agreement,  (iii) claims related to patent rights
acquired by P&G after the date of execution of this Settlement  Agreement (other
than the  Additional P&G Patents) with respect to any products of Paragon and/or
its  Affiliates  manufactured,  used or sold in any  country  after  the date of
execution of this Settlement Agreement, or (iv) claims related to either the P&G
Patents or the  Additional P&G Patents with respect to the  manufacture,  use or
sale by Paragon and/or its Affiliates in any country after the date of execution
of this  Settlement  Agreement  of a  product  design  other  than the  Approved
Products unless manufactured, used or sold pursuant to a license from P&G.

               6.3. To the extent that (i) Paragon or its  Affiliates  make, use
or sell any  products,  including  the  Approved  Products,  in any  country  or
territory in which Paragon or its  Affiliates do not have the right to make, use
or sell such products  under the 



                                      -8-
<PAGE>

P&G Licenses or (ii) Paragon or its Affiliates alter the designs of the Approved
Products  after the date hereof such that P&G believes any of the P&G Patents or
the Additional  P&G Patents,  as the case may be, are infringed, if P&G, at that
time, has licensed the patent(s) in question to other  Entities, then  P&G shall
make  available  to Paragon and/or its Affiliates  a license (an "MFL  License")
on such  patent(s)  on  terms  and  conditions no less favorable  than those P&G
licenses.  If  there is an  unresolved  dispute  between  the Parties  regarding
whether a product infringes a P&G Patent  or an Additional P&G Patent,  any such
dispute  shall be  handled  pursuant to  the  provisions  of  Section  8 of this
Settlement Agreement. Notwithstanding  the foregoing, (a) this Section 6.3 shall
not apply to licenses (i) given by P&G in connection with litigation settlements
or  cross-licenses  or (ii) given  with  respect to  patents  other than the P&G
Patents and the Additional  P&G Patents, the rights to which are acquired by P&G
after the date  hereof, (b) P&G shall not  be required to make  available an MFL
License if the effect of the license would  be to allow an  Affiliate of Paragon
to make, have made,  import,  use, offer for sale and/or sell licensed  products
without entering into a mutually agreeable settlement agreement with P&G for any
past infringing  activity by such Affiliate with respect to the patents to be so
licensed.

               6.4. The P&G  Licenses  shall be personal to Paragon and shall be
nontransferable  and  nonassignable  to third parties  without the prior written
consent  of  P&G,  which  consent  P&G  shall  not   unreasonably   withhold  or
unreasonably  delay. It shall not be  unreasonable  for P&G to withhold or delay
its consent if the effect of the  proposed  transfer or  assignment  would be to
allow a transferee or assignee to obtain the prospective right to make,  import,
use, offer for sale or sell Licensed  Products  without entering into a mutually
agreeable   settlement  agreement  for  any  past  infringing  activity  by  the
transferee  or  assignee.  In addition,  subject to Section 6.3 hereof,  the P&G
Licenses  shall not apply to the  manufacture,  import,  use or sale of Licensed
Products by any other business entity  acquired by Paragon,  by which Paragon is
acquired, merged with Paragon, consolidated with Paragon, partnered with Paragon
or in any other  business  arrangement  with Paragon after the effective date of
this  Settlement  Agreement  without  the prior  written  consent of P&G,  which
consent P&G shall not unreasonably  withhold or unreasonably delay. It shall not
be  unreasonable  for P&G to  withhold or delay its consent if the effect of the
proposed  transaction  would be to allow an acquiring,  merging or consolidating
entity or partner to obtain the prospective  right to make,  import,  use, offer
for sale or sell Licensed  Products in the United States without entering into a
mutually  agreeable  settlement  agreement  with  P&G  for any  past  infringing
activity  by the  acquiring,  merging or  consolidating  entity or partner  with
respect to the patents included in the definition of "Licensed Products."

               6.5.  If  Paragon  so elects in  writing,  Paragon  and P&G shall
arbitrate the issue of whether any of Paragon's  products



                                      -9-
<PAGE>

infringe a valid claim of U.S.  Patent No.  4,963,140 (the  "Robertson  Patent")
and/or U.S. Patent No. 4,681,578 (the  "Anderson  Patent").  The  arbitration(s)
shall be binding and conducted before a panel of three arbitrators, one of which
shall be  selected by each  of Paragon  and P&G and the third of which  shall be
selected  by the other  two arbitrators.  The  arbitration(s) shall be conducted
further  pursuant to  other terms  to be  agreed  upon by  the  Parties.  If the
arbitrators find  that one or more  Paragon  products  infringe a valid claim of
either the Robertson  Patent  and/or the  Anderson  Patent,  as the case may be,
then Paragon  shall  continue to pay royalties to P&G pursuant to the respective
license(s) for such patent(s) for any infringing  products manufactured and sold
after the  execution  of this Settlement  Agreement.  If Paragon prevails in the
arbitration(s),  it shall  not owe  royalties  under either the Robertson Patent
and/or the Anderson Patent, as the case may be, for the products involved in the
arbitration(s)  manufactured  or sold after  the arbitration  decision.  Any P&G
Claims under the Robertson Patent or Anderson  Patent  relating to products made
or  sold  prior to the execution of this  Settlement  Agreement are  compromised
as part of the P&G Allowed  Claims under Section 2.1 hereof.

        7.     ASSUMPTION OF THE VAN TILBERG LICENSE. As part of the  procedures
seeking the entry of the Bankruptcy Court Approval Order, Paragon shall seek the
Bankruptcy  Court's approval of Paragon's  assumption,  under section 365 of the
Bankruptcy Code, of the non-exclusive  License Agreement,  dated April 23, 1997,
between  Paragon and P&G (the "Van Tilberg  License")  relating to United States
Patent Nos. 4,589,876 (including its Reexamination Certificate B1 4,589,576) and
5,267,992 and Canadian Patent No.  1,232,702 owned by P&G. Paragon and P&G agree
that, as of June 30, 1998, the date of the most recent annual accounting for the
fiscal year ended  December 28, 1997,  in  accordance  with the terms of the Van
Tilberg  License,  Paragon is owed a credit under the Van Tilberg  License in an
amount equal to $173,005.82  (the "Credit") and that there are no defaults under
the Van Tilberg License that are required to be cured pursuant to section 365 of
the  Bankruptcy  Code as of such date.  Paragon  shall be  entitled to apply the
Credit  until  exhausted  against  royalties  becoming due under the Van Tilberg
License from and after  December 29, 1997, in  accordance  with the terms of the
Van Tilberg License.

        8.    FUTURE PATENT DISPUTES.  In order to potentially avoid the expense
and delay of patent litigation going forward,  both for themselves and for their
Affiliates, Paragon and P&G agree that before any patent litigation is commenced
(including  declaratory  judgment  actions),  any patent  dispute that may arise
following the  execution of this  Settlement  Agreement  will be subject to good
faith negotiations, including escalation to a high-ranking business executive of
each of Paragon and P&G or their respective  Affiliate,  as the case may be, for
resolution;  if the dispute remains unresolved after such good faith negotiation
and escalation, then the parties will discuss in good faith whether some form of
alternative  dispute resolution  ("ADR")



                                      -10-
<PAGE>

mechanism could be employed. If, after such good faith discussions, either Party
rejects  ADR in  writing,  litigation  may  be  commenced.  Notwithstanding  the
foregoing, none of the statements made or actions taken by any Party during good
faith  negotiations  or  discussions  of ADR may be the  basis of a  declaratory
judgment action.

        9.    CLAIMS  ASSERTED BY P&G.  P&G represents and  warrants that (a) it
has  not filed  any  proofs of  claim in  the  Chapter 11  Case  other  than the
Bankruptcy Claim, and (b) it has not acquired or transferred or entered into any
agreement  to acquire or transfer  any claims  asserted  against  Paragon in the
Chapter 11 Case. P&G  represents, warrants and covenants that it (x) has not and
will not amend, modify  or supplement, or seek to amend,  modify  or  supplement
the Bankruptcy  Claim, except in a  manner consistent  with the  terms  of  this
Settlement  Agreement  and (y) shall not  acquire  any claims  asserted  against
Paragon  in the  Chapter  11  Case  without  Paragon's  prior  written  consent.
Notwithstanding the foregoing,  nothing stated in this Settlement  Agreement (i)
shall restrict P&G's rights to assert Administrative Expense Claims that (1) P&G
could not have, with the exercise of reasonable due diligence,  discovered prior
to the date of  execution  of this  Settlement  Agreement or (2) arise after the
date of execution of this Settlement Agreement,  or (ii) shall in any way limit,
or be construed to limit, the legal effect of any Administrative  Expense Claims
bar date to be established  in the Chapter 11 Case, or any discharge  granted to
Paragon pursuant to section 1141 of the Bankruptcy Code.

        10.    RELEASES.

               10.1.  Contemporaneously  with the  execution of this  Settlement
Agreement, Paragon shall execute and hold in escrow the Paragon Release. Paragon
shall  release  and  deliver to P&G the  Paragon  Release as soon as  reasonably
practicable  (but in no event  later  than  five (5)  Business  Days)  after the
Bankruptcy Court Approval Order becomes a Final Order.

               10.2.  Contemporaneously  with the  execution of this  Settlement
Agreement,  P&G shall  execute  and hold in escrow  the P&G  Release.  P&G shall
release and deliver to Paragon the P&G Release as soon as reasonably practicable
(but in no event later than five (5) Business Days) after the  Bankruptcy  Court
Approval Order becomes a Final Order.

        11.    RESTRICTIONS ON  TRANSFER OF P&G ALLOWED CLAIMS.   P&G shall  not
sell or otherwise transfer all or any portion of the Bankruptcy Claim or the P&G
Allowed  Claims  for a period of ninety  (90) days  following  the filing of the
motion to obtain the Bankruptcy Court Approval Order. Following such ninety (90)
day period,  P&G shall not sell or otherwise  transfer all or any portion of the
Bankruptcy Claim or the P&G Allowed Claims to any Entity or Entities unless such
Entity or Entities (i) agree(s) to be bound to the terms and  conditions of this
Settlement



                                      -11-
<PAGE>

Agreement, and (ii) sign(s) an agreement that specifically provides that Paragon
is an intended third party beneficiary of such  Entity(ies)'  agreement to be so
bound to, and subject to the  enforcement  of, the terms and  conditions of this
Settlement  Agreement.  Notwithstanding any assignment or transfer by P&G of all
or any portion of the  Bankruptcy  Claim or the P&G Allowed Claims in accordance
with the  terms  hereof,  P&G  shall  continue  to  remain  bound by each of the
provisions of this Settlement  Agreement,  including,  but not limited to, P&G's
obligations to execute,  deliver and perform its  obligations  under each of the
Ancillary Agreements.  In the event that P&G sells or otherwise transfers all or
any  portion  of  the  Bankruptcy   Claim  or  the  P&G  Allowed   Claims,   and
notwithstanding  any provisions  contained  herein or in the P&G Licenses to the
contrary, the P&G Licenses shall remain in full force and effect notwithstanding
the lack of entry of the  Bankruptcy  Court Approval Order on or before July 31,
1999, or the reversal or modification of such order on appeal.

        12.    EXCLUSIVITY AND PLAN CONFIRMATION.

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

               12.2.  Notwithstanding the provisions of section 12.1 hereof, P&G
shall  have the right to object to (a) any motion  filed by  Paragon  seeking an
extension of the Exclusive  Periods if Paragon is not diligently  pursuing final
approval of this Settlement  Agreement  (including its obligations under Section
22 of this  Settlement  Agreement),  or (b)  confirmation of the Plan if the P&G
Allowed  Claims are not treated in accordance  with the terms and  conditions of
this  Settlement  Agreement or the Plan does not  otherwise  comply with section
1129 of the Bankruptcy Code except to the extent such compliance has been waived
by P&G with  respect  to the  payment  of  interest  under  Section  2.3 of this
Settlement Agreement.

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

        14.    NOTICES.  Any  notices  or other communications  hereunder  or in
connection  herewith  shall be in writing  and shall be deemed to have been duly
given when delivered in person,  by facsimile  



                                      -12-
<PAGE>

transmission or by registered or certified mail (postage prepaid, return receipt
requested) addressed, as follows:

        If to Paragon, to:

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

        with a copy to:

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

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

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

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



        If to P&G, to:

        The Procter and Gamble Company
               6090 Center Hill Avenue
               Cincinnati, Ohio  45224
               Telephone:  513-634-5142



                                      -13-
<PAGE>

               Facsimile:  513-634-1927
               Attention:  Patrick D. Lane

        with a copy to:

        Jones, Day, Reavis & Pogue
               North Point
               901 Lakeside Avenue
               Cleveland, Ohio  44114
               Telephone:  216-586-3939
               Facsimile:  216-579-0212
               Attention:  David G. Heiman, Esq.

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

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

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

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



                                      -14-
<PAGE>

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

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

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

        20.    RULES OF CONSTRUCTION.

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

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

               20.3. Any reference in this  Settlement  Agreement to an existing
document  or exhibit  means  such  document  or  exhibit  as it may be  amended,
modified or supplemented in writing by the Parties.

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

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

        21.    CONDITIONS.  As  an  express  condition  precedent  to  Paragon's
obligations under this Settlement Agreement:



                                      -15-
<PAGE>

               21.1.  BANKRUPTCY  COURT APPROVAL.  A Final Order shall have been
entered  approving this Settlement  Agreement in all respects.  In the event the
Bankruptcy Court Approval Order does not become a Final Order, the terms of this
Settlement  Agreement shall not be binding on any of the Parties hereto,  except
that (a) Section 15 hereof shall remain  binding and (b) the P&G Licenses  shall
continue to be effective and  terminable by P&G in accordance  with the terms of
the P&G Licenses.

               21.2.  EXECUTION OF ANCILLARY  AGREEMENTS.  Paragon and P&G shall
execute and deliver each of the Ancillary Agreements annexed hereto.

        22.    AGREEMENT TO COOPERATE.  As soon as reasonably  practicable after
the  date  of  execution  of  this  Settlement  Agreement,  Paragon  shall  take
reasonable  good  faith steps to  promptly obtain the Bankruptcy  Court Approval
Order (either through the filing of a motion seeking approval of this Settlement
Agreement, the  confirmation  of a  Plan  embodying the terms of the  Settlement
Agreement, and/or a  combination  of the  foregoing),  and P&G  shall  take such
steps as  reasonably  requested  by Paragon in good faith to obtain entry of the
Bankruptcy Court Approval Order.

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

        24.    ANNOUNCEMENTS.  All  press releases  by any Party  regarding this
Settlement  Agreement  shall be  approved  by both  Paragon and P&G prior to the
issuance  thereof;  provided that either Party may make any public disclosure it
believes  in good  faith is  required  by law or  regulation  (in which case the
disclosing  Party shall  advise the other Party prior to making such  disclosure
and  provide  such  other  Party an  opportunity  to review  and  comment on the
proposed  disclosure).  Paragon's  filing of a motion with the Bankruptcy  Court
seeking  approval of this Settlement  Agreement shall not be considered a public
announcement requiring P&G's approval for purposes of this Section 24.

        25.    CONFIDENTIALITY.  Nothing contained in this  Settlement Agreement
modifies,  or is intended to modify,  the obligations of P&G or Paragon or their
respective employees,  advisors and agents 



                                      -16-
<PAGE>

under any confidentiality  agreements that such Entities have executed.

        26.    JURISDICTION.   The  Bankruptcy   Court  shall  retain  exclusive
jurisdiction,  and the Parties consent to such exclusive  jurisdiction,  to hear
and determine any and all matters,  claims or disputes  arising from or relating
to the  interpretation  and/or  implementation  of  this  Settlement  Agreement;
PROVIDED,  HOWEVER,  that the  Bankruptcy  Court  shall not retain  jurisdiction
following  the  Effective  Date  to  determine  matters,   claims  and  disputes
concerning the interpretation and enforcement of the P&G Licenses.


                                      -17-
<PAGE>

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

                                            PARAGON TRADE BRANDS, INC.
                                            Debtor and Debtor in Possession



                                            By:  /S/ BOBBY V. ABRAHAM   
                                            ----------------------------
                                               Name:  B. V. Abraham
                                               Title: Chairman and Chief
                                                        Executive Officer



                                            THE PROCTER & GAMBLE COMPANY



                                            By:  /S/ MARK D. KETCHUM     
                                            -----------------------------
                                               Name:  Mark D. Ketchum
                                               Title: President-Global Baby Care