<PAGE>   1
                     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 29, 1996
                                      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
          incorporation or organization)           identification no.)

     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. [X]

As of February 28, 1997, there were 12,288,293 shares of the Registrant's
Common Stock outstanding, and the aggregate market value of such stock held
by nonaffiliates of the Registrant was $224,261,347 (based on the closing
price on the New York Stock Exchange).

                     DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 29, 1996 have been incorporated by reference into Parts
II and IV of this report.  Portions of the Registrant's Proxy Statement
relating to the Annual Meeting of Stockholders to be held May 20, 1997, are
incorporated by reference into Part III of this report.

Exhibit Index on Page 15

<PAGE>   2


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


                                     PART I
                                                                          Page


 Item 1:   BUSINESS                                                        1    
                                                                                
 Item 2:   PROPERTIES                                                      6    
                                                                                
           EXECUTIVE OFFICERS                                              6    
                                                                                
 Item 3:   LEGAL PROCEEDINGS                                               7    
                                                                                
 Item 4:   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             8    
                                                                                

                                    PART II


 Item 5:   MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
           STOCKHOLDER MATTERS                                             8

 Item 6:   SELECTED FINANCIAL DATA                                         8

 Item 7:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS                                           8

 Item 8:   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                     8

 Item 9:   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE                                            8

                                    PART III

 Item 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT              8

 Item 11:  EXECUTIVE COMPENSATION                                          8

 Item 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  9

 Item 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                  9

                                    PART IV

 Item 14:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 9
                                                                           

                                     Page i

<PAGE>   3




                                    PART I

ITEM 1:  BUSINESS

GENERAL

Paragon Trade Brands, Inc. (the "Company") is the largest store brand
manufacturer of infant disposable diapers in North America.  The Company,
previously a division of Weyerhaeuser Company ("Weyerhaeuser"), became a
publicly-held, independent company as a result of a public offering of stock
completed on February 2, 1993.  The Company acquired substantially all the
assets and liabilities of the private label diaper business of Weyerhaeuser
(the "Business") in exchange for 10 million shares of stock and $35 million in
cash.  The Company manufactures a line of premium-quality diapers known as
"Ultra," a supreme diaper product, a line of economy diapers that have fewer
features, and a line of training pants.  The Company has also recently begun to
manufacture a line of feminine care products.  The Company's products are
distributed throughout North America through grocery and food stores, mass
merchandisers, warehouse clubs, toy stores and drug stores that market the
products under their own store brand names.

Weyerhaeuser entered the store brand infant disposable diaper market in 1972.
As part of the general refocusing on its core businesses, Weyerhaeuser decided
to divest its interest in the Business by means of the public offering
completed on February 2, 1993.  The Company was incorporated in Delaware in
June 1992 as a wholly-owned subsidiary of Weyerhaeuser.

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.  The
manufacturing  equipment and plants are being held for sale.  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.

In 1996, the Company relocated its corporate headquarters from Federal Way,
Washington to Norcross, Georgia.

PRODUCTS

The Company manufactures several diaper product lines: a premium-quality Ultra
line, in both thick and thin versions, an economy line ("Economy"), a Supreme
line and a training pant line.  Ultra diaper sales accounted for approximately
78 percent, 76 percent and 77 percent of the Company's total unit sales in
1996, 1995 and 1994, respectively.  Economy diaper units represented
approximately 12 percent, 17 percent, and 13 percent of the Company's total
unit sales in fiscal years 1996, 1995 and 1994, respectively.  Training pant
sales represented approximately 3 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 both its thin and thick versions of the Ultra diaper in
five 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
cartoon characters on the "tape landing zone" of its Ultra diapers.  In late
1996, 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.


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<PAGE>   4




The Company also produces a supreme diaper product with a thin pad and a soft,
cloth-like nonwoven outer cover in response to the Huggies(R) Supreme product
introduced by Kimberly-Clark Corporation ("Kimberly-Clark").  Sales of this
product represented approximately 4 percent of the Company's total unit sales
in fiscal year 1996.

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.  Sales of feminine care products were
negligible in 1996.

PRODUCT DEVELOPMENT

To enhance the Company's objective of providing its trade customers with
premium-quality store brand disposable diapers and feminine care 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 $4.2 million,
$3.6 million and $6.9 million on research and development in fiscal years 1996,
1995 and 1994, respectively.

The Company intends to enter the adult incontinence and baby wipes businesses.

PATENT RIGHTS

Because of the emphasis on product innovations in the disposable diaper and
feminine care 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 "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 and
feminine care product features and manufacturing processes.

MAJOR CUSTOMERS AND FOREIGN OPERATIONS

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 13 percent, 11 percent and 15 percent of total net sales in
fiscal years 1996, 1995 and 1994, respectively.  As is customary in the infant
disposable diaper market, the Company does not have long-term contracts with
any of its trade customers.  The Company estimates that approximately 9
percent, 6 percent and 5 percent of net sales were to trade customers in Canada
in fiscal years 1996, 1995 and 1994, respectively.

The Company does not sell its disposable diapers directly in Mexico.  However,
the Company believes that in fiscal year 1994 approximately 7 percent of its
diapers were sold to trade customers in the United States and used by consumers
in Mexico.  As a result of the devaluation of the Mexican peso in December of
1994, these sales were negligible in 1995 and 1996.

On January 26, 1996, the Company 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.  The
Company also acquired the option to purchase an additional 34 percent interest
in Mabesa at a contractually determined price.  In addition, the Company
acquired a 49 percent share 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 from a diaper
manufacturing facility it closed in 1995 in La Puente, California 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 expected to be completely
operational by mid-1997.

                                    Page 2

<PAGE>   5




RAW MATERIALS

The principal raw material components of the Company's products are fluff pulp,
SAP, 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 fluff
pulp, a product made from wood fibers.  The Company entered into a fluff pulp
supply contract with Weyerhaeuser whereby it agreed to purchase its
requirements of bleached chemical fluff pulp through August 31, 1997, at prices
as favorable as those Weyerhaeuser charges other North American disposable
diaper manufacturers for similar grade pulp.  In early 1996, the Company
entered into an agreement with Hoechst Celanese Corporation pursuant to which
the Company agreed, subject to certain limitations, to purchase its SAP
requirements from Hoechst Celanese. The Company believes that alternative
sources of 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.

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 The
Procter & Gamble Company ("Procter & Gamble") and Kimberly-Clark.  The Company
estimates that, in 1996, the national branded manufacturers accounted for
approximately 75 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 59 percent of the unit volume.
Both Kimberly-Clark and Procter & Gamble dominate the premium segment.  The
value segment of the industry, which the Company estimates accounted for
approximately 41 percent of unit volume in 1996, is highly competitive.  The
Company includes the following products in the value segment: store brands,
control labels, Procter & Gamble's Luvs(R), Drypers(R), Fitti(R), and all other
regional brands.

In total, Procter & Gamble is the dominant manufacturer in the U.S. diaper
market, with approximately 41 percent market share.  Procter & Gamble
manufactures two brands:  Pampers(R), its premium brand with approximately 26
percent market share, and Luvs, its value brand with 15 percent market share.
Luvs was repositioned from a premium brand to a value brand in April 1993.
Kimberly-Clark manufactures the number one diaper brand, Huggies, with
approximately 33 percent market share.  Kimberly-Clark 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.  Procter & Gamble, in
particular, has been very aggressive in reducing prices in the market in
pursuit of market share.  In April 1993, Procter & Gamble reduced prices on
Pampers by 5 percent and on Luvs by 16 percent.  In November 1994, Procter &
Gamble announced another major price reduction; prices were effectively reduced
on Pampers by 2.5 percent and on Luvs by 11 percent.  Kimberly-Clark responded
with similar pricing actions. All other diaper manufacturers have been forced
to reduce their prices to remain competitive.  During 1996, pricing pressures
continued due to a shift of volume to mass merchants who aggressively sold
multi-packs.  These multi-packs sell 10 to15 percent below the 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

                                     Page 3

<PAGE>   6



Company.  As a result, the Company believes that the national branded
manufacturers are capable of competing effectively on the basis of price, even
in the face 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.

Kimberly-Clark has been more active than Procter & Gamble in introducing new
products in recent years.  Kimberly-Clark was first to market with a disposable
training pant product line and an inner-leg gathers feature.  Procter & Gamble
followed Kimberly-Clark with a training pant product almost five years later.
In January 1994, Kimberly-Clark 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, Kimberly-Clark added a nonwoven backsheet on its Huggies brand
diapers.  In September 1994, Procter & Gamble introduced a new stretch waist
feature on its Pampers brand diaper.  In 1996, Kimberly-Clark and Procter &
Gamble introduced a breathable diaper.

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 will initiate a process improvement
and information technology upgrading project to further enhance its customer
service capabilities.

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 Procter & Gamble 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. Kimberly-Clark 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

The principal bases of competition in the feminine care market are price,
product quality, product innovation and customer service.  The U.S. feminine
care market is led by national branded manufacturers including Johnson and
Johnson, Inc., Kimberly-Clark, Playtex Products, Inc., Procter & Gamble and
Tambrands, Inc.  The Company estimates that in 1996, the national branded
manufacturers accounted for approximately 90 percent of all U.S. feminine care
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.  A
privately-held

                                    Page 4

<PAGE>   7



manufacturer is the dominant supplier of store brand feminine care products.
The Company does not expect its feminine care business to break even until some
time in 1998.

EMPLOYEES

At December 29, 1996, the Company had approximately 1,319 full-time employees,
including 1,129 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").

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

When used in this discussion, 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: increasing raw material prices; new
product and packaging introductions by competitors; increased price and
promotion pressure from competitors; new competitors in the market; and patent
litigation, are described in the preceding paragraphs.  Readers are cautioned
not to place undue reliance on the 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.


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ITEM 2:  PROPERTIES

As of December 29, 1996, 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.

In June 1996, the Company purchased an existing office building and moved its
corporate headquarters to Norcross, Georgia.

The following table summarizes the physical properties that were in use by the
Company in its operations at December 29, 1996:



<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
Federal Way, Washington  Held for Sale        88,000           Owned             --
Gaffney, South Carolina  Manufacturing       155,000          Leased              4
Harmony, Pennsylvania    Manufacturing       173,000           Owned             10
Macon, Georgia           Manufacturing       308,000           Owned             13
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              8
</TABLE>

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        55   Chief Executive Officer and Chairman of the Board
David W. Cole           48   President and Chief Operating Officer
Alan J. Cyron           44   Executive Vice President and Chief Financial Officer
Catherine O. Hasbrouck  32   Vice President, General Counsel and Secretary
</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.


                                    Page 6

<PAGE>   9




Alan J. Cyron has been the Vice President, Chief Financial Officer and
Assistant Secretary of the Company since April 4, 1995, served as its Treasurer
from May through July 1995 and was promoted to Executive Vice President on
February 28, 1997.  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).

ITEM 3:  LEGAL PROCEEDINGS

Procter & Gamble filed a claim in the District Court for the District of
Delaware that the Company's disposable baby diaper products infringe two of
Procter & Gamble's inner-leg gather patents.  The lawsuit seeks injunctive
relief, lost profit and royalty damages totaling approximately $100 million,
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 Procter & Gamble.  In March 1996, the District Court
granted Procter & Gamble's motion for summary judgment to dismiss the Company's
antitrust counterclaim.  The Company intends to appeal the District Court's
decision at the appropriate time.  In September 1996, Procter & Gamble filed
two motions for summary judgment with respect to the Company's patent
infringement counterclaim.  In December 1996, the District Court denied both of
Procter & Gamble's motions for summary judgment.  The trial has concluded and
the parties are engaged in post trial briefing.  The ultimate outcome cannot be
predicted at this time.  Legal fees and costs for this litigation have been
significant.  If Procter & Gamble were to prevail on its claims, award of all
or a substantial amount of the relief requested by Procter & Gamble 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 believes
that Procter & Gamble's claims are not well founded.

On October 26, 1995, Kimberly-Clark filed a lawsuit against the company in U.S.
District court in Dallas, Texas, alleging infringements by the Company's
products of two Kimberly-Clark 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
Kimberly-Clark.  In October 1996, Kimberly-Clark 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.  The Company intends to vigorously defend its claim.  In addition,
Kimberly-Clark has notified the Company that it intends to assert against the
Company a third Kimberly-Clark patent recently issued by the U.S. Patent and
Trademark Office.  Trial is scheduled for October 1997.  Legal fees and costs
in connection with this litigation will be significant.  Should Kimberly-Clark
prevail on its claims, award of all or a substantial portion of the relief
requested by Kimberly-Clark 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 patent
coverage claimed by Kimberly-Clark is not applicable to the Company's products.

In July 1995, 12 former employees of the Company filed claims in the Court of
Common Pleas, Butler County, Pennsylvania alleging discriminatory and/or
wrongful discharge related to their termination in the July 1993 restructure of
the Company's Harmony, Pennsylvania plant.  Related National Labor Relations
Board cases have been dismissed.  The complaints have been removed to federal
court.  Discovery has concluded and the Company filed a motion for summary
judgment in September 1996.

On September 27, 1996 the Company filed a declaratory judgment action against
Procter & Gamble in U.S. District Court in Atlanta seeking a ruling from the
court that certain patents owned by Procter & Gamble are invalid, unenforceable
and not infringed by the Company's feminine care products.  Procter & Gamble
has responded asserting infringement by the Company's feminine care products of
six of the patents listed in the Company's complaint.  Discovery has commenced.
Based on the advice of patent counsel, the Company believes that its feminine
care products do not infringe any valid claim of such patents.

                                    Page 7

<PAGE>   10




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 Procter & Gamble and Kimberly-Clark 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 1996 fiscal year.

                                    PART II

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

The response to this item is included on the inner back cover of the
Registrant's Annual Report to Stockholders for the year ended December 29,
1996.  The required information is hereby incorporated by reference.

ITEM 6:  SELECTED FINANCIAL DATA

The response to this item is included on page 1 of the Registrant's Annual
Report to Stockholders for the year ended December 29, 1996.  The required
information is hereby incorporated by reference.

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

The response to this item is included on pages 12 through 16 of the
Registrant's Annual Report to Stockholders for the year ended December 29,
1996.  The required information is hereby incorporated by reference.

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is included on pages 17 through 35 of the
Registrant's Annual Report to Stockholders for the year ended December 29,
1996.  The required information is hereby incorporated by reference.

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 20, 1997 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
20, 1997, and the information under the caption "Executive Compensation" in
such Proxy Statement relating to executive officers' compensation is
incorporated by reference into this report.


                                    Page 8

<PAGE>   11




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 20, 1997 is incorporated by reference
into this report.

ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

                                   PART IV

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

(a)   Documents filed as part of this report:

1.    FINANCIAL STATEMENTS.

The Registrant's consolidated financial statements to be included in Part II,
Item 8, are incorporated by reference to the Registrant's 1996 Annual Report to
Stockholders, a copy of which is included as an exhibit to this report.

2.    FINANCIAL STATEMENT SCHEDULES

      Report of Independent Public Accountants as to Schedules (see page 14)

               Schedule II:  Valuation and Qualifying Accounts (see page 13)

All other schedules are omitted because they are not applicable or not required
or because the required information is included in the consolidated financial
statements or notes thereto.

3.    EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT         DESCRIPTION                                                                          
-------         ---------------------------------------------------------------------------------------     
<S>            <C>          
 3.1           Certificate of Incorporation of Paragon Trade Brands, Inc.(4)
 3.2           By-Laws of Paragon Trade Brands, Inc., as amended through July 31, 1995(5)                    
 4.1           Certificate of Incorporation of Paragon Trade Brands, Inc. (see Exhibit 3.1).               
10.1           Asset Transfer Agreement, dated as of January 26, 1993, by and between Weyerhaeuser and     
               Paragon(1)
10.2           Intellectual Property Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
10.3           License, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)
10.4           Sublicense, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)                 
10.5           Technology Agreement, dated as of October 15, 1987, by and between Weyerhaeuser             
               and Johnson and Johnson, as amended(1)
10.6           Critical Supply Agreement, dated as of February 2, 1993, between Weyerhaeuser and Paragon(1)

</TABLE>


                                     Page 9

<PAGE>   12

<TABLE>
      <S>      <C>
      10.7*    Stock Option Plan for Non-Employee Directors(1)

      10.8*    Annual Incentive Compensation Plan(1)

      10.9*    1993 Long-Term Incentive Compensation Plan(1)

      10.10*   Employment Agreement, dated as of February 2, 1993, between Paragon and Bobby V. Abraham(1)

      10.11*   Employment Agreement, dated as of February 2, 1993, between Paragon and David W. Cole(1)

      10.12*   1995 Incentive Compensation Plan(5)

      10.13    Amended and Restated Credit Agreement, dated as of February 6, 1996(7)

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

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

      10.16    Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc. and Chemical               
               Bank, as Rights Agent(3)

      10.17    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)

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

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

      11       Computation of Per Share Earnings (see Note 13 of Notes to Financial Statements, incorporated
               by reference from the Registrant's Annual Report to Stockholders for the fiscal year ended
               December 29, 1996 and filed with this report)

      13       Annual Report to Stockholders

      21.1     Subsidiaries of the Company(7)

      23.1     Consent of Arthur Andersen LLP

      27       Financial Data Schedule (for SEC use only).
</TABLE>

     *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.

                                    Page 10
<PAGE>   13


  (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.

(b)  The registrant filed no Reports on form 8-K during the fiscal quarter ended
December 29, 1996.

                                    Page 11

<PAGE>   14

                                   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 28th day of March,
1997.

                                         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 28th day of March, 1997.



        /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

                                    Page 12

<PAGE>   15


                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                  PARAGON TRADE BRANDS, INC. AND SUBSIDIARIES
           FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 29, 1996
                         (DOLLAR AMOUNTS IN THOUSANDS)


<TABLE>
                                                 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

       1996..................................      $5,866    $2,965     $(1,194)      $7,637
                                                   ======    ======     =======       ======
       1995..................................      $5,885    $  958     $  (977)      $5,866
                                                   ======    ======     =======       ======
       1994..................................      $5,357    $3,067     $(2,539)      $5,885
                                                   ======    ======     =======       ======
   Excess and obsolete items - inventories

       1996..................................      $5,051    $6,841     $(4,089)      $7,803
                                                   ======    ======     =======       ======
       1995..................................      $5,830    $6,223     $(7,002)      $5,051
                                                   ======    ======     =======       ======
       1994..................................      $4,476    $5,602     $(4,248)      $5,830
                                                   ======    ======     =======       ======
</TABLE>


                                    Page 13
<PAGE>   16


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



We have audited in accordance with generally accepted auditing standards, the
financial statements included in Paragon Trade Brands, Inc.'s annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 6, 1997.  Our audit was made for the purpose of
forming an opinion on those statements taken as a whole.  The schedule listed
in the index above 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
February 6, 1997







                                    Page 14

<PAGE>   17




                                EXHIBIT INDEX


<TABLE>
<CAPTION>  
EXHIBIT                                 DESCRIPTION
-------------  -----------------------------------------------------------------------------------
<S>            <C>
3.1            Certificate of Incorporation of Paragon Trade Brands, Inc.(4)

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

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

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

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

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

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

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

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

10.7*          Stock Option Plan for Non-Employee Directors(1)

10.8*          Annual Incentive Compensation Plan(1)

10.9*          1993 Long-Term Incentive Compensation Plan(1)

10.10*         Employment Agreement, dated as of February 2, 1993, between Paragon and                             
               Bobby V. Abraham(1)

10.11*         Employment Agreement, dated as of February 2, 1993, between Paragon and David W. Cole(1)

10.12*         1995 Incentive Compensation Plan(5)

10.13          Amended and Restated Credit Agreement, dated as of February 6, 1996(7)

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

10.14          Revolving Canadian Credit Facility and Parent Guarantee(2)

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

10.16          Rights Agreement dated December 14, 1994 between Paragon Trade Brands, Inc.
               and Chemical Bank, as Rights Agent(3)

</TABLE>


                                    Page 15
<PAGE>   18


<TABLE>
<CAPTION>                                                                                                             
<S>            <C>                                                                                           
10.17          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)

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

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

11             Computation of Per Share Earnings (see Note 13 of Notes to Financial Statements, incorporated 
               by reference from the Registrant's Annual Report to Stockholders for the fiscal year ended    
               December 29, 1996 and filed with this report)                                                 

13             Annual Report to Stockholders                                                                 

21.1           Subsidiaries of the Company(7)

23.1           Consent of Arthur Andersen LLP                                                                

27             Financial Data Schedule (for SEC use only).                                                                      
</TABLE>


 *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.                      



                                    Page 16