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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    ---------

                                    FORM 10-K
         (MARK ONE)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

         For the fiscal year ended December 31, 1996

                                                    OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

         For the transition period for ____________ to ____________

                           COMMISSION FILE NO. 0-21496

                             WESTPOINT STEVENS INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               DELAWARE                                      36-3498354
   (State or other jurisdiction of                        (I.R.S. employer
    incorporation or organization)                       identification no.)

                507 WEST TENTH STREET, WEST POINT, GEORGIA 31833
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                                 (706) 645-4000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                                        Name of each exchange
        Title of each class                              on which registered
        -------------------                              -------------------
    Common Stock, $.01 par value                                NASDAQ

         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 be the best of the Registrant's knowledge, in definitive proxy or information
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

         The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $607,550,895 at February 3, 1997. The number of
shares of Common Stock outstanding at February 3, 1997, was 30,916,288.

                  APPLICABLE ONLY TO REGISTRANTS INVOLVED IN A
             BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS:

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

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of the registrant's definitive proxy statement to be mailed to
stockholders in connection with the registrant's May 14, 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.

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                                TABLE OF CONTENTS

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Item 1.  Business.......................................................................................   1

Item 2.  Properties.....................................................................................   8

Item 3.  Legal Proceedings..............................................................................   9

Item 4.  Submission of Matters to a Vote of Security Holders............................................  10

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters...........................  10

Item 6.  Selected Financial Data........................................................................  10

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations..........  13

Item 8.  Financial Statements and Supplementary Data....................................................  17

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........  38

Item 10. Directors and Executive Officers of the Registrant.............................................  38

Item 11. Executive Compensation.........................................................................  38

Item 12. Security Ownership of Certain Beneficial Owners and Management.................................  38

Item 13. Certain Relationships and Related Transactions.................................................  38

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................  38
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ITEM 1. BUSINESS

WestPoint Stevens Inc., a Delaware corporation organized in 1987 (the
"Company"), is engaged directly and indirectly through its subsidiaries in the
manufacture, marketing and distribution of products in two industry segments:
bed and bath home fashions products ("Home Fashions") and knitted fabrics for
the apparel industry.

See "Reorganization," "Recent Developments," and "Item 8. Financial Statements
and Supplementary Data" included elsewhere herein for information regarding
certain matters concerning the bankruptcy reorganization of the Company (the
"Reorganization") consummated on September 16, 1992 under Chapter 11 of Title 11
of the United States Code (the "Bankruptcy Code"), the Company's
recapitalization consummated in May 1993 (the "Recapitalization"), the Company's
refinancings consummated in December 1993 (the "Refinancing") and November 1994
which resulted in the Company's present secured credit facility (the "Senior
Credit Facility"), the public offering of trade receivables participation
certificates by the Company's receivables subsidiary in May 1994 under a trade
receivables program (the "Trade Receivables Program"), and the adoption by the
Company of a second stock repurchase program in May 1995, which was expanded in
November 1995, and further expanded in August 1996.

GENERAL

The Company manufactures and markets Home Fashions products for distribution to
chain and department stores, mass merchants and specialty stores. Home Fashions
products are manufactured and distributed under owned trademarks and pursuant to
various licensing agreements. See "- Home Fashions - Trademarks and Licenses."

The Company's wholly-owned subsidiary, Alamac Knits Fabrics, Inc. ("Alamac"),
produces knitted fabrics supplied primarily to manufacturers of men's, women's
and children's apparel.

HOME FASHIONS

The Company is the largest producer in the domestic bed and bath towel market.
The Company's management estimates that it has the largest market share
(approximately 36%) in the domestic sheet and pillowcase market and the second
largest market share (approximately 35%) in the domestic bath towel market. Such
estimates are calculated by the Company based on United States government data
(source: United States Census Bureau Current Industrial Report dated January 14,
1997), publicly available information about the Company's competitors and
information in trade publications. In addition, according to such United States
government data, each of these markets had over $1 billion in annual sales
during each of the past five years. Home Fashions accounted for approximately
87% of the Company's consolidated net sales for the fiscal year ended December
31, 1996.

See Note 10 "Segment and Major Customer Information" in the Notes to
Consolidated Financial Statements of the Company elsewhere herein for a summary
of certain operating information for the Home Fashions segment. For a discussion
of the Company's overall financial condition, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."

         PRODUCTS

The Company manufactures and markets a broad range of bed and bath products,
including decorative sheets and towels, designer sheets and accessories, sheets
and towels for institutions, blankets, private label sheets and towels,
bedskirts, bedspreads, comforters, duvet covers, drapes, valances, throw
pillows, shower curtains and table covers. Such products are made from a variety
of fabrics, such as chambray, twill, sateen, flannel, linen, cotton and cotton
blends and are available in a wide assortment of colors and patterns. The
Company has positioned itself as a single-source supplier to retailers of bed
and bath products, offering a broad assortment of products across multiple price
points. Such product and price point breadth allows the Company to provide a
comprehensive product offering for each major distribution channel.


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         TRADEMARKS AND LICENSES

The Company's products are marketed under well-known and firmly established
trademarks, brand names and private labels. The Company uses trademarks, trade
names and private labels as merchandising tools to assist its customers in
coordinating their product offerings and differentiating their products from
those of their competitors. Home Fashions' trademarks include ATELIER MARTEX(R),
MARTEX(R), UTICA(R), STEVENS(TM), LADY PEPPERELL(R) and VELLUX(R). In addition,
certain Home Fashions' products are manufactured and sold pursuant to licensing
agreements under designer names that include, among others, Ralph Lauren,
Sanderson, Larry Laslo, Julie Ingleman and Halston.

A portion of the Company's sales are derived from licensed designer brands. The
license agreements for the Company's designer brands generally are for a term of
two or three years; some of the licenses are automatically renewable for
additional periods, provided that certain sales thresholds set forth in the
license agreements are met. No single license has accounted for more than 9% of
the Company's total sales volume during any of the last five fiscal years.
Although the Company has no reason to believe that it will lose any of its
licenses, the loss of a significant license could have an adverse effect upon
the Company's business, which could be material. The following are the
expiration dates for the licensing agreements discussed above: Ralph Lauren,
December 31, 1997; Sanderson, March 31, 1998; Larry Laslo, March 31, 1998; Julie
Ingleman, December 31, 1997; and Halston, December 31, 1998.

         MARKETING

The Company is committed to developing and maintaining integral relationships
with its customers through "Strategic Partnering," a program designed to improve
customers' operating results by leveraging the Company's merchandising,
manufacturing and inventory management skills. Strategic Partnering includes
Electronic Data Interchange ("EDI") direct electronic entry systems, "Quick
Response" and "Vendor Managed Inventory" customer delivery programs and
point-of-sale processing. The Company incorporates Strategic Partnering into its
planning, manufacturing and shipping systems, in order to enable it to
efficiently and economically anticipate and respond to customers' inventory
requirements. As a result, the Company is better able to plan and forecast its
own production and inventory requirements. Sales of the Company's Home Fashions
products in the United States are conducted by business units consisting of
marketing, merchandising, management information systems, finance and sales
staff members under the supervision of an account executive. Business units are
linked by a centralized manufacturing logistics and planning group and designer
and administration groups. Each business unit focuses on one of the following
channels of distribution: mass merchants; department and specialty stores;
custom brands; Ralph Lauren; health and hospitality institutions; international
and other. This organization allows the Company to tailor its services and
resources to the different requirements of each channel of distribution and
customer.

The Company works closely with its major customers to assist them in
merchandising and promoting its products to the consumer. In addition, the
Company periodically meets with its customers in an effort to maximize product
exposure and sales and to jointly develop merchandise assortments and plan
promotional events specifically tailored to the customer. The Company provides
merchandising assistance with store layouts, fixture designs, advertising and
point-of-sale displays. The Company also provides its customers with suggested
customized advertising materials designed to increase its product sales.

Approximately 90% of the Home Fashions' sales are made to retail establishments
in the United States, including chain and department stores, mass merchants, and
specialty bed and bath stores. Finished products are distributed to retailers
directly from the Company's plants. Distribution to hospitals and other
healthcare establishments accounts for most of the remaining portion of the Home
Fashions' sales. Certain institutional products also are sold directly and
through distributors to major hotel and motel chains, and to laundry supply
businesses. In addition to domestic sales, the Company distributes its Home
Fashions products for eventual sale to certain foreign markets, principally
Canada, Mexico, the United Kingdom, continental Europe, the Middle East and the
Far East. International operations accounted for less than 5% of the total
revenues of Home Fashions in 1996. In January 1997, the Company purchased P.J.
Flower & Co. Limited ("Flower") through a recently formed English subsidiary.
Flower is an English


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company that manufactures, markets and distributes home fashions products in
Europe and had approximately $20 million in annual sales for 1996. The Company
intends to continue its efforts to increase its foreign sales.

In addition, certain products of the Company are sold through WestPoint Stevens
Stores Inc., a wholly-owned subsidiary of the Company ("WestPoint Stores").
WestPoint Stores currently consists of 36 geographically dispersed, value-priced
outlets, some of which are located in factory outlet shopping centers. The
products sold in WestPoint Stores are first quality (including overstocks),
seconds, discontinued items and other products.

         INVENTORY MANAGEMENT, ELECTRONIC COMMUNICATION AND DELIVERY

The Company uses EDI, Quick Response and Vendor Managed Inventory replenishment
programs, point-of-sale data and the latest available technology in retail
warehouse and shelf space management to minimize inventory and maximize floor
stock turnover for its customers. The Company's EDI system allows customers to
place orders, and allows the Company to fill, track and bill orders, all by
computer. This system enables the Company to ship products on a Quick Response
basis so that customers can maintain lower inventories and react rapidly to
changes in product demand. In addition, the Company is using Vendor Managed
Inventory and dedicating certain manufacturing facilities to servicing key
strategic customers. The Company anticipates that these programs will result in
lower transportation expense and reduced distribution complexities for its
customers. Through the use of the Nielsen Spaceman III space analysis program,
the Company supports its customers' efforts to improve operating results through
efficient inventory and shelf space management. The Company's objective is to
provide its customers with 100% delivery reliability in terms of order
quantities and delivery schedules. The Company believes that the use of in-house
transportation has enabled the Company to maintain a high level of on-time
delivery.

         CUSTOMERS

The Company is pursuing strategic relationships with large, high volume
merchandisers. An important component of the Company's strategy is to increase
its share of shelf and floor space by strengthening its partnership with its
customers. The Company is working closely with retailers and is sharing
information and business practices with them to improve service and achieve
higher profitability for both the retailer and the Company.

The Company's Home Fashions products are sold to chain stores, including, among
others, J.C. Penney Company, Inc. ("J.C. Penney"), and Sears Roebuck & Co., Inc.
("Sears"); mass merchants such as Wal-Mart Stores, Inc. ("Wal-Mart"), Kmart
Corporation ("Kmart") and Target Stores (a division of Dayton Hudson
Corporation); and department and specialty stores, including Federated
Department Stores and Mervyn's (also a division of Dayton Hudson Corporation).
The above named customers, which are the Company's six largest customers,
accounted for approximately 54% of the net sales of Home Fashions and 47% of the
net sales of the Company during the fiscal year ended December 31, 1996. Sales
to the Dayton Hudson Corporation and to J.C. Penney each represented
approximately 11% of the net sales of the Company in 1996. Each of such
customers has purchased goods from the Company in each of the last 10 years.
Although the Company has no reason to believe that it will lose the business of
any of its largest customers, a loss of any of the largest accounts (or a
material portion of any thereof) would have an adverse effect upon the Company's
business, which could be material.

ALAMAC

Alamac manufactures and sells knitted fabrics primarily to manufacturers of
men's, women's and children's apparel. Based on United States government data
(source: United States Census Bureau Current Industrial Report dated September
3, 1996), publicly available information about Alamac's competitors and
information in trade publications, management believes that Alamac supplies
approximately 11% of the knitted fabric in the markets it serves. Alamac
accounted for approximately 13% of the Company's net sales for the fiscal year
ended December 31, 1996.

See Note 10 "Segment and Major Customer Information" in the Notes to
Consolidated Financial Statements of the Company elsewhere herein for a summary
of certain operating information for Alamac. For a discussion of the


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Company's overall financial condition, see "Item 7.  Management's Discussion
and Analysis of Financial Condition and Results of Operations."


         PRODUCTS

Alamac's knitted fabrics are available in a full range of colors, pattern
layouts and weight/width options and are produced in 50/50 poly-cotton, 100%
cotton and cotton-rich blends. Primary fabrications are jersey, interlock,
fleece, double knit and rib. Alamac's current product mix is comprised of
piece-dyed solids and yarn-dyed fancies. These products are sold under the
Alamac name to branded and private label manufacturers. Alamac markets
highly-styled, customized seasonal knit lines. Support services include seasonal
color and fabric direction, conceptual fashion lines, computerized design
capability, rapid sample production, customized delivery schedules, EDI and
customer service programs. Alamac has recently begun to pursue Vendor Managed
Inventory opportunities.

Alamac develops exclusively designed knitted lines to meet the fashion needs of
both apparel manufacturers and retailers. Alamac receives additional fashion
input from its customers who work closely with Alamac throughout the styling
process in developing new fabrics which address the customers' needs in terms of
design, fiber content, texture, weight and price. Alamac manufactures its
products pursuant to each customer's specifications. As a result, risks
associated with maintaining high levels of inventory are reduced at Alamac.
Alamac's product strategy has been to emphasize high quality and
fashion-oriented customized seasonal knitted fabric lines. Alamac pioneered the
use of CAD/CAM (computer aided design/computer aided manufacturing) design
technologies which have reduced product development time and expense and have
enabled Alamac to deliver fabric samples in as little as two weeks.

         PATENTS AND TRADEMARKS

The Company and its subsidiaries own other United States trademarks used in
Alamac's operations, including ALAMAC(R) and ALASET(TM). In addition, Alamac
produces a full range of SANITECH(TM) knit fabrics with an antimicrobial
treatment.

         MARKETING

Alamac currently sells to branded and private label manufacturers including
Health-Tex, Inc., Osh-Kosh B'Gosh, Inc., and Garan, Inc. Alamac currently sells
35% of its fabrics to the childrenswear manufacturers, 31% to the womenswear
manufacturers, and 34% to the menswear manufacturers. In addition, Alamac is
focusing its efforts to increase sales in speciality markets such as
manufacturers of employee uniforms and golf apparel and on the higher-margin
specialty retailer segment, including manufacturers of coordinated sportswear.
In light of this strategic shift, Alamac has increased its capabilities to
manufacture 100% cotton knits. Alamac has established and maintained credibility
with its customers through Strategic Partnering relationships that employ EDI,
Quick Response and point-of-sale data.

Alamac's sales force, headquartered in New York City with regional offices in
Atlanta, Dallas and Los Angeles, sells to and services approximately 250
accounts primarily throughout the United States market and, to a lesser degree,
the Caribbean basin, Mexico and Europe. The sales force is organized by specific
product lines (childrenswear, womenswear and menswear), with a manager and sales
team responsible for accounts within each product line. In addition, two
separate sales teams cover the retail/chain market and the international market.
The sales force works closely with Alamac's merchandising department to ensure
market exposure and follow-up of ongoing product styling. Costing, order
delivery schedules, product forecasting and specific customer needs also are
addressed by the sales teams.

Alamac distributes its knitted fabrics from a centralized distribution center
located in Lumberton, North Carolina. Alamac believes that the use of Company
transportation has enabled it to maintain a high level of on-time delivery of
fabrics. Alamac also exports knitted fabrics to the Caribbean basin, Mexico and
Europe.


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         CUSTOMERS

No single customer of Alamac represented 10% or more of the net sales of the
Company for the fiscal year ended December 31, 1996. Although Alamac's
management has no reason to believe that it will lose the business of any of its
largest customers, a loss of any of Alamac's largest accounts (or a material
portion of any thereof) could have a significant effect on Alamac's business.
Management does not believe, however, that any such loss would have an adverse
effect on the Company's business taken as a whole.

Alamac also supports a close working relationship with major retailers to
provide fabric, fashion and color direction, quality standard specifications and
customer service programs where required. Retail chains and catalog houses that
also are important to Alamac's distribution are: Wal-Mart; J.C. Penney; KMart;
Mervyn's; Target Stores; Lands' End, Inc.; Sears; and L.L. Bean, Inc.

MANUFACTURING

The Company currently uses the latest manufacturing and distribution equipment
and technologies in its mills. Management therefore believes that the Company is
one of the most efficient manufacturers in the home fashions industry. Over the
past five years, the Company has spent approximately $453 million to modernize
its manufacturing and distribution systems and has spent approximately $100
million of that amount during 1996. The capital expenditures have been used to,
among other things, replace shuttle looms with faster, more efficient projectile
and air jet looms, replace ring spinning with open-end and air jet spinning,
purchase new high speed multicolor printing equipment, and further automate the
Company's cut and sew operations. Air jet and projectile looms produce at higher
speeds than shuttle looms, yielding fewer defects, requiring less maintenance
and providing cleaner and safer working environments. Using air jet technology,
compressed air propels the filling yarn at high speeds, with robotics handling
fabric cutting and tucking. The Company's new open-end spinning machines use
computerized monitors and sensors which track and analyze the work, streamline
information gathering and detect defects immediately to improve yarn quality.
The Company intends to invest $125 million in capital improvements in the
aggregate in 1997 which includes the continued conversion of the Company's older
projectile looms to higher speed air jet looms, construction and installation of
dyeing and finishing plant and equipment, and automated fabricating equipment
and distribution management systems which will further eliminate labor-intensive
and costly manufacturing steps and improve distribution efficiency. These
capital programs have resulted, and are expected to continue to result, in
improved product quality, increased efficiency and capacity, lower costs and
quicker response time to customer orders. The Company utilizes 21 manufacturing
facilities, all of which are owned by the Company and located primarily in the
Southeastern United States and with the acquisition of P.J. Flower & Co.
Limited, leases one manufacturing facility in England. See "Item 2. Properties."

Alamac maintains a vertically integrated operation, with five manufacturing
plants located in North Carolina and South Carolina.

RAW MATERIALS

The principal raw materials used in the manufacture of Home Fashions and Alamac
products are cotton of various grades and staple lengths and polyester in staple
and filament form. Cotton and polyester presently are available from several
sources in quantities sufficient to meet the Company's requirements. The Company
is not dependent on any one supplier as a source of raw materials. Since cotton
is an agricultural product, its supply and quality are subject to weather
patterns, disease and other factors. The price of cotton is also influenced by
supply and demand considerations, both domestically and worldwide, and by the
cost of polyester. Although the Company has always been able to acquire
sufficient quantities of cotton for its operations in the past, any shortage in
the cotton supply by reason of weather, disease or other factors could adversely
affect the Company's operations. The price of man-made fibers such as polyester
is influenced by demand, manufacturing capacity and costs, petroleum prices,
cotton prices and the cost of polymers used in producing man-made fibers. Any
significant prolonged petrochemical shortages could significantly affect the
availability of man-made fibers and cause a substantial increase in demand for
cotton,


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resulting in decreased availability and, possibly, increased price. The Company
also purchases substantial quantities of dyes and chemicals. Dyes and chemicals
have been and are expected to continue to be available in sufficient supply from
a wide variety of sources.

SEASONALITY; INVENTORY; CYCLICALITY

Traditionally, the home fashions industry has been seasonal, with peak sales
seasons in the spring and fall. The Company's commitment to EDI, Quick Response,
and Vendor Managed Inventory, however, has facilitated, in the Home Fashions
segment, a more even distribution of products throughout the calendar year.
Alamac's fashion lines are developed for two primary retail selling seasons:
spring and fall. Two supplemental lines are added for the transitional seasons
of summer and the Christmas/winter holiday season. Historically, Alamac's
customer orders are stronger during the first four months of the calendar year,
corresponding to demand for fabrics to be sold (as finished apparel) during the
following fall retail selling season and orders generally increase again from
July through October in anticipation of the spring retail season.

In accordance with industry practice, the Company increases its Home Fashions'
inventory levels during the winter and summer to meet customer demands for the
spring and fall peak seasons. These increases, however, are moderate due to
continued improvements in EDI and Quick Response, which have reduced the need to
stockpile inventory to meet peak season demands. Because Alamac produces fabrics
to meet specific customer orders and specifications, more than 95% of its sales
are made to order. There are no major fluctuations in Alamac's inventory during
the production seasons of the calendar year. Alamac is therefore not generally
subject to risks associated with maintaining high inventory levels.

The home fashions and apparel fabrics industries are also cyclical. While the
Company's performance may be negatively affected by downturns in consumer
spending, management believes the effects thereof are mitigated by the Company's
large market shares and broad distribution base.

BACKLOG ORDERS

The backlog of Home Fashions' unfilled customer orders believed by management to
be firm was approximately $97.9 million at February 1, 1997, as compared with
approximately $74.8 million at February 3, 1996. Alamac's backlog of unfilled
customer orders believed by management to be firm was approximately $29.8
million at February 1, 1997, as compared with approximately $21.6 million at
February 3, 1996. The Company does not believe that its backlogs are a
meaningful indicator of its future business.

COMPETITION

Both the home fashions and the apparel fabrics industries are highly
competitive. In both segments, the Company competes on the basis of price,
quality and customer service, among other factors. In the sheet and towel
markets, the Company competes primarily with Fieldcrest Cannon, Inc.
("Fieldcrest Cannon") and Springs Industries, Inc. ("Springs"). In the other
bedding and accessories markets, the Company competes with many companies, most
of which are much smaller in size than the Company. The Company has pursued a
competitive strategy focused on providing the best fashion, quality, service and
value to its customers and to the ultimate consumer. The Company believes that
competition from foreign manufacturers does not materially impact the current
operations of Home Fashions.

Alamac has built customer loyalty and expanded its competitive edge by focusing
on competitive pricing, product innovation, product quality, on-time delivery,
customized Quick Response programs, EDI, customized fabric design, fashion
direction and individualized customer service programs. Alamac's direct
competitors consist of other domestic and foreign knitting mills, converters,
commission knit package operations and vertically integrated apparel
manufacturers. Major domestic competitors include the Dyersburg Corporation, the
Stevcoknit Division of Delta Woodside Industries, Inc. and the Caro Knit Group
of Dixie Yarns, Inc. While competition from foreign


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manufacturers has not materially impacted the operations of Alamac, competition
from foreign manufacturers of finished knitted fabric and garments are expected
to increase in future years and may impact the markets in which Alamac's
customers compete.

The Company does not believe that there is any significant foreign competition
with its current operations. There can be no assurance, however, if such foreign
competition develops that the Company will effectively compete.

OTHER OPERATIONS

The Company's operations include Grifftex Chemicals ("Grifftex"). Grifftex
formulates chemicals primarily used in the Company's finishing processes.
Grifftex does not represent a material portion of the Company's business.

RESEARCH AND DEVELOPMENT

Management believes that research and development in product innovation and
differentiation is important to maintain the Company's competitive edge. The
Company continually seeks to develop new specialty finishing techniques that
would improve fabric quality and enhance fabric aesthetics. Research also is
conducted to develop new products in response to changing customer demands and
environmental concerns. The Company did not make any material expenditures for
Company sponsored research and development activities during the last three
fiscal years.

ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local environmental laws
and regulations governing, among other things, the discharge, storage, handling
and disposal of a variety of hazardous and non-hazardous substances and wastes
used in or resulting from its operations, including, but not limited to, the
Water Pollution Control Act, as amended; the Clean Air Act, as amended; the
Resource Conservation and Recovery Act, as amended; the Toxic Substances Control
Act; and the Comprehensive Environmental Response, Compensation and Liability
Act (known as "CERCLA"), as amended.

The Company's operations also are governed by laws and regulations relating to
employee safety and health, principally the Occupational Safety and Health Act
and regulations thereunder which, among other things, establish exposure
limitations for cotton dust, formaldehyde, asbestos and noise, and regulate
chemical and ergonomic hazards in the workplace.

Although the Company does not expect that compliance with any of the
aforementioned laws and regulations will have a material adverse effect on its
capital expenditures, earnings or competitive position in the foreseeable
future, there can be no assurances that environmental requirements will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such requirements.

EMPLOYEES

The Company (including its subsidiaries) employed approximately 16,920 active
employees as of February 1, 1997. Of these employees, approximately 15,500 were
employed in the Company's manufacturing operations, approximately 340 in sales
and approximately 1,080 in administration.

The Company believes that its relations with all of its employees are excellent.
The Company has not experienced a strike or work stoppage by any of its
unionized employees during the past 15 years.

The Company has developed an efficient employee communications system that
includes rules and regulations for employee conduct and procedures for employee
complaints. This long-standing system focuses on and, in the view of management,
has resulted in, strong employee relations practices, good working conditions,
progressive personnel policies and expansive safety programs.


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REORGANIZATION

The Company, through its subsidiaries, acquired approximately 95% of the
outstanding common stock of West Point-Pepperell, Inc. ("WestPoint") pursuant
to a tender offer (the "Tender Offer"), which was consummated on April 5, 1989.
At the time of the Tender Offer, it was anticipated that substantially all of
the Tender Offer financing would be refinanced and the remaining common stock of
WestPoint held by public shareholders would be acquired by the Company in a
merger. Due to the Company's inability to refinance the Tender Offer financing
and to effect the "back end" merger with WestPoint contemplated by the Tender
Offer, the Company defaulted on its obligations with respect to the Tender Offer
financing.

On June 9, 1992, following receipt of pre-petition approval by the requisite
creditors and securityholders, the Company filed a voluntary petition for relief
under Chapter 11, Title 11 of the United States Bankruptcy Code. On September 4,
1992, the bankruptcy court issued an order confirming the Joint Plan of
Reorganization of the Company and certain of its subsidiaries other than
WestPoint (the "Plan"), which was consummated on September 16, 1992.

From April 1989 to October 1992, WestPoint's operating plan called for
concentrating on the Home Fashions Division and, consequently, WestPoint's other
operations, including the operations of Alamac, were treated as discontinued.
WestPoint reinstated Alamac as a continuing operation as of October 1, 1992, and
on June 29, 1993, Alamac was incorporated as a wholly owned subsidiary of
WestPoint and certain assets were transferred to Alamac effective July 5, 1993.

In December 1993, the Company simplified its corporate and capital structures by
(a) refinancing all of its outstanding consolidated bank indebtedness and
certain of its other indebtedness, and (b) effecting a series of mergers (the
"Merger"), with the Company as the ultimate surviving corporation changing its
name to WestPoint Stevens Inc.

RECENT DEVELOPMENTS

In November 1994, the Company adopted a program providing for the repurchase of
up to 1 million shares of Common Stock. On March 22, 1995, the Company announced
it had completed the repurchase of 1 million shares at an average price of
approximately $13.89 per share. In May 1995, the Company adopted a second
program providing for the repurchase of up to 1 million more shares of Common
Stock. This program was expanded to include an additional 2 million shares of
Common Stock in November 1995. In August 1996 this program was further expanded
to include an additional 1 million shares of Common Stock. At December 31, 1996,
approximately 1.6 million shares remained to be purchased under this program.
The repurchase of shares include open market purchases and private transactions.
The repurchased shares are held in the Company's treasury for general corporate
purposes.

OTHER FACTORS

Except for historical information contained herein, certain matters set forth in
this Annual Report on Form 10-K are forward looking statements that involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward looking statements. Potential risks and
uncertainties include such factors as the financial strength of the retail
industry, the level of consumer spending, the competitive pricing environment
within the home fashions' industry and the success of planned advertising,
marketing and promotional campaigns. Investors are also directed to consider
other risks and uncertainties discussed in documents filed by the Company with
the Securities and Exchange Commission.


ITEM 2.  PROPERTIES

GENERAL

The Company's properties are owned or leased directly and indirectly through its
subsidiaries. Management believes that the Company's facilities and equipment
are in good condition and sufficient for current operations.


                                        8
<PAGE>   11
The Company owns office space in West Point, Georgia and Lanett and Valley,
Alabama, and leases various additional office space, including approximately
332,000 square feet in New York City, of which approximately 169,000 square feet
is subleased to other tenants. The Company also owns or leases various
administrative, storage and office space.

The Company also owns a chemical plant containing approximately 39,000 square
feet of floor space from which Grifftex Chemicals operates.

HOME FASHIONS

The Company owns 21 Home Fashions manufacturing facilities located in Alabama,
Florida, Georgia, Maine, North Carolina, South Carolina and Virginia which
contain in the aggregate approximately 8,565,000 square feet of floor space.

The Company also owns 8 distribution centers and warehouses for Home Fashions
operations which contain approximately 2,499,000 square feet of floor space. In
addition, the Company leases 5 Home Fashions distribution outlets and warehouses
containing approximately 323,000 square feet of floor space.

WestPoint Stores owns 2 retail stores and leases its 34 other retail stores, all
of which are dispersed throughout the United States.

In addition, the Company, through its subsidiary Flower, leases a manufacturing
facility containing approximately 21,000 square feet, a warehouse containing
approximately 56,000 square feet and office space containing approximately
10,000 square feet in England. Also, Flower's U.S. subsidiary leases a warehouse
containing approximately 12,500 square feet in New Jersey.

ALAMAC

Alamac owns 5 manufacturing facilities. These facilities are located in North
Carolina and South Carolina and contain in the aggregate approximately 1,769,000
square feet of floor space. Alamac also leases approximately 36,000 square feet
of warehouse space.


ITEM 3.  LEGAL PROCEEDINGS

On July 12, 1995, the United States District Court, Eastern District of North
Carolina, granted final approval of the settlement of a class action lawsuit
against J.P. Stevens & Co., Inc. ("Stevens"). The action involved claims of
racial discrimination in hiring, promotion and placement dating to the late
1960's. West Point-Pepperell, Inc., predecessor to the Company, assumed
liability for this litigation upon its acquisition of Stevens. The settlement
requires payment of $20 million to the class, payable in three equal
installments, plus certain other fees and costs. The final payment was made on
January 2, 1997.

The Company is subject to various federal, state and local environmental laws
and regulations governing, among other things, the discharge, storage, handling
and disposal of a variety of hazardous and non-hazardous substances and wastes
used in or resulting from its operations and potential remediation obligations
thereunder. Certain of the Company's facilities (including certain facilities no
longer owned or utilized by the Company) have been cited or are being
investigated with respect to alleged violations of such laws and regulations.
The Company believes that it has adequately provided in its financial statements
for any expenses and liabilities that may result from such matters. The Company
also is insured with respect to certain of such matters. The Company's
operations are governed by laws and regulations relating to employee safety and
health which, among other things, establish exposure limitations for cotton
dust, formaldehyde, asbestos and noise, and regulate chemical and ergonomic
hazards in the workplace. Although the Company does not expect that compliance
with any of such laws and regulations will adversely affect the Company's


                                        9
<PAGE>   12
operations, there can be no assurance such regulatory requirements will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such requirements.

The Company and its subsidiaries are involved in various other legal
proceedings, both as plaintiff and as defendant, which are normal to their
business.

It is the opinion of management that the aforementioned actions and claims, if
determined adversely to the Company, will not have a material adverse effect on
the financial condition or operations of the Company taken as a whole.


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

During the fourth quarter of fiscal 1996, no matters were submitted by the
Company to a vote of its stockholders.


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

The Common Stock of the Company is listed on the National Association of
Securities Dealers Automated Quotation System - National Market System
("NASDAQ") under the symbol WPSN. Such listing became effective on August 2,
1993. Prior thereto, the Company's Common Stock was not listed or admitted to
unlisted trading privileges on a national securities exchange or included for
quotation through an inter-dealer quotation system of a registered national
securities association, and there was a limited trading market for the Common
Stock.

High (ask) and low (bid) quotations, as reported, each quarterly period within
the two most recent fiscal years were:

<TABLE>
<CAPTION>
                  Quarter Ended                              Quotations
                  -------------                        ------------------------
                                                     1996                    1995
                                                --------------            -------------
                                            High/Ask      Low/Bid     High/Ask     Low/Bid
                                            --------      -------     --------     -------
                  <S>                        <C>          <C>          <C>         <C>
                  March 31...............    21-5/8       17-1/2       15          13-1/8
                  June 30................    25           19-1/4       19          15
                  September 30...........    29-1/2       22-3/8       23-1/2      17-1/2
                  December 31............    30-1/4       26-1/4       22-1/2      17-3/4
</TABLE>

The Company has not declared any cash dividends on its Common Stock during the
past two fiscal years. Under its existing credit facility the Company is
permitted to pay dividends from excess cash flow as defined in the credit
facility. The Company does not expect to pay dividends to its stockholders in
the near future.

As of February 3, 1997, there were approximately 13,628 holders of the Company's
Common Stock. Of that total, approximately 177 were stockholders of record and
approximately 13,451 held their stock in nominee name.


ITEM 6.  SELECTED FINANCIAL DATA

The selected historical financial data presented below for 1996, 1995 and 1994
were derived from the Audited Consolidated Financial Statements of the Company
and its subsidiaries for the years ended December 31, 1996, 1995 and 1994 (the
"Consolidated Financial Statements"), and should be read in conjunction
therewith, including the notes thereto and the other financial information
included elsewhere herein. Information for periods subsequent to September 30,
1992 was prepared under the principles of "Fresh Start" reporting and is not
comparable to the information for prior periods. Accordingly, a bold vertical
line has been used to separate such information. The statement of operations
data reflect the discontinuance of all operations other than Home Fashions and
the Alamac Knits Subsidiary. The balance sheet data prior to September 30, 1992
have not been reclassified for management's decision in October 1992 to
reinstate the Alamac Knits Subsidiary as a continuing operation.


                                       10
<PAGE>   13
<TABLE>
<CAPTION>                                                                                                    
                                                            YEAR ENDED                        THREE        ||       NINE      
                                                            DECEMBER 31,                   MONTHS ENDED    ||  MONTHS ENDED  
                                           ----------------------------------------------   DECEMBER 31,   ||  SEPTEMBER 30, 
                                             1996        1995         1994        1993(1)      1992        ||     1992(2)    
                                           ----------------------------------------------  -------------   ||  ------------- 
<S>                                        <C>         <C>          <C>          <C>          <C>          ||    <C>         
    (IN MILLIONS, EXCEPT PER SHARE DATA)                                                                   ||                
                                                                                                           ||                
STATEMENT OF                                                                                               ||                
   OPERATIONS DATA:                                                                                        ||                
Net sales                                  $1,723.8    $1,649.9     $1,596.8     $1,501.0     $394.0       ||    $1,102.1    
Gross earnings                                397.9       384.0        368.0        355.3       90.0       ||       255.6    
Operating earnings (loss)(3)                  195.6         5.0        (65.8)      (258.4)       9.3       ||        87.5    
Interest expense                              102.4       101.3        102.1         98.2       30.7       ||       177.9    
Income (loss) from                                                                                         ||                
    operations before income                                                                               ||                
    tax expense (benefit) and                                                                              ||                
    extraordinary items                        90.4       (99.4)      (180.8)      (372.8)     (21.7)      ||      (704.7)   
Income (loss) from                                                                                         ||                
    operations before                                                                                      ||                
    extraordinary items                        57.7      (129.8)      (203.4)      (321.6)     (25.2)      ||      (728.9)   
                                                                                                           ||                
Net income (loss)                              57.7      (129.8)      (203.4)      (402.3)     (25.2)      ||       422.6    
                                                                                                           ||                
Net income (loss) per common share(4)          1.81       (3.97)       (6.02)      (12.55)     (0.87)      ||           -    
                                                                                                           ||                
Weighted average shares outstanding            31.8        32.7         33.8         32.1       29.1       ||                 
</TABLE>




<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                  ----------------------------------------------------------
                                    1996        1995        1994        1993       1992(2)
                                  ----------  ----------  ----------  ----------  ----------
<S>                               <C>         <C>         <C>         <C>         <C>
(IN MILLIONS)

BALANCE SHEET DATA:
Total assets                      $  1,157.0  $  1,143.0  $  1,270.2  $  1,512.9  $  1,979.9
Working capital (deficiency)(5)        140.9       115.7       122.7       159.7      (646.4)
Total debt                           1,099.0     1,148.0     1,083.0     1,112.5     1,088.5
Stockholders' equity (deficit)        (450.4)     (505.9)     (337.2)     (140.3)      232.0
</TABLE>




<TABLE>
<CAPTION>
                                                      YEAR ENDED                    THREE      ||     NINE
                                                      DECEMBER 31,               MONTHS ENDED  || MONTHS ENDED
                                         ------------------------------------     DECEMBER 31, || SEPTEMBER 30,
     (IN MILLIONS, EXCEPT RATIOS)          1996      1995      1994     1993(1)      1992      ||    1992(2)
                                         --------  --------  --------  --------  ------------- || -------------
<S>                                      <C>       <C>       <C>       <C>          <C>        ||   <C>
OTHER DATA:                                                                                    ||
Depreciation and amortization(6)         $   77.0  $   80.4  $   86.2  $   82.8     $  22.7    ||   $   84.5
Amortization of excess reorganization                                                          ||
    value (2)                                   -     177.7     236.9     221.6        31.9    ||          -
Restructuring expense                           -         -         -     200.0           -    ||          -
Reorganization expense                          -         -         -         -           -    ||      612.5
Capital expenditures                         99.9     102.2     109.0      89.0        16.2    ||       36.3
Operating earnings before amortization                                                         ||
    of excess reorganization value,                                                            ||
    goodwill amortization and                                                                  ||
    restructuring expense(7)                195.6     182.7     171.1     163.2        41.1    ||      107.6
Operating margin before amortization                                                           ||
    of excess reorganization value,                                                            ||
    goodwill amortization and                                                                  ||
    restructuring expense(8)                 11.3%     11.1%     10.7%     10.9%       10.4%   ||        9.8%
</TABLE>                                                   
                                                           
                                                           
                                                           
                        See footnotes on following page.   
                                                           
                                                           
                                       11                  
                                                           
<PAGE>   14
(1)The results for the year ended December 31, 1993 include restructuring
expense of $200 million ($117.8 million after minority interest and income
taxes). The charge related to (a) the closing and consolidation of certain
facilities; (b) the write-off of certain equipment; and (C) severance,
outplacement and other costs associated with plant closures and overhead
reductions.

(2)Upon the consummation of a "prepackaged" plan of reorganization, the Company
established a new basis of accounting ("Fresh Start"). In Fresh Start reporting,
the Company's assets and liabilities were evaluated and stated at their fair
values as of September 30, 1992. The resulting adjustments to the Company's
consolidated assets and liabilities, primarily reflecting reorganization
expenses of approximately $612.5 million and an extraordinary gain on debt
discharge of approximately $1,142 million, increased the Company's stockholders'
equity by approximately $1,800 million. The total reorganization value of the
Company was based on management's estimate of the fair value of the Company's
debt and Common Stock. These estimates resulted in management's estimated
reorganization value of approximately $1 billion, of which the Excess
Reorganization Value was $637.5 million.

(3)Operating earnings (loss) for the year ended December 31, 1995 includes
amortization of excess reorganization value of $177.7 million, for the year
ended December 31, 1994 includes amortization of excess reorganization value of
$236.9 million, for the year ended December 31, 1993 includes restructuring
expense of $200 million, amortization of excess reorganization value of $221.6
million and, for the three months ended December 31, 1992 includes amortization
of excess reorganization value of $31.9 million.

(4)Per share amounts for periods prior to October 1, 1992, have not been
presented because they are not meaningful due to the implementation of "Fresh
Start" reporting.

(5)Working capital (deficiency) for the years ended December 31, 1996, 1995,
1994, 1993 and 1992 includes the current portion of bank indebtedness and other
long-term debt of $24.0 million, $73.0 million, $48.0 million, $18.0, and $998.1
million, respectively.

(6)Excludes amortization of excess reorganization value.

(7)Such amounts are presented to facilitate comparisons between periods since
there were no charges in the 1996 period for amortization of excess
reorganization value, goodwill amortization or restructuring expense.

(8)Operating margin before amortization of excess reorganization value, goodwill
amortization and restructuring expense represents operating earnings before
amortization of excess reorganization value, goodwill amortization and
restructuring expense as a percentage of net sales for the periods presented.


                                       12
<PAGE>   15
                 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The table below sets forth net sales, gross earnings, operating earnings (loss),
interest expense and net income (loss) of the Company for the years ended
December 31, 1996, 1995, and 1994 (in millions of dollars and as percentages of
net sales).


<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                         -----------------------------------
                                                                            1996        1995          1994
                                                                         ----------  ----------   ----------
<S>                                                                      <C>         <C>          <C>
Net sales:
          Home Fashions ..............................................   $  1,501.8  $  1,418.2   $  1,346.9
          Alamac Knits Subsidiary ....................................        222.0       231.7        249.9
                                                                         ----------  ----------   ----------

          Total ......................................................   $  1,723.8  $  1,649.9   $  1,596.8

Gross earnings .......................................................   $    397.9  $    384.0   $    368.0

Operating earnings (loss) ............................................   $    195.6  $      5.0   $    (65.8)

Interest expense .....................................................   $    102.4  $    101.3   $    102.1

Net income (loss) ....................................................   $     57.7  $   (129.8)  $   (203.4)

Gross margins ........................................................         23.1%       23.3%        23.0%

Operating earnings before amortization of excess reorganization value:
          Home Fashions ..............................................   $    188.5  $    178.7   $    156.8
          Alamac Knits Subsidiary ....................................          7.1         4.0         14.3
                                                                         ----------  ----------   ----------

          Total ......................................................   $    195.6  $    182.7   $    171.1

Operating margins before amortization of excess reorganization value:
          Home Fashions ..............................................         12.6%       12.6%        11.6%
          Alamac Knits Subsidiary ....................................          3.2%        1.7%         5.7%
          Total ......................................................         11.3%       11.1%        10.7%
</TABLE>






                                       13
<PAGE>   16
RESULTS OF OPERATIONS--CONTINUED

                             1996 COMPARED WITH 1995

NET SALES. Net sales for the year ended December 31, 1996 increased $73.9
million, or 4.5%, to $1,723.8 million compared with net sales of $1,649.9
million for the year ended December 31, 1995. Home Fashions net sales of
$1,501.8 million were $83.6 million, or 5.9%, higher than net sales for the same
period of 1995, and resulted primarily from higher unit volume in the 1996
period compared with the 1995 period. Alamac Knits Subsidiary net sales of $222
million were $9.7 million, or 4.2%, lower than net sales for the same period of
1995, and resulted primarily from lower unit volume in the 1996 period compared
with the 1995 period.

GROSS EARNINGS/MARGINS. Gross earnings for the year ended December 31, 1996 of
$397.9 million increased $13.9 million, or 3.6%, compared with $384 million for
the same period of 1995 and reflect gross margins of 23.1% in the 1996 period
compared with 23.3% in the 1995 period. Gross earnings increased in 1996
primarily as a result of the increase in Home Fashions unit volume and decreases
in operating costs of our Alamac Knits Subsidiary, both offset somewhat by a
wage increase effective the beginning of the second quarter, higher raw material
costs, and production challenges due to high customer demand and capacity
constraints in the last half of 1996. The Company is expanding its sheet and
towel facilities in order to meet the increased customer demand.

OPERATING EARNINGS/MARGINS. Selling, general and administrative expenses
increased by $1 million, or 0.5%, for the year ended December 31, 1996, compared
with the same period of 1995, and as a percentage of net sales represent 11.7%
in 1996 and 12.2% in 1995. The increase in expenses for 1996 was due primarily
to higher warehousing/shipping and advertising expenses, offset somewhat by
lower selling and trade receivables program expenses along with lower
administrative expenses.

Operating earnings were $195.6 million for the year ended December 31, 1996
compared with operating earnings of $5 million for the same period of 1995 which
includes the amortization of excess reorganization value of $177.7 million.
Operating earnings increased as a result of the increase in gross earnings
offset somewhat by the increase in selling, general and administrative expenses,
and the complete amortization of excess reorganization value in 1995 as
discussed herein.

INTEREST EXPENSE. Interest expense for the year ended December 31, 1996 of
$102.4 million increased $1.1 million compared with interest expense for the
year ended December 31, 1995. The increase is due primarily to higher average
debt levels in the 1996 period compared with the corresponding 1995 average debt
levels offset somewhat by lower interest rates on the Company's variable rate
bank debt.

OTHER EXPENSE-NET. Other expense-net for the year ended December 31, 1996
decreased $0.3 million compared with the same period in 1995. Included in other
expense-net for the years ended December 31, 1996 and 1995 are the amortization
of deferred financing fees of $3.9 million in each period less certain
miscellaneous income items.

INCOME TAX EXPENSE. The Company's effective tax rate differed from the federal
statutory rate primarily due to state income taxes, nondeductible items and the
effects of amortization of excess reorganization value in 1995.

NET INCOME. Net income for the year ended December 31, 1996 was $57.7 million,
or $1.81 per share. In the year ended December 31, 1995, the net loss was $129.8
million, or $3.97 per share, including amortization of excess reorganization
value of $177.7 million, or $5.43 per share. Excess reorganization value was
completely amortized in 1995.

Per share amounts are based on 31.8 million and 32.7 million average shares
outstanding for the 1996 and 1995 periods, respectively. The decrease in the
average shares outstanding was primarily the result of the purchase by the
Company of shares under the stock repurchase programs.

OPERATING EARNINGS BEFORE CERTAIN CHARGES. Operating earnings for the year ended
December 31, 1996 were $195.6 million, or 11.3% of sales, and increased $12.9
million, or 7.1%, compared with operating earnings (before the amortization of
excess reorganization value) of $182.7 million, or 11.1% of sales, for the same
period of 1995. The increase resulted from the increase in gross earnings offset
somewhat by the increase in selling, general and administrative expenses
discussed above. Home Fashions operating earnings for 1996 of $188.5 million
increased $9.8 million, or 5.5% compared with the same period of 1995 and
reflect operating margins of 12.6% in both 1996 and 1995. Alamac Knits operating
earnings for 1996 of $7.1 million increased $3.1 million compared with the same
period of 1995 and reflect operating margins of 3.2% in 1996 and 1.7% in 1995.


                                       14
<PAGE>   17
RESULTS OF OPERATIONS--CONTINUED

                             1995 COMPARED WITH 1994

NET SALES. Net sales for the year ended December 31, 1995 increased $53.1
million, or 3.3%, to $1,649.9 million compared with net sales of $1,596.8
million for the year ended December 31, 1994. Home Fashions net sales of
$1,418.2 million were $71.3 million, or 5.3%, higher than net sales for the same
period of 1994, and resulted primarily from better pricing and higher unit
volume in the 1995 period compared with the 1994 period. Alamac Knits Subsidiary
net sales of $231.7 million were $18.2 million, or 7.3%, lower than net sales
for the same period of 1994, and resulted primarily from lower unit volume in
the 1995 period compared with the 1994 period.

GROSS EARNINGS/MARGINS. Gross earnings for the year ended December 31, 1995 of
$384 million increased $16 million, or 4.3%, compared with $368 million for the
same period of 1994 and reflect gross margins of 23.3% in 1995 compared with 23%
in 1994. Gross earnings and margins increased in 1995 compared with 1994 despite
substantially higher raw material costs, a 4% wage increase effective the
beginning of 1995, and reduced plant operating schedules at our Alamac Knits
Subsidiary (reflecting the retail weakness for apparel fabrics) in 1995 compared
with 1994. The increase in gross margins reflects the substantial cost
reductions implemented through a $300 million modernization program that was
completed in 1995 and price increases in 1995 to offset the continuing rise in
raw material costs.

OPERATING EARNINGS/MARGINS. Selling, general and administrative expenses
increased by $4.4 million, or 2.3%, for the year ended December 31, 1995,
compared with the same period of 1994, and as a percentage of net sales
represent 12.2% in 1995 and 12.3% in 1994. The increase in expenses for 1995 was
due primarily to the higher sales volume (including shipping/warehousing costs
and costs related to the Trade Receivables Program) and a 4% wage increase
effective the beginning of 1995.

The amortization of excess reorganization value, which was completely amortized
as of September 30, 1995, was $177.7 million in 1995, compared with $236.9
million in 1994.

The Company's operating earnings (loss) were $5 million for the year ended
December 31, 1995 and ($65.8) million for the same period of 1994, as a result
of the above.

INTEREST EXPENSE. Interest expense for the year ended December 31, 1995 of
$101.3 million decreased $0.8 million compared with interest expense for the
year ended December 31, 1994. The decrease is due primarily to lower average
debt levels in the 1995 period compared with the corresponding 1994 average debt
levels and lower interest rates on the Company's variable rate bank debt.

OTHER EXPENSE-NET. Other expense-net decreased $9.9 million for the year ended
December 31, 1995 compared with the same period in 1994. Included in other
expense-net for the years ended December 31, 1995 and 1994 are the amortization
and write-off of deferred financing fees of $3.9 million and $13.6 million,
respectively.

INCOME TAX EXPENSE. The Company's effective tax rate differed from the federal
statutory rate primarily due to the effects of amortization of excess
reorganization value, nondeductible items and state income taxes.

NET INCOME. The net loss for the year ended December 31, 1995 was $129.8
million, or $3.97 per share, including amortization of excess reorganization
value of $177.7 million, or $5.43 per share. In the corresponding period of
1994, the net loss was $203.4 million, or $6.02 per share, including
amortization of excess reorganization value of $236.9 million, or $7.01 per
share, the write-off of deferred financing fees of $5.4 million (net of
applicable taxes), or $.16 per share, related to the bank agreement that was
refinanced in the fourth quarter of 1994. Excess reorganization value (a
non-cash charge against earnings) was being amortized on a straight-line basis
and was completely amortized as of September 30, 1995.

Per share amounts are based on 32.7 million and 33.8 million average shares
outstanding for the 1995 and 1994 periods, respectively. The decrease in the
average shares outstanding was primarily the result of the purchase by the
Company of shares under the stock repurchase programs.


                                       15
<PAGE>   18
RESULTS OF OPERATIONS--CONTINUED

                       1995 COMPARED WITH 1994--CONTINUED

OPERATING EARNINGS BEFORE CERTAIN CHARGES. Operating earnings before
amortization of excess reorganization value for the year ended December 31, 1995
were $182.7 million and increased $11.6 million, or 6.7%, compared with
operating earnings before amortization of excess reorganization value of $171.1
million for the same period of 1994, primarily as a result of the increase in
gross earnings offset somewhat by the increase in selling, general and
administrative expenses discussed above. Home Fashions operating earnings of
$178.7 million increased $21.9 million, or 14% compared with the same period of
1994 and reflect operating margins of 12.6% in 1995 and 11.6% in 1994. Alamac
Knits operating earnings of $4 million decreased $10.3 million compared with the
same period of 1994 and reflect operating margins of 1.7% in 1995 and 5.7% in
1994. The increase in Home Fashions operating earnings more than offset the
decrease in Alamac Knits operating earnings.


EFFECTS OF INFLATION

The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on its sales or profitability.


LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity are expected to be cash from its
operations and funds available under the Senior Credit Facility. At February 5,
1997, the maximum commitment under the Senior Credit Facility was approximately
$350 million and the Company had unused borrowing availability under the Senior
Credit Facility totaling approximately $190 million. The Senior Credit Facility
contains covenants which, among other things, limit indebtedness and require the
maintenance of certain financial ratios and minimum net worth as defined.

The Company's principal uses of cash for the next several years will be
operating expenses, capital expenditures and debt service requirements related
primarily to interest payments. The Company spent approximately $100 million in
1996 on capital expenditures and intends to invest an additional $125 million in
1997.

During 1996 the Company purchased approximately 1.3 million shares under the
various stock repurchase programs, at an average price of $23.59 per share. In
August 1996 the Board of Directors approved the purchase of up to one million
additional shares of the Company's common stock, subject to the Company's debt
limitations, which brings the total shares that have been approved for purchase
to five million shares. At December 31, 1996, approximately 1.6 million shares
remained to be purchased.

Cash contributions in 1997 to the Company's pension plans are estimated to total
approximately $12.1 million, compared with actual contributions in 1996 of $21.3
million, including the effect of the changes in the actuarial assumptions
relating to the Company's pension plans (see Note 3 "Employee Benefit Plans -
Pension Plans" in the Notes to Consolidated Financial Statements included
elsewhere herein).

The Company, through a "bankruptcy remote" receivables subsidiary, has a Trade
Receivables Program which provides for the sale of accounts receivable, on a
revolving basis. At December 31, 1996 and 1995, $133 million and $121 million,
respectively, had been sold under this program and the sale is reflected as a
reduction of accounts receivable in the Company's Consolidated Balance Sheets.
The cost of the Trade Receivables Program in 1997 is estimated to total
approximately $8 million, compared with $7.4 million in 1996, and will be
charged to selling, general and administrative expenses.

Debt service requirements for interest payments in 1997 are estimated to total
approximately $103 million (excluding amounts related to the Trade Receivables
Program) compared with payments of $102.6 million in 1996. There are no debt
service requirements in 1997 related to required principal amortization.

Management believes that cash from the Company's operations and borrowings under
its credit agreements will provide the funding necessary to meet the Company's
anticipated requirements for capital expenditures and operating expenses and to
enable it to meet its anticipated debt service requirements.


                                       16
<PAGE>   19
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Consolidated Financial Statements for the years ended December 31, 1996, 1995
and 1994


<TABLE>
<S>                                                                       <C>
Report of Ernst & Young, Independent Auditors..........................      18
Consolidated Balance Sheets............................................   19-20
Consolidated Statements of Operations..................................      21
Consolidated Statements of Stockholders' Equity (Deficit)..............      22
Consolidated Statements of Cash Flows..................................      23
Notes to Consolidated Financial Statements.............................   24-37
</TABLE>




                                       17
<PAGE>   20
                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


BOARD OF DIRECTORS AND STOCKHOLDERS
WESTPOINT STEVENS INC.


We have audited the accompanying consolidated balance sheets of WestPoint
Stevens Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the index at Item 14 (a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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


In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
WestPoint Stevens Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.






                                        /s/Ernst & Young LLP


Columbus, Georgia
February 5, 1997


                                       18
<PAGE>   21
                             WESTPOINT STEVENS INC.

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)



<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              -------------------------
                                                                 1996           1995
                                                              ----------     ----------
<S>                                                           <C>            <C>
ASSETS
Current Assets
         Cash and cash equivalents .......................    $   14,029     $    7,987
         Accounts receivable (less allowances of $22,861
              and $22,895, respectively) .................        66,949         82,933
         Inventories .....................................       299,651        320,468
         Prepaid expenses and other current assets .......        14,939         19,506
                                                              ----------     ----------

                   Total current assets ..................       395,568        430,894





Property, Plant and Equipment
         Land ............................................         8,271          8,431
         Buildings and improvements ......................       276,935        258,257
         Machinery and equipment .........................       737,253        666,284
         Leasehold improvements ..........................        13,902         13,325
                                                              ----------     ----------
                                                               1,036,361        946,297
         Less accumulated depreciation and amortization         (330,393)      (262,112)
                                                              ----------     ----------

                   Net property, plant and equipment .....       705,968        684,185





Other Assets
         Deferred financing fees .........................        23,108         26,987
         Prepaid pension and other assets ................        32,355            902
                                                              ----------     ----------

                   Total other assets ....................        55,463         27,889
                                                              ----------     ----------

                                                              $1,156,999     $1,142,968
                                                              ==========     ==========
</TABLE>


                             See accompanying notes.


                                       19
<PAGE>   22
                             WESTPOINT STEVENS INC.

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)




<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                --------------------------
                                                                    1996           1995
                                                                -----------    -----------
<S>                                                             <C>            <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
         Senior Credit Facility .............................   $    24,000    $    73,000
         Accrued interest payable ...........................         6,525          6,643
         Accounts payable ...................................        73,475         75,020
         Other accrued liabilities ..........................       150,715        160,532
                                                                -----------    -----------

                         Total current liabilities ..........       254,715        315,195



Long-Term Debt ..............................................     1,075,000      1,075,000



Noncurrent Liabilities
         Deferred income taxes ..............................       179,057        136,755
         Other liabilities ..................................        98,625        121,955
                                                                -----------    -----------

                         Total noncurrent liabilities .......       277,682        258,710



Stockholders' Equity (Deficit)
         Common Stock and capital in excess of par value:
                   Common Stock, $.01 par value; 75,000,000
                   shares authorized; 34,707,250 and
                   34,597,050 shares issued, respectively ...       329,394        327,850
         Accumulated deficit ................................      (703,068)      (760,733)
         Treasury stock; 3,855,549 and 2,621,150 shares
                   at cost, respectively ....................       (70,316)       (41,051)
         Minimum pension liability adjustment, net of taxes
                   of $3,763 and $20,034, respectively ......        (6,408)       (32,003)
                                                                -----------    -----------

                         Total stockholders' equity (deficit)      (450,398)      (505,937)
                                                                -----------    -----------

                                                                $ 1,156,999    $ 1,142,968
                                                                ===========    ===========
</TABLE>




                             See accompanying notes.


                                       20
<PAGE>   23
                             WESTPOINT STEVENS INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                               ----------------------------------------
                                                   1996         1995            1994
                                               -----------   -----------    -----------
<S>                                            <C>           <C>            <C>        
Net sales ..................................   $ 1,723,814   $ 1,649,878    $ 1,596,792

Cost of goods sold .........................     1,325,904     1,265,886      1,228,801
                                               -----------   -----------    -----------

      Gross earnings .......................       397,910       383,992        367,991

Selling, general and administrative expenses       202,341       201,308        196,852

Amortization of excess reorganization value            -         177,675        236,892
                                               -----------   -----------    -----------

      Operating earnings (loss) ............       195,569         5,009        (65,753)

Interest expense ...........................       102,447       101,308        102,052

Other expense-net ..........................         2,757        3 ,099         12,959
                                               -----------   -----------    -----------

      Income (loss) from operations before
         income tax expense ................        90,365       (99,398)      (180,764)

Income tax expense .........................        32,700        30,450         22,600
                                               -----------   -----------    -----------


      Net income (loss) ....................   $    57,665   $  (129,848)   $  (203,364)
                                               ===========   ===========    =========== 


Net income (loss) per common share .........   $      1.81   $     (3.97)   $     (6.02)
                                               ===========   ===========    =========== 


Average number of common and common
    equivalent shares outstanding ..........        31,783        32,699         33,775
                                               ===========   ===========    =========== 
</TABLE>


                             See accompanying notes.


                                       21
<PAGE>   24
                             WESTPOINT STEVENS INC.

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                           COMMON
                                                           STOCK
                                                         AND CAPITAL
                                                             IN                                             MINIMUM
                                                          EXCESS OF       TREASURY STOCK                    PENSION
                                                 COMMON      PAR        -------------------   ACCUMULATED  LIABILITY
                                                 SHARES     VALUE       SHARES      AMOUNT      DEFICIT    ADJUSTMENT      TOTAL
                                                 ------   ---------     ------      -------   -----------  ----------    ---------
<S>                                              <C>      <C>          <C>          <C>        <C>          <C>          <C>
Balance, January 1, 1994 .....................   34,266   $ 323,727      (491)      $(4,417)   $(427,521)   $ (32,072)   $(140,283)
     Exercise of management stock options ....       53         666         -             -            -            -          666
     Purchase of treasury shares .............        -           -      (172)       (2,377)           -            -       (2,377)
     Net loss ................................        -           -         -           -       (203,364)           -     (203,364)
     Change in minimum pension liability
          adjustment .........................        -           -         -           -              -        8,158        8,158
                                                 ------   ---------    ------      --------    ---------    ---------    --------- 

Balance, December 31, 1994 ...................   34,319     324,393      (663)       (6,794)    (630,885)     (23,914)    (337,200)
     Exercise of management stock options
          including tax benefit ..............      278       3,490         -             -            -            -        3,490
     Purchase of treasury shares .............        -           -    (1,958)      (34,257)           -            -      (34,257)
     Redemption of purchase rights ...........        -         (33)        -             -            -            -          (33)
     Net loss ................................        -           -         -             -     (129,848)           -     (129,848)
     Change in minimum pension liability
          adjustment .........................        -           -         -             -            -       (8,089)      (8,089)
                                                 ------   ---------    ------      --------    ---------    ---------    --------- 

Balance, December 31, 1995 ...................   34,597     327,850    (2,621)      (41,051)    (760,733)     (32,003)    (505,937)
     Exercise of management stock options
          including tax benefit ..............      110       1,532         -             -            -            -        1,532
     Issuance of stock pursuant to Stock Bonus
          Plan including tax benefit .........        -          12        58         1,226            -            -        1,238
     Purchase of treasury shares .............        -           -    (1,293)      (30,491)           -            -      (30,491)
     Net income ..............................        -           -         -             -       57,665            -       57,665
     Change in minimum pension liability
         adjustment ..........................        -           -         -             -            -       25,595       25,595
                                                 ------   ---------    ------      --------    ---------    ---------    --------- 

Balance, December 31, 1996 ...................   34,707   $ 329,394    (3,856)     $(70,316)   $(703,068)   $  (6,408)   $(450,398)
                                                 ======   =========      ====       =======    =========    =========    ========= 
</TABLE>




                             See accompanying notes.


                                       22
<PAGE>   25
                             WESTPOINT STEVENS INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)




<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                  1996          1995         1994
                                                                                ---------    ---------    ---------
<S>                                                                             <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss) .......................................................   $  57,665    $(129,848)   $(203,364)
    Adjustments to reconcile net income (loss) to net
       cash provided by (used for) operating activities:
          Amortization of excess reorganization value .......................           -      177,675      236,892
          Depreciation and other amortization ...............................      76,988       80,379       86,220
          Deferred income taxes .............................................      26,153       26,172       15,492

          Changes in assets and liabilities excluding the effect of the Trade
              Receivables Program:
                Accounts receivable .........................................       3,939       (2,694)     (20,451)
                Inventories .................................................      20,817      (23,105)       2,408
                Prepaid expenses and other current assets ...................       4,567       (5,522)      (3,808)
                Accrued interest payable ....................................        (118)         113       (1,184)
                Accounts payable and other accrued liabilities ..............     (10,046)      15,971       (4,122)
                Other-net ...................................................      (8,964)     (34,398)       5,822
                                                                                ---------    ---------    ---------
    Total adjustments .......................................................     113,336      234,591      317,269
                                                                                ---------    ---------    ---------

Net cash provided by operating activities ...................................     171,001      104,743      113,905
                                                                                ---------    ---------    ---------


CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures ....................................................     (99,943)    (102,197)    (109,019)
    Net proceeds from sale of assets ........................................       1,098        3,066       11,922
                                                                                ---------    ---------    ---------

Net cash used for investing activities ......................................     (98,845)     (99,131)     (97,097)
                                                                                ---------    ---------    ---------


CASH FLOWS FROM FINANCING ACTIVITIES:
    Senior Credit Facility:
       Borrowings ...........................................................     645,500      564,500      538,500
       Repayments ...........................................................    (694,500)    (499,500)    (568,000)
    Proceeds from Trade Receivables Program .................................      12,045         (391)       8,690
    Proceeds from issuance of Common Stock ..................................       1,332        2,600          666
    Purchase of Common Stock for treasury ...................................     (30,491)     (34,257)      (2,377)
    Payment of deferred taxes ...............................................           -      (32,500)           -
    Redemption of purchase rights ...........................................           -          (33)           -
    Collection of notes receivable ..........................................           -            -        4,682
    Fees associated with refinancing ........................................           -            -       (4,732)
                                                                                ---------    ---------    ---------

Net cash provided by (used for) financing activities ........................     (66,114)         419      (22,571)
                                                                                ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents ........................       6,042        6,031       (5,763)
Cash and cash equivalents at beginning of period ............................       7,987        1,956        7,719
                                                                                ---------    ---------    ---------

Cash and cash equivalents at end of period ..................................   $  14,029    $   7,987    $   1,956
                                                                                =========    =========    =========
</TABLE>


                             See accompanying notes


                                       23
<PAGE>   26
                             WESTPOINT STEVENS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

BUSINESS. WestPoint Stevens Inc. (the "Company") is a manufacturer and marketer
of bed and bath products, including sheets, pillowcases, comforters, blankets,
bedspreads, towels and related products and is also a leading domestic
manufacturer of knitted apparel fabrics. The Company conducts its operations in
two principal industry segments: bed and bath products and knitted fabrics for
the apparel industry.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the
Company include the accounts of the Company and all of its subsidiaries. All
material intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments and trade accounts receivable.

The Company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in the Company's investment strategy.

Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base. However, as of December 31, 1996, substantially all of the Company's
receivables were from companies in the retail industry.

CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Short-term investments (consisting primarily of commercial paper and
certificates of deposit) totaling approximately $14 million and $8 million are
included in cash and cash equivalents at December 31, 1996 and 1995,
respectively. These investments are carried at cost, which approximates market
value.

INVENTORIES. Inventory costs include material, labor and factory overhead.
Inventories are stated at the lower of cost or market (net realizable value). At
December 31, 1996 and 1995, approximately 85% and 88%, respectively, of the
Company's inventories are valued at the lower of cost or market using the
"dollar value" last-in, first-out ("LIFO") method. The remainder of the
inventories (approximately $44.1 million and $37.3 million at December 31, 1996
and 1995, respectively) are valued at the lower of cost (substantially first-in,
first-out method) or market.

Inventories consist of the following (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                ----------------------
                                                                  1996          1995
                                                                --------      --------
<S>                                                             <C>           <C>
Finished goods.............................................     $134,690      $145,790
Work in progress...........................................      114,140       123,878
Raw materials and supplies.................................       71,038        68,138
LIFO reserve...............................................      (20,217)      (17,338)
                                                                --------      --------
                                                                $299,651      $320,468
                                                                ========      ========
</TABLE>

PROPERTY, PLANT AND EQUIPMENT. As a result of the adoption of Fresh Start
reporting, as of September 30, 1992, property, plant and equipment were adjusted
to their estimated fair values and historical accumulated depreciation was
eliminated. Additions since September 30, 1992 are stated at cost.


                                       24
<PAGE>   27
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES--CONTINUED

PROPERTY, PLANT AND EQUIPMENT (CONTINUED). Depreciation is computed over
estimated useful lives using the straight-line method for financial reporting
purposes and accelerated methods for income tax reporting. Depreciation expense
was approximately $77.0 million, $80.4 million, and $86.2 million in the years
ended December 31, 1996, 1995 and 1994, respectively.

Estimated useful lives for property and equipment are as follows:

<TABLE>
<S>                                                               <C>
Buildings and improvements......................................  10 to 40 Years
Machinery and equipment.........................................   3 to 18 Years
Leasehold improvements..........................................     Lease Terms
</TABLE>

REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCATED TO IDENTIFIABLE ASSETS
("Excess Reorganization Value"). In September 1992, the Company completed a
"prepackaged" plan of reorganization (the "Plan") and in accordance with SOP
90-7 the Company established a new basis of accounting ("Fresh Start"). In Fresh
Start reporting, the Company's assets and liabilities were adjusted to their
fair values as of September 30, 1992. The excess of the reorganization value
over the value of identifiable assets, $637.5 million, was reported as Excess
Reorganization Value at September 30, 1992. Excess Reorganization Value has been
amortized on a straight-line basis over three years and was fully amortized by
September 1995.

HEDGING TRANSACTIONS. The Company engages in hedging activities within the
normal course of its business. Management has been authorized to manage exposure
to price fluctuations relevant to the purchase of cotton through the use of a
variety of derivative nonfinancial instruments. Derivative nonfinancial
instruments require or permit settlement by the delivery of commodities and
include exchange traded commodity futures contracts and options. Gains and
losses on these hedges, which were not material at December 31, 1996 and 1995,
are deferred and subsequently recognized in income as cost of goods sold in the
same period as the hedged item. The Company does not hold or issue derivative
instruments for trading purposes.

INCOME TAXES. The Company accounts for income taxes under FAS 109, Accounting
for Income Taxes. Under FAS 109, deferred income taxes are provided at the
enacted marginal rates on the differences between the financial statement and
income tax bases of assets and liabilities.

PENSION PLANS. The Company has a number of defined benefit pension plans
covering essentially all employees who are not covered by certain collective
bargaining agreements. The benefits are based on years of service and
compensation. The Company's practice is to fund amounts which are required by
the Employee Retirement Income Security Act of 1974.

The Company also sponsors an employee savings plan covering certain employees.
Participants in this plan elect to make contributions as either a percent of
earnings or a basic contribution. For the periods prior to December 31, 1994,
there were no contributions by the Company for this plan. The Company amended
the plan to provide for Company contributions beginning in 1995 (see Note 3
"Employee Benefit Plans - Retirement Savings Plan").

OTHER EMPLOYEE BENEFITS. The Company accounts for post-retirement and
post-employment benefits in accordance with FAS 106, Employer's Accounting for
Post Retirement Benefits Other Than Pensions and FAS 112, Employer's Accounting
for Postemployment Benefits.

STOCK BASED COMPENSATION. The Company grants stock options for a fixed number of
shares in accordance with certain of its benefit plans. The Company accounts for
stock option grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
the stock option grants if the exercise price is equal to or more than the fair
value of the shares at the date of grant.

FAIR VALUE DISCLOSURES.  Cash and cash equivalents: The carrying amounts
reported in the balance sheets for cash and cash equivalents approximates its
fair value.


                                       25
<PAGE>   28
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES--CONTINUED

Accounts receivable and accounts payable: The carrying amounts reported in the
balance sheets for accounts receivable and accounts payable approximate their
fair value.

Long-term and short-term debt: The fair value of the Company's outstanding debt
is estimated based on the quoted market prices for the same issues or on the
current rates offered to the Company for debt of similar issues. The fair value
of the $1,099 million and $1,148 million of outstanding debt at December 31,
1996 and 1995 was approximately $1,127 million and $1,142 million, respectively.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. In March 1995, the FASB issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996, and the effect of
adoption was not material.

NET INCOME (LOSS) PER COMMON SHARE. The computation of net income (loss) per
common share is based on the weighted average number of common and common
equivalent shares (stock options) outstanding each period.


2.  INDEBTEDNESS AND FINANCIAL ARRANGEMENTS

Indebtedness is as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                   -----------------------
                                                      1996         1995
                                                   ----------   ----------
<S>                                                <C>          <C>
Short-term indebtedness
    Senior Credit Facility
         Revolver ..............................   $   24,000   $   73,000
                                                   ==========   ==========


Long-term indebtedness
    Senior Credit Facility
            Revolver ...........................   $   50,000   $   50,000
    8-3/4% Senior Notes due 2001 ...............      400,000      400,000
    9-3/8% Senior Subordinated Debentures
       due 2005 ................................      550,000      550,000
    9% Sinking Fund Debentures due 2017 ........       75,000       75,000
                                                   ----------   ----------
                                                   $1,075,000   $1,075,000
                                                   ==========   ==========
</TABLE>


The Company's Senior Credit Facility with certain lenders (collectively, the
"Banks") consists of a $349.6 million revolving credit facility ("Revolver") due
May 23, 2001. The Company has included $50 million of Revolver in long-term debt
at December 31, 1996 because the Company intends that at least that amount would
remain outstanding during 1997.

At the option of the Company, interest under the Senior Credit Facility will be
payable either at the prime rate or at LIBOR plus 1.25%. Upon the Company
achieving certain ratios of EBITDA (as defined) to cash interest expense,
interest rates can be reduced up to 0.5%. The Company pays a commitment fee in
an amount equal to 0.375% of the unused portion of each Bank's commitment under
the Revolver. The loans under the Senior Credit Facility are secured by the
pledge of all the stock of the Company's material subsidiaries and a first
priority lien on substantially all of the assets of the Company, other than the
Company's accounts receivable.


                                       26
<PAGE>   29
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2.  INDEBTEDNESS AND FINANCIAL ARRANGEMENTS--CONTINUED

A subsidiary of the Company has a credit facility with the Banks that provides
$25 million of revolving credit loans. Borrowings under this facility reduce the
amounts available under the Senior Credit Facility. No amounts were outstanding
under this facility at December 31, 1996.

The 8-3/4% Senior Notes due 2001 (the "Notes") are general unsecured obligations
of the Company and rank senior in right of payment to the 9-3/8% Senior
Subordinated Debentures due 2005 (the "Debentures") and pari passu in right of
payment with all indebtedness of the Company under the Senior Credit Facility
and all other existing or future Senior Indebtedness of the Company. The
Debentures are general unsecured obligations of the Company and subordinate in
right of payment to the Notes and all other existing and future Senior
Indebtedness of the Company, including indebtedness under the Senior Credit
Facility, pari passu with any future senior subordinated indebtedness and senior
to any future subordinated indebtedness of the Company.

The Notes bear interest at the rate of 8-3/4% per annum, payable semi-annually
on June 15 and December 15 of each year. The Notes are redeemable, in whole or
in part at any time on or after December 15, 1998, at the option of the Company,
at the redemption prices, as defined, together with accrued and unpaid interest
to the date of redemption. The Debentures bear interest at the rate of 9-3/8%
per annum, payable semi-annually on June 15 and December 15 of each year. The
Debentures are redeemable, in whole or in part at any time on or after December
15, 1998, at the option of the Company, at the redemption prices, as defined,
together with accrued and unpaid interest to the date of the redemption.

In addition, in the event of a Change of Control (as defined), the Company will
be obligated to make an offer to redeem a holder's Notes or Debentures at a
redemption price of 101% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of redemption. The Company may also redeem each of
the Notes or Debentures upon a Change of Control at a redemption price equal to
the greater of 101% of the principal amount thereof, together with accrued
interest thereon to the date of redemption or 100% of the principal amount
thereof, plus a Make-Whole Premium (as defined).

The Company's credit agreements contain a number of customary covenants
including, among others, restrictions on the incurrence of indebtedness,
transactions with affiliates, and certain asset dispositions. Certain provisions
require the Company to maintain certain financial ratios, such as a minimum
current ratio, and a minimum interest coverage ratio. A minimum consolidated net
worth, as defined, is also mandated. At December 31, 1996, the Company could
make restricted payments aggregating approximately $5.7 million.

The Company, through a "bankruptcy remote" receivables subsidiary ("Receivables
Subsidiary"), has a trade receivables program ("Trade Receivables Program")
which provides for the sale of accounts receivable, on a revolving basis. At
December 31, 1996 and 1995, $133 million and $121 million, respectively had been
sold under this program and the sale is reflected as a reduction of accounts
receivable in the accompanying Consolidated Balance Sheets. The Trade
Receivables Program was financed through the issuance of (a) $115 million of
Floating Rate Class A Trade Receivables Participation Certificates ("Class A
Certificates"); (b) $18 million of Floating Rate Class B Trade Receivables
Participation Certificates ("Class B Certificates"); and (c) $27 million of
Investor Revolving Certificates. The Class A Certificates and Class B
Certificates bear interest at LIBOR plus .27% and LIBOR plus .57%, respectively,
and the Investor Revolving Certificates bear interest at LIBOR plus .375%. The
expected final payment date of amounts outstanding under the Trade Receivables
Program is May 18, 1999, but earlier termination could occur upon the occurrence
of certain defined events. The cost of the Trade Receivables Program is charged
to selling and administrative expense.

The Trade Receivables Program requires the Company and Receivables Subsidiary to
perform certain servicing obligations with respect to the existing and future
trade receivables sold by the Company. The Company is not subject to any
financial covenants under the Trade Receivables Program, but the documentation
for the Trade Receivables Program provides for early termination of the Trade
Receivables Program and early payment of the securities issued thereunder upon
certain events, which include the incurrence of losses or delinquencies on the
receivables in excess of certain levels or the bankruptcy or insolvency of the
Company.


                                       27
<PAGE>   30
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2.  INDEBTEDNESS AND FINANCIAL ARRANGEMENTS--CONTINUED

Excluding amounts related to the Revolver, maturities of long-term debt for
1998, 1999 and 2000 are $3.75 million per year and $403.75 million in 2001.

In connection with the refinancing of its Senior Credit Facility on November 23,
1994, the Company wrote-off deferred financing fees of $8.9 million ($5.4
million after income taxes).


3.  EMPLOYEE BENEFIT PLANS

PENSION PLANS

Pension expense related to the Company's defined benefit plans, is comprised of
the following (in thousands of dollars):

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                       ----------------------------------
                                                         1996         1995         1994
                                                       --------     --------     --------
<S>                                                    <C>          <C>          <C>
Service cost-benefits earned during period .........   $  8,244     $  6,174     $  7,428
Interest cost on projected benefit obligation ......     24,255       23,757       22,731
Deferred actuarial gains (losses) ..................     (1,170)      33,038      (22,285)
                                                       --------     --------     --------
Subtotal ...........................................     31,329       62,969        7,874
Actual (returns) losses on plan assets .............    (22,276)     (49,969)       5,026
                                                       --------     --------     --------

Total defined benefit plan expense .................   $  9,053     $ 13,000     $ 12,900
                                                       ========     ========     ========

Actuarial assumptions for pension expense:
        Discount rate ..............................       7.25%         8.5%           7%
        Average rate of increase in compensation
                  levels ...........................          4%           4%           4%
        Expected long-term rate of return on plan
                  assets ...........................         10%         8.5%         8.5%
</TABLE>




                                       28
<PAGE>   31
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3.  EMPLOYEE BENEFIT PLANS

PENSION PLANS--CONTINUED

The following table sets forth the funded status of the Company's pension plans
and amounts recognized in the accompanying Consolidated Balance Sheets at
December 31, 1996 and 1995 (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                            ------------------------------------------------
                                                                                         1996                       1995
                                                                            -----------------------------        -----------
                                                                              ASSETS          ACCUMULATED        ACCUMULATED
                                                                              EXCEED            BENEFITS           BENEFITS
                                                                            ACCUMULATED          EXCEED             EXCEED
                                                                              BENEFITS           ASSETS             ASSETS
                                                                            -----------       -----------        -----------
<S>                                                                          <C>               <C>                <C>
Actuarial present value of projected benefit obligation:
        Vested ......................................................        $  85,620         $ 200,902          $ 312,899
        Nonvested ...................................................            3,835             5,706              3,696
                                                                             ---------         ---------          ---------
Accumulated benefit obligation ......................................           89,455           206,608            316,595
Effect of projected future salary increases .........................                -            16,918             23,633
                                                                             ---------         ---------          ---------
Projected benefit obligation ........................................           89,455           223,526            340,228
Plan assets at fair value ...........................................          102,718           197,174            281,443
                                                                             ---------         ---------          ---------
Projected benefit obligation less than (in excess of)
        plan assets .................................................           13,263           (26,352)           (58,785)
Unrecognized net actuarial losses ...................................           15,458            27,089             75,670
Minimum pension liability adjustment ................................                -           (10,171)           (52,037)
                                                                             ---------         ---------          ---------

Pension related asset (liability)  included in
         Consolidated Balance Sheets ................................        $  28,721         $  (9,434)         $ (35,152)
                                                                             =========         =========          =========

Actuarial assumptions for funded status information:
        Discount rate ...............................................             8.25%             8.25%              7.25%
        Average rate of increase in compensation levels .............                -               3.5%                 4%
</TABLE>


At December 31, 1996, the Company changed the discount rate to 8.25% from 7.25%
which decreased the projected benefit obligation by approximately $38.5 million.
At December 31, 1995, the Company changed the discount rate to 7.25% from 8.5%
which increased the projected benefit obligation by approximately $43.5 million.

The provisions of Financial Accounting Standards Board Statement No. 87 Employee
Accounting for Pensions (SFAS No. 87) require recognition in the balance sheet
of an additional minimum liability for pension plans with accumulated benefits
in excess of plan assets. At December 31, 1996 and 1995, minimum pension
liability adjustments of $10.2 million ($6.4 million after related income taxes)
and $52.0 million ($32.0 million after related income taxes), respectively, are
included in the accompanying Consolidated Balance Sheets.

Plan assets are primarily invested in United States Government and corporate
debt securities, equity securities and fixed income insurance contracts. At
December 31, 1996 and 1995, the Company's pension plans held Notes and
Debentures of the Company with a market value of $17.0 million and $13.2
million, respectively.


                                       29
<PAGE>   32
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3.  EMPLOYEE BENEFIT PLANS--CONTINUED

RETIREMENT SAVINGS PLAN

The Company amended its Retirement Savings Value Plan (the "401K Plan")
effective January 1, 1995, to provide that the Company will match 50 percent of
employee's before-tax contributions up to two percent of the employee's
compensation. Company contributions may be made either in cash or in shares of
Common Stock of the Company. During both 1996 and 1995, the Company charged $2.4
million to expense in connection with the 401K Plan.


OTHER POST-RETIREMENT BENEFIT PLANS

In addition to sponsoring defined benefit pension plans, the Company sponsors
various defined benefit post-retirement plans that provide health care and life
insurance benefits to certain current and future retirees. All such
post-retirement benefit plans are unfunded. The following table presents the
status of post-retirement plans (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                     ----------------------
                                                                                       1996          1995
                                                                                     -------        -------
<S>                                                                                  <C>            <C>
Accumulated post-retirement benefit obligation:
        Retirees ...............................................................     $17,815        $20,707
        Fully eligible active plan participants ................................         209            370
        Other active plan participants .........................................          87            168
        Unrecognized net gain ..................................................       4,627          1,808
                                                                                     -------        -------

Accrued post-retirement benefit obligation .....................................     $22,738        $23,053
                                                                                     =======        =======
</TABLE>


Net periodic post-retirement benefit plans expense includes the following
components (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                                    YEAR ENDED DECEMBER 31,
                                                                                            ---------------------------------------
                                                                                              1996            1995            1994
                                                                                            -------         -------         -------
<S>                                                                                         <C>             <C>             <C>    
Service cost attributed to service during the period ...............................        $     3         $     5         $     6
Interest cost on accumulated post-retirement benefit plan obligations ..............          1,377           1,569           1,433
Amortization of unrecognized gain ..................................................            (61)           (142)            (51)
                                                                                            -------         -------         -------
Net periodic post-retirement benefit plans cost ....................................        $ 1,319         $ 1,432         $ 1,388
                                                                                            =======         =======         =======
</TABLE>



As of December 31, 1996, the actuarial assumptions include a discount rate of
8.25% and a medical care trend rate of 8.7% for 1997, grading down to 6% by
2000. These trend rates reflect the Company's prior experience and management's
expectation of future rates. Increasing the assumed health care cost trend rates
by one percentage point in each year would increase the accumulated
post-retirement benefit plans obligations as of December 31, 1996 by
approximately $0.5 million, and the aggregate service and interest cost
components of net periodic post-retirement benefit cost for the year ended
December 31, 1996 by an immaterial amount.

The Company continues to evaluate post-retirement plan redesign options that may
reduce the ongoing annual expense of post-retirement benefits cost covered by
FAS 106 and FAS 112.


4.  OTHER EXPENSE--NET

Included in "Other expense-net" in the accompanying Consolidated Statements of
Operations for the years ended December 31, 1996, 1995 and 1994, are the
amortization and write-off of deferred financing fees of $3.9 million, $3.9
million and $13.6 million, respectively.


                                       30
<PAGE>   33
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5.  INCOME TAXES

The Company accounts for income taxes under FAS 109. Under FAS 109, deferred
income taxes are provided at the enacted marginal rates on the difference
between the financial statement and income tax bases of assets and liabilities.
Deferred income tax provisions or benefits are based on the change in the
deferred tax assets and liabilities from period to period.

The total provision (benefit) for income taxes consisted of the following (in
thousands of dollars):

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                             -------------------------------------
                                                               1996          1995           1994
                                                             --------      --------       --------
<S>                                                          <C>           <C>            <C>
Current
        Federal .....................................        $    957      $  2,311       $    600
        State .......................................             630         2,475          1,819
        Foreign .....................................             621          (145)           273
Deferred ............................................          30,492        25,809         19,908
                                                             --------      --------       --------
                                                             $ 32,700      $ 30,450       $ 22,600
                                                             ========      ========       ========
</TABLE>


Income tax expense from operations differs from the statutory federal income tax
rate of 35% for the following reasons (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                 -------------------------------------
                                                                                   1996          1995           1994
                                                                                 --------      --------       --------
<S>                                                                              <C>           <C>            <C>
Income tax expense (benefit) at federal statutory income
    tax rate ..............................................................      $ 31,628      $(34,789)      $(63,267)
State income taxes (net of effect of federal
    income tax) ...........................................................         1,183         1,586          2,185
Interest on prior years' taxes ............................................             -         2,051          3,700
Amortization of Excess Reorganization Value ...............................             -        62,187         82,912
Other-net .................................................................          (111)         (585)        (2,930)
                                                                                 --------      --------       --------

Income tax expense ........................................................      $ 32,700      $ 30,450       $ 22,600
                                                                                 ========      ========       ========
</TABLE>


Components of the net deferred income tax liability are as follows (in thousands
of dollars):

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                              ----------------------
                                                                                 1996         1995
                                                                              ---------    ---------
<S>                                                                           <C>          <C>
Deferred tax liabilities:
        Basis differences resulting from reorganization ...................   $(108,634)   $(109,226)
        Accelerated depreciation ..........................................     (75,930)     (73,768)
        Income taxes related to prior years, including interest ...........     (18,755)     (16,122)
        Nondeductible expenses ............................................     (42,503)     (31,337)
        Other .............................................................      (4,715)      (5,038)

Deferred tax assets:
        Reserves for litigation, environmental, employee benefits and other      62,057       92,043
        Other .............................................................       9,423        6,693
                                                                              ---------    ---------
                                                                              $(179,057)   $(136,755)
                                                                              =========    =========
</TABLE>


                                       31
<PAGE>   34
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5.  INCOME TAXES--CONTINUED

At December 31, 1996, the Company has estimated operating loss carryforwards
("NOLs") expiring in 2004-2009 of approximately $443 million available to reduce
future federal taxable income. Due to the ownership change which occurred
September 16, 1992 in connection with a reorganization, the utilization of NOLs
generated prior to this date will be significantly limited.

During prior years, the Internal Revenue Service (the "Service") issued Revenue
Agent's Reports to Cluett, Peabody & Co., Inc., J. P. Stevens & Co., Inc., and
West Point - Pepperell, Inc. asserting income tax deficiencies and additions to
tax totaling approximately $89 million related to tax years 1979 and 1982
through 1989. This amount did not include interest which accrues from the dates
the taxes were due until the dates of the payments. During 1995, the Company
reached agreements with the Service concerning all of the Revenue Agent's
Reports. As a result, the Company made payments in December, 1995, totaling
approximately $33 million, which includes interest of approximately $19 million
that was tax deductible. This liability had been accrued in previous periods
and, accordingly, no additional income tax expense has been recognized in 1995
related to the agreements.


6.  STOCKHOLDERS' EQUITY

STOCK OPTIONS

The Company has granted stock options in accordance with (a) the 1993 Management
Stock Option Plan (the "1993 Stock Option Plan") and, (b) the 1994 Non-Employee
Directors Stock Option Plan (the "1994 Directors Stock Option Plan") and also
has granted certain other stock options which were contractual options not
granted pursuant to any plan. The 1993 Stock Option Plan covers approximately
1.9 million shares of Common Stock (approximately 700,000 shares of which are
subject to further shareholder approval at the Company's May 14, 1997 Annual
Meeting of Stockholders) and the 1994 Directors Stock Option Plan covers 150,000
shares of Common Stock. Key employees are granted options under the 1993 Stock
Option Plan at terms (purchase price, expiration date and vesting schedule)
established by a committee of the Board of Directors. Options granted either in
accordance with contractual arrangements or pursuant to the 1993 Stock Option
Plan have been at a price which is approximately equal to fair market value on
the date of grant. Non-employee directors are granted options under the 1994
Directors Stock Option Plan at a price which is approximately equal to fair
market value on the date of grant and such options are exercisable on the date
of grant for a period of ten years. The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, respectively: risk-free interest rates of 6.2% and 7%; no dividend
yield; volatility factors of the expected market price of the Company's common
stock of .29 and .29; and a weighted-average expected life of the option of 8
years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


                                       32
<PAGE>   35
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6.  STOCKHOLDERS' EQUITY--CONTINUED

STOCK OPTIONS--CONTINUED

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Pro forma stock based
compensation costs resulted in 1996 pro forma net income of $57.2 million (or
pro forma net income per share of $1.80) and 1995 pro forma net loss of $130.2
million (or pro forma net loss per share of $3.98).

Changes in outstanding options were as follows:

<TABLE>
<CAPTION>
                                                               NUMBER OF SHARES
                                                                (IN THOUSANDS)                     WEIGHTED AVERAGE
                                              ----------------------------------------------         OPTION PRICE
                                              QUALIFIED PLANS     CONTRACTUAL          TOTAL          PER SHARE
                                              ---------------     -----------         ------          ---------
<S>                                                <C>                <C>              <C>              <C>
Options outstanding at December 31, 1994             813               510             1,323            $12.22
Granted                                               94                 -                94            $14.96
Exercised and terminated                             (38)             (250)             (288)           $ 9.46
                                                  ------            ------            ------            ------
Options outstanding at December 31, 1995             869               260             1,129            $13.14
Granted                                              888                 -               888            $26.68
Exercised and terminated                             (67)              (55)             (122)           $12.13
                                                  ------            ------            ------            ------
Options outstanding at December 31, 1996           1,690               205             1,895            $19.56
                                                  ======            ======            ======            ======
</TABLE>


At December 31, 1996, options for 883,600 shares were exercisable.


STOCK BONUS PLAN

During 1995, the Company's Board of Directors approved the WestPoint Stevens
Inc. 1995 Key Employee Stock Bonus Plan (the "Stock Bonus Plan") covering
500,000 shares of the Company's Common Stock. Under the Stock Bonus Plan, the
Company may grant bonus awards of shares of Common Stock to key employees based
on the Company's achievement of targeted earnings levels during the Company's
fiscal year. For 1996 and 1995, respectively, bonus awards were deemed earned by
fifty-three and thirty-nine employees covering an aggregate of 321,732 and
338,468 shares of Common Stock. The Stock Bonus Plan provides for vesting of the
bonus awards of 20 percent in the year of award and 20 percent in each of the
next four years if the employee continues employment with the Company. The
Company charged $3.4 million and $1.4 million to expense in 1996 and 1995,
respectively, in connection with the Stock Bonus Plan.


7.  LEASE COMMITMENTS

The Company's operating leases, including sublease arrangements with divested
operations, consist of land, sales offices, manufacturing equipment, warehouses
and data processing equipment with expiration dates at various times during the
next thirteen years. Some of the operating leases stipulate that the Company can
(a) purchase the properties at their then fair market values or (b) renew the
leases at their then fair rental values. Some of the Company's leases,
principally sales office space and manufacturing equipment, are sublet to others
under leases expiring over the next four years.


                                       33
<PAGE>   36
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7.  LEASE COMMITMENTS--CONTINUED

The following is a schedule, by year, of future minimum lease payments as of
December 31, 1996 under operating leases, including sublease arrangements, that
have initial or remaining noncancellable lease terms in excess of one year (in
thousands of dollars):


<TABLE>
<CAPTION>
         YEAR ENDING DECEMBER 31,
         ------------------------
                  <S>                                               <C>
                  1997...........................................   $ 26,959
                  1998...........................................     26,202
                  1999...........................................     21,865
                  2000...........................................     16,448
                  2001...........................................     10,917
                  Years subsequent to 2001.......................     26,627
                                                                    --------

                  Total minimum lease payments...................    129,018
                  Minimum sublease rentals.......................     (5,720)
                                                                    --------
                  Net minimum lease payments required for
                      operating leases...........................   $123,298
                                                                    ========
</TABLE>


The following schedule shows the composition of total rental expense for all
operating leases, except those with terms of one month or less that were not
renewed (in thousands of dollars):

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                --------------------------------------
                                                  1996           1995           1994
                                                --------       --------       --------
<S>                                             <C>            <C>            <C>
Minimum lease payments ....................     $ 40,217       $ 42,070       $ 38,616
Less sublease rentals .....................       (4,761)        (7,464)        (7,028)
                                                --------       --------       --------

Rent expense ..............................     $ 35,456       $ 34,606       $ 31,588
                                                ========       ========       ========
</TABLE>


8.  LITIGATION AND CONTINGENT LIABILITIES

The Company is subject to various federal, state and local environmental laws
and regulations governing, among other things, the discharge, storage, handling
and disposal of a variety of hazardous and non-hazardous substances and wastes
used in or resulting from its operations and potential remediation obligations
thereunder. Certain of the Company's facilities (including certain facilities no
longer owned or utilized by the Company) have been cited or are being
investigated with respect to alleged violations of such laws and regulations.
The Company is cooperating fully with relevant parties and authorities in all
such matters. The Company believes that it has adequately provided in its
financial statements for any expenses and liabilities that may result from such
matters. The Company also is insured with respect to certain of such matters.
The Company's operations are governed by laws and regulations relating to
employee safety and health which, among other things, establish exposure
limitations for cotton dust, formaldehyde, asbestos and noise, and regulate
chemical and ergonomic hazards in the workplace. Although the Company does not
expect that compliance with any of such laws and regulations will adversely
affect the Company's operations, there can be no assurance such regulatory
requirements will not become more stringent in the future or that the Company
will not incur significant costs in the future to comply with such requirements.

The Company and its subsidiaries are involved in various other legal
proceedings, both as plaintiff and as defendant, which are normal to its
business. It is the opinion of management that the aforementioned actions and
claims, if determined adversely to the Company, will not have a material adverse
effect on the financial condition or operations of the Company taken as a whole.


                                       34
<PAGE>   37
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

 9.  CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                               ------------------------------------
                                                                 1996          1995          1994
                                                               --------      --------      --------
<S>                                                            <C>           <C>           <C>
(IN THOUSANDS OF DOLLARS)

Supplemental disclosures of cash flow information: 
     Cash paid during the period:
        Interest ........................................      $102,565      $101,195      $103,236
                                                               ========      ========      ========

        Income taxes ....................................      $  5,733      $  4,433      $  5,429
                                                               ========      ========      ========
</TABLE>


10.  SEGMENT AND MAJOR CUSTOMER INFORMATION

The Company is engaged in the manufacturing and marketing of products in two
industry segments, consumer home fashions and knitted apparel fabrics, through
Home Fashions and the Alamac Knits Subsidiary, respectively. Intersegment sales,
export sales and foreign operations each comprise less than 10% of consolidated
totals. "Other assets" consist mainly of prepaid pension costs, deferred
financing fees and other corporate assets.




                                       35
<PAGE>   38
                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10.  SEGMENT AND MAJOR CUSTOMER INFORMATION--CONTINUED

Segment information is as follows (in thousands of dollars):



<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                 ------------------------------------------------
                                                                     1996              1995               1994
                                                                 -----------       -----------        -----------
<S>                                                              <C>               <C>                <C>
Net sales
        Home Fashions ....................................       $ 1,501,795       $ 1,418,157        $ 1,346,857
        Alamac Knits Subsidiary ..........................           222,019           231,721            249,935
                                                                 -----------       -----------        -----------
Total ....................................................       $ 1,723,814       $ 1,649,878        $ 1,596,792
                                                                 ===========       ===========        ===========

Operating earnings before amortization of excess
     reorganization value
        Home Fashions ....................................       $   188,518       $   178,722        $   156,770
        Alamac Knits Subsidiary ..........................             7,051             3,962             14,369
                                                                 -----------       -----------        -----------
Total ....................................................       $   195,569       $   182,684        $   171,139
                                                                 ===========       ===========        ===========

Operating earnings (loss)
        Home Fashions ....................................       $   188,518       $    26,276        $   (46,498)
        Alamac Knits Subsidiary ..........................             7,051           (21,267)           (19,255)
                                                                 -----------       -----------        -----------
Total ....................................................       $   195,569       $     5,009        $   (65,753)
                                                                 ===========       ===========        ===========

Assets employed at period end
        Home Fashions ....................................       $   957,385       $   962,456        $ 1,052,359
        Alamac Knits Subsidiary ..........................           144,173           147,263            183,975
        Other ............................................            55,441            33,249             33,901
                                                                 -----------       -----------        -----------
Total ....................................................       $ 1,156,999       $ 1,142,968        $ 1,270,235
                                                                 ===========       ===========        ===========
Capital expenditures, including capital leases
        Home Fashions ....................................       $    94,945       $    92,440        $    84,544
        Alamac Knits Subsidiary ..........................             4,998             9,757             24,475
                                                                 -----------       -----------        -----------
Total ....................................................       $    99,943       $   102,197        $   109,019
                                                                 ===========       ===========        ===========

Amortization of excess reorganization value
        Home Fashions ....................................                         $   152,446        $   203,268
        Alamac Knits Subsidiary ..........................                              25,229             33,624
                                                                                   -----------        -----------
Total ....................................................                         $   177,675        $   236,892
                                                                                   ===========        ===========

Depreciation and other amortization
        Home Fashions ....................................       $    68,929       $    69,262        $    74,244
        Alamac Knits Subsidiary ..........................             8,059            11,117             11,976
                                                                 -----------       -----------        -----------
Total ....................................................       $    76,988       $    80,379        $    86,220
                                                                 ===========       ===========        ===========
</TABLE>


                                       36
<PAGE>   39

                             WESTPOINT STEVENS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10.  SEGMENT AND MAJOR CUSTOMER INFORMATION--CONTINUED

Products of Home Fashions are sold primarily to domestic chain stores, mass
merchants, department and specialty stores. Products of Alamac Knits Subsidiary
are sold to branded and private label manufacturers who cover virtually all
segments of the knitted apparel market. Sales to two customers as a percent of
net sales, amounted to approximately 11% each for the year ended December 31,
1996. Sales to two customers as a percent of net sales, amounted to
approximately 10% each for the year ended December 31, 1995. Sales to two
customers as a percent of net sales, amounted to approximately 11% and 10% for
the year ended December 31, 1994. During 1996, the Company's six largest
customers accounted for approximately 47% of the Company's net sales.


11.  QUARTERLY FINANCIAL SUMMARY (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            QUARTER
                                                           -------------------------------------------
                                                           FIRST       SECOND      THIRD       FOURTH
                                                           ------      ------      ------      ------
<S>                                                        <C>         <C>         <C>         <C>
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31, 1996
----------------------------

Net sales .............................................    $383.0      $421.0      $464.8      $455.0
Gross earnings ........................................      89.3        91.4       112.3       104.9
Net income ............................................       8.0         8.7        21.7        19.3

Net income per common share (1) .......................       .25         .27         .68         .61





YEAR ENDED DECEMBER 31, 1995
----------------------------

Net sales .............................................    $376.2      $396.5      $454.4      $422.8
Gross earnings ........................................      88.0        89.2       108.5        98.3
Net income (loss) .....................................     (52.6)      (52.2)      (40.9)       15.9

Net income (loss) per common share (1) ................     (1.58)      (1.59)      (1.26)        .49
</TABLE>



(1)Net income (loss) per common share calculations for each of the quarters is
based on the weighted average number of common and common equivalent shares
outstanding for each period and the sum of the quarters may not necessarily be
equal to the full year net income (loss) per common share amount.


                                       37
<PAGE>   40
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

    IDENTIFICATION OF DIRECTORS

The information called for in this item is incorporated by reference from the
Company's 1997 definitive proxy statement (under the caption "Board of
Directors") to be filed with the Securities and Exchange Commission by April 11,
1997 (the "1997 Proxy Statement").

    IDENTIFICATION OF EXECUTIVE OFFICERS

The information called for in this item is incorporated by reference from the
Company's 1997 Proxy Statement (under the caption "Management").

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is incorporated by reference from the
Company's 1997 Proxy Statement (under the caption "Executive Compensation").

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by this item is incorporated by reference from the
Company's 1997 Proxy Statement (under the caption "Security Ownership of Certain
Beneficial Owners and Management").

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this item is incorporated by reference from the
Company's 1997 Proxy Statement (under the captions "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and Related
Transactions").

                                     PART IV

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

(a)  FINANCIAL STATEMENTS AND SCHEDULES

     FINANCIAL STATEMENTS.

     Consolidated Financial Statements for the three years ended December 31,
1996.

<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                                  ----
                  <S>                                                            <C>
                  Report of Ernst & Young LLP, Independent Auditors ..........      18
                  Consolidated Balance Sheets ................................   19-20
                  Consolidated Statements of Operations ......................      21
                  Consolidated Statements of Stockholders' Equity (Deficit)...      22
                  Consolidated Statements of Cash Flows ......................      23
                  Notes to Consolidated Financial Statements .................   24-37
</TABLE>

All financial statements required to be filed as part of this Annual Report on
Form 10-K are filed under "Item 8. Financial Statements and Supplementary Data."


                                       38
<PAGE>   41
FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
                                                                                   PAGE
                                                                                   ----
                  <S>                                                               <C>
                  Schedule II -- Valuation and Qualifying Accounts............      44
</TABLE>

Note: All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore, have
been omitted.

(b) REPORTS ON FORM 8-K

The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1996.


EXHIBITS

<TABLE>
<CAPTION>
   EXHIBIT
    NUMBER                         DESCRIPTION OF EXHIBIT
   -------                         ----------------------
    <S>           <C>
     2.1          Debtors' Joint Plan of Reorganization, dated June 9, 1992, 
                  proposed by West Point Acquisition Corp. (since renamed
                  WestPoint Stevens Inc.), West Point Subsidiary Corp. (since
                  renamed Valley Fashions Subsidiary Corp.) and West Point
                  Tender Corp. (since renamed Valley Fashions Tender Corp.),
                  incorporated by reference to the Current Report on Form 8-K
                  (Commission File No. 1-4990) filed by West Point-Pepperell,
                  Inc. with the Commission on October 1, 1992.

     3.1          Restated Certificate of Incorporation of WestPoint Stevens 
                  Inc., as currently in effect, incorporated by reference to the
                  Post-Effective Amendment No. 1 Registration Statement on Form
                  S-1 (Commission File No. 33-77726) filed by the Company with
                  the Securities and Exchange Commission on May 19, 1994.

     3.2          Amended and Restated By-laws of WestPoint Stevens Inc., as
                  currently in effect, incorporated by reference to the
                  Post-Effective Amendment No. 1 to Registration Statement on
                  Form S-1 (Commission File No. 33-77726) filed by the Company
                  with the Securities and Exchange Commission on May 19, 1994.

      4           Form 15 (Commission File No. 0-21496) filed by the Company
                  with the Commission on May 25, 1995, incorporated by reference
                  herein.

    10.1          Indenture, dated as of December 10, 1993, between the Company
                  and First Trust National Association, as trustee, for the 8
                  3/4% Senior Notes due 2001, incorporated by reference to the
                  Annual Report on Form 10-K for the fiscal year ended December
                  31, 1993 (Commission File No. 0-21496) filed by the Company
                  with the Commission.

    10.2          Form of 8 3/4% Senior Notes due 2001 (included in the 
                  Indenture filed as Exhibit 10.1), incorporated by reference to
                  the Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1993 (Commission File No. 0-21496) filed by the
                  Company with the Commission.

    10.3          Indenture, dated as of December 10, 1993, between the Company
                  and the Bank of New York, as trustee, for the 9 3/8%
                  Subordinated Debentures due 2005, incorporated by reference to
                  the Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1993 (Commission File No. 0-21496) filed by the
                  Company with the Commission.

    10.4          Form of 9 3/8% Subordinated Debentures due 2005 (included in 
                  the Indenture filed as Exhibit 10.3), incorporated by
                  reference to the Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1993 (Commission File No. 0-21496)
                  filed by the Company with the Commission.
</TABLE>


                                       39
<PAGE>   42
<TABLE>
<CAPTION>
   EXHIBIT
    NUMBER                         DESCRIPTION OF EXHIBIT
   -------                         ----------------------
    <S>           <C>
    10.5          Rights Agreement, dated as of September 16, 1992, between the
                  Company, The Bank of New York, as rights agent, as amended by
                  Amendment No. 1 to Rights Agreement, dated as of March 12,
                  1993, and Amendment No. 2 to Rights Agreement, dated as of
                  December 10, 1993, incorporated by reference to the
                  Registration Statement on Form 10/A (Commission File No.
                  0-21496) filed by the Company on January 6, 1994.

    10.6          Form of Restated Plan Registration Rights Agreement dated as
                  of May 7, 1993, among the Company and the Existing Holders (as
                  defined therein), incorporated by reference to the
                  Registration Statement on Form 10 (Commission File No.
                  0-21496) filed by the Company on July 1, 1993.

    10.7          Form of Registration Rights Agreement, dated as of May 7, 
                  1993, among the Company and the Purchaser (as defined therein)
                  incorporated by reference to Exhibit 1 to the Form of
                  Securities Purchase Agreement filed as Exhibit 10.13 to the
                  Registration Statement on Form 10 (Commission File No.
                  0-21496) filed by the Company with the Commission on July 1,
                  1993.

    10.8          Amended and Restated Credit Agreement, dated as of May 7, 
                  1993, by and among West Point-Pepperell, Inc., the banks
                  listed on the signature pages thereof, Bankers Trust Company,
                  as administrative agent, and The Chase Manhattan Bank, N.A.,
                  Citicorp USA, Inc., NationsBank of North Carolina, Inc., The
                  Bank of New York and The Bank of Nova Scotia, as co-agents,
                  incorporated by reference to the Registration Statement on
                  Form 10 (Commission File No. 0-21496) filed by Valley Fashions
                  Corp. with the Commission on July 1, 1993.

    10.9          Employment Agreement, dated as of March 8, 1993, between West
                  Point-Pepperell, Inc. and Holcombe T. Green, Jr., together
                  with Letter, dated as of March 8, 1993, from the Company to
                  Holcombe T. Green, Jr., incorporated by reference to the
                  Registration Statement on Form 10 (Commission File No.
                  0-21496) filed by Valley Fashions Corp. (since renamed
                  WestPoint Stevens Inc.) with the Commission on July 1, 1993.

    10.10         Employment Agreement, dated as of April 1, 1993, between West
                  Point-Pepperell, Inc. and Morgan M. Schuessler, together with
                  Letter, dated as of April 1, 1993, from the Company to Morgan
                  M. Schuessler, incorporated by reference to the Registration
                  Statement on Form 10 (Commission File No. 0-21496) filed by
                  Valley Fashions Corp. (since renamed WestPoint Stevens Inc.)
                  with the Commission on July 1, 1993.

    10.11         Employment Agreement, dated as of February 1, 1993, between
                  West Point-Pepperell, Inc. and Joseph L. Jennings, Jr.,
                  incorporated by reference to the Registration Statement on
                  Form 10 (Commission File No. 0-21496) filed by the Company
                  with the Commission on July 1, 1993.

    10.12         Employment Agreement, dated as of March 8, 1993, between West
                  Point-Pepperell, Inc. and Thomas J. Ward, incorporated by
                  reference to the Registration Statement on Form 10 (Commission
                  File No. 0-21496) filed by the Company with the Commission on
                  July 1, 1993.

    10.13         Form of directors and officers Indemnification Agreement with
                  West Point-Pepperell, Inc., incorporated by reference to the
                  Registration Statement on Form S-1 (Commission File No.
                  33-69858) filed by the Company with the Commission on October
                  1, 1993.

    10.14         1993 Management Stock Option Plan, incorporated by reference
                  to the Registration Statement on Form 10 (Commission File No.
                  0-21496) filed by the Company with the Commission on July 1,
                  1993.
</TABLE>


                                       40
<PAGE>   43
<TABLE>
<CAPTION>
   EXHIBIT
    NUMBER                         DESCRIPTION OF EXHIBIT
   -------                         ----------------------
    <S>           <C>
    10.15         Description of 1993 Senior Management Incentive Plan, 
                  incorporated by reference to the Company's 1994 Proxy
                  Statement (Commission File No. 0-21496) filed by the Company
                  with the Commission.

    10.16         West Point-Pepperell, Inc. Supplemental Retirement Plan for
                  Eligible Executives, as amended, incorporated by reference to
                  the Schedule 14D-9 dated November 3, 1988 (Commission File No.
                  1-4490) filed by West Point-Pepperell, Inc. with the
                  Commission.

    10.17         West Point-Pepperell, Inc. Supplemental Executive Retirement
                  Plan, as amended, incorporated by reference to the Schedule
                  14D-9 dated November 3, 1988 (Commission File No. 1-4490)
                  filed by West Point-Pepperell, Inc. with the Commission.

    10.18         Indenture, dated as of March 1, 1987, between J.P. Stevens &
                  Co., Inc. and The Bank of New York, as trustee, for the 9%
                  Sinking Fund Debentures due 2017 including the First and
                  Second Supplemental Indentures thereto, incorporated by
                  reference to the Registration Statement on Form S-1
                  (Commission File No. 33-69858) filed by the Company with the
                  Commission on October 1, 1993.

    10.19         Credit Agreement, dated as of December 1, 1993, among Valley
                  Fashions Corp., Bankers Trust Company as Administrative Agent,
                  the Co-Agents parties thereto and the other financial
                  institutions parties thereto as amended on December 10, 1993,
                  incorporated by reference to the Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1993 (Commission File
                  No. 0-21496) filed by the Company with the Commission.

    10.20         Revolving Certificate Purchase Agreement, dated as of December
                  1, 1993, among WPS Receivables Corporation, the Company, the
                  Co-Agents and Revolving Purchasers named therein, Bankers
                  Trust Company, as Administrative Agent, and NationsBank of
                  North Carolina, N.A., as Agent, incorporated by reference to
                  the Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1993 (Commission File No. 0-21496) filed by the
                  Company with the Commission.

    10.21         Amendment No. 1 to the Revolving Certificate Purchase 
                  Agreement, dated as of December 10, 1993, among WPS
                  Receivables Corporation, the Company, the Co-Agents and
                  Revolving Purchasers named therein, Bankers Trust Company, as
                  Administrative Agent, and NationsBank of North Carolina, N.A.,
                  as Agent, incorporated by reference to the Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1993
                  (Commission File No. 0-21496) filed by the Company with the
                  Commission.

    10.22         Pooling and Servicing Agreement, dated as of December 10, 
                  1993, among, WPS Receivables Corporation, as transferor, the
                  Company, as the initial Servicer, and Chemical Bank, as
                  Trustee, incorporated by reference to the Current Report on
                  Form 8-K (Commission File No. 0-21496) filed by the Company
                  with the Commission on December 10, 1993.

    10.23         Receivables Purchase Agreement, dated as of December 10, 1993,
                  among WPS Receivables Corporation, as Purchaser, and the
                  Company and Alamac Knit Fabrics, Inc., as Sellers,
                  incorporated by reference to the Current Report on Form 8-K
                  (Commission File No. 0-21496) filed by the Company with the
                  Commission on December 10, 1993.

    10.24         Form of Securities Purchase Agreement, dated as of March 12,
                  1993, among the Company, New Street Capital Corporation,
                  Magten Asset Management Corporation and each Other Holder (as
                  defined therein), incorporated by reference to the
                  Registration Statement on Form 10 (Commission File No.
                  0-21496) filed by the Company with the Commission on July 1,
                  1993.
</TABLE>


                                       41
<PAGE>   44
<TABLE>
<CAPTION>
   EXHIBIT
    NUMBER                         DESCRIPTION OF EXHIBIT
   -------                         ----------------------
    <S>           <C>
    10.25         Amended and Restated Credit Agreement dated November 23, 1994,
                  among the Company, NationsBank of North Carolina, N.A. as
                  Administrative Agent, the Co-Agents parties thereto and the
                  other financial institutions parties thereto, incorporated by
                  reference to the Annual Report on Form 10-K/A for the fiscal
                  year ended December 31, 1994 (Commission File No. 0-21496)
                  filed by the Company with the Commission.

    10.26         WestPoint Stevens Inc. 1994 Non-Employee Directors Stock 
                  Option Plan, incorporated by reference to the Annual Report on
                  Form 10-K/A for the fiscal year ended December 31, 1994
                  (Commission File No. 0-21496) filed by the Company with the
                  Commission.

    10.27         Amended and Restated Pooling and Servicing Agreement, dated 
                  as of May 27, 1994, among WPS Receivables Corporation, the
                  Company and Chemical Bank, incorporated by reference to the
                  Registration Statement on Form S-1, Amendment No. 2
                  (Commission File No. 33- 76956) filed by WPS Receivables
                  Corporation with the Commission on May 24, 1994.

    10.28         Revolving Certificate Purchase Agreement, dated as of May 27,
                  1994, among WPS Receivables Corporation, the Company, the
                  Co-Agents and Revolving Purchasers named therein, Bankers
                  Trust Company, as Administrative Agent, and NationsBank of
                  North Carolina, N.A., as Agent, incorporated by reference to
                  the Registration Statement on Form S-1, Amendment No. 3
                  (Commission File No. 33-76956) filed by WPS Receivables
                  Corporation with the Commission on May 16, 1994.

    10.29         Amended and Restated Receivables Purchase Agreement, dated as
                  of May 27, 1994, among WPS Receivables Corporation, as
                  Purchaser, and the Company and Alamac Knit Fabrics, Inc., as
                  Sellers, incorporated by reference to the Registration
                  Statement on Form S-1, Amendment No. 3 (Commission File No.
                  33-76956) filed by WPS Receivables Corporation with the
                  Commission on May 16, 1994.

    10.30         Series 1994-1 Supplement, dated as of May 27, 1994, to the
                  Amended and Restated Pooling and Servicing Agreement, among
                  WPS Receivables Corporation, the Company and Chemical Bank,
                  incorporated by reference to the Registration Statement on
                  Form S-1, Amendment No. 3 (Commission File 33-76956) filed by
                  WPS Receivables Corporation with the Commission on May 16,
                  1994.

    10.31         Series 1994-R Supplement, dated as of May 27, 1994, to the 
                  Amended and Restated Pooling and Servicing Agreement, among
                  WPS Receivables Corporation, the company and Chemical Bank,
                  incorporated by reference to the Registration Statement on
                  Form S-1, Amendment No. 3 (Commission File No. 33-76956) filed
                  by WPS Receivables Corporation with the Commission on May 16,
                  1994.

    10.32         WestPoint Stevens Inc. Amended and Restated 1994 Non-Employee
                  Directors Stock Option Plan, incorporated by reference to the
                  Form 10-Q for the quarterly period ended June 30, 1995
                  (Commission File No. 0-21496) filed by the Company with the
                  Commission on August 9, 1995.

    10.33         Description of Senior Management Incentive Plan, incorporated
                  by reference to the Company's 1995 Proxy Statement (Commission
                  File No. 0-21496) filed by the Company with the Commission on
                  April 7, 1995.

    10.34         WestPoint Stevens Inc. 1995 Key Employee Stock Bonus Plan,
                  incorporated by reference to the Registration Statement Form
                  S-8 (Registration No. 33-95580) filed by the Company on August
                  11, 1995.
</TABLE>


                                       42
<PAGE>   45
<TABLE>
<CAPTION>
   EXHIBIT
    NUMBER                         DESCRIPTION OF EXHIBIT
   -------                         ----------------------
    <S>           <C>
    10.36         Amendment Agreement dated December 4, 1995 among the Company, 
                  NationsBank, N.A., The Bank of New York, The First National
                  Bank of Boston, The First National Bank of Chicago, The Nippon
                  Credit Bank, Ltd., Wachovia Bank of Georgia, N.A., Trust
                  Company Bank, AmSouth Bank of Alabama and ABN AMRO Bank, N.V.,
                  incorporated by reference to the Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1995 (Commission File
                  No. 0-21496) filed by the Company with the Commission.

    10.37         Form of directors and officers Indemnification Agreement with
                  the Company, incorporated by reference to the Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1995
                  (Commission File No. 0-21496) filed by the Company with the
                  Commission.

    10.38         WestPoint Stevens Inc. 1995 Key Employee Stock Bonus Plan (As
                  Amended), incorporated by reference to the Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1995
                  (Commission File No. 0-21496) filed by the Company with the
                  Commission.

    10.39         Tax Settlement Form 870-AD between WestPoint Stevens Inc.
                  (successor-in-interest to Cluett, Peabody & Co., Inc.) and the
                  Internal Revenue Service dated December 11, 1995, incorporated
                  by reference to the Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1995 (Commission File No. 0-21496)
                  filed by the Company with the Commission.

    10.40         Tax Settlement Form 870-AD between WestPoint Stevens Inc.
                  (successor-in-interest to West Point-Pepperell, Inc.) and the
                  Internal Revenue Service dated August 29, 1995, incorporated
                  by reference to the Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1995 (Commission File No. 0-21496)
                  filed by the Company with the Commission.

    10.41         Tax Settlement Form 870-AD between J.P. Stevens & Co., Inc.
                  and the Internal Revenue Service dated August 29, 1995,
                  incorporated by reference to the Annual Report on Form 10- K
                  for the fiscal year ended December 31, 1995 (Commission File
                  No. 0-21496) filed by the Company with the Commission.

    10.42         Second Amendment and Waiver Agreement dated as of January 23,
                  1997, among the Company, NationsBank, N.A. (formerly known as
                  NationsBank of North Carolina, N.A., the Bank of New York, The
                  First National Bank of Boston, The First National Bank of
                  Chicago, The Nippon Credit Bank, Ltd., Wachovia Bank of
                  Georgia, N.A., SunTrust Bank, Atlanta (formerly known as Trust
                  Company Bank), AmSouth Bank of Alabama, and ABN AMRO Bank,
                  N.V.

    10.43         Credit Agreement dated as of January 23, 1997, among WestPoint
                  Stevens (UK) Limited, P.J. Flower & Co. Limited, as the
                  Borrowers, the Company as Guarantor, the several lenders
                  identified on the signature pages thereto and such other
                  lenders as may from time to time become a party thereto and
                  NationsBank, N.A., as agent for the Lenders

    10.44         First Amendment to the WestPoint Stevens Inc. Supplemental 
                  Retirement Plan dated as of September 6, 1996

    10.45         Employment Agreement effective January 1, 1997 between the
                  Company and Joseph L. Jennings superseding the Employment
                  Agreement of February 1, 1993.

      11          Statement re: Computation of earnings per share

      21          List of Subsidiaries of the Registrant.

      23          Consent of Ernst & Young LLP, independent auditors.

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


                                       43
<PAGE>   46
                             WESTPOINT STEVENS INC.
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)




<TABLE>
<CAPTION>
                                                                     ADDITIONS
                                                   BALANCE AT        CHARGED TO                               BALANCE AT
                                                  BEGINNING OF       COSTS AND                     OTHER        END OF
                                                     PERIOD          EXPENSES     DEDUCTIONS    ADJUSTMENTS    PERIOD(3)
                                                    --------         --------      --------      --------      --------
<S>                                                 <C>              <C>           <C>           <C>           <C>
Year Ended December 31, 1996
   Accounts receivable allowances:
      Doubtful accounts.......................      $ 16,357         $ 1,913       $  1,174(1)   $      -      $ 17,096
      Cash and/or trade discounts
          and returns and allowances..........         6,538            (773)(2)          -             -         5,765
                                                    --------         --------      --------      --------      --------
                                                    $ 22,895         $  1,140      $  1,174      $      -      $ 22,861
                                                    ========         ========      ========      ========      ========




Year Ended December 31, 1995
   Accounts receivable allowances:
      Doubtful accounts.......................      $ 12,015         $  6,486      $  2,144(1)  $       -      $ 16,357
      Cash and/or trade discounts
          and returns and allowances..........         5,638              900(2)          -             -         6,538
                                                    --------         --------      --------      --------      --------
                                                    $ 17,653         $  7,386      $  2,144      $      -      $ 22,895
                                                    ========         ========      ========      ========      ========




Year Ended December 31, 1994
   Accounts receivable allowances:
      Doubtful accounts.......................      $ 10,496         $  2,596      $    920(1)   $   (157)     $ 12,015
      Cash and/or trade discounts
          and returns and allowances..........         6,885           (1,247)(2)         -             -         5,638
                                                    --------         --------      --------      --------      --------
                                                    $ 17,381         $  1,349      $    920      $   (157)     $ 17,653
                                                    ========         ========      ========      ========      ========
</TABLE>




(1)Accounts written off, less recoveries of accounts previously written off.
(2)Net change.
(3)Reserves are deducted from assets to which they apply.


                                       44
<PAGE>   47
                                   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.



                                        WESTPOINT STEVENS INC.
                                        (Registrant)

                                        By: /s/ Holcombe T. Green, Jr.
                                            ------------------------------------
                                            Holcombe T. Green, Jr.
                                            Chairman of the Board and Chief
                                            Executive Officer

                                            February 13, 1997

         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 the dates indicated.


<TABLE>
<S>                                                 <C>
By: /s/ Holcombe T. Green, Jr.                      By: /s/ Morgan M. Schuessler
    ------------------------------------------          ---------------------------------------
    Holcombe T. Green, Jr.                              Morgan M. Schuessler
    Chairman of the Board and Chief Executive           Executive Vice President/Finance
    Officer (principal executive officer)               and Chief Financial Officer
                                                        (principal financial officer)

    February 13, 1997                                   February 13, 1997



By: /s/ Joseph L. Jennings, Jr.                     By: /s/ J. Nelson Griffith
    ------------------------------------------          ---------------------------------------
    Joseph L. Jennings, Jr.                             J. Nelson Griffith
    Vice Chairman of the Board                          Controller
                                                        (principal accounting officer)

    February 13, 1997                                   February 13, 1997



By: /s/ M. Katherine Dwyer                          By: /s/ John G. Hudson
    ------------------------------------------          ---------------------------------------
    M. Katherine Dwyer                                  John G. Hudson
    Director                                            Director

    February 13, 1997                                   February 13, 1997



By: /s/ Charles W. McCall                           By: /s/ Douglas T. McClure
    ------------------------------------------          ---------------------------------------
    Charles W. McCall                                   Douglas T. McClure
    Director                                            Director

    February 13, 1997                                   February 13, 1997
</TABLE>


                                       45
<PAGE>   48
<TABLE>
<S>                                                 <C>
By: /s/ Gerald B. Mitchell                          By: /s/ Phillip Siegel
    ------------------------------------------          ---------------------------------------
    Gerald B. Mitchell                                  Phillip Siegel
    Director                                            Director

    February 13, 1997                                   February 13, 1997



By: /s/ John F. Sorte
    ------------------------------------------
    John F. Sorte
    Director

    February 13, 1997
</TABLE>




                                       46