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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 2, 2005	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 3, 2004 OR~~
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file numbers: 001-31829 and 333-22155

~~001-31829~~CARTER'S, INC. THE ~~and~~WILLIAM ~~333-22155~~CARTER COMPANY (Exact names of registrants as specified in their charters)

CARTER’S, INC.

Delaware Massachusetts (States or other jurisdictions of Incorporation or Organization)		13-3912933 04-1156680 (I.R.S. Employer Identification Nos.)
The Proscenium 1170 Peachtree Street NE, Suite 900 Atlanta, Georgia 30309 (Address of principal executive offices, including zip code)
(404) 745-2700 (Registrant's telephone number, including area code)

THE WILLIAM CARTER COMPANY

(Exact names of registrants as specified in their charters)

DelawareMassachusetts		13-391293304-1156680
(States or other jurisdictions of Incorporation or Organization)		(I.R.S. Employer Identification Nos.)
The Proscenium 1170 Peachtree Street NE, Suite 900 Atlanta, Georgia 30309
(Address of principal executive offices, including zip code)
(404) 745-2700
(Registrant’s telephone number, including area code)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o ý No ý o

The common equity of Carter’s, Inc. was not publicly traded as of the end of the second fiscal quarter of our most recently completed fiscal year. Accordingly, Carter’s, Inc. does not meet the definition of an accelerated filer under Rule 12b-2 of the Securities Exchange Act of 1934.

Applicable only to corporate issuers:

Carter’'s, Inc. has one class of common stock. There were 28,~~086~~506,~~958~~ 652 shares of Carter’'s, Inc.’'s common stock, with a par value of $0.01 per share, outstanding as of the close of business on ~~August 17~~ April 28, ~~2004~~2005.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Carter’'s, Inc. and The William Carter ~~Company,~~ ~~the wholly-owned operating subsidiary of Carter’s, Inc~~Company. Unless the context indicates otherwise, any reference in this report to “"TWCC”" refers to The William Carter Company, the wholly-owned operating subsidiary of Carter's, Inc. “ "Carter’'s,”" “"we,”" “"us,”" and “"our”" refer to Carter’'s, Inc. together with TWCC.

The William Carter Company meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

CARTER’'S, INC. AND THE WILLIAM CARTER COMPANY INDEX

AND THE WILLIAM CARTER COMPANY

			PAGE
Part I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Unaudited Condensed Consolidated Balance Sheets as of April 2, 2005 and January 1, 2005	1
		Unaudited Condensed Consolidated Statements of Operations for the three-month periods ended April 2, 2005 and April 3, 2004	2
		Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods ended April 2, 2005 and April 3, 2004	3
		Notes to the Unaudited Condensed Consolidated Financial Statements	4
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19
	Item 4.	Controls and Procedures	20
Part II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3.	Defaults upon Senior Securities	21
	Item 4.	Submission of Matters to a Vote of Security Holders	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	21
Signatures			22
Certifications			23

~~INDEX~~ TO ~~QUARTERLY~~ Part ~~REPORT~~I—FINANCIAL ~~ON FORM 10-Q~~INFORMATION

Part I.		Financial Information
	Item 1.		Financial Statements
			Condensed Consolidated Balance Sheets as of July 3, 2004 (unaudited) and January 3, 2004
			Unaudited Condensed Consolidated Statements of Operations for the three and six-month periods ended July 3, 2004 and July 5, 2003
			Unaudited Condensed Consolidated Statements of Cash Flows for the six-month periods ended July 3, 2004 and July 5, 2003
			Notes to the Unaudited Condensed Consolidated Financial Statements
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.		Quantitative and Qualitative Disclosures about Market Risk
	Item 4.		Controls and Procedures
Part II.		Other Information
	Item 1.		Legal Proceedings
	Item 2.		Change in Securities
	Item 3.		Defaults upon Senior Securities
	Item 4.		Submission of Matters to a Vote of Security Holders
	Item 5.		Other Information
	Item 6.		Exhibits and Reports on Form 8-K
Signatures
Certifications

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’'S, INC. AND THE WILLIAM CARTER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except for share data) (unaudited)

AND THE WILLIAM CARTER COMPANY

				April 2, 2005			January 1, 2005
ASSETS
Current assets:
	Cash and cash equivalents			$	36,548		$	33,265
	Accounts receivable, net				75,806			80,440
	Inventories, net				106,842			120,792
	Prepaid expenses and other current assets				5,647			4,499
	Deferred income taxes				10,950			12,571

		Total current assets			235,793			251,567
Property, plant, and equipment, net					51,155			53,187
Tradename					220,233			220,233
Cost in excess of fair value of net assets acquired					139,282			139,282
Deferred debt issuance costs, net					5,287			5,867
Other assets					2,260			2,829

			Total assets	$	654,010		$	672,965

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current maturities of long-term debt			$	521		$	724
	Accounts payable				18,111			26,453
	Other current liabilities				35,089			40,696

		Total current liabilities			53,721			67,873
Long-term debt					163,870			183,778
Deferred income taxes					83,597			83,579
Other long-term liabilities					9,802			9,802

		Total liabilities			310,990			345,032

Commitments and contingencies
Stockholders' equity:
	Carter's, Inc., preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at April 2, 2005 and January 1, 2005				—			—
	Carter's, Inc., common stock, voting; par value $.01 per share; 40,000,000 shares authorized; 28,506,652 shares issued and outstanding at April 2, 2005 and 28,432,452 shares issued and outstanding at January 1, 2005 (TWCC's common stock, voting; par value $.01 per share; 200,000 shares authorized; 1,000 shares issued and outstanding at April 2, 2005 and January 1, 2005)				285			284
	Additional paid-in capital				248,838			247,610
	Deferred compensation				(86	)		(95	)
	Retained earnings				93,983			80,134

		Total stockholders' equity			343,020			327,933

			Total liabilities and stockholders' equity	$	654,010		$	672,965

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except for share data)

(unaudited)

	July 3, 2004		January 3, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	13,176	$	36,061
Accounts receivable, net	71,982		65,318
Inventories, net	148,423		104,760
Prepaid expenses and other current assets	3,401		6,625
Deferred income taxes	8,301		9,045
Total current assets	245,283		221,809
Property, plant, and equipment, net	52,627		50,502
Tradename	220,233		220,233
Cost in excess of fair value of net assets acquired	139,282		139,282
Licensing agreements, net of accumulated amortization of $14,375 and $11,875	625		3,125
Deferred debt issuance costs, net	6,837		7,666
Other assets	2,943		3,485
Total assets	$	667,830	$	646,102
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	927	$	3,336
Accounts payable	50,428		30,436
Other current liabilities	30,429		37,405
Total current liabilities	81,784		71,177
Long-term debt	204,002		209,377
Deferred income taxes	82,293		83,196
Other long-term liabilities	9,816		9,816
Total liabilities	377,895		373,566
Commitments and contingencies
Stockholders’ equity:
Carter’s, Inc., preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at July 3, 2004 and January 3, 2004	—		—
Carter’s, Inc., common stock, voting; par value $.01 per share; 40,000,000 shares authorized; 28,073,103 shares issued and outstanding at July 3, 2004 and 27,985,360 shares issued and outstanding at January 3, 2004 (TWCC’s common stock, voting; par value $.01 per share; 200,000 shares authorized; 1,000 shares issued and outstanding at July 3, 2004 and January 3, 2004)	281		280
Additional paid-in capital	242,948		241,780
Retained earnings	46,706		30,476
Total stockholders’ equity	289,935		272,536
Total liabilities and stockholders’ equity	$	667,830	$	646,102

See accompanying notes to the unaudited condensed consolidated financial statements

CARTER’'S, INC. AND THE WILLIAM CARTER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except for share data) (unaudited)

AND THE WILLIAM CARTER COMPANY

		For the three-month periods ended
		April 2, 2005			April 3, 2004
Net sales		$	206,207		$	182,720
Cost of goods sold			130,442			116,450

Gross profit			75,765			66,270
Selling, general, and administrative expenses			51,996			47,370
Closure costs			—			534
Royalty income			(3,523	)		(3,164	)

Operating income			27,292			21,530
Interest expense, net			4,402			4,624

Income before income taxes			22,890			16,906
Provision for income taxes			9,041			6,593

Net income		$	13,849		$	10,313

Carter's, Inc.
	Basic net income per common share	$	0.49		$	0.37
	Diluted net income per common share	$	0.46		$	0.35
	Basic weighted average number of shares outstanding		28,466,734			27,985,360
	Diluted weighted average number of shares outstanding		30,181,110			29,836,179

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except for share data)

(unaudited)

	For the three-month periods ended						For the six-month periods ended
	July 3, 2004			July 5, 2003			July 3, 2004			July 5, 2003
Net sales	$	156,307		$	140,008		$	339,027		$	306,001
Cost of goods sold	96,716			90,153			213,166			195,542
Gross profit	59,591			49,855			125,861			110,459
Selling, general, and administrative expenses	48,024			41,843			95,394			86,764
Closure costs	6			—			540			—
Royalty income	(2,504		)	(1,903		)	(5,668		)	(4,457		)
Operating income	14,065			9,915			35,595			28,152
Interest expense, net	4,364			6,519			8,988			13,521
Income before income taxes	9,701			3,396			26,607			14,631
Provision for income taxes	3,784			1,308			10,377			5,633
Net income	$	5,917		$	2,088		$	16,230		$	8,998
Carter’s, Inc.
Basic net income per common share	$	0.21		$	0.09		$	0.58		$	0.40
Diluted net income per common share	$	0.20		$	0.09		$	0.54		$	0.38
Basic weighted average number of shares outstanding	28,002,221			22,552,137			27,993,791			22,550,452
Diluted weighted average number of shares outstanding	29,890,163			24,023,255			29,875,271			23,974,808

See accompanying notes to the unaudited condensed consolidated financial statements

CARTER’'S, INC. AND THE WILLIAM CARTER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)

AND THE WILLIAM CARTER COMPANY

					For the three-month periods ended
					April 2, 2005			April 3, 2004
Cash flows from operating activities:
	Net income				$	13,849		$	10,313
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				4,088			5,338
		Amortization of debt issuance costs				580			478
		Accretion of debt discount				19			19
		Amortization of deferred compensation				9			—
		Non-cash stock compensation expense				72			67
		Tax benefit from exercise of stock options				912			—
		Loss on disposal of assets				37			—
		Deferred tax provision				1,639			421
		Effect of changes in operating assets and liabilities:
			Accounts receivable			4,634			(7,463	)
			Inventories			13,950			13,571
			Prepaid expenses and other assets			(1,179	)		688
			Accounts payable and other liabilities			(13,962	)		(10,044	)

				Net cash provided by operating activities		24,648			13,388

Cash flows from investing activities:
	Capital expenditures					(2,079	)		(4,400	)
	Proceeds from sale of property, plant, and equipment					—			166
	Collections on loan					600			600

				Net cash used in investing activities		(1,479	)		(3,634	)

Cash flows from financing activities:
	Payments of term loan					(20,130	)		(7,590	)
	Proceeds from exercise of stock options					244			—
	Payments of capital lease obligations					—			(69	)

				Net cash used in financing activities		(19,886	)		(7,659	)

Net increase in cash and cash equivalents						3,283			2,095
Cash and cash equivalents, beginning of period						33,265			36,061

Cash and cash equivalents, end of period					$	36,548		$	38,156

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	For the six-month periods ended
	July 3, 2004			July 5, 2003
Cash flows from operating activities:
Net income	$	16,230		$	8,998
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	10,947			9,991
Amortization of debt issuance costs	829			815
Accretion of debt discount	38			66
Tax benefit from exercise of stock options	832			—
Non-cash stock compensation expense	137			—
Gain on sale of property, plant, and equipment	(129		)	(21		)
Deferred tax benefit	(159		)	(2,022		)
Effect of changes in operating assets and liabilities:
Accounts receivable	(6,664		)	(6,304		)
Inventories	(43,663		)	(27,210		)
Prepaid expenses and other assets	3,116			(672		)
Accounts payable and other liabilities	13,123			(5,579		)
Net cash used in operating activities	(5,363		)	(21,938		)
Cash flows from investing activities:
Capital expenditures	(10,711		)	(6,810		)
Proceeds from sale of property, plant, and equipment	351			275
Collections on loan	600			600
Net cash used in investing activities	(9,760		)	(5,935		)
Cash flows from financing activities:
Payments of term loan	(7,822		)	(5,745		)
Payments of capital lease obligations	(140		)	(129		)
Proceeds from exercise of stock options	200			—
Proceeds from sale of common stock	—			100
Other	—			3,044
Net cash used in financing activities	(7,762		)	(2,730		)
Net decrease in cash and cash equivalents	(22,885		)	(30,603		)
Cash and cash equivalents, beginning of period	36,061			35,562
Cash and cash equivalents, end of period	$	13,176		$	4,959

See accompanying notes to the unaudited condensed consolidated financial statements

CARTER'S, INC.
AND THE WILLIAM CARTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1—THE COMPANY:

Carter's, Inc. conducts its operations and derives all of its operating income and cash flow through its wholly-owned subsidiary, The William Carter Company ("TWCC"). This is a combined report for Carter's, Inc. and its wholly-owned subsidiary, TWCC. Both Carter's, Inc. and TWCC are registrants with the Securities and Exchange Commission. Carter's, Inc. is required to register its equity securities under the Securities Act of 1933, as amended, and TWCC is a voluntary filer as required under the terms of the indenture governing its 10.875% senior subordinated notes.

Carter's, Inc., together with TWCC (collectively "Carter's," "we," "us," and "our") design, source, manufacture, and market branded childrenswear under the Carter's, Carter's Classics, Child of Mine, and Tykes labels. We replaced the Tykes brand name with our Just One Year brand beginning in December 2004. Our products are sourced through contractual arrangements with numerous manufacturers throughout the world and through production at company-managed sewing facilities in Mexico. Our sewing operations in Costa Rica were closed in the fourth quarter of fiscal 2003. (See Note 9 regarding the closure of our Costa Rican facilities). Products are manufactured for wholesale distribution to major domestic retailers, including the mass channel, and for our 181 retail stores that market our brand name merchandise and certain products manufactured by other companies.

NOTE 2—BASIS OF PREPARATION:

The accompanying unaudited condensed consolidated financial statements comprise the consolidated financial statements of Carter's, Inc. and TWCC. Carter's, Inc.'s only asset is its investment in the common stock of TWCC, its wholly-owned subsidiary. As a result, the consolidated financial positions, results of operations, and cash flows of Carter's, Inc. and TWCC are substantially the same.

In our opinion, the accompanying unaudited condensed consolidated financial statements of Carter's, Inc. and TWCC contain all adjustments necessary for a fair presentation of our financial position as of April 2, 2005 and the results of our operations and cash flows for the three-month periods ended April 2, 2005 and April 3, 2004. Operating results for the three-month period ended April 2, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005. Our accompanying condensed consolidated balance sheet as of January 1, 2005 is from our audited consolidated financial statements included in our most recently filed annual report on Form 10-K.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q. The accounting policies we follow are set forth in our most recently filed annual report on Form 10-K in the notes to our consolidated financial statements for the fiscal year ended January 1, 2005.

Our fiscal year ends on the Saturday in December or January nearest to the last day of December. The accompanying unaudited condensed consolidated financial statements for the first quarter of fiscal 2005 reflect our financial position as of April 2, 2005. The first quarter of fiscal 2004 ended on April 3, 2004.

NOTE 3—STOCK-BASED COMPENSATION:

We account for stock-based compensation on stock options under the intrinsic value method consistent with Accounting Principles Board Opinion ("APB") No. 25 ("APB 25"). Under this method, we record compensation expense equal to the difference between the exercise price of the stock option and the fair market value of the underlying stock as of the date of the stock option grant. For disclosure purposes only, we also estimate the impact on our net income of applying the fair value method of measuring compensation cost on stock options with the fair value of Carter's, Inc.'s common stock, prior to our initial public offering, determined under the minimum value method as provided by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). Stock options granted subsequent to our initial public offering have been valued using the Black-Scholes option pricing model.

The following table illustrates, for disclosure purposes only, the effect on net income if compensation expense for our option grants had been determined based on the fair value as of the grant dates consistent with the methodology of SFAS 123 and SFAS 148:

		For the three-month periods ended
		April 2, 2005			April 3, 2004
(dollars in thousands, except per share data)
Net income, as reported		$	13,849		$	10,313
Add:
	Stock-based employee compensation (under APB 25) included in reported net income, net of related tax effects		44			41
Deduct:
	Total stock-based employee compensation expense determined under the fair value based method (under SFAS 123 and SFAS 148) for all awards, net of related tax effects		(383	)		(219	)

Pro forma net income		$	13,510		$	10,135

Carter's, Inc.'s net income per common share:
	Basic—as reported	$	0.49		$	0.37
	Basic—pro forma	$	0.47		$	0.36
	Diluted—as reported	$	0.46		$	0.35
	Diluted—pro forma	$	0.45		$	0.34

For basic stock options, using a minimum value method, the fair value of each stock option as of the date of grant was estimated to range from $3.08 to $9.76 per share for stock options granted in fiscal 2003 and $2.44 to $3.95 per share for stock options granted in fiscal 2002. For basic stock options, using the Black-Scholes method, the fair value of each stock option at the date of the grant was estimated to range from $12.67 to $15.41 per share for stock options granted in fiscal 2004, $6.40 to

~~CARTER’S~~$13.55 per share for stock options granted in fiscal 2003, ~~INC~~and $6.31 per share for stock options granted from August 23, 2002 to December 28, 2002.

~~AND~~ For performance ~~THE~~stock ~~WILLIAM~~options, ~~CARTER~~using ~~COMPANY~~a minimum value method, the fair value of each stock option as of the date of grant was estimated to range from $3.08 to $9.76 per share for stock options granted in fiscal 2003 and $2.44 to $3.95 per share for stock options granted in fiscal 2002. For performance stock options, using the Black-Scholes method, the fair value of each stock option at the date of grant has been estimated to range from $6.40 to $13.55 per share for stock options granted in fiscal 2003 and $6.31 per share for stock options granted from August 23, 2002 to December 28, 2002.

~~NOTES~~ We have TOdetermined ~~CONDENSED~~that ~~CONSOLIDATED~~the ~~FINANCIAL~~effect ~~STATEMENTS~~on pro forma net income would have been immaterial had compensation expense for our stock option grants, for periods prior to our initial public offering calculated using the minimum value method, been determined based on the fair value method as of the grant date using the Black-Scholes model.

~~(unaudited)~~ The fair value of options granted subsequent to August 23, 2002 was estimated at the date of grant using the Black-Scholes method with the following weighted average assumptions:

NOTE 1 – THE COMPANY:

	For the fiscal years ended
	For the fiscal years ended				For the period from August 23, 2002 through December 28, 2002
	January 1, 2005		January 3, 2004
Volatility	36.80	%	49.58	%	49.58	%
Risk-free interest rate	3.66	%	4.03	%	4.05	%
Expected lives (years)	7		10		10
Dividend yield	—		—		—

OnNOTE September 30, 2003, Carter Holdings, Inc., a Massachusetts corporation re-incorporated in Delaware and changed its name by forming and subsequently merging with and into its new wholly-owned Delaware subsidiary. The surviving company is named Carter’s, Inc. In connection with the re-incorporation, Carter’s, Inc. effected a 4~~-for-1 split of its common stock. As a result, Carter’s, Inc.’s common stock share and per share data for all periods presented have been adjusted to reflect this stock split.~~—INVENTORIES:

~~Carter’s,~~ Inventories ~~Inc.~~consisted ~~conducts its operations and derives all~~ of its operating income and cash flow through its wholly-owned subsidiary, The William Carter Company (“TWCC”). Carter’s, Inc., together with TWCC (collectively “Carter’s,” “we,” “us,” and “our”) design, source, manufacture, and market branded childrenswear under the ~~Carter’s,~~following: Carter’s Classics, Child of Mine, and Tykes labels. Our products are sourced through contractual arrangements with numerous manufacturers throughout the world and through production at company-managed sewing facilities in Mexico. Our sewing operations in Costa Rica were closed in the fourth quarter of fiscal 2003. (See Note 9 regarding the closure of our Costa Rican facilities). Products are manufactured for wholesale distribution to major domestic retailers, including the mass channel, and for our 174 retail stores that market our brand name merchandise and certain products manufactured by other companies. Our retail operations represented approximately 38.4% and 40.4% of our consolidated net sales in the second quarters of fiscal 2004 and fiscal 2003 and 35.2% and 37.1% for the first six-month periods of fiscal 2004 and fiscal 2003.

On October 29, 2003, we completed an initial public offering of Carter’s, Inc.’s common stock (the “offering”) including the sale of 5,390,625 shares by us and 1,796,875 shares by the selling stockholders, primarily Berkshire Partners LLC and its affiliates. Net proceeds to us from the offering totaled $93.9 million. On November 28, 2003, we used approximately $68.7 million of the proceeds to redeem approximately $61.3 million in outstanding senior subordinated notes and pay a redemption premium of approximately $6.7 million and related accrued interest charges of $0.7 million. We used approximately $2.6 million of the net proceeds to terminate the Berkshire Partners LLC management agreement and used approximately $11.3 million to prepay amounts outstanding under our term loan, as required by our senior credit facility. The remaining proceeds were utilized for working capital and other general corporate purposes.

		April 2, 2005		January 1, 2005
(dollars in thousands)
Finished goods		$	100,956	$	116,137
Work in process			3,608		3,241
Raw materials and supplies			2,278		1,414

	Total	$	106,842	$	120,792

NOTE 25—CARTER'S, INC.'S ~~– BASIS~~STOCK ~~OF PREPARATION~~TRANSACTIONS:

~~The~~ During ~~accompanying financial statements comprise~~ the ~~consolidated~~first ~~financial~~quarter ~~statements~~ of ~~Carter’s,~~fiscal ~~Inc. and TWCC. Carter’s~~2005, ~~Inc.’s~~certain ~~only~~employees ~~asset~~exercised is74,200 ~~its investment in the common~~ stock ofoptions ~~TWCC,~~for ~~its wholly-owned subsidiary. As a result, the consolidated financial positions, results of operations, and~~ cash ~~flows~~proceeds ofto Carter’'s, Inc. ~~and~~of ~~TWCC are substantially the same~~$243,520.

In our opinion, the accompanying unaudited condensed consolidated financial statements of Carter’s, Inc. and TWCC contain all adjustments necessary to present fairly our financial position as of July 3, 2004, the results of our operations for the three and six-month periods ended July 3, 2004 and July 5, 2003, and cash flows for the six-month periods ended July 3, 2004 and July 5, 2003. Operating results for the six-month period ended July 3, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2005. Our accompanying condensed consolidated balance sheet as of January 3, 2004 is from our audited consolidated financial statements included in our most recently filed annual report on Form 10-K.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q. The accounting policies we follow are set forth in the notes to our consolidated financial statements contained in our most recently filed annual report on Form 10-K for the fiscal year ended January 3, 2004.

~~Our fiscal~~ During ~~year ends on~~ the ~~Saturday~~first inquarter ~~December or January nearest to the last day~~ of ~~December. Consistent~~ ~~with~~fiscal ~~this policy~~2004, ~~fiscal~~ ~~2003~~we ~~ended~~issued ~~on January 3~~220,000 ~~2004~~stock ~~and~~options ~~fiscal~~to ~~2004~~purchase ~~will end on January 1~~Carter's, ~~2005~~ Inc. As's acommon ~~result,~~stock ~~fiscal~~to ~~2003~~certain ~~contained 53 weeks of financial results and fiscal 2004 will contain 52 weeks of financial results~~employees. ~~The~~ ~~additional~~No ~~week in~~compensation ~~fiscal~~expense ~~2003~~ was ~~included~~recorded during in the first ~~half~~quarter of fiscal ~~2003. Therefore,~~2004 ~~the~~on ~~accompanying~~these ~~unaudited consolidated~~stock ~~financial~~option ~~statements~~grants ~~for~~as the ~~first~~fair ~~half~~market value of ~~fiscal~~the ~~2004~~stock ~~reflect~~options ~~our financial~~issued ~~position~~ as of ~~July 3, 2004 and for~~ the ~~26-week~~date ~~period then ended. The first half~~ of ~~fiscal~~grant ~~2003 ended~~was onequal ~~July~~to 5,the ~~2003~~exercise ~~and~~price ~~included 27 weeks~~ of ~~financial results. The accompanying consolidated financial statements for~~ the ~~second~~stock ~~quarter periods ended July 3, 2004 and July 5, 2003 each contain 13 weeks of financial results~~options.

~~During~~NOTE ~~the first~~6—COST ~~half~~IN ofEXCESS ~~fiscal~~OF ~~2004,~~FAIR weVALUE ~~contracted~~OF ~~with~~NET aASSETS ~~third-party~~ACQUIRED ~~service~~AND toOTHER ~~provide us~~INTANGIBLE with the fair value of co-op advertising arrangements entered into with certain of our major wholesale and mass channel customers. Such fair value is determined based upon, among other factors, comparable market analysis for similar advertisements. In accordance with Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer/Reseller” (“EITF 01-09”), we have included the fair value of these arrangements of approximately $1,221,000 in the second quarter of fiscal 2004 and $1,652,000 in the first half of fiscal 2004 as a component of selling, general, and administrative expenses on the accompanying unaudited condensed consolidated statements of operations rather than as a reduction of revenue. Co-op advertising arrangements in fiscal 2003 were treated as a reduction of revenue in accordance with EITF 01-09 as we had determined that it was impracticable to obtain the fair value of those arrangements.ASSETS:

~~NOTE~~ In 3connection –with our 2001 acquisition by Berkshire Partners LLC and affiliates (the "Acquisition"), as more fully described in Note 1 to our consolidated ~~STOCK~~financial statements in our most recently filed annual report on Form 10-~~BASED~~K, ~~COMPENSATION:~~we adopted provisions of SFAS No. 141, "Business Combinations" and applied the required provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." Accordingly, our tradename and goodwill have been deemed to have indefinite lives and are no longer being amortized. Our licensing agreements were amortized over the average three-year life of such agreements. Amortization expense for the first quarter of fiscal 2004 was $1.3 million. The licensing agreements were fully amortized as of August 14, 2004.

WeNOTE ~~account~~7—EMPLOYEE ~~for stock-based~~BENEFIT compensation on stock options under the intrinsic value method consistent with Accounting Principles Board Opinion No. 25. Under this method, we record compensation expense equal to the difference between the exercise price of the stock option and the fair market value of the underlying stock as of the date of the option grant. For disclosure purposes only, we also estimate the impact on our net income of applying the fair value method of measuring compensation cost on stock options with the fair value, prior to our initial public offering, determined under the minimum value method as provided by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”). Stock options granted subsequent to our initial public offering have been valued using the Black-Scholes option pricing model.PLANS:

We offer a comprehensive post-retirement medical plan to current and certain future retirees and their spouses until they become eligible for Medicare or a Medicare Supplement plan in addition to life insurance to current and certain future retirees. We also have an obligation under a defined benefit plan covering certain former officers. See Note 7 "Employee Benefit Plans" to our consolidated financial statements in our most recently filed annual report on Form 10-K for further information.

The components of post-retirement life and medical benefit expense charged to operations are as follows:

		For the three-month periods ended
		April 2, 2005		April 3, 2004
(dollars in thousands)
Service cost—benefits attributed to service during the period		$	25	$	22
Interest cost on accumulated post-retirement benefit obligation			165		150
Amortization of net actuarial loss			—		—

	Total net periodic post-retirement benefit cost	$	190	$	172

The ~~following~~ ~~table~~components ~~illustrates,~~of ~~for~~pension ~~disclosure~~benefit ~~purposes only, the effect on net income if compensation~~ expense ~~for~~charged ~~our~~to ~~option~~operations ~~grants~~are ~~had been determined based on the fair value~~ as ~~of the grant dates consistent with the methodology of SFAS 123 and SFAS 148 (dollars in thousands, except per share data)~~follows:

			April 2, 2005			April 3, 2004
		~~For the three-month periods ended~~	For the three-month periods ended					~~For the six-month periods ended~~
		July 3, 2004			July 5, 2003			July 3, 2004			July 5, 2003
Net income, as reported		$	5,917		$	2,088		$	16,230		$	8,998
(dollars in thousands)
Add:
Service cost—benefits attributed to service during the period			$	—		$	—
Stock-based employee compensation (under APB 25) included in reported net income, net of related tax effects		40			4			81			8
Interest cost on accumulated pension benefit obligation				20			19
Deduct:
Amortization of net actuarial loss				—			—
Total stock-based employee compensation expense determined under the fair value based method (under SFAS 123 and SFAS 148) for all awards, net of related tax effects		(304		)	(135		)	(523		)	(267		)
	Total net periodic pension benefit cost		$	20		$	19
Pro forma net income		$	5,653		$	1,957		$	15,788		$	8,739
Carter’s, Inc.’s net income per common share:
Basic-as reported		$	0.21		$	0.09		$	0.58		$	0.40
Basic-pro forma		$	0.20		$	0.09		$	0.56		$	0.39
Diluted-as reported		$	0.20		$	0.09		$	0.54		$	0.38
Diluted-pro forma		$	0.19		$	0.08		$	0.53		$	0.36

~~For~~NOTE basic options, using a minimum value method, the fair value of each option as of the date of grant was estimated to range from $3.08 to $9.76 per share for options granted in fiscal 2003. For basic options, using a fair value method, the fair value of each option at the date of the grant was estimated to range from $12.81 to $14.15 per share for options granted in fiscal 2004 and range from $6.40 to $13.55 per share for options granted in fiscal 2003. These per share option values were calculated at an assumed risk-free interest rate of 3.2% to 4.5% for fiscal 2004 and 3.8%—SEGMENT ~~to 4.2% for 2003, with an expected life of 7 to 10 years and expected volatility from 36.7% to 50.0%. No dividends were assumed.~~INFORMATION:

~~For performance~~ We ~~options,~~report ~~using~~segment ainformation ~~minimum~~in ~~value~~accordance ~~method,~~with the ~~fair~~provisions ~~value~~ of ~~each option~~SFAS asNo. 131, of"Disclosure ~~the~~about ~~date~~Segments of ~~grant~~an ~~was~~Enterprise ~~estimated~~and toRelated ~~range from $3.08 to $9.76 per~~Information," ~~share~~which ~~for~~requires ~~options~~segment ~~granted~~information into ~~fiscal~~be ~~2003. For~~disclosed ~~performance~~based ~~options,~~upon ~~using~~ a ~~fair~~"management ~~value~~approach." ~~method,~~The ~~the~~management ~~fair~~approach ~~value~~refers ~~of each~~to ~~option at~~ the ~~date~~internal ofreporting ~~grant~~that ~~was~~is ~~estimated~~used toby ~~range~~management ~~from $6.40 to $13.55 per share~~ for ~~options~~making ~~granted in fiscal 2003.~~ operating ~~These~~decisions ~~per~~and ~~share~~assessing ~~option values were calculated at~~ the ~~same~~performance ~~assumed risk-free interest rates shown above with an expected life~~ of 10our ~~years~~reportable ~~and expected volatility of 50~~segments.~~0%. No dividends~~ ~~were assumed.~~

The table below presents certain segment information for the periods indicated:

			For the three-month periods ended
			April 2, 2005			% of Total		April 3, 2004			% of Total
(dollars in thousands)
Net sales:
	Wholesale		$	98,954		48.0	%	$	90,553		49.6	%
	Retail			67,764		32.9	%		59,241		32.4	%
	Mass Channel			39,489		19.1	%		32,926		18.0	%

		Total net sales	$	206,207		100.0	%	$	182,720		100.0	%

Operating income:						% of net sales					% of net sales
	Wholesale		$	19,378		19.6	%	$	13,724		15.2	%
	Retail			11,938		17.6	%		9,489		16.0	%
	Mass Channel			4,029		10.2	%		4,384		13.3	%
	Other reconciling items			(8,053	)	(3.9	)%		(6,067	)	(3.3	)%

		Total operating income	$	27,292		13.2	%	$	21,530		11.8	%

NOTE 49—CLOSING ~~– INVENTORIES~~COSTS:

~~Inventories~~ In ~~consisted~~July of ~~the~~2003, ~~following~~we decided to exit our Costa Rican sewing facilities, given our ability to obtain lower costs from third-party suppliers. During fiscal 2003, we (recorded approximately $1,041,000): in severance and other exit costs related to these closures. During the first quarter of fiscal 2004, we recorded approximately $210,000 in severance and $324,000 in other exit costs related to these closures.

	July 3, 2004		January 3, 2004
Finished goods	$	142,873	$	102,921
Work in process	3,465		1,572
Raw materials and supplies	2,085		267
Total	$	148,423	$	104,760

NOTE 10—EARNINGS PER SHARE:

~~Results~~ In ~~for the~~accordance ~~second~~with ~~quarter~~SFAS ofNo. 128, ~~fiscal~~"Earnings ~~2004~~Per ~~include~~Share," abasic ~~favorable~~earnings ~~adjustment~~per toshare ~~pre-tax income~~is based on the weighted average number of ~~approximately~~common ~~$1.5~~shares ~~million,~~outstanding orduring the ~~$933~~year,~~000,~~ ~~net~~whereas ofdiluted ~~tax,~~earnings toper ~~correct adjustments~~share ~~made~~also gives effect to ~~inventory~~all ~~and~~potentially ~~cost~~dilutive ofcommon ~~goods~~shares, ~~sold~~which ~~during~~include ~~fiscal~~stock ~~2003~~options and non-vested restricted stock, that were outstanding during the ~~first~~period. ~~quarter~~All ofsuch ~~fiscal~~stock ~~2004~~options are reflected in the denominator using the treasury stock method. We This method assumes that shares are issued for stock options that are "in the money," but that we use ~~determined~~the proceeds of such ~~adjustments~~stock option exercises (generally, cash to be ~~immaterial~~paid plus future compensation expense to ~~prior~~be ~~periods~~recognized ~~affected;~~and ~~accordingly~~the amount of tax benefits, ~~they~~ ~~were~~if ~~corrected~~any, that will be credited to additional paid-in capital assuming exercise of the ~~second~~stock ~~quarter~~options) to repurchase shares at the average market value of ~~fiscal~~our ~~2004~~shares for the respective periods. ~~Had~~ ~~such~~Non-vested ~~adjustments~~shares ~~been~~of ~~corrected~~restricted stock are reflected in the ~~periods~~ ~~they~~denominator ~~were~~using ~~initially~~the ~~recorded~~treasury stock method with proceeds of the amount, ~~net~~if ~~income~~any, ~~for~~the ~~fiscal~~employees ~~2003~~must ~~would~~pay ~~have~~upon vesting, the amount of compensation cost attributed to future services and not yet ~~been~~recognized ~~$24.3~~in ~~million~~earnings, orand ~~4.4%~~the ~~higher~~amount ~~than~~of ~~reported~~tax benefits, if any, that would be credited to additional paid-in capital (i. ~~First~~e., ~~quarter~~the ~~fiscal~~amount ~~2004~~of ~~net~~the ~~income~~tax ~~would~~deduction in excess of recognized compensation cost) ~~have~~assuming ~~been~~vesting ~~$10.1~~of ~~million,~~the orshares 2at the current market price.4% ~~lower~~We ~~than~~have ~~reported~~used ~~and~~our ~~there~~best ~~would~~estimate ~~have~~of ~~been no~~the ~~material~~average ~~impact~~fair tomarket value of our shares for the ~~consolidated~~respective ~~balance~~periods ~~sheets~~prior orto ~~consolidated~~our initial public ~~statements~~offering ofcompleted ~~cash~~on ~~flows~~October 29, 2003.

~~NOTE~~ There were 5no ~~– STOCK~~antidilutive ~~TRANSACTIONS~~shares OFfor ~~CARTER’S~~the first quarter ended April 2, ~~INC:~~2005. For the first quarter ended April 3, 2004, antidilutive shares of 1,349 were excluded from the computations of diluted earnings per share.

During the first quarter of fiscal 2004, we issued 220,000 options, and during the second quarter of fiscal 2004, we issued 71,200 options to purchase Carter’s, Inc.’s common stock to certain employees. During the first quarter of fiscal 2003, we issued 76,800 options to purchase Carter’s, Inc.’s common stock to one of our directors and to certain employees. Additionally, during the second quarter of fiscal 2003, we sold shares of our common stock to one of our directors for cash proceeds of $100,000. In connection with this transaction, we recorded contributions to our additional paid-in capital in the amount of $100,000.

No compensation expense was recorded during the first or second quarters of fiscal 2004 and fiscal 2003 as a result of these option grants or stock purchase, as the stock was purchased at its fair market value and the options were issued as of the date of grant with an exercise price equal to the fair market value of a share of stock.

During the second quarter of fiscal 2004, certain employees exercised 87,743 options for cash proceeds of $200,000.

NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS:

In connection with our 2001 acquisition by Berkshire Partners LLC and affiliates (the “Acquisition”), as more fully described in Note 1 “The Company” to our consolidated financial statements in our most recently filed annual report on Form 10-K, we adopted provisions of SFAS No. 141, “Business Combinations” and applied the required provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Accordingly, our tradename and goodwill have been deemed to have indefinite lives and are no longer being amortized. Our licensing agreements are being amortized over the average three-year life of such agreements. Amortization expense for the second quarters and first six-month periods of fiscal 2004 and 2003 was $1.3 and $2.5 million, respectively, and is expected to be $3.1 million for fiscal 2004.

~~NOTE~~ The following 7is ~~– EMPLOYEE~~a ~~BENEFIT~~reconciliation ~~PLANS~~of basic number of common shares outstanding to diluted number of common and common equivalent shares outstanding for Carter's, Inc.:

We offer a comprehensive post-retirement medical plan to current and certain future retirees and their spouses until they become eligible for Medicare or a Medicare supplement plan. We also offer life insurance to current and certain future retirees. See Note 7 “Employee Benefit Plans” to the consolidated financial statements in our most recently filed annual report on Form 10-K for further information.

			For the three-month periods ended
			April 2, 2005		April 3, 2004
Net income			$	13,849,000	$	10,313,000
	Carter's, Inc.'s weighted average number of common and common equivalent shares outstanding:
		Basic number of common shares outstanding		28,466,734		27,985,360
		Dilutive effect of stock options and unvested restricted stock awards		1,714,376		1,850,819

		Diluted number of common and common equivalent shares outstanding		30,181,110		29,836,179

		Basic net income per common share	$	0.49	$	0.37
		Diluted net income per common share	$	0.46	$	0.35

~~The~~NOTE ~~components~~11—RECENT ofACCOUNTING ~~pension benefit expense charged to operations are as follows ($000)~~PRONOUNCEMENTS:

	For the three-month periods ended				For the six-month periods ended
	July 3, 2004		July 5, 2003		July 3, 2004		July 5, 2003
Service cost – benefits attributed to service during the period	$	—	$	—	$	—	$	—
Interest cost on accumulated pension benefit obligation	20		22		39		43
Amortization of prior service cost	—		—		—		32
Amortization of net actuarial loss	—		16		—		—
Total net periodic pension benefit cost	$	20	$	38	$	39	$	75

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123, "Accounting for Stock-Based Compensation" and supercedes APB 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123, will no longer be an alternative to financial statement recognition. We have selected the modified prospective method of adoption which requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R and for all subsequent stock options granted thereafter. In April 2005, the Securities and Exchange Commission ("SEC") approved a new rule for public companies which delays the effective date of SFAS 123R. Under the SEC's rule, SFAS 123R is now effective for public companies for annual periods that begin after June 15, 2005. The impact of adoption, based upon current options outstanding, is estimated to result in a reduction in fiscal 2006 after-tax earnings of approximately $1.3 million or approximately $0.04 per diluted share.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, "Share Based Payments" ("SAB 107"). The ~~components~~interpretations in SAB 107 express views of ~~post-retirement~~the ~~life~~staff regarding the interaction between SFAS 123R and ~~medical~~certain ~~benefit~~SEC ~~expense~~rules and regulations and provide the staff's views regarding the valuation of share-based payment arrangements for public companies. In ~~charged~~particular, SAB 107 provides guidance related to ~~operations~~share-based ~~are~~payment astransactions ~~follows~~with non-employees, the transition from non-public to public entity status, valuation methods (~~$000~~including assumptions such as expected volatility and expected term):, the accounting for certain redeemable financial instruments issued under share-based payment

	For the three-month periods ended				For the six-month periods ended
	July 3, 2004		July 5, 2003		July 3, 2004		July 5, 2003
Service cost – benefits attributed to service during the period	$	25	$	20	$	47	$	40
Interest cost on accumulated post-retirement benefit obligation	156		157		306		315
Amortization of net actuarial loss	—		—		—		—
Total net periodic post-retirement benefit cost	$	181	$	177	$	353	$	355

NOTE 8 – SEGMENT INFORMATION:

We report segment information in accordance with the provisions of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information” (“SFAS 131”), which requires segment information to be disclosed based upon a “management approach.” The management approach refers to the internal reporting that is used by management for making operating decisions and assessing the performance of our reportable segments. During the third quarter of fiscal 2003, we revised our methodology for evaluating and reporting profitability. Additionally, as a result of the launch of our Child of Mine brand with Wal-Mart in June of 2003, we have expanded our presence in the mass channel resulting in a new segment of our business.

Under our previous method of evaluating and reporting the profitability of our segments, each segment’s results included costs directly related to the segment’s revenue, and all other costs were allocated based on the relationship to consolidated net sales or units produced to support each segment’s revenue. Intersegment sales and transfers were recorded at cost and treated as a transfer of inventory. Under our new methodology, segment results include the direct costs of each segment (on the same basis as the previous methodology), and all other costs are allocated based upon detailed estimates and analysis of actual time and expenses incurred to support the operations of each segment or units produced or sourced to support

~~each segment’s revenue. Certain costs~~arrangements, ~~including incentive~~ ~~compensation for certain employees,~~ the ~~Berkshire~~classification ~~Partners~~of ~~LLC~~compensation ~~management~~expense, ~~fee (terminated~~non-GAAP infinancial ~~connection with our initial public offering~~measures, ~~see~~first-time ~~Note~~adoption 1of toSFAS ~~the unaudited~~123R ~~condensed~~in ~~consolidated~~an ~~financial~~interim ~~statements)~~period, ~~and~~capitalization ~~various~~of ~~other general~~compensation ~~corporate~~cost ~~costs~~related ~~that are not specifically allocable~~ to ~~our~~share-based payment ~~segments~~arrangements, ~~are~~ ~~included~~the inaccounting ~~other~~for ~~reconciling~~income ~~items~~tax ~~below. Intersegment~~effects ~~sales~~of ~~and~~share-based ~~transfers~~payment ~~continue~~arrangements toupon beadoption ~~recorded at cost and treated as a transfer~~ of ~~inventory.~~SFAS ~~Prior~~123R, ~~period segment information has been reclassified to conform with~~ the ~~current~~modification ~~presentation. The accounting policies~~ of ~~the~~employee ~~segments~~share ~~are~~options ~~the~~prior ~~same~~to asadoption ~~those described in Note 2 “Summary~~ of ~~Significant~~SFAS 123R, ~~Accounting~~and ~~Policies”~~disclosures ~~to the consolidated financial statements~~ in ~~our~~ ~~most~~Management's ~~recently~~Discussion ~~filed~~and ~~annual~~Analysis ~~report~~subsequent onto ~~Form~~adoption ~~10-K~~of SFAS 123R.

The table below presents certain segment information for the periods indicated ($000):

	For the three-month periods ended										For the six-month periods ended
	July 3, 2004			% of Total		July 5, 2003			% of Total		July 3, 2004			% of Total		July 5, 2003			% of Total
Net sales:
Wholesale	$	73,535		47.0	%	$	65,633		46.9	%	$	164,088		48.4	%	$	162,232		53.0	%
Retail	59,994			38.4	%	56,579			40.4	%	119,235			35.2	%	113,521			37.1	%
Mass Channel	22,778			14.6	%	17,796			12.7	%	55,704			16.4	%	30,248			9.9	%
Total net sales	$	156,307		100.0	%	$	140,008		100.0	%	$	339,027		100.0	%	$	306,001		100.0	%
EBITDA:
Wholesale	$	11,408		58.0	%	$	7,483		50.0	%	$	27,767		59.7	%	$	26,429		69.3	%
Retail	11,530			58.6	%	11,380			76.1	%	22,524			48.4	%	22,058			57.8	%
Mass Channel	2,666			13.6	%	1,213			8.1	%	8,053			17.3	%	1,071			2.8	%
Other reconciling items	(5,930		)	(30.2	%)	(5,119		)	(34.2	%)	(11,802		)	(25.4	%)	(11,415		)	(29.9	%)
Total EBITDA	$	19,674		100.0	%	$	14,957		100.0	%	$	46,542		100.0	%	$	38,143		100.0	%

EBITDA shown above represents earnings before interest, income tax expense, depreciation, and amortization. EBITDA is presented because it is one measurement used by management in assessing financial performance, and we believe it is helpful to investors, securities analysts, and other interested parties in evaluating performance of companies in our industry. EBITDA is also a measure used as a basis for calculating our financial covenants under our senior credit facility. EBITDA is not a measurement of financial performance under generally accepted accounting principles in the United States of America. It should not be considered as an alternative to cash flow from operating activities, as a measure of liquidity, an alternative to net income, or any other measures of performance derived in accordance with generally accepted accounting principles in the United States of America. Our definition and calculation of EBITDA may not be comparable to similarly titled measures used by other companies.

A reconciliation of EBITDA to net income is presented below ($000):

	For the three-month periods ended						For the six-month periods ended
	July 3, 2004			July 5, 2003			July 3, 2004			July 5, 2003
Total EBITDA	$	19,674		$	14,957		$	46,542		$	38,143
Depreciation and amortization expense	(5,609		)	(5,042		)	(10,947		)	(9,991		)
Interest expense, net	(4,364		)	(6,519		)	(8,988		)	(13,521		)
Provision for income taxes	(3,784		)	(1,308		)	(10,377		)	(5,633		)
Net income	$	5,917		$	2,088		$	16,230		$	8,998

~~NOTE~~ 9 – ~~CLOSURE~~ITEM ~~COSTS~~2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

~~On July~~ The 3,following ~~2004,~~is wea ~~closed~~discussion of our ~~distribution~~results ~~facility~~of ~~located~~operations inand ~~Leola, Pennsylvania~~current infinancial ~~order~~position. toYou ~~consolidate~~should ~~its~~read ~~shipping~~this ~~operations~~discussion in conjunction with our ~~remaining~~unaudited ~~three~~condensed ~~distribution~~consolidated ~~facilities~~financial statements and notes included elsewhere in ~~Georgia~~this quarterly report. Actual results may differ materially from those suggested by our forward-looking statements for ~~This~~various ~~closure~~reasons ~~was~~including ~~announced~~those todiscussed ~~affected~~in ~~employees~~the onsection ~~June~~entitled 1,"Risks ~~2004. Total~~Factors" ~~employees~~in ~~terminated~~our asmost ofrecently ~~July~~filed 3,annual ~~2004 were~~report 33on Form 10-K. As aThose ~~result~~risk offactors ~~this~~expressly ~~closure,~~qualify ~~we recorded~~all ~~approximately~~subsequent ~~$95,000~~oral and inwritten ~~severance~~forward-looking ~~costs~~statements ~~during~~attributable ~~the~~to ~~second~~us ~~quarter~~or ~~and first~~persons ~~half~~acting ofon ~~fiscal~~our ~~2004~~behalf. ~~During~~ ~~the third~~Except ~~and~~for ~~fourth~~any ~~quarters~~ongoing ofobligations ~~fiscal~~to ~~2004~~disclose material information as required by the federal securities laws, we ~~expect~~do not have any intention or obligation to ~~incur~~update ~~approximately $200,000~~forward-looking instatements ~~additional~~after ~~severance~~we ~~and~~file ~~other~~this ~~exit~~quarterly ~~costs~~report.

In Our fiscal ~~July~~year ~~2003,~~ends weon ~~decided~~the toSaturday ~~exit our sewing facilities located~~ in ~~Costa~~December ~~Rica~~or ~~given~~January ~~our~~nearest ~~ability~~ to ~~obtain~~the ~~lower~~last ~~costs~~day ~~from third-party~~of ~~suppliers~~December. ~~Such~~ ~~closures~~The ~~were announced~~accompanying onunaudited ~~September~~condensed ~~16,~~consolidated ~~2003,~~financial ~~and~~statements for the ~~facilities~~first quarter ~~were~~of ~~held~~fiscal ~~and~~2005 ~~used~~reflect ~~for production~~our ~~through~~financial ~~the~~position ~~end~~as of ~~November~~April 2, ~~2003~~2005. ~~Total~~ ~~employees~~The ~~terminated~~first asquarter of ~~July~~fiscal 3, 2004 ~~were~~ended ~~approximately~~on 1April 3,~~492~~ 2004.

As a result of the Costa Rican closures, we recorded approximately $1,306,000 in accelerated depreciation during the third and fourth quarters of fiscal 2003 (included in cost of goods sold) and plant closure costs of approximately $1,041,000 comprised of $184,000 of asset impairment charges, $483,000 of severance, and $374,000 in other exit costs. We also incurred approximately $424,000 in the fourth quarter of fiscal 2003 and $11,000 in the first quarter of fiscal 2004 of federal income tax expense related to the dissolution of our Costa Rican subsidiary (included in the provision for income taxes).

Activity associated with the closure cost reserves for our Costa Rican sewing facility and our distribution facility in Leola, Pennsylvania for the three and six-month periods ended July 3, 2004 is as follows:

	January 3, 2004 Reserves		Provisions		Payments			April 3, 2004 Reserves		Provisions			Payments			July 3, 2004 Reserves
Severance and other termination benefits	$	274,000	$	210,000	$	(256,000	)	$	228,000	$	(41,000	)	$	(87,000	)	$	100,000
Other exit costs	—		324,000		(324,000		)	—		47,000			(47,000		)	—
Total	$	274,000	$	534,000	$	(580,000	)	$	228,000	$	6,000		$	(134,000	)	$	100,000

NOTE 10 – EARNINGS PER SHARE:

In accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share is based on the weighted average number of common shares outstanding during the period, whereas diluted earnings per share also gives effect to all potentially dilutive common shares, which include stock options, that were outstanding during the period. All such stock options are reflected in the denominator using the treasury stock method. This method assumes that shares are issued for options that are “in the money,” but that we use the proceeds of such option exercises (generally, cash to be paid plus future compensation expense to be recognized) to repurchase shares at the average market value of our shares for the respective periods. We have used our best estimate of the average market value of our shares for the respective periods prior to our initial public offering completed on October 29, 2003.

The following is a reconciliation of basic number of common shares outstanding to diluted number of common and common equivalent shares outstanding:

	For the three-month periods ended				For the six-month periods ended
	July 3, 2004		July 5, 2003		July 3, 2004		July 5, 2003
Net income	$	5,917,000	$	2,088,000	$	16,230,000	$	8,998,000
Carter’s, Inc.’s weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding	28,002,221		22,552,137		27,993,791		22,550,452
Dilutive effect of stock options	1,887,942		1,471,118		1,881,480		1,424,356
Diluted number of common and common equivalent shares outstanding	29,890,163		24,023,255		29,875,271		23,974,808
Basic net income per common shares	$	0.21	$	0.09	$	0.58	$	0.40
Diluted net income per common shares	$	0.20	$	0.09	$	0.54	$	0.38

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

The following is a discussion of our results of operations and current financial position. You should read this discussion in conjunction with our unaudited condensed consolidated financial statements and notes included elsewhere in this quarterly report. Actual results may differ materially from those suggested by our forward-looking statements for various reasons including those discussed in the section entitled “Risks Factors” in our final prospectus dated October 23, 2003. Those risk factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. Except for any ongoing obligations to disclose material information as required by the federal securities laws, we do not have any intention or obligation to update forward-looking statements after we file this quarterly report.

Our fiscal year ends on the Saturday in December or January nearest to the last day of December. Consistent with this policy, fiscal 2003 ended on January 3, 2004 and fiscal 2004 will end on January 1, 2005. As a result, fiscal 2003 contained 53 weeks of financial results and fiscal 2004 will contain 52 weeks of financial results. The additional week in fiscal 2003 was included in the first half of fiscal 2003. Therefore, the accompanying unaudited condensed consolidated financial statements for the first half of fiscal 2004 reflect our financial position as of July 3, 2004 and for the 26-week period then ended. The first half of fiscal 2003 ended on July 5, 2003 and included 27 weeks of financial results. The three-month periods ended July 3, 2004 and July 5, 2003 each contained 13 weeks of financial results.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, (i) selected statement of operations data expressed as a percentage of net sales and (ii) the number of retail stores open at the end of each period:

	April 2, 2005		April 3, 2004
	Three-month periods ended				~~Six-month periods ended~~
	July 3, 2004		July 5, 2003		July 3, 2004		July 5, 2003
Wholesale sales	4748.0	%	4649.96	%	~~48.4~~	%	~~53.0~~	%
Retail sales	3832.49		4032.4		~~35.2~~		~~37.1~~
Mass Channel sales	1419.61		1218.70		~~16.4~~		~~9.9~~
Net sales	100.0		100.0		~~100.0~~		~~100.0~~
Cost of goods sold	6163.93		6463.47		~~62.9~~		~~63.9~~
Gross profit	3836.17		3536.63		~~37.1~~		~~36.1~~
Selling, general, and administrative expenses	3025.72		2925.9		~~28.1~~		~~28.4~~
Closure costs	—		—0.3		~~0.2~~		—
Royalty income	(1.67	)	(1.47	)	~~(1.7~~	)	~~(1.5~~	)
Operating income	913.02		711.18		~~10.5~~		~~9.2~~
Interest expense, net	2.81		42.75		~~2.7~~		~~4.4~~
Income before income taxes	611.21		29.43		~~7.8~~		~~4.8~~
Provision for income taxes	24.4		03.97		~~3.0~~		~~1.9~~
Net income	36.87	%	1.5.6	%	~~4.8~~	%	~~2.9~~	%
Number of retail stores at end of period	~~174~~181		~~159~~170		~~174~~		~~159~~

14Three-month period ended April 2, 2005 compared to three-month period ended April 3, 2004

~~Three~~ NET ~~and six-month~~SALES. Consolidated ~~periods~~net ~~ended~~sales ~~July~~in 3the first quarter of fiscal 2005 increased $23.5 million, ~~2004~~or ~~compared~~12.9%, to $206.2 million ~~three~~from ~~and~~$182.7 million ~~six-month~~in ~~periods ended~~the ~~July~~first 5quarter of fiscal 2004. Revenue growth in all channels of distribution has been driven by the success of our focus on high-volume, essential ~~2003~~core products.

~~NET SALES. In the second quarter of fiscal 2004,~~ Total ~~consolidated~~wholesale ~~net~~ sales increased $168.3 4 million, or 119.63%, to $~~156~~99.~~3 million from $140.~~0 million in the ~~second~~first quarter of fiscal ~~2003. This~~2005 ~~increase~~from ~~for the second quarter of fiscal 2004 over the prior year was driven by growth in each of our channels of distribution. In the first half of fiscal 2004, consolidated net sales were~~ $~~339~~90.0 6 million, anin ~~increase of $33.0 million, or 10.8%, as compared with $306.0 million for~~ the first ~~half~~quarter of fiscal ~~2003. The~~ ~~increase in the first half of~~2004. ~~fiscal~~Wholesale ~~2004 over the prior year primarily reflects growth in~~ sales ~~to the mass channel~~, ~~including~~excluding ~~sales of our Child of Mine brand to Wal~~off-~~Mart,~~price ~~which launched in June of 2003~~sales, ~~and growth in sales in our retail channel.~~

~~Total wholesale sales increased $7.9 million, or~~ 12.0%, to $73.5 million in the second quarter of fiscal 2004 from $65.6 million in the second quarter of fiscal 2003. Wholesale sales, excluding off-price sales, increased $10.1 million, or 17.2%, to $68.6 million from $58.5 million in the second quarter of fiscal 2003, driven by growth in each of our baby, playwear, and sleepwear product categories. Sales growth in our baby and playwear product categories has resulted from our focus on improving core products. Increased sleepwear sales were driven by our focus on improved product design and sourcing capabilities. In the first half of fiscal 2004, wholesale sales increased $1.9 million, or 1.1%, to $164.1 million from $162.2 million in the first half of fiscal 2003. Wholesale sales, excluding off-price sales in the first half of fiscal 2004, increased $3.4 million, or 2.2%, to $155.3 million from $151.9 million in the first half of fiscal 2003. The increase in wholesale sales for the first half of fiscal 2004 was driven primarily by strong sleepwear sales.

~~Mass channel sales in the second quarter of fiscal 2004~~ increased $5.0 6 million, or 286.04%, to ~~$22.8~~ ~~million from~~ $1792.8 2 million in the ~~second~~first quarter of fiscal ~~2003. Mass~~2005 ~~channel~~from ~~sales in the first half of fiscal 2004 increased~~ $2586.~~5 million, or 84.2% to $55.~~7 million ~~from $30.2 million~~ in the first ~~half~~quarter of fiscal ~~2003~~2004. ~~This revenue~~ ~~growth~~The ~~for~~increase ~~the~~in ~~second~~wholesale ~~quarter~~sales ~~and~~over the first ~~half~~quarter of fiscal 2004 ~~primarily~~ reflects ~~sales~~increased ofvolume in our ~~Child~~playwear ofand ~~Mine brand~~sleepwear ~~that~~product ~~began~~categories, ~~selling~~partially tooffset ~~Wal-Mart~~by inlower ~~the~~volume ~~latter~~in ~~part~~our ofbaby ~~the~~product ~~second~~category ~~quarter of~~resulting ~~fiscal~~from ~~2003. Also contributing to~~the ~~this~~timing ~~growth were increased sales~~ of ~~the~~product ~~Tykes brand sold to Target~~launches.

~~Retail store~~ Mass channel sales ~~were~~in ~~$60.0 million for~~ the ~~second~~first quarter of fiscal ~~2004,~~2005 anincreased ~~increase of~~ $~~3.4 million, or~~ 6.~~0%, from $56.~~6 million in the second quarter of fiscal 2003. Comparable store sales for the second quarter of fiscal 2004, based on 158 locations, were flat compared to the second quarter of fiscal 2003. The primary driver of the revenue increase was incremental revenue generated from new stores opened subsequent to July 5, 2003, offset by the impact of stores closed over the last twelve months. In the first half of fiscal 2004, retail store sales increased $5.7 million, or 5 19.09%, to $~~119~~39.2 5 million from $~~113~~32.5 9 million in the first ~~half~~quarter of fiscal ~~2003~~ 2004. ~~Such~~ This revenue growth ~~was~~reflects ~~driven~~increased ~~by incremental~~ sales of ~~$7.4~~our ~~million~~Child ~~generated~~of ~~from~~Mine ~~new~~brand ~~stores~~due ~~opened subsequent~~ to ~~July 5, 2003 and a comparable store sales increase of $1.9 million, or 1.8%, based on 158 locations. Such increases were partially offset by~~ the ~~impact~~introduction of ~~store~~our ~~closures~~new ofplaywear ~~$0.5~~product ~~million~~line ~~and an additional week of selling~~ in the first ~~half~~quarter of fiscal 2005, ~~2003~~growth offrom ~~$3.1 million. There~~additional ~~were~~floor ~~a total of 174 stores as of July 3~~space, ~~2004. We plan to open five stores~~ and ~~close~~increased ~~four~~productivity ~~stores~~in ~~during~~existing ~~the balance of fiscal 2004~~stores. We ~~do not expect to incur any significant costs as a result of these store closures.~~

~~GROSS~~ Retail store ~~PROFIT. Our~~sales ~~gross~~were ~~profit increased~~ $967.7 8 million, ~~or 19.5%,~~for ~~to $59.6 million in~~ the ~~second~~first quarter of fiscal ~~2004~~2005, ~~from~~an ~~$49.9~~increase ~~million in the second quarter~~ of ~~fiscal 2003~~$8.5 ~~Gross~~million, ~~profit~~or ~~as a percentage of net sales in the second quarter of fiscal 2004 increased to 38~~14.14%, from 35$59.6%2 million in the ~~second~~first quarter of fiscal ~~2003~~ ~~due~~2004. toSuch ~~improved~~revenue ~~product~~growth ~~costs~~was ~~and~~driven ~~lower~~by ~~levels~~a ofcomparable ~~customer~~store ~~accommodations~~sales ~~resulting from~~increase ~~improved~~of ~~product performance~~$5.2 ~~Additionally~~million, asor ~~described~~8.8%, inbased ~~Note~~on 4169 tolocations ~~the~~and ~~accompanying~~incremental ~~unaudited condensed~~sales ~~consolidated financial statements, we recorded a favorable adjustment~~ of $13.5 3 million togenerated ~~correct~~from ~~adjustments~~new tostores opened ~~cost~~subsequent ofto ~~sales~~April 3, ~~and~~2004. ~~inventory~~The ~~made during~~increase ~~fiscal~~in ~~2003~~comparable ~~and~~store ~~the~~sales ~~first~~was ~~quarter~~driven ofby ~~fiscal~~converting ~~2004. Gross~~all ~~profit~~stores ~~increased $15.4 million, or 13.9%,~~ to ~~$125.9~~a ~~million~~new informat ~~the~~beginning ~~first~~May ~~half~~ of ~~fiscal~~ 2004, ~~compared~~including tomoving ~~$110.5 million~~baby inproducts to the ~~first half~~ front of ~~fiscal~~the ~~2003. As~~store, amore ~~percentage~~impactful ofwindow ~~net sales~~displays, ~~gross~~and ~~profit~~more effective in-store ~~the~~merchandising ~~first~~and ~~half~~marketing, all of ~~fiscal 2004~~which ~~increased~~improved tostore 37productivity.1% ~~from~~There ~~36.1%~~were ina ~~the~~total ~~first half~~ of ~~fiscal~~181 ~~2003. This~~stores ~~increase~~as inof ~~gross profit~~April 2, ~~relative to~~ ~~sales~~2005, ~~for~~including ~~the~~one ~~first~~store ~~half~~opened ofin ~~fiscal~~February ~~2004 resulted primarily from favorable product costs, lower levels~~ of ~~inventory~~2005. ~~provisions~~We ~~due~~plan to ~~our~~open ~~focus~~eleven onstores ~~core products,~~ and ~~the~~close ~~inventory~~four ~~adjustment,~~stores ~~noted~~during ~~above,~~the ~~offset~~balance ~~by a higher mix~~ of ~~mass channel~~fiscal ~~revenues that generally yield lower margins than our wholesale and retail channels~~2005.

15 GROSS PROFIT. Our gross profit increased $9.5 million, or 14.3%, to $75.8 million in the first quarter of fiscal 2005 from $66.3 million in the first quarter of fiscal 2004. Gross profit as a percentage of net sales in the first quarter of fiscal 2005 increased to 36.7% from 36.3% in the first quarter of fiscal 2004. The increase in gross margin was largely due to product cost reduction.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and administrative expenses for the ~~second~~first quarter of fiscal 2005 ~~2004~~ increased $64.2 6 million, or 149.8%, to $4852.0 million from $4147.8 4 million in the ~~second~~first quarter of fiscal ~~2003~~2004. Selling, general, and administrative expenses, as a percentage of ~~net~~ net sales, ~~increased~~decreased to 3025.72% in the ~~second~~first quarter of fiscal ~~2004~~2005 from 2925.9% in the ~~second~~first quarter of fiscal ~~2003. This increase~~2004 ~~was~~due ~~driven~~to ~~primarily~~leveraging byour ~~growth~~operating inexpenses ~~distribution~~against ~~costs~~higher ~~and~~levels ~~the classification~~ of ~~co-operative~~revenue ~~advertising~~and controlling ~~expenses~~the asgrowth ~~further described~~ in ~~Note~~spending, 2primarily todistribution ~~the accompanying unaudited condensed consolidated financial statements~~costs. In ~~the~~The first ~~half~~quarter of fiscal 2004, ~~selling, general,~~included ~~and administrative expenses increased~~ $81.6 3 million, orof ~~9.9%,~~amortization ~~to $95.4 million from $86.8 million in the first half~~ of ~~fiscal~~our ~~2003. As~~licensing aagreements, ~~percentage~~which ofwere ~~net~~fully ~~sales, these expenses~~amortized ~~decreased~~on toAugust 15, ~~28.1% in the first half of fiscal~~ 2004 ~~from 28~~.4% ~~in the first half of fiscal 2003. Such improvements reflect the benefit of operating leverage.~~

CLOSURE COSTS. In ~~June~~July of ~~2004~~2003, we decided to exit our ~~distribution~~ ~~facility~~Costa inRican ~~Leola~~sewing facilities, ~~Pennsylvania~~given inour ~~order~~ability to ~~consolidate~~obtain ~~our~~lower costs ~~distribution~~from ~~operations~~third-party ~~and~~suppliers. ~~reduce~~During ~~costs. We~~fiscal 2003, we recorded approximately $951,041,000 ofin severance and other exit costs ~~during~~related ~~the~~to ~~second quarter~~these ~~and~~closures. During the first ~~half~~quarter of fiscal 2004, we recorded approximately $210,000 in severance and $324,000 in other exit costs related to these closures.

In ROYALTY ~~July~~INCOME. We ~~of 2003,~~license wethe ~~decided~~use toof ~~exit~~the ~~our~~Carter's, ~~Costa~~Carter's ~~Rican sewing facilities~~Classics, ~~given~~Just ~~our ability~~One toYear, ~~obtain~~and ~~lower~~Child ~~costs~~of ~~from~~Mine ~~third-party suppliers~~names. ~~During~~ In the ~~second~~first quarter of fiscal 2004, we ~~reversed~~ ~~approximately~~sublicensed ~~$136,000~~the Tykes ofname ~~severance~~to ~~costs~~certain ~~and~~licensees. ~~other~~In ~~termination~~December ~~benefits~~2004, ~~previously~~we ~~estimated~~replaced ~~for~~the ~~this~~Tykes ~~closure~~brand ~~and~~name ~~recorded~~in ~~approximately~~Target ~~$47,000~~stores ofwith ~~other~~our ~~closure~~Just ~~costs~~One Year brand. In Royalty income in the first ~~half~~ quarter of fiscal ~~2004,~~2005 weincreased ~~recorded~~11.3% ~~approximately~~to $~~74,000~~3.5 million ofcompared ~~severance~~to ~~and~~ $~~371,000~~3.2 million in the first quarter of ~~other~~fiscal ~~closure~~2004. ~~costs~~This increase is due primarily to the sales growth of Carter's brand licensed products.

~~ROYALTY~~ OPERATING INCOME. We Operating ~~license the use of our Carter’s, Carter’s Classics, and Child of Mine names and sublicense the Tykes name to certain licensees. Our royalty~~ income infor the ~~second~~first quarter of fiscal ~~2004~~2005 increased $05.6 8 million, or 3126.68%, to $227.5 3 million compared to $121.9 5 million in the ~~second~~first quarter of fiscal ~~2003~~2004. ~~During~~ ~~the~~As ~~first~~a ~~half~~percentage of ~~fiscal~~net ~~2004~~sales, ~~royalty~~operating income ~~was~~increased ~~approximately $5~~to 13.72% ~~million,~~in anthe ~~increase~~first quarter of ~~$1.2~~fiscal ~~million,~~2005 compared orto 2711.28%, ~~over~~in the first ~~half~~quarter of fiscal ~~2003~~2004. The ~~increases~~increase in ~~the~~operating ~~second quarter~~income ~~and~~reflects ~~first~~growth ~~half~~in ofnet ~~fiscal~~sales ~~2004~~in ~~resulted~~all ~~primarily~~channels, ~~from~~increased ~~royalties~~gross ~~earned on~~profit, ~~licensed~~and ~~sales~~the benefit of ~~our~~leveraging ~~Child~~operating expenses ofagainst ~~Mine brand~~higher bylevels ~~our~~of ~~licensee~~revenue. ~~partners~~The ~~who~~first ~~began~~quarter ~~shipping~~of ~~their~~fiscal ~~products~~2004 ~~during~~included ~~the third~~$1.3 million ~~quarter~~in amortization of ~~fiscal 2003.~~

OPERATING INCOME. Operating income for the second quarter of fiscal 2004 increased $4.2 million, or 41.9%, to $14.1 million compared to $9.9 million in the second quarter of fiscal 2003. As a percentage of net sales, operating income increased to 9.0% in the second quarter of fiscal 2004 compared to 7.1% in the second quarter of fiscal 2003. Operating income for the first half of fiscal 2004 increased $7.4 million to $35.6 million from $28.2 million in the first half of fiscal 2003. Operating income, as a percentage of net sales, increased to 10.5% in the first half of fiscal 2004 compared to 9.2% in the first half of fiscal 2003. These increases in operating income for the second quarter and first half of fiscal 2004 reflect the benefit from revenue growth, increases in gross profit, and leveraging of operating expenses, described above.13

~~INTEREST EXPENSE, NET.~~ our ~~Interest~~licensing ~~expense~~agreements inand ~~the second quarter of fiscal 2004 decreased~~ $~~2.2 million, or 33.1%, to $4.4 million compared to $6.5 million in the second quarter of fiscal 2003. In the first half of fiscal 2004, interest expense decreased $4.5 million to $9.~~0 ~~million from $13~~.5 million in ~~the~~closure ~~first~~costs ~~half~~related ~~of fiscal 2003. These decreases are attributable~~ to ~~the redemption of approximately $61.3 million of~~ our ~~10.875%~~Costa ~~senior~~Rica ~~subordinated notes~~sewing infacility ~~the fourth quarter of fiscal 2003, lower variable interest rates on reduced levels of term loan indebtedness, and the additional week of interest in the first half of fiscal 2003~~closures.

~~INCOME~~ INTEREST ~~TAXES. We~~EXPENSE, ~~recorded a provision for income taxes of $3~~NET.8 Interest ~~million~~expense in the ~~second~~first quarter of fiscal ~~2004~~2005 ~~compared to~~decreased $14.38% ~~million~~to ~~in the second quarter of fiscal 2003. In the first half of fiscal 2004, we recorded a provision for income taxes of~~ $104.4 million ~~compared~~as compared to $54.6 million in the first ~~half~~quarter of fiscal ~~2003~~2004. ~~Our~~ ~~effective tax~~This ~~rate~~decrease ~~was~~is ~~approximately~~attributable to ~~39.0%~~reduced ~~during~~levels ~~the~~of ~~second~~term ~~quarter~~loan ~~and~~indebtedness for the first ~~half~~quarter of fiscal ~~2004~~2005 ~~and~~compared ~~38.5%~~to ~~during~~ the ~~second~~first quarter ~~and first half~~ of fiscal ~~2003~~2004.

16 INCOME TAXES. We recorded a provision for income taxes of $9.0 million in the first quarter of fiscal 2005 compared to $6.6 million in the first quarter of fiscal 2004. Our effective tax rate was approximately 39.5% during the first quarter of fiscal 2005 and 39.0% during the first quarter of fiscal 2004.

NET INCOME. As a result of the factors noted above, our ~~second~~ first quarter ~~2004~~of fiscal 2005 net income was approximately $513.9 8 million, as compared to approximately $210.1 3 million in the ~~second~~first quarter of fiscal ~~2003. Net income for the first half of fiscal~~ 2004 ~~was $16~~.2 ~~million compared to $9.0 million in the first half of fiscal 2003.~~

FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY

Our primary cash needs are working capital, capital expenditures, and debt service. Historically, we have financed these needs through ~~internally~~operating ~~generated~~ cash flow and funds borrowed under our senior credit facility. Our primary source of liquidity will continue to be cash flow from operations and borrowings ~~available~~ under our revolving loan facility, and we expect that these sources will fund our ongoing requirements for debt service and capital expenditures. These sources of liquidity may be impacted by continued demand for our products and our ability to meet ~~debt~~ debt covenants under our credit facility.

Net ~~accounts~~ accounts receivable at ~~July 3~~April 2, ~~2004~~2005 were $7275.0 8 million compared to $5972.9 8 million at ~~July 5~~April 3, ~~2003~~2004 and $6580.3 4 million at January 3 1, ~~2004~~2005. ~~The~~ The increase over ~~July 5~~April 3, ~~2003~~2004 reflects ~~higher~~the ~~levels~~growth ofin revenue. inDue ~~the latter part of the second quarter of fiscal 2004 as compared~~ to the ~~end of the second quarter of fiscal 2003. Due to the~~ seasonal nature of our operations, the net accounts receivable balance at ~~July~~ 3April 2, ~~2004~~2005 is not comparable to the net accounts receivable balance at ~~January~~ 3January 1, ~~2004~~2005.

Net inventories at ~~July 3~~April 2, ~~2004~~2005 were $~~148~~106.4 8 million compared to $~~132~~91.9 2 million at ~~July~~ 5April 3, ~~2003~~2004 and $~~104~~120.8 million at January 3 1, ~~2004~~2005. ~~This~~ The increase over ~~July 5~~April 3, ~~2003~~2004 ~~was~~includes ~~planned~~ additional inventory required to support ~~third~~forecasted ~~quarter~~revenue ~~fiscal~~growth ~~2004~~in ~~shipping~~all ~~requirements~~channels of distribution. Due to the seasonal nature of our operations, ~~net~~ net inventories at ~~July 3~~April 2, ~~2004~~2005 are not comparable to net inventories at ~~January~~ 3January 1, ~~2004~~2005.

Net cash ~~used in~~provided by operating activities for the first ~~half~~quarter of fiscal ~~2004~~2005 was $524.4 6 million compared to ~~net cash used in operating activities of~~ $2113.9 4 million in the first ~~half~~ quarter of fiscal ~~2003~~2004. The change in net cash ~~used~~provided inby operating activities in the first ~~half~~quarter of fiscal ~~2004~~2005 compared to the first ~~half~~quarter of fiscal ~~2003~~2004 is primarily attributable to ~~increases~~the growth in ~~accounts~~ ~~payable~~earnings and ~~the~~reductions ~~growth~~ in accounts ~~earnings~~receivable, partially offset by ~~increased levels~~reductions ofin ~~inventory~~accounts payable and other current liabilities.

We ~~have~~ have invested $102.7 1 million in capital expenditures during the first ~~half~~quarter of fiscal ~~2004~~ 2005 compared to $64.8 4 million during the first ~~half~~quarter of fiscal ~~2003~~2004. We plan to invest an additional $1322.8 9 million in capital expenditures during the remainder of fiscal ~~2004~~2005. Major investments include ~~the expansion of our distribution capabilities,~~ retail store openings and remodeling, and fixturing programs for wholesale and mass channel customers.

~~On October 29, 2003, we completed an initial public offering of~~ Effective ~~Carter’s~~November 24, ~~Inc.’s common stock including the sale of 5~~2004,~~390,625~~ ~~shares~~our bycredit usfacility ~~and 1,796,875~~was ~~shares~~amended ~~by the selling stockholders, primarily Berkshire Partners LLC and its affiliates. Net proceeds~~ to usincrease ~~from the~~our ~~offering~~letter ~~totaled $93.9 million. On November 28, 2003, we used approximately $68.7 million~~ of ~~the~~credit ~~proceeds~~sublimit to ~~redeem~~ ~~approximately~~ $6160.3 0 million infrom ~~outstanding senior subordinated notes and pay a redemption premium of approximately~~ $640.7 0 million and ~~related~~eliminate ~~accrued interest charges of $0.7 million. We used approximately $2.6 million of~~ the ~~net proceeds to terminate the Berkshire~~ ~~Partners~~requirement ~~LLC management agreement and used approximately $11.3 million~~ to ~~prepay~~ ~~amounts~~hedge ~~outstanding~~a ~~under~~portion ~~our~~of ~~term loan as required by~~ our ~~senior~~variable ~~credit facility. We~~rate ~~used remaining proceeds for working capital and other general corporate purposes~~debt.

~~Effective July~~ Principal ~~29,~~borrowings ~~2003,~~under ~~our~~the ~~credit~~term ~~facility~~loan ~~was~~are ~~amended~~due ~~to,~~and ~~among~~payable ~~other~~in ~~things,~~quarterly ~~increase~~installments ~~the amount~~ of ~~the~~$130,270 ~~commitments~~from ~~under~~June 30, ~~the~~2005 ~~revolving~~through ~~loan~~September 30, ~~facility~~2007 ~~from~~and ~~$60.0~~four ~~million~~quarterly payments toof approximately $8012.0 5 million; ~~provide~~from ~~for~~December 31, a2007 75through ~~basis~~September 30, ~~point~~2008. ~~reduction~~Interest inon the ~~applicable interest margin by prepaying our existing Tranche B~~ term loan ~~and~~is ~~replacing~~payable ~~it with~~at ~~a new Tranche C term loan; and reduce~~ the ~~amount~~end of ~~our~~interest ~~mandatory~~rate ~~loan prepayment~~reset ~~requirement from 50% or 75% of excess cash flow to 25% or 50% of excess cash flow~~periods, ~~depending~~which onvary ~~the applicable leverage ratio. Pursuant to the amendment, we are also~~in ~~permitted~~length tobut ~~repurchase~~in upno tocase ~~$15.0~~exceed ~~million~~six ~~of additional senior subordinated notes, which we may consider from time to time~~months.

1714

~~Our senior~~The ~~credit~~outstanding ~~facility,~~balance asof ~~amended,~~the ~~sets~~revolving ~~forth~~loan ~~mandatory~~facility ~~and~~is ~~optional~~payable ~~prepayment conditions that may result~~ in ~~our~~full ~~use~~on ofAugust 15, ~~cash~~2006. toInterest ~~reduce~~is ~~our~~payable ~~debt~~quarterly ~~obligations, including~~on ~~payments~~base ~~of: (i)~~rate ~~50%~~borrowings ofunder the ~~net~~ ~~cash~~revolving ~~proceeds~~loan ~~from~~facility anand ~~equity~~may ~~issuance by Carter’s, Inc., excluding, among~~be ~~other~~payable ~~things,~~more ~~any~~frequently ~~issuance of equity~~ in ~~connection~~the ~~with~~event ~~employee~~we orchoose ~~director stock plans or~~ a ~~permitted~~Eurodollar ~~acquisition~~rate ~~and~~option ~~(ii)~~available ~~25%~~under ~~or 50% of consolidated excess cash flow, depending on~~ the ~~applicable leverage ratio, as both~~ terms ~~are defined~~of in the ~~amended~~ senior credit facility. ~~The~~ ~~terms~~No ofprincipal ~~the~~payments ~~consolidated~~are ~~excess~~required ~~cash~~on ~~flow~~the ~~condition~~senior ~~were~~subordinated ~~effective~~notes ~~for~~prior ~~fiscal~~to ~~2002,~~their ~~and~~scheduled ~~accordingly,~~maturity wein ~~made a principal prepayment of approximately $4~~August 2011.8 ~~million~~Beginning ~~on March 26~~August 15, ~~2003 and approximately $2.4 million on March 22~~2006, ~~2004. This~~we ~~excess cash flow condition~~ may ~~result~~redeem inall ~~future~~or ~~annual~~part ~~prepayments~~of ~~depending~~the onsenior ~~the~~subordinated ~~consolidated excess~~notes ~~cash~~as ~~flow~~further ~~generated~~described in ~~each year.~~Note ~~The~~5 ~~lenders will apply such prepayments first~~ to ~~the term loan and,~~our ~~second,~~consolidated tofinancial ~~permanently~~statements ~~reduce our revolving loan facility. Subject to certain conditions~~ in our ~~senior credit~~most ~~facility,~~recently wefiled ~~may~~annual ~~make~~report ~~optional~~on ~~prepayments~~Form 10-K. ofInterest ~~our~~is ~~debt~~payable ~~obligations without~~semi-annually ~~premium~~on orthe ~~penalty. The~~senior ~~lenders will~~subordinated ~~apply~~notes ~~such~~in ~~optional~~February ~~prepayments~~and ~~according~~August toof ~~our~~each ~~instruction~~year.

On The senior ~~March~~credit 22facility, ~~2004~~as amended, wesets ~~prepaid~~forth anmandatory ~~additional~~and ~~$5.0~~optional ~~million~~prepayment ofconditions ~~term~~that ~~loan indebtedness. At~~may ~~July~~result 3,in ~~2004,~~our weuse ~~had approximately~~of ~~$204.9 million~~cash ofto reduce our debt ~~outstanding~~obligations, ~~consisting~~including payments of: ~~$113.1~~(i) ~~million~~50% of ~~senior~~the ~~subordinated~~net ~~notes~~cash ~~(the~~proceeds ~~“Notes”)~~from an equity issuance by Carter's, ~~$91.8~~ ~~million~~Inc., inexcluding, ~~term~~among ~~loan~~other ~~borrowings~~things, ~~and~~any noissuance ~~borrowings~~of ~~under~~equity ~~our revolving~~in ~~loan~~connection ~~facility,~~with ~~exclusive~~employee ofor ~~approximately~~director ~~$16.6 million~~stock ofplans or a ~~outstanding~~permitted ~~letters~~acquisition and (ii) 25% or 50% of ~~credit. At~~consolidated ~~July 3,~~excess ~~2004~~cash flow, wedepending ~~had~~on ~~approximately~~the ~~$63.4~~applicable ~~million~~leverage ofratio, ~~financing~~as ~~available~~both ~~under~~terms ~~our revolving~~are ~~loan~~defined ~~facility. At~~in ~~January~~the 3,amended senior credit facility. ~~2004~~Accordingly, we ~~had~~made ~~approximately~~a ~~$212.7 million~~principal ofprepayment ~~debt outstanding, consisting~~ of approximately $~~113~~2.14 million ofon ~~Notes~~March 22, ~~$99~~2004.~~6 million~~ This excess cash flow condition may result in ~~term~~future ~~loan~~annual ~~borrowings~~prepayments ~~and~~depending on the noconsolidated ~~revolver~~excess ~~borrowings,~~cash ~~exclusive~~flow ofgenerated ~~approximately~~in $6each year.~~5 million~~ ~~of outstanding~~No ~~letters~~such ofprepayment ~~credit~~is required in fiscal 2005. The ~~revolver~~ lenders will beapply ~~available~~such prepayments first to ~~fund~~the ~~our~~term ~~working~~loan ~~capital~~and, ~~requirements~~second, ~~capital~~to permanently reduce ~~expenditures~~the revolving loan facility. Subject to certain conditions in the senior credit facility, ~~and~~we ~~other~~may ~~general~~make ~~corporate~~optional ~~purposes~~prepayments of our debt obligations without premium or penalty. The lenders will apply such optional prepayments according to our instruction.

~~After giving~~ In ~~effect~~March 2005, toDecember 2004, ~~the~~and ~~prepayments~~March 2004, ofwe ~~our~~prepaid ~~term~~an ~~loan~~additional ~~described~~$20.0 million, ~~above~~$20.0 million, ~~principal borrowings~~and ~~under~~$5.0 million ~~our~~in term loan ~~are due and payable in thirteen quarterly~~indebtedness. ~~installments~~At ofApril 2, ~~$231~~2005,~~792~~ ~~from~~we ~~September~~had ~~30,~~approximately ~~2004~~$164.4 million ~~through~~of ~~September~~debt 30outstanding, ~~2007~~consisting ~~and four quarterly payments~~ of ~~approximately~~ $22113.2 million ~~from~~of ~~December~~senior ~~31,~~subordinated ~~2007 through September 30~~notes, ~~2008~~$51. ~~Interest~~2 million ~~on our~~in term loan ~~is payable at the end of interest rate reset periods~~borrowings, ~~which vary~~ inand ~~length but in~~ no ~~case~~borrowings ~~exceed~~under ~~six~~the ~~months. The outstanding balance of our~~ revolving loan facility, isexclusive ~~payable~~of ~~in full~~approximately on$7.2 million ~~August~~of ~~15,~~outstanding ~~2006,~~letters ~~and~~of ~~interest~~credit. isAt ~~payable~~April 2, ~~quarterly~~2005, ~~or more frequently in the event~~ we ~~have~~had ~~chosen~~approximately a$72.8 million of ~~Eurodollar~~financing ~~rate option~~ available under ~~the terms of~~ our ~~senior~~revolving ~~credit~~loan facility. ~~No principal~~ ~~payments~~At ~~are required on the Notes prior to their scheduled maturity in August 2011. Beginning August 15~~January 1, ~~2006~~2005, we ~~may~~had ~~redeem~~approximately ~~all or part of the Notes as further described in Note~~ $184.5 million ~~to our most recently filed~~of ~~annual~~debt ~~report~~outstanding, onconsisting ~~Form~~of ~~10-K~~$113. ~~Interest is~~2 million ~~payable~~of ~~semi-annually~~senior onsubordinated ~~the~~notes, ~~Notes~~$71.3 million in ~~February~~term ~~and~~loan ~~August~~borrowings ofand ~~each~~no ~~year. Prior~~revolver toborrowings, ~~the~~exclusive ~~completion~~ of ~~our initial public~~approximately ~~offering, our semi-annual interest payment on the Notes was~~ $96.5 8 million ~~for each~~of ~~payment. After~~outstanding ~~giving~~letters ~~effect to the redemption~~ of ~~$61~~credit.~~3 million~~ ofThe ~~the~~revolver ~~principal~~will ~~amount~~be ofavailable ~~the~~to ~~Notes~~fund inour ~~November~~working ~~2003~~capital requirements, ~~our~~capital ~~semi-annual interest~~expenditures, ~~payment~~and isother ~~now~~general ~~approximately~~corporate $6purposes.~~2 million.~~

~~As previously~~ Based ~~provided~~on byour acurrent ~~management~~level ~~agreement~~of ~~with~~operations, ~~Berkshire~~anticipated ~~Partners~~cost ~~LLC~~savings, and operating improvements, we ~~agreed~~believe that cash generated from operations and available cash, together with amounts ~~among~~available ~~other~~under ~~things~~the revolving loan facility, will be adequate to ~~pay~~meet ~~Berkshire~~our ~~Partners~~debt anservice ~~annual~~requirements, ~~management~~capital ~~fee~~expenditures, ofand ~~$1.65 million~~working ~~per~~capital ~~year~~needs for ~~four~~the ~~years~~foreseeable future, ~~commencing~~although no assurance can be given in this regard. We may, however, need to refinance all or a portion of the principal amount of our term loan on or before August 15, 2006 and the ~~first~~principal ~~anniversary~~amount of our senior ~~2001~~subordinated ~~acquisition. We~~notes ~~paid~~on ~~this~~or ~~fee quarterly,~~prior to maturity in ~~advance~~2011. As ~~described above,~~The ~~upon~~Company ~~completion~~reviews ofstrategic ~~our~~growth ~~initial~~initiatives ~~public~~from ~~offering~~time to time which, ~~this~~if ~~management~~pursued, ~~fee agreement~~could ~~was~~result ~~terminated~~in additional indebtedness in future periods.

Based on our current level of operations and anticipated cost savings and operating improvements, we believe that cash generated from operations and available cash, together with amounts available under our revolving loan facility, will be adequate to meet our debt service requirements, capital expenditures, and working capital needs for the foreseeable future, although no assurance can be given in this regard. We may, however, need to refinance all or a portion of the principal amount of the Notes on or prior to maturity in 2011.

Our senior credit facility imposes certain covenants, requirements, and restrictions on actions by us and our subsidiaries that, among other things, restrict the payment of dividends.

EFFECTS OF INFLATION AND DEFLATION

We are affected by inflation and changing prices primarily through the purchase of raw materials, increased operating costs and expenses, and fluctuations in ~~interest~~ interest rates. The effects of inflation on our net sales and operations have not been material in recent years. In recent years, there has been deflationary pressure on selling prices. While we ~~have~~ have been successful in offsetting such deflationary pressures through product improvements and lower costs with the expansion of our global sourcing ~~network~~capabilities, if deflationary ~~pricing~~price trends outpace our ability to obtain further price reductions from our global suppliers ~~and other cost reduction initiatives~~, our profitability may be affected.

SEASONALITY

We experience seasonal fluctuations in our sales and profitability, with generally lower sales and gross profit in the first and second quarters of our fiscal year. Over the past five fiscal years, approximately 57% of our consolidated net sales were generated in the second half of our fiscal year. Accordingly, our results of operations for the first and second quarters of any year are not indicative of the results we expect for the full year.

As a result of ~~this~~the effects of seasonality, our inventory levels and other working capital requirements generally begin to increase during the second quarter and into the third quarter of each fiscal year. During these peak periods we have historically borrowed under the ~~revolver~~revolving loan facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that ~~are believed~~we tobelieve beare reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to our consolidated financial statements contained in our most recently filed annual report on Form 10-K. ~~The~~ The following discussion addresses our critical accounting policies, which are those that require management’'s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue recognition: We recognize wholesale and mass channel revenue after shipment of products to customers, when title passes, and when all risks and rewards of ownership have transferred. In certain cases, in which we retain the risk of loss during shipment, revenue recognition does not occur until the goods have reached the specified customer. We consider revenue realized or realizable and earned when the product has been shipped and when all risks and rewards of ownership have transferred, the sales price is fixed or determinable, and collectibility is reasonably assured. In the normal course of business, we grant certain accommodations and allowances to our wholesale and mass channel customers. Such amounts are reflected as reductions of net sales. ~~Retail~~ ~~store~~For ~~revenues~~certain ~~are~~accommodations ~~recognized~~related ~~at the point of sale. We reduce revenue for customer returns and deductions. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers~~ to ~~make~~cooperative ~~payments~~("co-op") ~~and~~advertising ~~reserve~~ for ~~certain accommodations~~which ~~and allowances that~~ we ~~have~~can ~~granted~~determine ~~to our wholesale and mass channel customers. If~~ the ~~financial condition~~fair ofvalue, ~~our~~such ~~customers~~amounts ~~were~~are toclassified ~~deteriorate,~~as ~~resulting~~a incomponent ~~an impairment~~ of ~~their~~ ~~ability~~selling, ~~to make payments~~general, anand ~~additional~~administrative ~~allowance could be required~~expenses.

19 Retail store revenues are recognized at the point of sale. We reduce revenue for customer returns and deductions. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make payments and other actual and estimated deductions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance could be required. Past due balances over 90 days are reviewed individually for collectibility. Our credit and collections department reviews all other balances regularly. Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered.

During ~~the~~ ~~first half of~~ fiscal 2004, we contracted with a third-party service to provide us with the fair value of co-op advertising arrangements entered into with certain of our major wholesale and mass channel customers. Such fair value is determined based upon, among other factors, comparable market analysis for similar advertisements. In accordance with Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer/Reseller” (“EITF 01-09”), we have included the fair value of these arrangements of approximately $1,221,000 in the second quarter of fiscal 2004 and $1,652,000 in the first half of fiscal 2004 as a component of selling, general, and administrative expenses on the accompanying unaudited condensed consolidated statement of operations rather than as a reduction of revenue. Co-op advertising arrangements in fiscal 2003 were treated as a reduction of revenue in accordance with EITF 01-09 as we had determined that it was impracticable to obtain the fair value of those arrangements.

No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer/Reseller" ("EITF 01-09"), we have included the fair value of these arrangements of approximately $1.2 million and $431,000 in the first quarters of fiscal 2005 and 2004 as a component of selling, general, and administrative expenses in the accompanying unaudited condensed consolidated statements of operations rather than as a reduction of revenue.

Inventory: We provide reserves for slow-moving inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those we project, additional write-downs may be required.

Goodwill and tradename: As of ~~July 3~~April 2, ~~2004~~2005, we had approximately $360 million in goodwill and tradename assets. The fair value of the Carter’'s tradename was estimated at the Acquisition to be approximately $220 million using a discounted cash flow analysis, which examined the hypothetical cost savings that accrue as a result of our ownership of the tradename. The cash flows, which incorporated both historical and projected financial performance, were discounted using a discount rate of ~~12%~~ten percent. The tradename was determined to have an indefinite life. The carrying value of these assets is subject to annual impairment reviews as of the last day of each fiscal year. Factors affecting such impairment reviews include the continued market acceptance of our offered products and the development of new products. Impairment reviews may also be triggered by ~~any~~ any significant events or changes in circumstances. Our impairment review of goodwill is based on the estimated fair values of the underlying businesses. These estimated fair values are based on ~~estimates~~ estimates of the future cash flows of the businesses.

Accrued expenses: Accrued expenses for health insurance, workers compensation, incentive compensation, professional fees, and other outstanding obligations are assessed based on actual commitments, statistical trends, and estimates based on projections and current expectations, and these estimates are updated periodically as additional information becomes available.

Accounting for income taxes: As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax exposure (state, federal, and foreign), together with assessing permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant, and equipment, and valuation of inventories. Temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase such allowance in a period, we must include an expense within the tax provision in the accompanying unaudited condensed consolidated ~~statement~~statements of operations.

20 Stock-based compensation arrangements: We account for stock-based compensation on stock options under the intrinsic value method, whereby we record compensation expense equal to the difference between the exercise price of the stock option and the fair market value of the underlying stock at the date of the option grant. For disclosure purposes only, we also estimate the impact on our net income of applying the fair value method of measuring compensation cost on stock options with the fair value, prior to our initial public offering, determined under the minimum value method as provided by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). For stock issued or sold outright to employees, directors, or third parties, we measure expense as the difference between the price paid by the recipient and the fair market value of the stock on the

Stock-based compensation arrangements: We account for stock-based compensation on stock options under the intrinsic value method, whereby we record compensation expense equal to the difference between the exercise price of the stock option and the fair market value of the underlying stock at the date of the option grant. For disclosure purposes only, we also estimate the impact on our net income of applying the fair value method of measuring compensation cost on stock options with the fair value, prior to our initial public offering, determined under the minimum value method as provided by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” For stock issued or sold outright to employees, directors, or third parties, we measure expense as the difference between the price paid by the recipient and the fair market value of the stock on the date of issuance or sale. Prior to our initial public offering, in the absence of a public market for Carter’s, Inc.’s common stock, management and the Board of Directors estimated the market value of Carter’s, Inc.’s common stock for all option grants and stock issuances using an approach that applies a multiple to Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, income tax expense, depreciation and amortization, and also excludes Acquisition-related charges, write-downs of long-lived assets, closure costs, and a deferred charge write-off. Adjusted EBITDA is not a measurement under accounting principles generally accepted in the United States of America.17

~~FORWARD~~date ~~LOOKING~~of ~~STATEMENTS~~issuance or sale. Prior to our initial public offering, in the absence of a public market for Carter's, Inc.'s common stock, management and the Board of Directors estimated the market value of Carter's, Inc.'s common stock for all option grants and stock issuances using an approach that applies a multiple to Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, income tax expense, depreciation and amortization, and also excludes Acquisition-related charges, write-downs of long-lived assets, plant closure costs, and a deferred charge write-off. Adjusted EBITDA is a non-GAAP measure.

~~Statements~~RECENT ~~contained~~ACCOUNTING herein that relate to our future performance, including, without limitation, statements with respect to our anticipated results of operations or level of business for fiscal 2004 or any other future period, are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations only and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Among the factors that could cause actual results to materially differ include a decrease in sales to or the loss of one or more of our key customers, downward pressure on our prices, disruptions in foreign supply sources, negative publicity, the loss of one or more of our major suppliers for raw materials, increased competition in the baby and young children’s apparel market, our substantial leverage which increases our exposure to interest rate risk and could require us to dedicate a substantial portion of our cash flow to repay principal, the impact of governmental regulations and environmental risks applicable to our business, and seasonal fluctuations in the children’s apparel business. These risks are described in our final prospectus dated October 23, 2003 under the headings “Risk Factors,” “Business-Competition; Certain Risks,” and “Statement Regarding Forward-Looking Statements.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.PRONOUNCEMENTS

21 In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123, "Accounting for Stock-Based Compensation" and supercedes APB 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123, will no longer be an alternative to financial statement recognition. We have selected the modified prospective method of adoption which requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R and for all subsequent stock options granted thereafter. In April 2005, the Securities and Exchange Commission ("SEC") approved a new rule for public companies which delays the effective date of SFAS 123R. Under the SEC's rule, SFAS 123R is now effective for public companies for annual periods that begin after June 15, 2005. The impact of adoption, based upon current options outstanding, is estimated to result in a reduction in fiscal 2006 after-tax earnings of approximately $1.3 million or approximately $0.04 per diluted share.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, "Share Based Payments" ("SAB 107"). The interpretations in SAB 107 express views of the staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provide the staff's views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from non-public to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to adoption of SFAS 123R, and disclosures in Management's Discussion and Analysis subsequent to adoption of SFAS 123R.

FORWARD-LOOKING STATEMENTS

Statements contained herein that relate to our future performance, including, without limitation, statements with respect to our anticipated results of operations or level of business for fiscal 2005 or any other future period, are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. The factors that could cause actual results to materially differ include a decrease in sales to, or the loss of one or more of our key customers, downward pressure on our prices, disruptions in foreign supply sources, negative publicity, the loss of one or more of our major suppliers for raw materials, increased competition in the baby and young children's apparel market, our substantial leverage which increases our exposure to interest rate risk and could require us to dedicate a substantial portion of our cash flow to repay

principal, the impact of governmental regulations and environmental risks applicable to our business, and seasonal fluctuations in the children's apparel business. These risks are described in our most recently filed annual report on Form 10-K under the headings "Risk Factors" and "Statement Regarding Forward-Looking Statements." We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the operation of our business, we have market risk exposures including those related to foreign currency risk and interest rates. These risks and our strategies to manage our exposure to them are discussed below.

We contract for production with third parties primarily in the Far East and South and Central America. While these contracts are stated in United States dollars, there can be no assurance that the cost for the future production of our products will not be affected by exchange rate fluctuations between the United States dollar and the local currencies of these contractors. ~~Due~~ Due to the number of currencies involved, we cannot quantify the potential impact of future currency fluctuations on net income in future years. In order to manage this risk, we source products from approximately ~~100~~ 75 vendors worldwide, providing us with flexibility in our production should significant fluctuations occur between the United States dollar and various local currencies. To date, such ~~exchange~~ exchange fluctuations have not had a material impact on our financial condition or results of operations. We do not hedge foreign currency exchange rate risk.

Our operating results are subject to risk from interest rate fluctuations on our ~~debt~~senior credit facility, which carries variable interest rates. At ~~July~~April 2, 32005, ~~2004,~~ our outstanding debt aggregated $~~204~~164.9 4 million, of which $9151.8 2 million bore interest at a variable rate, so that an increase of 1% in the applicable rate would increase our annual interest cost by $~~918~~512,000 and could have an adverse effect on our net income and cash flow. ~~Pursuant~~ to the provisions of our senior credit facility, we purchased an interest rate cap as an economic hedge against approximately $31.3 million of variable rate debt. The cap rate is 7.0%, and the arrangement expires on December 7, 2004.

OTHER RISKS

There also are other risks in the operation of our business specifically related to raw material pricing and our global sourcing network.

The principal raw materials we use are finished fabrics and trim materials. Prices for these materials are affected by changes in market demand, and there can be no assurance that prices for these and other raw materials will not increase in the near future. These materials are available from more than one supplier, which enables us to negotiate pricing. However, the loss of one or more of these suppliers could temporarily interrupt our supply, which could have an adverse effect on our sales and increase our costs.

We currently source substantially all of our production from our offshore operations and third-party manufacturers located in foreign countries. As a result, we may be adversely affected by political instability resulting in the disruption of trade from foreign countries, the imposition of new regulations relating to imports, duties, taxes, and other charges on imports, any significant decreases in the value of the dollar against foreign currencies, and restrictions on the transfer of funds. These and other factors could result in the interruption of production in offshore facilities, delay receipt of the products into the United States, or affect our operating income. Our future performance may be subject to such factors, which are beyond our control, and there can be no assurance that such factors would not have a material adverse effect on our financial condition and results of operations. We carefully select our sourcing agents, and in an effort to mitigate the possible disruption in product flow, we place production in various countries we believe to be of lower risk.

We continually evaluate opportunities to improve our products and reduce our costs. Our remaining sewing facilities, located in Mexico, ~~currently~~continue to provide us with an advantageous cost ~~structure. If~~ we determine in the future that we are able to source products currently sewn in Mexico at a significantly lower cost with superior quality elsewhere, we would develop a plan to exit such facilities and incur substantial closure-related costs.

structure. If we determine in the future that we are able to source products currently sewn in Mexico at a significantly lower cost with superior quality elsewhere, we would develop a plan to exit such facilities and incur closure-related costs.

We enter into various purchase order commitments with full-package suppliers. We can cancel these arrangements, although in some instances, we may be subject to a termination charge reflecting a percentage of work performed prior to cancellation. Historically, such cancellations and related termination charges have occurred infrequently and have not had a material impact on our business. However, as we rely more heavily on our full-package global sourcing network, we expect to incur more of these termination charges, which could increase our cost of goods sold.

ITEM 4. CONTROLS AND PROCEDURES

~~The Chief Executive Officer and Chief Financial Officer of Carter’s, Inc. and TWCC have evaluated the effectiveness of the design and operation of our disclosure controls and procedures~~ (~~as defined under Rules 13a-15(e~~a) ~~and 15d-15(e) promulgated under the~~ Evaluation ~~Securities Exchange Act~~ of ~~1934,~~Disclosure asControls ~~amended) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer~~ and ~~Chief~~Procedures ~~Financial Officer of Carter’s, Inc. and TWCC have concluded that our disclosure controls and procedures are adequate and effective.~~

We The Chief Executive Officer and Chief Financial Officer of Carter's, Inc. and TWCC have ~~recently~~evaluated ~~implemented~~the effectiveness of the design and operation of our disclosure controls and aprocedures ~~policy~~(as ~~that~~defined ~~requires~~under anRules 13a-15(e) ~~additional~~and ~~monthly~~15d-15(e) ~~review~~promulgated byunder ~~management~~the Securities Exchange Act of ~~all~~1934, as amended) as of the end of the period covered by this report. Based upon that ~~inventory-related~~evaluation, ~~journal~~the ~~entries~~Chief ~~exceeding~~Executive Officer ~~$500~~and Chief Financial Officer of Carter's,~~000~~ Inc. and TWCC have concluded that our disclosure controls and procedures are adequate and effective.

23 (b) Changes in Internal Control over Financial Reporting

~~PART~~ There were IIno –changes ~~OTHER~~in ~~INFORMATION~~the Company's internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

~~ITEM 1. LEGAL PROCEEDINGS:~~20

~~From~~ ~~time to~~ ~~time,~~ ~~we have been involved in various legal proceedings. We believe that all such litigation is~~ ~~routine~~PART inII—OTHER ~~nature and incidental to the conduct of our business. We believe that no such litigation will have a material adverse effect on our financial condition, cash flows, or results of operations.~~INFORMATION

On ~~August 21,~~ ~~2002,~~ ITEM ~~a lawsuit was filed against us in the State Court of Fulton County, State of Georgia by T~~1.~~N.S.~~ ~~Mills,~~LEGAL Inc. and Bowling Green Spinning Company in which the plaintiffs are claiming damages of approximately $830,000 related to an alleged oral guarantee of money owed to them by a third-party vendor. On July 27, 2004 the court granted our motion for summary judgment.PROCEEDINGS:

~~ITEM~~ From 2time to time, we have been involved in various legal proceedings. ~~CHANGES~~We INbelieve ~~SECURITIES:~~that all such litigation is routine in nature and incidental to conducting our business, and we believe that no such litigation will have a material adverse effect on our financial condition, cash flows, or results of operations.

~~None~~ ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:

~~ITEM~~ None ~~3. DEFAULTS UPON SENIOR SECURITIES:~~

~~None~~ ITEM 3. DEFAULTS UPON SENIOR SECURITIES:

~~ITEM~~ None ~~4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:~~

~~The~~ ~~Company held its Annual Meeting of~~ ~~Stockholders~~ ~~on May 14, 2004 (the “Annual Meeting”) for which proxies were~~ ~~solicited~~ITEM ~~pursuant~~4. toSUBMISSION ~~Regulation~~OF ~~14A~~MATTERS ofTO ~~the~~A ~~Securities~~VOTE ~~Exchange~~OF ~~Act~~SECURITY ~~of 1934, as amended.~~HOLDERS:

At None the Annual Meeting, two Class I directors were nominated for re-election, and the holders of Carter’s, Inc.’s common stock elected both nominees as indicated by the following schedule of votes cast:

Nominee	Total Votes For	Total Votes Against	Total Abstentions	Total Broker Non-Votes
Ross M. Jones	24,660,812	1,660,873	—	—
David Pulver	26,129,923	191,762	—	—

ITEM 5. OTHER INFORMATION:

~~The~~ None Directors continuing to serve after the Annual Meeting were: Class I directors - Ross M. Jones and David Pulver, Class II directors - Bradley M. Bloom and Frederick J. Rowan, II, and Class III directors - Paul Fulton, John R. Welch, and Thomas Whiddon.

~~The~~ ~~holders of~~ ~~Carter’s,~~ ~~Inc.’s common stock approved the Company’s 2003 Equity Incentive~~ ~~Plan. A~~ITEM ~~total of 23,856,557 votes were cast in favor, 1,582,577 votes were cast against, 5,585 votes were abstentions, and 876,966 votes were broker non-votes~~6. EXHIBITS:

(a): Exhibits:

The holders of Carter’s, Inc.’s common stock approved the Company’s Amended and Restated Annual Incentive Compensation Plan. A total of 24,960,934 votes were cast in favor, 478,799 votes were cast against, 4,986 votes were abstentions, and 876,966 votes were broker non-votes.

Exhibit Number		Description of Exhibits
31.1		Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification
31.2		Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification
31.3		Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification
31.4		Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification
32		Section 1350 Certification

~~ITEM 5. OTHER INFORMATION:~~21

~~None~~ SIGNATURES

24 Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

	CARTER'S, INC. THE WILLIAM CARTER COMPANY
Date: April 28, 2005	/s/ FREDERICK J. ROWAN, II Frederick J. Rowan, II Chairman of the Board of Directors and Chief Executive Officer
Date: April 28, 2005	/s/ MICHAEL D. CASEY Michael D. Casey Executive Vice President and Chief Financial Officer

~~(a) Exhibits:~~22

Exhibit Number			Description of Exhibits
31.1			Rule 13a-14(a)/15d-14(a) Certification
31.2			Rule 13a-14(a)/15d-14(a) Certification
31.3			Rule 13a-14(a)/15d-14(a) Certification
31.4			Rule 13a-14(a)/15d-14(a) Certification
32			Section 1350 Certification

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Part I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

SIGNATURES

(b) Reports on Form 8-K:

On April 27, 2004, Carter’s, Inc. filed a current report on Form 8-K with the Securities and Exchange Commission. Under Item 12 of the report, we reported that on April 27, 2004, Carter’s, Inc. issued a press release announcing its financial results for the first quarter ended April 3, 2004.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

	CARTER’S, INC.
	THE WILLIAM CARTER COMPANY
Date: August 17, 2004	/s/ FREDERICK J. ROWAN, II
	Frederick J. Rowan, II
	Chairman of the Board of Directors and Chief Executive Officer
Date: August 17, 2004	/s/ MICHAEL D. CASEY
	Michael D. Casey
	Executive Vice President and Chief Financial Officer

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