UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DCD.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 ~~OCTOBER~~JULY 43, ~~2003~~2004 OR
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file ~~number~~numbers:

001-31829 and 333-22155

CARTER’S, INC.

THE WILLIAM CARTER COMPANY

(Exact ~~name~~names of ~~registrant~~ registrants as specified in ~~charter~~their charters)

Massachusetts			04-1156680
DelawareMassachusetts		13-391293304-1156680
(State or other jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)
(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	~~The Proscenium 1170 Peachtree Street NE, Suite 900 Atlanta, Georgia 30309~~
(Address of principal executive offices, including zip code)
(404) 745-2700		~~(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 No ý

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:

AsCarter’s, Inc. has one class of common ~~November 17~~stock. There were 28,086,958 ~~2003~~shares of Carter’s, ~~there~~Inc.’s ~~were~~common 1stock,~~000~~ ~~shares~~par value of ~~Common~~$0.01 ~~Stock~~per share, outstanding as of the close of business on August 17, 2004.

~~FORM~~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. Unless the context indicates otherwise, any reference in this report to “TWCC” refers to The William Carter Company. “Carter’s,” “we,” “us,” and “our” refer to Carter’s, Inc. together with TWCC.

~~THE~~The ~~WILLIAM~~William ~~CARTER~~Carter ~~COMPANY~~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.

~~(A WHOLLY-OWNED SUBSIDIARY OF~~ CARTER’S, INC.)

~~INDEX~~AND THE WILLIAM CARTER COMPANY

Part I.		Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of October 4, 2003 (unaudited) and December 28, 2002
		Unaudited Condensed Consolidated Statements of Operations for the three and nine-month periods ended October 4, 2003 and September 28, 2002
		Unaudited Condensed Consolidated Statements of Cash Flows for the nine-month periods ended October 4, 2003 and September 28, 2002
		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 Risks
	Item 4.	Disclosure Controls and Procedures
Part II.		Other Information

INDEX TO QUARTERLY REPORT ON FORM 10-Q

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

~~THE~~PART ~~WILLIAM~~I ~~CARTER~~– ~~COMPANY~~FINANCIAL INFORMATION

(AITEM ~~WHOLLY-OWNED~~1. ~~SUBSIDIARY~~FINANCIAL ~~OF CARTER’S, INC.)~~STATEMENTS

CARTER’S, INC.

AND THE WILLIAM CARTER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except ~~per~~for share data)

	October 4, 2003		December 28, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,055	$	35,562
Accounts receivable, net	70,893		53,600
Inventories, net	118,080		105,700
Prepaid expenses and other current assets	2,833		4,903
Deferred income taxes	8,425		10,021
Total current assets	207,286		209,786
Property, plant, and equipment, net	47,679		50,476
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 $10,625 and $6,875	4,375		8,125
Deferred debt issuance costs, net	10,783		11,248
Other assets	3,703		4,199
Total assets	$	633,341	$	643,349
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,180	$	6,346
Accounts payable	32,991		34,669
Other current liabilities	36,723		38,309
Total current liabilities	70,894		79,324
Long-term debt	292,401		291,276
Deferred income taxes	83,717		83,873
Other long-term liabilities	9,977		10,140
Total liabilities	456,989		464,613
Commitments and contingencies
Common stockholder’s equity:
Common stock, voting; par value $.01 per share; 200,000 shares authorized, 1,000 shares issued and outstanding at October 4, 2003 and December 28, 2002	—		—
Additional paid-in capital	147,501		146,645
Retained earnings	28,851		32,091
Total common stockholder’s equity	176,352		178,736
Total liabilities and stockholder’s equity	$	633,341	$	643,349

(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

~~THE WILLIAM~~ CARTER’S, ~~COMPANY~~INC.

(AAND ~~WHOLLY-OWNED~~THE ~~SUBSIDIARY~~WILLIAM OF CARTER~~’S,~~ ~~INC.)~~COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except for share data)

(unaudited)

For the three-month periods ended

For the ~~nine~~six-month periods ended

October 4, 2003

September 28, 2002

October 4, 2003

September 28, 2002

July 3, 2004

July 5, 2003

July 3, 2004

July 5, 2003

Net sales

~~212~~156,~~135~~307

~~165~~140,~~779~~008

~~518~~339,~~136~~027

~~409~~306,~~469~~001

Cost of goods sold

~~136~~96,~~451~~716

~~100~~90,~~642~~153

~~331~~213,~~993~~166

~~250~~195,~~711~~542

Gross profit

7559,~~684~~591

6549,~~137~~855

~~186~~125,~~143~~861

~~158~~110,~~758~~459

Selling, general, and administrative expenses

5148,~~896~~024

4341,~~118~~843

~~138~~95,~~660~~394

~~122~~86,~~031~~764

Plant closure costs

115

—

115

—

Closure costs

—

540

—

Royalty income

(32,~~692~~504

)

(21,~~461~~903

)

(85,~~149~~668

)

(64,~~236~~457

)

Operating income

2714,~~365~~065

249,~~480~~915

5535,~~517~~595

4228,~~963~~152

Interest expense, net

64,~~788~~364

76,~~268~~519

208,~~309~~988

2113,~~238~~521

Income before income taxes

209,~~577~~701

173,~~212~~396

3526,~~208~~607

2114,~~725~~631

Provision for income taxes

73,~~922~~784

61,~~634~~308

1310,~~555~~377

85,~~372~~633

Net income

125,~~655~~917

102,~~578~~088

2116,~~653~~230

138,~~353~~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

~~THE WILLIAM~~ CARTER’S, ~~COMPANY~~INC.

(AAND ~~WHOLLY-OWNED~~THE ~~SUBSIDIARY~~WILLIAM OF CARTER~~’S,~~ ~~INC.)~~COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	For the nine-month periods ended
	For the six-month periods ended
	October 4, 2003			September 28, 2002
	July 3, 2004			July 5, 2003
Cash flows from operating activities:
Net income	$	2116,~~653~~230		$	138,~~353~~998
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	1610,~~009~~947			139,~~202~~991
Amortization of debt issuance costs	~~1,264~~829			~~1,223~~815
Accretion of debt discount	9938			9866
Non-cash compensation expense	256			762
Tax benefit from exercise of stock options	832			—
Plant closure costs	115			—
Non-cash stock compensation expense	137			—
Gain on sale of property, plant, and equipment	(21129		)	(~~209~~21		)
Deferred tax provision (benefit)	1,440			(1,261		)
Deferred tax benefit	(159		)	(2,022		)
Effect of changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable	(6,664		)	(6,304		)
Accounts receivable	(17,293		)	(12,794		)
Inventories	(43,663		)	(27,210		)
Inventories	(12,380		)	(7,529		)
Prepaid expenses and other assets	3,116			(672		)
Prepaid expenses and other assets	1,515			(822		)
Accounts payable and other liabilities	13,123			(5,579		)
(Decrease) increase in liabilities:
Net cash used in operating activities	(5,363		)	(21,938		)
Accounts payable and other liabilities	(3,245		)	5,239
Net cash provided by operating activities	9,412			11,262
Cash flows from investing activities:
Capital expenditures	(910,~~367~~711		)	(86,~~989~~810		)
Proceeds from sale of property, plant, and equipment	~~275~~351			~~754~~275
Collections on loan	600			—600
Net cash used in investing activities	(89,~~492~~760		)	(85,~~235~~935		)
Cash flows from financing activities:
Payments on term loan	(6,040		)	(937		)
Payments of term loan	(7,822		)	(5,745		)
Payments on revolving loan facility	(89,700		)	—
Payments of capital lease obligations	(140		)	(129		)
Proceeds from revolving loan facility	91,600			—
Proceeds from exercise of stock options	200			—
Payment of dividend to Parent	(24,893		)	—
Proceeds from sale of common stock	—			100
Payments of debt issuance costs	(799		)	—
Other	—			3,044
Payments of capital lease obligations	(195		)	(567		)
Net cash used in financing activities	(7,762		)	(2,730		)
Proceeds from contributions from Parent	600			1,000
Net decrease in cash and cash equivalents	(22,885		)	(30,603		)
Net cash used in financing activities	(29,427		)	(504		)
Cash and cash equivalents, beginning of period	36,061			35,562
Net (decrease) increase in cash and cash equivalents	(28,507		)	2,523
Cash and cash equivalents, end of period	$	13,176		$	4,959
Cash and cash equivalents, beginning of period	35,562			24,692
Cash and cash equivalents, end of period	$	7,055		$	27,215

See accompanying notes to the unaudited condensed consolidated financial statements

~~THE WILLIAM~~ CARTER’S, ~~COMPANY~~INC.

~~(A WHOLLY-OWNED~~AND ~~SUBSIDIARY~~THE OFWILLIAM CARTER~~’S,~~ ~~INC.)~~COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 —– THE ~~BASIS OF PREPARATION~~COMPANY:

InOn ~~our~~September ~~opinion~~30, ~~the~~2003, ~~accompanying unaudited condensed~~Carter ~~consolidated~~Holdings, Inc., ~~financial~~a ~~statements~~Massachusetts ofcorporation ~~The~~re-incorporated ~~William~~in ~~Carter Company (“TWCC “)~~Delaware ~~contain~~and ~~all~~changed ~~adjustments~~its ~~necessary~~name toby ~~present~~forming ~~fairly~~and ~~our~~subsequently ~~financial~~merging ~~position~~with asand ~~of October 4,~~into ~~2003;~~its ~~the results of our operations for the three-month and~~new ~~nine~~wholly-~~month~~owned ~~periods~~Delaware ~~ended~~subsidiary. The surviving ~~October 4,~~company ~~2003~~is ~~and~~named ~~September 28~~Carter’s, ~~2002; and~~ Inc. ~~our~~In ~~cash~~connection ~~flows~~with ~~for~~ the ~~nine~~re-~~month periods ended October 4~~incorporation, ~~2003 and September 28~~Carter’s, ~~2002~~Inc. ~~Operating results~~ ~~for~~effected ~~the three~~a 4-~~month and nine~~for-~~month~~1 ~~periods~~split ~~ended October 4, 2003 are not necessarily indicative~~ of ~~the~~its ~~results~~common ~~that~~stock. As ~~may be expected for the~~a ~~fiscal~~result, ~~year ending January 3~~Carter’s, ~~2004~~Inc. ~~Our~~’s ~~accompanying~~common ~~condensed~~stock ~~consolidated~~share ~~balance~~and ~~sheet~~per asshare ~~of December 28,~~data ~~2002~~for isall ~~from our audited consolidated financial statements~~periods ~~included~~presented inhave ~~our~~been ~~most~~adjusted ~~recently~~to ~~filed~~reflect ~~annual~~this ~~report~~stock ~~on Form 10-K~~split.

~~Certain~~Carter’s, ~~information~~Inc. ~~and~~conducts its ~~footnote~~operations ~~disclosures~~and ~~normally~~derives ~~included~~all inof ~~financial~~its ~~statements~~operating ~~prepared~~income inand cash flow through its ~~accordance~~wholly-owned subsidiary, The William Carter Company (“TWCC”). Carter’s, Inc., together with ~~generally~~TWCC (collectively ~~accepted~~“Carter’s,” ~~accounting~~“we,” ~~principles~~“us,” inand “our”) design, source, manufacture, and market branded childrenswear under the ~~United~~Carter’s, ~~States~~Carter’s Classics, Child of ~~America~~Mine, ~~have~~and ~~been~~Tykes ~~condensed~~labels. Our products orare ~~omitted~~sourced ~~pursuant~~through tocontractual arrangements with numerous manufacturers throughout the ~~rules~~world and ~~regulations~~through production at company-managed ofsewing facilities in Mexico. Our sewing operations in Costa Rica were closed in the ~~Securities~~fourth ~~and~~quarter ~~Exchange~~of ~~Commission~~fiscal ~~and~~2003. (See Note 9 regarding the ~~instructions~~closure toof ~~Form~~our ~~10-Q~~Costa Rican facilities). ~~The~~Products ~~accounting~~are manufactured ~~policies~~for ~~we follow,~~wholesale ~~except~~distribution asto ~~described~~major indomestic ~~Note~~retailers, 7including the mass channel, ~~are~~and ~~set~~for ~~forth~~our in174 retail stores that market our ~~most~~brand ~~recently~~name merchandise ~~filed~~and certain products manufactured by other companies. Our retail operations represented approximately ~~annual~~38.4% ~~report~~and on40.4% ~~Form~~of ~~10-K~~our consolidated net sales in the ~~Notes~~second toquarters ~~our~~of ~~Consolidated Financial~~fiscal ~~Statements~~2004 and fiscal 2003 and 35.2% and 37.1% for the first six-month periods of fiscal ~~year~~2004 ~~ended~~and ~~December 28,~~fiscal ~~2002~~2003.

~~Our~~On ~~fiscal~~October ~~year~~29, 2003, ~~ends~~we ~~on the~~completed ~~Saturday,~~an ininitial ~~December or~~public ~~January~~offering of Carter’s, ~~nearest~~Inc.’s common stock (the ~~last~~“offering”) ~~day~~including the sale of ~~December. Consistent~~5,390,625 ~~with~~shares ~~this~~by ~~policy,~~us ~~fiscal~~and ~~2002~~1,796,875 ~~ended~~shares onby ~~December 28,~~the ~~2002~~selling stockholders, ~~and~~primarily ~~fiscal~~Berkshire ~~2003~~Partners ~~will~~LLC ~~end~~and ~~on January 3,~~its ~~2004~~affiliates. AsNet aproceeds ~~result,~~to ~~fiscal~~us ~~2003~~from ~~will~~the ~~contain~~offering 53totaled ~~weeks~~$93.9 ~~of financial results~~million. On ~~The~~November ~~additional~~28, ~~week~~2003, inwe ~~fiscal~~used ~~2003~~approximately ~~was~~$68.7 ~~included~~million inof the ~~first~~proceeds ~~nine months~~to ofredeem ~~2003~~approximately $61. ~~Therefore,~~3 ~~the~~million ~~accompanying condensed~~in ~~consolidated~~outstanding ~~financial~~senior ~~statements~~subordinated ~~for~~notes ~~the~~and pay ~~first~~a ~~nine~~redemption ~~months~~premium of ~~2003 reflect~~approximately ~~our~~$6.7 ~~financial~~million ~~position~~and asrelated accrued interest charges of ~~October 4,~~$0.7 ~~2003~~million. We used ~~and~~approximately ~~for~~$2.6 ~~the~~million ~~40-week period~~of ~~then~~the ~~ended. The~~net ~~first~~proceeds ~~nine months~~to ofterminate ~~2002~~the ~~ended~~Berkshire Partners onLLC ~~September 28,~~management ~~2002~~agreement and ~~included~~used 39approximately ~~weeks~~$11.3 ofmillion to ~~financial~~prepay ~~results. The~~amounts ~~accompanying condensed~~outstanding ~~consolidated~~under ~~financial~~our ~~statements~~term ~~for~~loan, ~~the~~as ~~three-month~~required ~~periods~~by ~~ended~~our senior ~~October 4,~~credit ~~2003~~facility. The ~~and~~remaining ~~September 28,~~proceeds were ~~2002~~utilized ~~each~~for ~~contain~~working 13capital ~~weeks~~and ~~of financial~~other ~~results~~general corporate purposes.

~~Certain~~NOTE ~~amounts~~2 ~~from~~– ~~prior~~BASIS ~~periods~~OF ~~have been reclassified to conform to the current period’s presentation. These reclassifications have no effect on net income as previously reported.~~PREPARATION:

~~STOCK~~The ~~BASED~~accompanying ~~COMPENSATION~~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.

WeIn ~~account for~~our ~~stock-based~~opinion, ~~compensation~~the onaccompanying ~~stock~~unaudited ~~options~~condensed ~~under~~consolidated ~~the~~financial ~~intrinsic value method~~statements ~~consistent~~of ~~with~~Carter’s, ~~Accounting~~Inc. ~~Principles~~and ~~Board~~TWCC ~~Opinion~~contain ~~No.~~all 25adjustments ~~(“APB~~necessary ~~25”). Under~~to ~~this~~present ~~method,~~fairly our wefinancial ~~record~~position ~~compensation expense~~as ~~equal~~of toJuly ~~the~~3, ~~difference~~2004, ~~between~~ the ~~exercise~~results ~~price~~ of ~~the~~our ~~stock~~operations ~~option~~for ~~and~~ the ~~fair~~three ~~market~~and ~~value~~six-month ofperiods ~~the~~ended ~~underlying~~July ~~stock~~3, as2004 ofand ~~the~~July ~~date~~5, of2003, ~~the~~and ~~option~~cash ~~grant. For~~flows ~~disclosure~~for ~~purposes~~the ~~only,~~six-month ~~we also~~periods ~~estimate~~ended ~~the~~July ~~impact~~3, on2004 ~~our~~and ~~net~~July ~~income~~5, of2003. Operating ~~applying~~results for the ~~fair~~six-month ~~value~~period ended ~~method~~July ~~of measuring~~3, ~~compensation~~2004 ~~cost~~are onnot ~~stock~~necessarily ~~options~~indicative ~~with~~of the ~~fair~~results ~~value~~that ~~determined~~may be ~~under~~expected for the ~~minimum~~fiscal ~~value~~year ~~method~~ending asJanuary ~~provided~~1, by2005. Our ~~Statement~~accompanying ofcondensed ~~Financial Accounting~~consolidated ~~Standards~~balance ~~(“SFAS”)~~sheet ~~No.~~as ~~123~~of January 3, ~~“Accounting~~2004 ~~for~~is ~~Stock-Based~~from ~~Compensation”~~our ~~(“SFAS 123”)~~audited asconsolidated ~~amended~~financial statements byincluded ~~SFAS~~in ~~No.~~our ~~148,~~most ~~“Accounting~~recently ~~for~~filed ~~Stock-Based Compensation-Transition~~annual ~~and~~report ~~Disclosure”~~on ~~(“SFAS~~Form ~~148”)~~10-K.

6Certain 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.

The following table illustrates 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 ($000):6

	For the three-month periods ended						For the nine-month periods ended
	October 4, 2003			September 28, 2002			October 4, 2003			September 28, 2002
Net income, as reported	$	12,655		$	10,578		$	21,653		$	13,353
Add:
Stock-based employee compensation (under APB 25) included in reported net income, net of related tax effects	35			4			43			6
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	(168		)	(130		)	(435		)	(375		)
Pro forma net income	$	12,522		$	10,452		$	21,261		$	12,984

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 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 accompanying consolidated financial statements for the second quarter periods ended July 3, 2004 and July 5, 2003 each contain 13 weeks of financial results.

~~For~~During ~~basic~~the first ~~options~~half of fiscal 2004, ~~using~~we contracted with a ~~minimum~~third-party ~~value~~service ~~method,~~to ~~the~~provide us with the fair value of ~~each~~co-op ~~option~~advertising asarrangements ofentered ~~the~~into ~~date~~with certain of ~~grant~~our ~~has~~major ~~been~~wholesale ~~estimated~~and tomass ~~range from~~channel $3customers.08 Such tofair ~~$9.76~~value ~~per~~is ~~share~~determined ~~for~~based ~~options~~upon, among ~~granted~~other infactors, ~~2003~~comparable ~~and~~market ~~$2.44~~analysis tofor ~~$3.95~~similar ~~per~~advertisements. In ~~share~~accordance ~~for~~with Emerging ~~options~~Issues ~~granted~~Task inForce ~~2002~~Issue No. 01-09, “Accounting for Consideration Given ~~For~~by ~~basic~~a ~~options,~~Vendor ~~using~~to a ~~fair~~Customer/Reseller” ~~value~~(“EITF ~~method~~01-09”), we have included the fair value of ~~each option~~these atarrangements ~~the~~of ~~date~~approximately of$1,221,000 in the ~~grant~~second ~~has~~quarter of ~~been~~fiscal ~~estimated~~2004 toand ~~range~~$1,652,000 ~~from~~in ~~$6.40~~the ~~to $13.55~~first ~~per~~half ~~share~~of ~~for~~fiscal ~~options~~2004 ~~granted~~as ina ~~2003~~component of selling, general, and ~~$6.31~~administrative ~~per~~expenses ~~share~~on ~~for~~the ~~options~~accompanying unaudited ~~granted~~condensed ~~from~~consolidated ~~August 23,~~statements ~~2002~~of tooperations ~~December 28,~~rather ~~2002~~than as a reduction of revenue. ~~These~~Co-op ~~per~~advertising ~~share~~arrangements in ~~option~~fiscal ~~values~~2003 were ~~calculated at~~treated anas ~~assumed~~a ~~risk~~reduction ~~free~~of ~~interest~~revenue ~~rate~~in ~~from~~accordance ~~3.8%~~with toEITF 01-09 ~~4.2%~~as ~~for~~we ~~2003~~had ~~and~~determined ~~3.0%~~that ~~to 4.4%~~it ~~for~~was ~~2002,~~impracticable ~~with~~to anobtain ~~expected~~the ~~life~~fair value of 10those ~~years~~arrangements. ~~No dividends were assumed.~~

~~For~~NOTE ~~performance options, using a minimum value method, the fair value of each option as of the date of grant has been estimated to range from $~~3~~.08~~ ~~to $9.76 per share for options granted in 2003 and $2.44 to~~– ~~$3.95~~STOCK-BASED per share for options granted in 2002. For performance options, using a fair value method, the fair value of each option at the date of grant has been estimated to range from $6.40 to $13.55 per share for options granted in 2003 and $6.31 per share for options granted from August 23, 2002 to December 28, 2002. These per share option values were calculated at the same assumed risk free interest rates shown above with an expected life of 10 years. No dividends were assumed.COMPENSATION:

We ~~have~~account ~~determined~~for stock-based ~~that~~compensation ~~the~~on ~~effect~~stock onoptions ~~pro~~under ~~forma~~the ~~net~~intrinsic value method ~~income~~consistent ~~would~~with beAccounting ~~immaterial~~Principles ~~had~~Board ~~compensation~~Opinion No. 25. Under this method, we record compensation expense ~~for~~equal ~~our~~to the difference between the exercise price of the stock option and ~~grants~~the ~~been~~fair market value of the underlying stock as of the date of the option ~~determined~~grant. For ~~based~~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 ~~the~~Financial ~~grant~~Accounting ~~date~~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.

~~NOTE 2 — THE COMPANY:~~7

~~TWCC~~The isfollowing table aillustrates, ~~wholly-owned subsidiary~~for ofdisclosure ~~Carter’s~~purposes only, ~~Inc.~~the ~~(“Carter’s”).~~ effect on net income if ~~Carter’s~~compensation ~~has~~expense nofor ~~significant~~our ~~assets~~option orgrants ~~investments~~had ~~other~~been ~~than~~determined ~~the~~based ~~shares~~on the fair value as of ~~TWCC’s~~the ~~common~~grant ~~stock.~~dates consistent with the methodology of SFAS 123 and SFAS 148 (dollars in thousands, except per share data):

We design, source, manufacture, and market branded childrenswear under the Carter’s, Carter’s Classics, Child of Mine, and Tykes brand names. Our products are sourced through production at

	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

Add:
Stock-based employee compensation (under APB 25) included in reported net income, net of related tax effects	40			4			81			8
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	(304		)	(135		)	(523		)	(267		)

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 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% 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.

~~company-managed sewing~~For ~~facilities~~performance ~~located~~options, inusing ~~Costa~~a ~~Rica~~minimum ~~and~~value ~~Mexico~~method, ~~and~~the ~~through~~fair ~~contractual arrangements~~value ~~with~~of ~~third-party~~each option ~~manufacturers~~as ~~throughout~~of the ~~world~~date ~~(see~~of ~~Note~~grant ~~9 regarding~~was ~~the~~estimated ~~closure~~to ofrange ~~our~~from ~~Costa~~$3.08 ~~Rican~~to ~~sewing facilities)~~$9. ~~Products~~76 ~~are~~per share ~~manufactured~~ for ~~wholesale~~options ~~distribution to~~granted ~~major~~in ~~domestic~~fiscal ~~retailers~~2003. For ~~and~~performance ~~for~~options, ~~our~~using ~~164~~a ~~retail~~fair ~~stores~~value ~~that~~method, ~~market~~the ~~our~~fair ~~brand~~value of ~~name~~each ~~merchandise~~option ~~and~~at ~~certain~~the ~~products~~date ~~manufactured~~of bygrant ~~other~~was ~~companies. Our~~estimated ~~retail~~to ~~operations~~range ~~represented approximately~~from ~~37%~~$6.40 ofto ~~our~~$13.55 per ~~consolidated~~share ~~net~~for ~~sales~~options granted in ~~the~~fiscal ~~third~~2003. These ~~quarter~~per ~~and~~share ~~first~~option values were calculated at the same assumed ~~nine~~risk-free ~~months~~interest ofrates ~~2003~~shown ~~and~~above ~~approximately~~with ~~44%~~an inexpected ~~the~~life ~~third~~of ~~quarter~~10 years and expected ~~first~~volatility ~~nine~~of 50.0%. No ~~months~~dividends ofwere ~~2002~~assumed.

~~NOTE 3 — INVENTORIES:~~8

~~Inventories~~NOTE ~~consisted~~4 of– ~~the following ($000)~~INVENTORIES:

	October 4, 2003		December 28, 2002
Finished goods	$	114,904	$	99,609
Work in process	3,039		3,509
Raw materials and supplies	137		2,582
Total	$	118,080	$	105,700

Inventories consisted of the following ($000):

NOTE 4 — PARENT COMPANY TRANSACTIONS:

	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

OnResults ~~July 31,~~for the ~~2003,~~second ~~we paid~~quarter of fiscal 2004 include a ~~dividend~~favorable adjustment to pre-tax income of approximately $241.95 million, toor ~~Carter’s. Carter’s~~$933,000, ~~utilized~~net ~~the~~of ~~proceeds~~tax, to ~~pay a~~correct ~~dividend~~adjustments made to inventory and cost of ~~$24.9~~goods ~~million~~sold onduring ~~outstanding~~fiscal ~~shares~~2003 and the first quarter of ~~its~~fiscal ~~common~~2004. We determined ~~stock~~such adjustments to ~~the~~be immaterial to prior periods affected; accordingly, ~~stockholders~~they ofwere ~~record~~corrected asin the second quarter of ~~July 30,~~fiscal ~~2003~~2004. AtHad such adjustments been corrected in the periods ~~same~~they ~~time~~were initially recorded, wenet ~~paid~~income afor ~~special~~fiscal ~~bonus~~2003 ofwould ~~approximately~~have been $224.5 3 million, toor ~~Carter’s~~4.4% ~~vested~~higher ~~option~~than ~~holders~~reported. First quarter fiscal 2004 net income would ~~This~~have ~~special~~been ~~bonus~~$10.1 ~~was~~million, ~~recorded~~or as2.4% ~~compensation~~lower ~~expense~~than ~~during~~reported and there would have been no material impact to the ~~third~~consolidated balance sheets or consolidated ~~quarter~~statements of ~~2003~~cash flows.

~~During~~NOTE ~~the~~5 ~~nine-month~~– ~~period~~STOCK ~~ended~~TRANSACTIONS ~~October 4,~~OF ~~2003, Carter~~CARTER’~~s issued options to purchase its common stock to two directors and certain employees. Additionally~~S, during the first nine months of 2003, Carter’s sold shares of its common stock to two of our directors for cash proceeds of $600,000 (one during the second quarter and one during the third quarter). In connection with these transactions, we recorded contributions from Carter’s to our additional paid-in capital in the amount of $600,000. Additionally, we recorded approximately $256,000 in compensation expense during the third quarter related to certain of these stock sales and option grants.INC:

During the ~~nine-month period ended September 28,~~ ~~2002,~~first ~~Carter’s~~quarter ~~sold shares~~ of ~~its~~fiscal ~~common~~2004, ~~stock~~we toissued ~~two~~220,000 ofoptions, ~~our~~and ~~directors (one~~ during the second quarter ~~and~~of ~~one~~fiscal ~~during~~2004, ~~the~~we ~~third~~issued ~~quarter)~~71,200 ~~and~~options ~~issued~~to ~~shares of~~purchase ~~its~~Carter’s, Inc.’s common stock to acertain ~~consultant~~employees. In ~~connection~~During ~~with~~the ~~these~~first ~~transactions~~quarter of fiscal 2003, aswe ~~well~~issued as76,800 options to purchase Carter’s, ~~stock~~Inc.’s ~~option~~common ~~grants~~stock to ~~certain~~ ~~employees,~~one weof ~~recorded~~our ~~compensation~~directors ~~expense~~and ~~during~~to ~~the~~certain employees. Additionally, ~~three~~during ~~and~~the ~~nine-month~~second ~~periods~~quarter ~~ended~~of ~~September 28~~fiscal 2003, ~~2002~~we insold ~~the~~shares ~~amounts~~ of ~~approximately~~ ~~$121,000~~our ~~and~~common ~~$762,000. Additionally,~~stock weto ~~received~~one of our directors for cash proceeds of $1100,000.~~0 million during the~~ ~~nine-month~~In ~~period~~connection ~~ended~~with ~~September 28~~this transaction, ~~2002~~we ~~and~~ recorded contributions ~~from Carter’s~~ to our additional paid-in capital in the amount of ~~approximately~~ $1100,000.~~8 million.~~

~~NOTE~~No compensation 5expense —was ~~GOODWILL~~recorded ~~AND~~during ~~OTHER~~the ~~INTANGIBILE~~first ~~ASSETS:~~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.

OnDuring ~~August 15, 2001, we adopted~~ the ~~provisions~~second ~~of SFAS~~quarter ~~No. 141, “Business Combinations” (“SFAS 141”) and applied the required provisions~~ of ~~SFAS~~fiscal ~~No. 142~~2004, ~~“Goodwill~~certain ~~and~~employees ~~Other Intangible Assets” (“SFAS~~exercised ~~142”). Accordingly~~87,743 ~~our~~options 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~~cash ~~third~~proceeds ~~quarter and first nine months~~ of ~~2003 and 2002 was~~ $~~1.3 million and $3.8 million~~200, ~~respectively, and is expected to be a total of $5~~000.~~0 million for fiscal 2003 and $3.1 million for 2004.~~

8NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS:

~~NOTE~~In 6connection with —our ~~SEGMENT~~2001 ~~INFORMATION:~~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.

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 new Child of Mine brand with Wal-Mart, we have expanded our presence in the mass merchant channel that has resulted in the establishment of a new segment of our business.9

~~Under~~NOTE ~~our~~7 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, including incentive compensation for certain employees, the Berkshire Partners LLC management fee (see Note 10), and various other general corporate costs that are not specifically allocable to our segments, are included in other reconciling items below. Intersegment sales and transfers continue to be recorded at cost and treated as a transfer of inventory. Prior period segment information has been reclassified to conform with the current presentation. The accounting policies of the segments are the same as those described in Note 2 – ~~“Nature of Business~~ ~~and~~EMPLOYEE ~~Summary~~BENEFIT ~~of Significant Accounting Policies” in our final Prospectus dated October 23, 2003 in the Notes to the Consolidated Financial Statements for the fiscal year ended December 28, 2002.~~PLANS:

~~The table~~We ~~below~~offer ~~presents~~a comprehensive post-retirement medical plan to current and certain ~~segment~~future ~~information~~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 ~~periods~~financial ~~indicated~~statements in our most recently filed annual report on ~~($000):~~Form 10-K for further information.

	For the three-month periods ended								For the nine-month periods ended
	October 4, 2003			% of Total	September 28, 2002			% of Total	October 4, 2003			% of Total	September 28, 2002			% of Total
Net sales:
Wholesale	$	103,341		49%	$	86,580		52%	$	265,573		51%	$	211,866		52%
Retail	77,471			37%	72,175			44%	190,992			37%	180,636			44%
Mass Merchant	31,323			15%	7,024			4%	61,571			12%	16,967			4%
Total net sales	$	212,135			$	165,779			$	518,136			$	409,469
EBITDA:
Wholesale	$	16,891		50%	$	15,109		52%	$	42,716		60%	$	37,477		67%
Retail	19,690			59%	19,611			67%	42,115			59%	40,275			71%
Mass Merchant	4,898			15%	1,101			4%	6,602			9%	1,099			2%
Other reconciling items	(8,096		)	(24%)	(6,704		)	(23%)	(19,907		)	(28%)	(22,686		)	(40%)
Total EBITDA	$	33,383			$	29,117			$	71,526			$	56,165

The components of pension benefit expense charged to operations are as follows ($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

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

~~EBITDA~~The ~~shown~~components 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~~post-retirement inlife our industry. EBITDA is also a measure used as a basis for calculating our financial covenants under our senior credit facility. Additionally, we believe EBITDA is an accepted indicator of our ability to incur and ~~service~~medical ~~debt~~benefit ~~obligations and~~expense ~~make~~charged capital expenditures. 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~~operations ~~flow~~are ~~from operating activities,~~ as afollows measure of liquidity, an alternative to net income, or any other measures of performance derived in accordance with generally accepted accounting principles. Our definition and calculation of EBITDA may not be comparable to similarly titled measures used by other companies.($000):

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

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

	For the three-month periods ended						For the nine-month periods ended
	October 4, 2003			September 28, 2002			October 4, 2003			September 28, 2002
EBITDA	$	33,383		$	29,117		$	71,526		$	56,165
Depreciation and amortization expense	(6,018		)	(4,637		)	(16,009		)	(13,202		)
Interest expense, net	(6,788		)	(7,268		)	(20,309		)	(21,238		)
Provision for income taxes	(7,922		)	(6,634		)	(13,555		)	(8,372		)
Net income	$	12,655		$	10,578		$	21,653		$	13,353

NOTE 8 – SEGMENT INFORMATION:

~~NOTE~~We 7report —segment information ~~RECENT~~in ~~ACCOUNTING~~accordance ~~PRONOUNCEMENTS:~~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.

InUnder ~~August 2001, the Financial Accounting~~our ~~Standards~~previous ~~Board~~method ~~(“FASB”)~~of ~~issued~~evaluating ~~SFAS~~and ~~No.~~reporting ~~143,~~the ~~“Accounting~~profitability ~~for~~of ~~Asset~~our ~~Retirement~~segments, ~~Obligations”~~each ~~(“SFAS~~segment’s ~~143”). SFAS~~results ~~143 requires~~included ~~recording~~costs ~~the~~directly ~~fair~~related ~~market~~to ~~value~~the ~~of an asset retirement obligation as a~~segment’s ~~liability~~revenue, inand ~~the~~all ~~period~~other incosts ~~which~~were aallocated ~~legal~~based ~~obligation~~on ~~associated~~the ~~with~~relationship ~~the~~to ~~retirement~~consolidated ofnet ~~tangible~~sales ~~long-lived~~or ~~assets~~units isproduced ~~incurred~~to ~~(including~~support ~~certain~~each ~~lease obligations)~~segment’s revenue. ~~SFAS~~Intersegment ~~143~~sales ~~also~~and ~~requires~~transfers were ~~recording~~recorded anat ~~asset~~cost ~~offsetting~~and ~~the~~treated ~~initial obligation~~ as ana ~~increase~~transfer toof ~~the carrying~~inventory. Under ~~amount~~our ofnew ~~the~~methodology, ~~related~~segment ~~long-lived~~results include ~~asset~~the ~~and~~direct ~~depreciation~~costs of ~~that~~each ~~cost over~~segment (on the ~~life~~same ofbasis as the ~~asset. We adopted~~previous ~~the~~methodology), ~~provisions~~and ofall ~~SFAS~~other ~~143~~costs inare ~~the~~allocated ~~first~~based ~~quarter~~upon ofdetailed ~~2003,~~ estimates and ~~the~~analysis ~~impact~~ of ~~such adoption~~actual ~~was~~time ~~not~~and ~~material~~expenses incurred to ~~our~~support ~~financial~~the ~~position~~operations ~~or results~~ of ~~operations~~ ~~for~~each ~~the~~segment ~~third quarter~~ or ~~first~~units ~~nine~~produced ~~months~~or ofsourced ~~2003.~~to support

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds FASB Statement No. 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in Accounting Principles Board Opinion 30 will now be used to classify those gains and losses. The provisions of SFAS 145, as related to the rescission of FASB Statement No. 4, are effective for fiscal 2003. In the first quarter of 2003, we adopted the provisions of SFAS 145 and the extraordinary item, of $7.6 million, recorded in our statement of operations for the predecessor period from December 31, 2000 through August 14, 2001 will be reclassified in our Annual Report on Form 10~~-K as a component of income before income taxes of $12.5 million (pre-tax) with the tax benefit of $4.9 million reclassified as a component of income taxes for the year ended January 3, 2004.~~

Ineach ~~July 2002~~segment’s revenue. Certain costs, ~~the~~ ~~FASB~~including ~~issued~~incentive compensation ~~SFAS~~for ~~No.~~certain ~~146~~employees, ~~“Accounting~~the ~~for~~Berkshire ~~Costs~~Partners ~~Associated~~LLC ~~with~~management ~~Exit or~~fee ~~Disposal~~(terminated ~~Activities”~~in ~~(“SFAS~~connection ~~146”). SFAS 146~~with ~~sets~~our ~~forth~~initial ~~various~~public ~~modifications~~offering, tosee ~~existing~~Note ~~accounting~~1 ~~guidance,~~to ~~which~~the ~~prescribes~~unaudited ~~the~~condensed ~~conditions~~consolidated ~~that~~financial ~~must~~statements), beand ~~met~~various inother general ~~order~~corporate ~~for~~ costs ~~associated~~that ~~with contract~~are ~~terminations,~~not ~~facility~~specifically ~~consolidations~~allocable to our segments, are ~~and~~included ~~employee~~in ~~relocations~~other ~~and terminations~~reconciling toitems bebelow. Intersegment ~~accrued~~sales and ~~recorded~~transfers ascontinue ~~liabilities~~to inbe ~~financial statements. Accordingly,~~recorded ~~SFAS~~at ~~146~~cost ~~may~~and ~~affect~~treated ~~the~~as ~~timing~~a transfer of ~~recognizing~~inventory. Prior ~~any~~period ofsegment ~~our~~information ~~future~~has ~~restructuring~~been ~~costs~~reclassified asto ~~well as~~conform with the ~~amount~~current ~~recognized~~presentation. ~~SFAS~~The ~~146 also~~accounting ~~establishes~~policies ~~that~~of the ~~liability~~segments ~~should~~are ~~initially~~the besame ~~measured~~as ~~and~~those ~~recorded~~described ~~at fair~~in ~~value. The~~Note ~~provisions~~2 “Summary of Significant ~~SFAS~~Accounting ~~146~~Policies” to the consolidated financial statements in ~~are~~our ~~required~~most torecently befiled ~~applied~~annual report on Form 10-K.

10The table below presents certain segment information for the periods indicated ($000):

prospectively to exit or disposal activities initiated by us after December 31, 2002. See Note 9 to the unaudited condensed consolidated financial statements regarding our decision to close two of our production facilities.

	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	%

InEBITDA ~~November 2002,~~shown ~~the~~above ~~FASB~~represents ~~issued~~earnings ~~FASB~~before ~~Interpretation~~interest, ~~No.~~income 45tax expense, ~~“Guarantor’s~~depreciation, and ~~Accounting~~amortization. EBITDA ~~and~~is presented ~~Disclosure~~because ~~Requirements~~it ~~for~~is ~~Guarantees,~~one ~~Including~~measurement ~~Indirect~~used ~~Guarantees~~by ofmanagement in assessing financial ~~Indebtedness~~performance, ofand ~~Others”~~we ~~(“FIN~~believe ~~45”). FIN 45~~it ~~requires~~is ~~that~~helpful ato ~~liability~~investors, besecurities ~~recorded~~analysts, and inother ~~the~~interested ~~guarantor’s~~parties ~~balance~~in ~~sheet~~evaluating ~~upon issuance~~performance of acompanies ~~guarantee~~in our industry. InEBITDA ~~addition,~~is also a measure used ~~FIN~~as 45a ~~requires~~basis ~~disclosures~~for ~~about~~calculating ~~the~~our ~~guarantees,~~financial ~~including~~covenants ~~indemnifications, that~~under anour ~~entity~~senior ~~has~~credit facility. EBITDA ~~issued~~is ~~and~~not a ~~rollforward~~measurement of financial ~~the~~performance ~~entity’s~~under ~~product~~generally ~~warranty liabilities. The~~accepted ~~disclosure~~accounting ~~provisions~~principles in the ofUnited ~~FIN~~States 45of ~~were~~America. It ~~effective~~should ~~for~~not be ~~financial~~considered ~~statements~~as ofan ~~interim~~alternative ~~periods~~to orcash ~~annual periods~~flow ~~ending~~from ~~after~~operating ~~December 15~~activities, ~~2002.~~ as a Inmeasure ~~addition~~of liquidity, wean ~~adopted~~alternative ~~the~~to ~~recognition~~net ~~provisions~~income, ofor ~~FIN~~any 45other ~~effective~~measures of ~~January 1,~~performance ~~2003~~derived ~~for~~in ~~guarantees~~accordance ~~issued~~with orgenerally ~~modified~~accepted ~~after~~accounting ~~December 31,~~principles ~~2002. The~~in ~~adoption~~the ofUnited ~~FIN~~States 45of ~~did not~~America. Our ~~have~~definition aand ~~material~~calculation ~~impact~~of onEBITDA ~~our~~may ~~financial~~not ~~position,~~be ~~results~~comparable ofto ~~operations,~~similarly ortitled ~~cash~~measures ~~flows~~used by other companies.

InA ~~December 2002,~~reconciliation ~~the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS 148 provides alternate methods~~ of ~~transition~~ ~~for~~EBITDA ~~a voluntary change~~ to ~~the~~net ~~fair~~income ~~value~~is ~~based~~presented ~~method~~below of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect of using the fair value method of accounting for stock-based employee compensation in interim financial statements. The transition and annual disclosure requirements were effective for us as of December 28, 2002. The interim disclosure requirements were effective for the first quarter of fiscal 2003 and have been reflected in Note 1 to the unaudited condensed consolidated financial statements.($000):

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 is not expected to have a material effect on our financial position, results of operations, or cash flows.

	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

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to our existing financial instruments effective July 6, 2003, the beginning of the first fiscal period after June 15, 2003. The FASB recently decided to defer the provisions of paragraphs 9 and 10 of this statement as they apply to mandatorily redeemable noncontrolling interests. We adopted SFAS 150 on June 1, 2003. The adoption of this statement did not have an effect on our financial position, results of operations, or cash flows.11

11NOTE 9 – CLOSURE COSTS:

~~NOTE~~On July 83, —2004, ~~LONG~~we ~~TERM~~closed ~~DEBT:~~our ~~(See~~distribution ~~Notes~~facility 4located in Leola, Pennsylvania in order to consolidate its shipping operations with our remaining three distribution facilities in Georgia. This closure was announced to affected employees on June 1, 2004. Total employees terminated as of July 3, 2004 were 33. As a result of this closure, we recorded approximately $95,000 in severance costs during the second quarter and first ~~10)~~half of fiscal 2004. During the third and fourth quarters of fiscal 2004, we expect to incur approximately $200,000 in additional severance and other exit costs.

~~Effective~~In July ~~29,~~ 2003, ~~our~~we ~~senior~~decided ~~credit facility was amended~~ to, ~~among~~exit ~~other things, increase the amount of the commitments under the revolving portion of~~ our ~~senior credit~~sewing ~~facility~~facilities ~~from~~located ~~$60.0 million to $75.0 million and allow for a maximum amount of commitments of up to $80.0 million (which has subsequently been committed to), provide for a 75 basis point reduction~~ in ~~the~~Costa ~~applicable~~Rica ~~interest~~given ~~margin by prepaying~~ our ~~existing~~ability ~~Tranche~~to Bobtain ~~term~~lower ~~loan~~costs ~~and replacing it with a new Tranche C term loan, reduce the amount of our mandatory loan prepayment requirement following the consummation of an initial public offering by us~~ from a ~~prepayment~~third-party ~~of 50% or 75% of excess cash flow to 25% or 50% of excess cash flow, depending on the applicable leverage ratio, and permit an aggregate dividend not to exceed $27~~suppliers.~~5 million to our equity holders and vested option holders.~~ ~~Additionally,~~Such ~~our~~closures ~~senior~~were ~~credit~~announced ~~facility~~on ~~was~~September ~~amended to provide that~~16, ~~upon the consummation of an initial public offering by us~~2003, ~~we are permitted to repurchase up to $61.3 million of our senior subordinated notes (in addition to redemption premiums) with proceeds from an equity offering~~ and ~~terminate our obligations of up to $3.6 million under~~ the ~~management~~facilities ~~agreement~~were ~~with~~held ~~Berkshire~~and ~~Partners~~used ~~LLC. These payments may be made from the proceeds~~for ofproduction anthrough ~~equity offering prior to being required to use 50% of any of~~ the ~~net proceeds~~end of ~~such~~November ~~an equity offering to prepay borrowings under our senior credit facility~~2003. ~~Following the consummation~~ ofTotal anemployees ~~initial~~terminated ~~public~~as ~~offering~~of byJuly us3, we2004 ~~will~~were ~~also~~approximately ~~be permitted to repurchase up to $15~~1,492.~~0 million of additional senior subordinated notes.~~

~~NOTE~~As 9a —result ~~PLANT~~of ~~CLOSINGS:~~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).

InActivity ~~July of~~associated ~~2003,~~with wethe ~~decided~~closure tocost ~~exit~~reserves for our ~~sewing~~Costa ~~facilities~~Rican ~~located~~sewing ~~in Costa~~facility ~~Rica~~and ~~given~~ our ~~ability~~distribution tofacility ~~obtain~~in ~~lower costs from third-party suppliers. Such closures were announced on September 16~~Leola, ~~2003~~Pennsylvania ~~and~~for the ~~facilities~~three ~~are being held~~ and ~~used for~~ ~~production~~six-month ~~through~~periods ~~the~~ended ~~end~~July ~~of November 2003. For the majority of the affected employees~~3, ~~severance~~2004 ~~benefits~~is ~~were~~as communicated at the end of October 2003. Total employees to be terminated will be approximately 1,474. As a result of these closures, we have recorded approximately $900,000 of accelerated depreciation (included in cost of goods sold), $65,000 of asset impairment charges, and $50,000 of severance during the third quarter of 2003.follows:

During the fourth quarter of 2003, we expect to incur additional accelerated depreciation and impairment charges of approximately $600,000. It is estimated that other closure costs of approximately $3.1 million will be incurred relating primarily to severance, lease termination costs, and income taxes of which approximately $1.9 million will be incurred in the fourth quarter of 2003.

	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 — SUBSEQUENT EVENTS:~~12

OnNOTE ~~October 29,~~10 ~~2003,~~– ~~Carter’s~~EARNINGS ~~completed~~PER an initial public offering of its common stock including the sale of 5,390,625 shares by us and 1,796,875 shares by the selling stockholders. Net proceeds to us from the offering totaled $93.2 million and were contributed by Carter’s to TWCC. On November 28, 2003, we will use approximately $68.0 million of the proceeds to redeem approximately $61.3 million in outstanding senior subordinated notes (and will pay a redemption premium of approximately $6.7 million). We have used approximately $2.6 million of the net proceeds to terminate the Berkshire Partners LLC management agreement. We have also used approximately 50% of the remaining proceeds of approximately $22.6 million to prepay $11.3 million of amounts outstanding under the term loan. The remaining proceeds of approximately $11.3 million will be utilized for working capital and other general corporate purposes.SHARE:

12In 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.

~~ITEM~~The 2.following ~~MANAGEMENT’S~~is ~~DISCUSSION~~a ~~AND~~reconciliation ~~ANALYSIS~~of OFbasic ~~FINANCIAL~~number ~~CONDITION~~of ~~AND~~common ~~RESULTS~~shares outstanding OFto ~~OPERATIONS~~diluted number of common and common equivalent shares outstanding:

The following is a discussion of our results of operations and our 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. Our discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services, and our future results. We base these statements on assumptions that we consider reasonable. Among the factors that could cause actual results differ to materially 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, in the event of default, to dedicate all or a 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. For further information about risks and exposures relating to our business and our company, you should read Item 3 of this quarterly report entitled “Quantitative and Qualitative Disclosures about Market Risks” and the section entitled “Risks Relating To Our Business” in our latest annual report on Form 10-K. Actual results may differ materially from those suggested by our forward-looking statements for various reasons including those discussed in Item 3. 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.

	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

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 such period:13

	As a Percentage of Net Sales
	For the three-month periods ended				For the nine-month periods ended
	October 4, 2003		September 28, 2002		October 4, 2003		September 28, 2002
Wholesale sales	48.7	%	52.2	%	51.2	%	51.7	%
Retail sales	36.5		43.5		36.9		44.1
Mass merchant sales	14.8		4.3		11.9		4.2
Net sales	100.0		100.0		100.0		100.0
Cost of goods sold	64.3		60.7		64.1		61.2
Gross profit	35.7		39.3		35.9		38.8
Selling, general, and administrative expenses	24.5		26.0		26.8		29.8
Royalty income	(1.7	)	(1.5	)	(1.6	)	(1.5	)
Operating income	12.9		14.8		10.7		10.5
Interest expense, net	3.2		4.4		3.9		5.2
Income before income taxes and extraordinary item	9.7		10.4		6.8		5.3
Provision for income taxes	3.7		4.0		2.6		2.0
Net income	6.0	%	6.4	%	4.2	%	3.3	%
Number of retail stores at end of period	164		156		164		156

ITEM 2.

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

13The 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.

~~Three~~Our ~~and~~fiscal ~~nine-month~~year ~~periods~~ends on the Saturday in December or January nearest to the last day of December. Consistent with this policy, fiscal 2003 ended ~~October 4~~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 ~~compared~~weeks toof ~~three~~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 ~~nine~~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 ~~September 28~~July 3, ~~2002~~2004 and July 5, 2003 each contained 13 weeks of financial results.

~~NET SALES. The three-month~~RESULTS ~~periods ended October 4, 2003 and September 28, 2002 each~~OF contained 13 weeks of financial results. The nine-month period ended October 4, 2003 contained 40 weeks as compared to the nine-month period ended September 28, 2002, which contained 39 weeks. In the third quarter of fiscal 2003, consolidated net sales increased $46.4 million, or 28.0%, to $212.1 million from $165.8 million in the third quarter of fiscal 2002. In the first nine months of 2003, consolidated net sales were $518.1 million, an increase of $108.7 million, or 26.5%, as compared to $409.5 million for the first nine months of 2002. This revenue growth has been driven by strong product performance resulting from our focus on improving the value of our core products through our global sourcing network, effective merchandising and pricing strategies, revenue recognized during the second and third quarters of 2003 from our new Child of Mine brand that is being sold in substantially all Wal-Mart stores in the United States, and the additional week of selling in the first nine months of 2003.OPERATIONS

~~Total~~The ~~wholesale sales~~following ~~increased~~table ~~$16.8~~sets ~~million~~forth, orfor ~~19.4%, to $103.3 million in~~ the ~~third~~periods ~~quarter of 2003 from $86.6 million in the third quarter of 2002. In the first nine months of 2003~~indicated, ~~wholesale~~(i) ~~sales~~selected ~~increased~~statement ~~$53.7 million, or 25.3%, to $265.6 million from $211.9 million in the first nine months~~ of ~~2002. Wholesale sales,~~ ~~excluding~~operations ~~off-price~~data ~~sales,~~expressed ~~increased~~as ~~$13.5~~a ~~million,~~percentage ~~or 16.2%, in the third quarter~~ of ~~2003~~net ~~to $96.4 million from $82.9 million in the third quarter of 2002. In the first nine months of 2003, wholesale~~ sales, ~~excluding~~and ~~off-price~~(ii) ~~sales, increased $47.8 million, or 23.9%, to $248.3 million from $200.5 million in~~ the ~~first~~number ~~nine months~~ of ~~2002. These increases were driven primarily by~~ ~~growth~~retail instores ~~our~~open ~~baby and playclothes product lines, and to a lesser extent, our sleepwear product line. This growth has occurred~~ at the ~~majority~~end of ~~our~~each ~~key wholesale accounts as a result of our focus on improving the value of our core products.~~period:

Our retail store sales were $77.5 million for the third quarter of 2003, an increase of $5.3 million, or 7.3%, compared to the third quarter of 2002. The drivers of the revenue increase were incremental revenue of $5.6 million generated from new stores opened subsequent to September 28, 2002 and a comparable store sales increase of $1.7 million, or 2.5%, based on 147 locations, offset by the impact of stores closed of $2.0 million. Comparing the same 13 weeks of 2003 to the same 13 weeks of 2002, comparable store sales increased 1.6% based on 147 locations. In the first nine months of 2003, retail store sales increased $10.4 million, or 5.7%, to $191.0 million from $180.6 million in the first nine months of 2002. The drivers of the revenue increase in the first nine months of 2003 were incremental revenue of $13.0 million from new store openings and the comparable store sales increase of $2.3 million, or 1.3%, based upon 147 locations, offset by the impact of stores closed in the last twelve months of $4.9 million. The comparable store sales increase was driven by the additional week of sales included in the first nine months of 2003. Comparing the first 40 weeks of 2003 to the first 40 weeks of 2002, comparable store sales declined 1.6%, based on 147 locations. This decline reflects the effect of unfavorable weather conditions, particularly in February 2003. We opened ten retail stores and closed two during the first nine months of 2003. There were a total of 164 stores as of October 4, 2003 compared to 156 stores at September 28, 2002. We plan to open five stores during the balance of 2003.

	Three-month periods ended				Six-month periods ended
	July 3, 2004		July 5, 2003		July 3, 2004		July 5, 2003

Wholesale sales	47.0	%	46.9	%	48.4	%	53.0	%
Retail sales	38.4		40.4		35.2		37.1
Mass Channel sales	14.6		12.7		16.4		9.9

Net sales	100.0		100.0		100.0		100.0
Cost of goods sold	61.9		64.4		62.9		63.9

Gross profit	38.1		35.6		37.1		36.1
Selling, general, and administrative expenses	30.7		29.9		28.1		28.4
Closure costs	—		—		0.2		—
Royalty income	(1.6	)	(1.4	)	(1.7	)	(1.5	)

Operating income	9.0		7.1		10.5		9.2
Interest expense, net	2.8		4.7		2.7		4.4

Income before income taxes	6.2		2.4		7.8		4.8
Provision for income taxes	2.4		0.9		3.0		1.9

Net income	3.8	%	1.5	%	4.8	%	2.9	%

Number of retail stores at end of period	174		159		174		159

Mass merchant store sales in the third quarter of 2003 increased $24.3 million to $31.3 million from $7.0 million in the third quarter of 2002. In the first nine months of 2003, our mass merchant store sales increased $44.6 million to $61.6 million from $17.0 million in the first nine months of 2002. Revenue recognized during the second and third quarters of 2003 from our new Child of Mine brand contributed to this significant growth. Also contributing to this growth for the third quarter and first nine months of 2003 is the strong performance of our Tykes brand with Target.14

~~GROSS PROFIT. Our~~Three ~~gross~~and ~~profit~~six-month ~~increased~~periods ~~$10.5~~ended ~~million,~~July or 16.2%, to $75.7 million in the third quarter of 2003 from $65.1 million in the third quarter of 2002. Gross profit as a percentage of net sales in the third quarter of 2003 decreased to 35.7% from 39.3~~% in the third quarter of 2002. Gross profit increased $27.4 million~~, or2004 ~~17.2%, to $186.1 million in the first nine months of 2003~~ compared to ~~$158.8 million in the first nine months of 2002. Gross profit, as a percentage of net sales, in the first nine months of 2003 decreased~~ to ~~35.9%~~three ~~from~~and ~~38.8%~~six-month ~~in similar~~ periods ~~in 2002. Such decreases in gross profit, relative to~~ ~~sales,~~ended ~~have~~July ~~resulted primarily from a higher mix of both wholesale sales and mass merchant store sales~~5, both of which generally yield lower margins than similar products sold through our retail channel. These decreases in gross profit margins also reflect the impact of our new pricing strategies with lower average2003

14NET SALES. In the second quarter of fiscal 2004, consolidated net sales increased $16.3 million, or 11.6%, to $156.3 million from $140.0 million in the second quarter of fiscal 2003. This increase 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 $339.0 million, an increase of $33.0 million, or 10.8%, as compared with $306.0 million for the first half of fiscal 2003. The increase in the first half of fiscal 2004 over the prior year primarily reflects growth in sales to the mass channel, including sales of our Child of Mine brand to Wal-Mart, which launched in June of 2003, and growth in sales in our retail channel.

~~prices~~Total wholesale onsales ~~certain~~increased ~~core products~~$7.9 ~~which~~million, ~~were~~or ~~partially~~12.0%, ~~offset~~to by$73.5 ~~additional~~million ~~product~~in ~~cost~~the ~~reductions~~second ~~achieved~~quarter ~~through~~of ~~the~~fiscal ~~continued~~2004 ~~expansion~~from ~~and~~$65.6 ~~leverage~~million ofin ~~our~~the ~~global~~second ~~sourcing~~quarter of fiscal ~~network~~2003. ~~Additionally~~Wholesale sales, ~~during~~excluding off-price ~~the~~sales, ~~third~~increased $10.1 million, or 17.2%, to $68.6 million from $58.5 million in the second quarter of fiscal 2003, wedriven ~~recorded~~by growth in each of our baby, playwear, and sleepwear product categories. Sales growth in ~~cost~~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 ~~goods~~fiscal ~~sold~~2004, ~~approximately~~wholesale sales increased $~~900~~1.9 million,~~000~~ or 1.1%, to $164.1 million from $162.2 million in ~~accelerated~~the ~~depreciation~~first ~~related~~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 ~~closure~~first half of ~~our~~fiscal ~~sewing~~2003. The ~~facilities~~increase in ~~Costa~~wholesale ~~Rica~~sales asfor ~~further~~the ~~described~~first inhalf ~~Note~~of 9fiscal to2004 ~~the~~was ~~condensed~~driven ~~unaudited~~primarily by ~~consolidated~~strong ~~financial~~sleepwear ~~statements~~sales.

~~SELLING, GENERAL,~~Mass ~~AND ADMINISTRATIVE EXPENSES. Selling, general, and administrative~~channel ~~expenses~~sales ~~for~~in the ~~third~~second quarter of ~~2003~~fiscal 2004 increased $85.80 million, or 2028.40%, to $5122.98 million from $4317.18 million in the ~~third~~second quarter of ~~2002~~fiscal 2003. ~~These~~Mass ~~costs,~~channel ~~as a percentage of net~~ sales, ~~decreased to 24.5%~~ in the ~~third quarter of 2003 from 26.0% in the third quarter of 2002. In the~~ first ~~nine~~half ~~months~~ of ~~2003,~~ ~~selling,~~fiscal ~~general,~~2004 ~~and administrative expenses~~ increased $1625.65 million, or 13 84.62%, to $~~138~~55.7 million from $~~122~~30.02 million ~~in the first nine months of~~ ~~2002. As a percentage of net sales, these expenses decreased to 26.8%~~ in the first ~~nine~~half ~~months~~ of ~~2003~~fiscal ~~from 29~~2003.~~8% in the first nine months of 2002.~~ ~~Such~~This ~~decreases~~revenue growth for the ~~third~~second quarter and first ~~nine~~half ~~months~~ of ~~2003~~fiscal ~~were~~2004 ~~due to our~~primarily ~~ability~~reflects tosales ~~grow~~of ~~revenue~~our atChild aof ~~faster~~Mine brand ~~rate~~that ~~than~~began ~~our~~ selling, ~~general,~~to ~~and administrative~~Wal-Mart ~~expenses~~in ~~partially~~the ~~offset~~latter bypart ~~higher~~of ~~distribution~~the ~~costs~~second ~~driven by~~quarter ~~unit~~of ~~volume~~fiscal ~~growth~~2003. Also ~~and~~contributing ~~a special bonus~~ to ~~vested option holders of Carter’s~~ ~~common~~this ~~stock~~growth aswere ~~further~~increased ~~described~~sales inof ~~Note 4 to~~ the ~~unaudited~~Tykes brand ~~condensed~~sold ~~consolidated financial~~to ~~statements~~Target.

~~ROYALTY~~Retail store ~~INCOME~~sales were $60. We0 ~~license~~ million for the ~~use~~second quarter of ~~the~~fiscal ~~Carter’s~~2004, ~~Carter’s~~an ~~Classics,~~increase of ~~and~~$3.4 ~~Child~~million, ofor ~~Mine~~6.0%, ~~names and sublicenses~~ from $56.6 million in the ~~Tykes~~second ~~name~~quarter toof ~~certain licensees~~fiscal 2003. ~~Our~~Comparable ~~royalty~~store ~~income~~sales infor the ~~third~~ ~~quarter~~second quarter of ~~2003~~fiscal ~~was~~2004, ~~approximately~~based ~~$3.7~~on ~~million~~158 locations, anwere ~~increase~~flat compared to the second quarter of 50fiscal 2003.~~0%,~~ The primary ~~over~~driver of the ~~third~~revenue increase ~~quarter~~was ofincremental ~~2002~~revenue ~~driven~~generated from new stores opened subsequent to July 5, 2003, offset by ~~licensed~~the ~~sales~~impact of ~~our~~stores closed ~~new~~over ~~Child~~the oflast ~~Mine~~twelve ~~brand~~months. In the byfirst ~~many~~half of ~~our~~fiscal 2004, retail store sales increased $5.7 million, or ~~licensee~~5.0%, ~~partners~~to ~~who~~$119.2 ~~began~~million ~~shipping~~from ~~their~~$113.5 ~~products~~million ~~during~~in the ~~third~~first ~~quarter~~half of fiscal 2003. ~~During~~Such ~~the~~revenue ~~first~~growth ~~nine~~was ~~months~~driven ofby ~~2003,~~incremental ~~royalty~~sales ~~income~~of ~~was~~ $87.14 million generated from new stores opened subsequent to July 5, an2003 and a comparable store sales increase of $1.9 million, or 301.78%, ~~over~~based on 158 locations. Such increases were partially offset by the ~~first~~impact ~~nine~~of ~~months~~store closures of ~~2002~~$0. 5 million and an ~~These~~additional ~~increases~~week ~~resulted~~of ~~from~~selling ~~licensed~~in ~~sales~~the first half of ~~our~~fiscal ~~new~~2003 ~~Child~~of $3.1 million. There were a total of ~~Mine~~174 stores ~~brand~~as of July 3, 2004. We plan to open five stores and close four stores during the ~~expansion~~balance of ~~our~~ ~~licensed~~fiscal ~~product~~2004. We ~~placement~~do ~~with~~not ~~other~~expect ~~key~~to ~~wholesale~~incur ~~customers~~any significant costs as a result of these store closures.

~~OPERATING INCOME~~GROSS PROFIT. ~~Operating~~ Our gross profit increased $9.7 million, or ~~income~~19.5%, ~~for~~to $59.6 million in the ~~third~~second quarter of ~~2003~~fiscal ~~increased~~2004 from $249.9 million in tothe ~~$27~~second quarter of fiscal 2003.4 Gross ~~million~~profit as a percentage of net sales in the second quarter of ~~compared~~fiscal 2004 increased to ~~$24~~38.51% ~~million~~from 35.6% in the ~~third~~second quarter of ~~2002~~fiscal 2003 due to improved product costs and lower levels of customer accommodations resulting from improved product performance. ~~Operating~~ Additionally, ~~income~~as ~~for~~described in Note 4 to the ~~first~~accompanying ~~nine~~unaudited condensed ~~months~~consolidated financial statements, we recorded a favorable adjustment of $1.5 million to correct adjustments to cost of sales and inventory made during fiscal 2003 and the first quarter of fiscal 2004. Gross profit increased $1215.64 million, or 13.9%, to $55125.59 million ~~from~~in the first half of fiscal 2004 compared to $43110.0 5 million in the first ~~nine~~half ~~months~~ of ~~2002~~fiscal 2003. ~~These~~ ~~increases~~As ~~reflect~~a percentage of net sales, gross profit in the ~~benefit~~first ~~from~~half ~~revenue~~of ~~growth,~~fiscal 2004 increased to 37.1% from 36.1% in the first half of fiscal 2003. This increase in gross profit, ~~and~~relative to ~~leveraging~~sales, for the first half of ~~operating~~fiscal ~~expenses~~2004 asresulted ~~described~~primarily from favorable product costs, lower levels of inventory provisions due to our focus on core products, and the inventory adjustment, noted above, offset by a higher mix of mass channel revenues that generally yield lower margins than our wholesale and retail channels.

INTEREST EXPENSE, NET. Net interest expense for the third quarter of 2003 decreased $0.5 million to $6.8 million from $7.3 million in the third quarter of 2002. In the first nine months of 2003, interest expense decreased $0.9 million to $20.3 million from $21.2 million in the first nine months of 2002. These decreases were due to lower variable interest rates on reduced levels of term loan indebtedness partially offset by an additional week of interest. As a result of the completion of the initial public offering by Carter’s as described in Note 10 to the unaudited condensed consolidated financial statements, and use of proceeds to retire approximately $61.3 million in principal amount of our senior subordinated notes and approximately $11.3 million in term loan borrowings, we will have reduced levels of interest expense in future periods.15

~~INCOME~~SELLING, GENERAL, AND ADMINISTRATIVE ~~TAXES~~EXPENSES. ~~We recorded~~ aSelling, ~~provision~~general, and administrative expenses for ~~income~~the ~~taxes~~second quarter of fiscal 2004 increased $76.92 million, or 14.8%, to $48.0 million from $41.8 million in the ~~third~~second quarter of fiscal 2003. ~~compared~~Selling, general, and administrative expenses, as a percentage of net sales, increased to $630.67% ~~million~~ in the ~~third~~second quarter of ~~2002~~fiscal 2004 from 29. In9% in the ~~first~~second ~~nine~~quarter ~~months~~ of fiscal 2003,. This increase wewas driven primarily by growth in distribution costs and the classification ~~recorded~~of aco-operative ~~provision~~advertising ~~for~~expenses ~~income~~as ~~taxes~~further described in Note 2 to the accompanying unaudited condensed consolidated financial statements. In the first half of fiscal 2004, selling, general, and administrative expenses increased $138.6 million, ~~compared~~or 9.9%, to $895.4 million from $86.8 million in the first ~~nine~~half ~~months~~ of ~~2002~~fiscal 2003. ~~Our effective~~As ~~tax~~a ~~rate~~percentage ~~was~~of ~~approximately~~net 38sales, these expenses decreased to 28.51% ~~during~~in the ~~third~~first ~~quarter~~half ~~and~~of fiscal 2004 from 28.4% in the first ~~nine~~half ~~months~~ of fiscal 2003. Such ~~and~~improvements reflect ~~2002~~the benefit of operating leverage.

~~NET INCOME~~CLOSURE COSTS. AsIn aJune ~~result~~ of ~~the factors noted above~~2004, ~~our~~we ~~third~~decided ~~quarter~~to ~~2003~~exit ~~net income was $12.7 million~~our ~~compared~~distribution tofacility ~~$10.6 million~~ in ~~the~~Leola, ~~third~~Pennsylvania ~~quarter~~in oforder ~~2002. Net~~to ~~income~~consolidate ~~for~~our distribution ~~the~~operations ~~first~~and ~~nine~~reduce ~~months~~costs. We ofrecorded ~~2003 was~~approximately $~~21.7~~95,000 ~~million~~of ~~compared~~severance tocosts ~~$13.4~~during ~~million~~the insecond quarter ~~the~~and first ~~nine~~half ~~months~~ of ~~2002~~fiscal 2004.

15In July of 2003, we decided to exit our Costa Rican sewing facilities, given our ability to obtain lower costs from third-party suppliers. During the second quarter of fiscal 2004, we reversed approximately $136,000 of severance costs and other termination benefits previously estimated for this closure and recorded approximately $47,000 of other closure costs. In the first half of fiscal 2004, we recorded approximately $74,000 of severance and $371,000 of other closure costs.

~~FINANCIAL~~ROYALTY ~~CONDITION~~INCOME. We license the use of our Carter’s, ~~CAPITAL~~Carter’s ~~RESOURCES~~Classics, ~~AND~~and ~~LIQUIDITY~~Child of Mine names and sublicense the Tykes name to certain licensees. Our royalty income in the second quarter of fiscal 2004 increased $0.6 million, or 31.6%, to $2.5 million compared to $1.9 million in the second quarter of fiscal 2003. During the first half of fiscal 2004, royalty income was approximately $5.7 million, an increase of $1.2 million, or 27.2%, over the first half of fiscal 2003. The increases in the second quarter and first half of fiscal 2004 resulted primarily from royalties earned on licensed sales of our Child of Mine brand by our licensee partners who began shipping their products during the third quarter of fiscal 2003.

~~Our~~OPERATING ~~primary~~INCOME. Operating ~~cash~~income ~~needs~~for ~~are~~the ~~working~~second ~~capital~~quarter of fiscal 2004 increased $4.2 million, ~~capital~~or ~~expenditures~~41.9%, ~~and~~to $14.1 ~~debt~~million ~~service~~compared to $9.9 million in the second quarter of fiscal 2003. ~~Historically,~~As wea ~~have~~percentage ~~financed~~of ~~these~~net ~~needs~~sales, ~~primarily~~operating ~~through~~income ~~internally~~increased ~~generated~~to ~~cash~~9.0% ~~flow~~in ~~and~~the ~~funds~~second ~~borrowed~~quarter ~~under~~of ~~our~~fiscal 2004 ~~senior~~compared ~~credit~~to ~~facility~~7.1% in the second quarter of fiscal 2003. ~~Our~~Operating ~~primary source~~income for the first half of ~~liquidity~~fiscal 2004 ~~will~~increased ~~continue~~$7.4 million to be$35.6 ~~cash~~million ~~flow~~ from ~~operations~~$28.2 ~~and borrowings~~million ~~under~~in ~~our~~the ~~revolving~~first ~~loan~~half of ~~facility~~fiscal 2003. Operating income, ~~and~~as wea percentage ~~expect~~of ~~that~~net ~~these~~sales, ~~sources will~~increased ~~fund~~to ~~our~~10.5% ~~ongoing~~in ~~requirements~~the ~~for~~first ~~debt~~half ~~service~~of ~~and~~fiscal ~~capital~~2004 ~~expenditures~~compared to 9. ~~These~~2% ~~sources~~in the first half of ~~liquidity~~ ~~may~~fiscal be2003. These ~~impacted~~increases byin ~~continued~~operating ~~demand~~income for ~~our~~the ~~products~~second quarter and ~~our~~first ~~ability~~half of fiscal to2004 ~~meet~~reflect ~~debt~~the ~~covenants~~benefit ~~under~~from ~~our~~revenue ~~credit~~growth, ~~facility~~increases in gross profit, and leveraging of operating expenses, described above.

~~Net~~INTEREST ~~accounts~~EXPENSE, ~~receivable~~NET. atInterest ~~October 4,~~expense ~~2003~~in ~~were~~the second quarter of fiscal 2004 decreased $702.9 2 million, ~~compared~~or 33.1%, to $484.4 million ~~at September 28,~~compared ~~2002~~to ~~and~~ $~~53.~~6.5 million atin ~~December 28,~~the ~~2002~~second quarter of fiscal 2003. ~~The~~In ~~increase~~the ~~over~~first half ~~September 28~~of fiscal 2004, ~~2002 reflects~~interest ~~sales~~expense ofdecreased ~~our~~$4.5 ~~new~~million ~~Child~~to of$9.0 ~~Mine~~million ~~brand~~from to$13.5 ~~Wal-Mart~~million in ~~2003~~the ~~and~~first ~~increased~~half ~~sales~~of ~~levels~~fiscal of2003. These ~~wholesale~~decreases ~~shipments~~are inattributable to the ~~latter~~redemption ~~part~~ of ~~the~~approximately ~~third~~$61.3 ~~quarter~~million ~~ended~~of ~~October 4,~~our ~~2003~~10. ~~Due~~875% tosenior subordinated notes in the ~~seasonal~~fourth ~~nature~~quarter of ~~our operations~~fiscal 2003, ~~the~~lower ~~net~~variable ~~accounts~~interest ~~receivable~~rates ~~balance~~on reduced atlevels ~~October 4,~~of ~~2003~~term isloan ~~not comparable~~indebtedness, toand the ~~net~~additional ~~accounts~~week ~~receivable~~of ~~balance~~interest in atthe ~~December 28,~~first ~~2002~~half of fiscal 2003.

~~Net~~INCOME ~~inventories at October 4, 2003 were $118~~TAXES.1 We ~~million~~recorded ~~compared~~a ~~to $96.6 million at~~provision ~~September 28,~~for ~~2002~~income ~~and~~taxes of $~~105~~3.78 million ~~at December 28, 2002. This increase over September 28, 2002~~ in ~~inventory~~the ~~levels~~second ~~was~~quarter ~~planned~~of tofiscal ~~support~~2004 ~~fourth quarter 2003 shipping~~compared ~~requirements,~~to ~~including~~$1.3 ~~inventory~~million ~~required~~in tothe ~~support~~second ~~our~~quarter ~~new Child~~ of ~~Mine~~fiscal ~~brand for Wal-Mart~~2003. ~~Average~~In ~~inventory~~the ~~levels~~first inhalf ~~2003~~of ~~are expected~~fiscal to2004, bewe ~~higher~~recorded a ~~than~~provision ~~average~~for ~~2002~~income ~~net~~taxes ~~inventory levels~~ of $9310.84 million ~~based~~ oncompared ~~increases~~to in$5.6 ~~forecasted~~million ~~demand~~in ~~and~~the first ~~our~~half ~~focus~~of onfiscal ~~shipping~~2003. Our ~~performance~~effective totax ~~our~~rate ~~customers~~was approximately 39. ~~Due~~0% toduring the ~~seasonal nature~~second ofquarter ~~our~~and ~~operations,~~first ~~net~~half ~~inventories~~of fiscal at2004 ~~October 4,~~and ~~2003~~38.5% ~~are~~during ~~not comparable~~the tosecond ~~net~~quarter ~~inventories~~and atfirst ~~December 28,~~half ~~2002~~of fiscal 2003.

Net cash provided by operating activities for the first nine months of 2003 was $9.4 million compared to $11.3 million for the first nine months of 2002. The decrease in net cash flow from operating activities in the first nine months of 2003 compared to the first nine months of 2002 is primarily attributed to the increases in inventory and accounts receivable, described above, and reductions in accounts payable and other current liabilities, partially offset by increased net income.16

WeNET ~~have invested $9~~INCOME.4 ~~million~~As ina ~~capital~~result ~~expenditures~~of ~~during~~ the ~~first~~factors ~~nine~~noted ~~months~~above, ~~of 2003 compared~~our tosecond ~~$9.0~~quarter ~~million~~2004 ~~during~~net ~~the~~income ~~first~~was ~~nine~~approximately ~~months of 2002~~$5. We9 ~~plan~~million, compared to approximately ~~invest an additional~~ $102.1 ~~– $12~~ million in ~~capital expenditures during~~ the ~~remainder~~second quarter of fiscal 2003. ~~Major~~Net ~~investments~~income ~~include~~for ~~retail~~the ~~store~~first ~~openings~~half ~~and~~of ~~remodeling,~~fiscal 2004 ~~fixturing~~was ~~programs~~$16.2 ~~for~~million ~~wholesale~~compared ~~customers,~~to ~~and~~$9.0 million in the ~~expansion~~first half of ~~our distribution~~fiscal ~~centers~~2003.

AtFINANCIAL ~~October 4~~CONDITION, ~~2003,~~CAPITAL ~~we had approximately $293.6 million of debt outstanding~~RESOURCES, ~~consisting~~ ofAND $174.0 million of senior subordinated notes, $117.7 million in term loan borrowings and $1.9 million in borrowings on our revolver, exclusive of approximately $9.5 million of outstanding letters of credit. At October 4, 2003, we had approximately $68.6 million of financing available under our revolver. At December 28, 2002, we had approximately $297.6 million of debt outstanding, consisting of $173.9 million of senior subordinated notes, $123.8 million in term loan borrowings and no revolver borrowings, exclusive of approximately $16.3 million of outstanding letters of credit. The borrowings under the revolver will be available to fund our working capital requirements, capital expenditures, and other general corporate purposes.LIQUIDITY

~~Effective July 29,~~Our ~~2003,~~cash ~~our~~needs ~~credit~~are ~~facility~~working ~~was amended to~~capital, ~~among~~capital ~~other things~~expenditures, ~~increase~~ ~~the~~and ~~amount of the commitments under the revolver from $60.0 million to~~debt ~~$75~~service.0 Historically, ~~million~~we ~~and~~have ~~allow for a maximum amount of commitments of up to $80.0~~financed ~~million~~these ~~(which~~needs ~~has~~through ~~subsequently~~internally ~~been~~generated ~~committed~~cash ~~to),~~flow ~~provide~~and ~~for~~funds aborrowed 75under ~~basis~~our ~~point~~senior ~~reduction~~credit infacility. Our ~~the applicable interest margin by prepaying our existing~~primary ~~Tranche~~source Bof ~~term~~liquidity ~~loan~~will ~~and~~continue ~~replacing~~to itbe ~~with~~cash aflow ~~new~~from ~~Tranche~~operations ~~C term loan, reduce the~~and ~~amount~~borrowings ofavailable under our ~~mandatory~~revolving loan ~~prepayment~~facility, ~~requirement~~and ~~following~~we ~~the~~expect ~~consummation~~that ofthese ansources ~~initial~~will ~~public~~fund ~~offering~~our byongoing usrequirements ~~from~~for adebt ~~prepayment~~service ofand ~~50% or 75% of excess~~capital ~~cash~~expenditures. These ~~flow~~sources ~~to 25% or 50%~~ of ~~excess cash flow, depending on the applicable~~liquidity ~~leverage~~may ~~ratio.~~be ~~Additionally,~~impacted ~~following the initial public offering~~ by ~~us,~~continued ~~as described~~demand ~~below,~~for weour ~~are~~products ~~also~~and ~~permitted~~our toability ~~repurchase up~~ to ~~$15.0~~meet debt ~~million~~covenants ~~of additional~~under ~~senior~~our ~~subordinated~~credit ~~notes~~facility.

16Net accounts receivable at July 3, 2004 were $72.0 million compared to $59.9 million at July 5, 2003 and $65.3 million at January 3, 2004. The increase over July 5, 2003 reflects higher levels of revenue in 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 3, 2004 is not comparable to the net accounts receivable balance at January 3, 2004.

OnNet ~~October 29,~~inventories ~~2003,~~at ~~Carter’s~~July ~~completed an initial public offering of its common stock including the sale of 5~~3,~~390,625~~ ~~shares~~2004 bywere ~~us and 1,796,875 shares by the selling stockholders. Net proceeds to us from the offering totaled~~ $93148.24 million ~~and~~compared ~~were contributed by Carter’s~~ to ~~TWCC. On November 28, 2003, we will use approximately~~ $68132.09 million ~~of the proceeds to redeem approximately~~at ~~$61.3~~July ~~million~~5, in2003 ~~outstanding senior subordinated notes (~~and ~~will pay a redemption premium of approximately~~ $6104.78 million~~). We~~ ~~have~~at ~~used~~January ~~approximately~~3, $22004.~~6 million of the net proceeds to terminate the Berkshire Partners LLC management agreement.~~ WeThis ~~have~~increase ~~also~~over ~~used~~July ~~approximately~~5, ~~50%~~2003 ofwas ~~the remaining proceeds of~~planned ~~approximately $22.6 million~~ to ~~prepay~~support ~~$11.3~~third ~~million~~quarter offiscal ~~amounts~~2004 ~~outstanding under~~shipping ~~the term loan~~requirements. ~~After~~Due ~~giving effect~~ to ~~this~~the ~~prepayment,~~seasonal wenature ~~have $112.7 million~~ of ~~senior~~our ~~subordinated~~operations, ~~notes~~net ~~and~~inventories ~~$106.4~~at ~~million~~July in3, ~~term~~2004 ~~loan~~are ~~borrowings~~not ~~outstanding. The~~comparable ~~remaining~~to ~~proceeds~~net ofinventories ~~approximately~~at ~~$11.~~January 3, ~~million will be utilized for working capital and other general corporate purposes~~2004.

~~After~~Net ~~giving~~cash ~~effect to the $11.3 million prepayment~~used ~~described~~in ~~above,~~operating ~~principal~~activities ~~borrowings~~for ~~under~~ the ~~term~~first ~~loan~~half ~~are~~of ~~due~~fiscal ~~and~~2004 ~~payable in~~was ~~sixteen remaining quarterly installments of~~ $~~266,614~~5.4 ~~from December 31,~~million ~~2003~~compared ~~through~~to ~~September 30,~~net ~~2007~~cash ~~and~~used ~~four~~in ~~quarterly~~operating ~~payments~~activities of ~~approximately~~ $2521.59 million ~~from~~in ~~December 31,~~the ~~2007 through~~first ~~September 30,~~half ~~2008. Interest on the term loan is usually payable at the end~~ of ~~interest~~fiscal ~~rate reset periods, which vary in length but in no case exceed six months~~2003. The ~~outstanding~~change ~~balance~~in ~~under the revolver~~net iscash ~~payable~~used in ~~full~~operating onactivities ~~August 15, 2006. Interest is payable quarterly on base rate borrowings under the revolver and may be payable more frequently~~ in the ~~event~~first wehalf ~~choose~~of afiscal ~~Eurodollar~~2004 ~~rate option~~compared ~~available under~~ to the ~~terms~~first half of ~~our~~fiscal ~~credit~~2003 ~~facility. No~~is ~~principal~~primarily ~~payments~~attributable ~~are required on our senior subordinated notes prior~~ to ~~their~~increases ~~scheduled maturity~~ in ~~August 2011.~~accounts ~~Interest is~~ payable ~~semi-annually on our senior subordinated notes in February~~ and ~~August of each year. These payments commenced on February 15, 2002. Prior to~~ the ~~redemption~~growth ~~of $61.3 million~~ in ~~senior~~ ~~subordinated notes noted above~~earnings, ~~our~~partially ~~semi-annual~~offset ~~interest~~by ~~payments on our~~increased ~~senior~~levels ~~subordinated~~of ~~notes were $9~~inventory.~~5 million. Subsequent to this redemption, our semi-annual interest payments will be $6.1 million.~~

~~The~~We ~~terms of the consolidated excess cash flow~~have ~~condition,~~invested as$10.7 ~~required~~million ~~under~~in ~~our~~capital ~~credit~~expenditures ~~facility~~during ~~were~~the ~~effective~~first ~~for~~half ~~fiscal~~of ~~2002,~~fiscal ~~and,~~2004 ~~accordingly,~~compared weto ~~made a principal prepayment of approximately~~ $46.8 million on ~~March 26,~~during ~~2003. This excess cash flow condition may result in future annual prepayments depending on~~ the ~~consolidated~~ ~~excess~~first ~~cash~~half ~~flow~~of ~~generated~~fiscal ~~in each year~~2003. ~~The~~We ~~lenders~~plan ~~will~~to ~~apply~~invest ~~such~~an ~~prepayments~~additional ~~first~~$13.8 ~~to the term loan~~million ~~and,~~in ~~second,~~capital toexpenditures ~~reduce~~during the ~~revolver. Subject~~remainder toof ~~certain~~fiscal ~~conditions~~2004. Major ininvestments ~~our~~include ~~credit~~the ~~facility,~~expansion ~~we may make optional prepayments~~ of our ~~debt~~distribution ~~obligations~~capabilities, ~~without~~retail ~~premium~~store oropenings ~~penalty. The~~and ~~lenders~~remodeling, ~~will~~and fixturing ~~apply~~programs ~~such~~for ~~optional prepayments~~wholesale ~~according~~and tomass ~~our~~channel ~~instruction~~customers.

AsOn ~~provided~~October by29, ~~a management~~2003, ~~agreement~~we ~~with~~completed ~~Berkshire~~an ~~Partners~~initial ~~LLC~~public offering of Carter’s, weInc.’s ~~agreed~~common stock including the sale of 5,390,625 ~~among~~shares ~~other~~by us and ~~things~~1,796,875 toshares ~~pay~~by the selling stockholders, primarily Berkshire Partners anLLC and ~~annual~~its ~~management~~affiliates. Net ~~fee~~proceeds ofto us from the offering totaled $193.659 million ~~per~~. On ~~year~~November ~~for~~28, ~~four years~~2003, ~~commencing~~we onused ~~the~~approximately ~~first~~$68.7 ~~anniversary~~million of the proceeds to ~~Acquisition~~redeem approximately $61. We3 ~~paid~~million ~~this~~in ~~fee~~outstanding senior subordinated notes and ~~quarterly,~~pay ina ~~advance~~redemption premium of approximately $6. As7 ~~described~~million and related accrued ~~above,~~interest ~~upon~~charges ~~completion~~of $0.7 million. We used approximately $2.6 million of the ~~initial~~net ~~public~~proceeds ~~offering~~to byterminate ~~Carter’s,~~the ~~this~~Berkshire Partners LLC management ~~fee~~ agreement ~~was~~and ~~terminated~~used approximately $11.3 million to prepay amounts outstanding under our term loan as required by our senior credit facility. We used remaining proceeds for working capital and other general corporate purposes.

OnEffective July 31 29, 2003, ~~we paid~~our acredit ~~cash~~facility ~~dividend~~was amended to, among other things, increase the amount of ~~approximately~~the commitments under the revolving loan facility from $2460.90 million to ~~Carter’s~~$80. ~~Carter’s~~0 ~~utilized~~million; ~~the~~provide ~~proceeds~~for toa ~~pay~~75 abasis point reduction in the applicable ~~dividend~~interest ofmargin ~~$24.9~~by ~~million~~prepaying onour ~~the~~existing ~~outstanding~~Tranche ~~shares~~B ofterm ~~common~~loan ~~stock~~and ofreplacing ~~Carter’s~~it towith a new Tranche C term loan; and reduce the ~~stockholders~~amount of ~~record~~our asmandatory loan prepayment requirement from 50% or 75% of ~~July 30,~~excess ~~2003. Concurrently,~~cash weflow ~~paid~~to a25% ~~special~~or ~~bonus~~50% of ~~approximately~~excess ~~$2.5~~cash ~~million~~flow, todepending ~~Carter’s~~on ~~vested~~the ~~option~~applicable ~~holders~~leverage ratio. ~~This~~Pursuant ~~payment~~to ~~was~~the ~~funded~~amendment, ~~through~~we ~~our~~are ~~amended~~also ~~credit~~permitted ~~facility~~to repurchase up to $15.0 million of additional senior subordinated notes, aswhich ~~described~~we ~~above~~may consider from time to time.

In July of 2003, we decided to exit our sewing facilities located in Costa Rica given our ability to obtain lower costs from third-party suppliers. Such closures were announced on September 16, 2003 and the facilities are being held and used for production through the end of November 2003. For the majority of the affected employees, severance benefits were communicated at the end of October 2003. As a result of these closures, we have recorded approximately $900,000 of accelerated depreciation (included in cost of goods sold), $65,000 of asset impairment charges, and $50,000 of severance during the third quarter of 2003. During the fourth quarter of 2003, we expect to incur additional accelerated depreciation and impairment charges of approximately $600,000. It is estimated that other closure costs of approximately $3.1 million will be incurred relating primarily to severance, lease termination costs, and income taxes of which approximately $1.9 million will be incurred in the fourth quarter of 2003.17

17Our senior credit facility, as amended, sets forth mandatory and optional prepayment conditions that may result in our use of cash to reduce our debt obligations, including payments of: (i) 50% of the net cash proceeds from an equity issuance by Carter’s, Inc., excluding, among other things, any issuance of equity in connection with employee or director stock plans or a permitted acquisition and (ii) 25% or 50% of consolidated excess cash flow, depending on the applicable leverage ratio, as both terms are defined in the amended senior credit facility. The terms of the consolidated excess cash flow condition were effective for fiscal 2002, and accordingly, we made a principal prepayment of approximately $4.8 million on March 26, 2003 and approximately $2.4 million on March 22, 2004. This excess cash flow condition may result in future annual prepayments depending on the consolidated excess cash flow generated in each year. The lenders will apply such prepayments first to the term loan and, second, to permanently reduce our revolving loan facility. Subject to certain conditions in our senior credit facility, we may make optional prepayments of our debt obligations without premium or penalty. The lenders will apply such optional prepayments according to our instruction.

~~Based~~On onMarch ~~our~~22, ~~current level~~2004, ofwe ~~operations,~~prepaid ~~anticipated~~an ~~cost~~additional ~~savings,~~$5.0 ~~and~~million ~~other~~of ~~operating~~term loan ~~improvements,~~indebtedness. At weJuly ~~believe~~3, ~~that~~2004, ~~cash~~we ~~generated~~had approximately ~~from~~$204.9 million ~~operations~~of ~~and~~debt ~~available cash~~outstanding, ~~together~~consisting ~~with~~of $113.1 million ~~amounts~~of ~~available~~senior ~~under~~subordinated notes (the ~~revolver~~“Notes”), $91.8 million ~~will~~in beterm ~~adequate~~loan ~~to meet~~borrowings, ~~our~~and ~~debt~~no ~~service~~borrowings ~~requirements,~~under ~~capital~~our revolving ~~expenditures~~loan facility, ~~and~~exclusive ~~working~~of ~~capital~~approximately $16.6 million of ~~needs~~outstanding ~~for~~letters ~~the~~of ~~foreseeable~~credit. At ~~future~~July 3, ~~although~~2004, nowe ~~assurance~~had ~~can~~approximately be$63.4 ~~given~~million inof ~~this~~financing available under our ~~regard~~revolving loan facility. IfAt ~~our~~January 3, 2004, we had approximately $212.7 million of debt isoutstanding, ~~accelerated~~consisting ~~following~~of an$113.1 million ~~event~~ of ~~default~~Notes, we$99.6 million ~~may~~in ~~need~~term toloan ~~refinance~~borrowings ~~all~~and no orrevolver aborrowings, ~~portion~~exclusive of ~~the principal~~approximately ~~amount~~$6.5 million of outstanding ~~our~~letters ~~senior~~of credit. The revolver ~~facility~~will ~~and~~be available to fund our ~~senior~~working ~~subordinated~~capital requirements, capital ~~notes~~expenditures, ~~prior~~and toother ~~maturity~~general corporate purposes.

~~Our~~After ~~credit~~giving ~~facility~~effect ~~imposes~~to ~~certain~~the ~~covenants~~prepayments of our term loan described above, ~~requirements~~principal borrowings under our term loan are due and payable in thirteen quarterly installments of $231,792 from September 30, 2004 through September 30, 2007 and four ~~restrictions~~quarterly payments of approximately $22.2 million from December 31, 2007 through September 30, 2008. Interest on our term loan is payable at the end of interest rate reset periods, which vary in length but in no case exceed six months. The outstanding balance of our revolving loan facility is payable in ~~actions~~full on August 15, 2006, and ~~actions~~interest byis payable quarterly, or more frequently in the event we have chosen a Eurodollar rate option available under the terms of our ~~subsidiaries~~senior ~~that~~credit facility. No principal payments are required on the Notes prior to their scheduled maturity in August 2011. Beginning August 15, ~~among~~2006, ~~other~~we ~~things~~may redeem all or part of the Notes as further described in Note 5 to our most recently filed annual report on Form 10-K. Interest is payable semi-annually on the Notes in February and August of each year. Prior to the completion of our initial public offering, ~~restrict~~our semi-annual interest payment on the Notes was $9.5 million for each payment. After giving effect to the redemption of ~~dividends~~$61.3 million ~~beyond~~of the ~~dividend~~principal ~~noted~~amount ~~above~~of the Notes in November 2003, our semi-annual interest payment is now approximately $6.2 million.

~~EFFECTS~~As OFpreviously provided ~~INFLATION~~by ~~AND~~a ~~DEFLATION~~management agreement with Berkshire Partners LLC, we agreed, among other things, to pay Berkshire Partners an annual management fee of $1.65 million per year for four years, commencing on the first anniversary of our 2001 acquisition. We paid this fee quarterly, in advance. As described above, upon completion of our initial public offering, this management fee agreement was terminated.

WeBased ~~are~~on ~~affected by~~our ~~inflation~~current ~~and~~level ~~changing~~of ~~prices~~operations ~~primarily~~and ~~through~~anticipated ~~the~~cost ~~purchase~~savings ofand ~~raw materials,~~operating ~~increased~~improvements, ~~operating~~we ~~costs~~believe ~~and~~that ~~expenses,~~cash ~~and~~generated ~~fluctuations~~from inoperations ~~interest~~and available ~~rates. The~~cash, ~~effects~~together ofwith ~~inflation~~amounts onavailable under our ~~net~~ ~~sales~~revolving ~~and~~loan ~~operations~~facility, ~~have~~will be ~~not~~adequate ~~been~~to ~~material~~meet inour ~~recent~~debt ~~years. In~~service ~~recent years~~requirements, ~~there~~capital ~~has~~expenditures, ~~been deflationary~~and ~~pressure~~working oncapital ~~selling~~needs ~~prices. Due~~for to the ~~competitive~~ ~~nature~~foreseeable ~~of the children’s apparel industry~~future, ~~there~~although is no assurance ~~that~~ ~~this~~can ~~trend will not continue.~~ be ~~While~~given ~~we have been successful~~ in ~~offsetting~~this ~~deflationary~~regard. We ~~pricing~~may, however, ~~pressures~~need ~~through~~to ~~product~~refinance ~~improvements~~all ~~and~~or ~~lower~~a ~~costs~~portion ~~with~~of the ~~expansion~~principal amount of ~~our~~ ~~global~~the ~~sourcing~~Notes ~~network,~~on ~~if deflationary price trends outpace our ability~~or prior to ~~obtain~~maturity ~~further~~in ~~price reductions from our global suppliers, our profitability may be affected~~2011.

~~SEASONALITY~~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.

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 58% 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.18

AsEFFECTS ~~a result of the~~OF ~~effects~~INFLATION ofAND seasonality, our inventory levels and other working capital requirements generally begin to increase during the second quarter and into the third quarter of each year. During these peak periods we have historically borrowed under the revolver.DEFLATION

~~CRITICAL~~We ~~ACCOUNTING~~are affected ~~POLICIES~~by ~~AND~~inflation ~~ESTIMATES~~and changing prices primarily through the purchase of raw materials, increased operating costs and expenses, and fluctuations in 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 been successful in offsetting such deflationary pressures through product improvements and lower costs with the expansion of our global sourcing network, if deflationary pricing trends outpace our ability to obtain further price reductions from our global suppliers and other cost reduction initiatives, our profitability may be affected.

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 to be 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.SEASONALITY

18We 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.

~~Our significant~~As ~~accounting~~a ~~policies~~result ~~are~~of ~~described~~this inseasonality, ~~Note 2 to~~ our ~~consolidated~~inventory ~~financial statements~~levels ~~contained~~and inother ~~our~~working ~~most recently filed annual report on Form~~capital ~~10-K. The~~requirements ~~following~~generally ~~discussion addresses~~begin ~~our~~to ~~critical~~increase ~~accounting~~during ~~policies,~~the ~~which~~second ~~are~~quarter ~~those~~and ~~that~~into ~~require management’s~~the ~~most~~third ~~difficult~~quarter ~~and subjective judgments, often as a result~~ of ~~the~~each ~~need~~year. During ~~to make~~these ~~estimates~~peak ~~about~~periods ~~the~~we ~~effect~~have ofhistorically ~~matters~~borrowed ~~that~~under ~~are~~the ~~inherently uncertain~~revolver.

~~Revenue~~CRITICAL ~~recognition: We recognize~~ACCOUNTING ~~wholesale~~POLICIES ~~and~~AND mass merchant store revenue after shipment of products to customers, when title passes and when all risks and rewards of ownership have transferred. As discussed in Note 2 to our consolidated financial statements contained in our most recently filed annual report on Form 10-K, in certain cases, this 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, 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 customers. Such amounts are reflected as reductions of net sales. 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. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance could be required.ESTIMATES

~~Inventory: We~~Our ~~write~~discussion ~~down~~and ~~our~~analysis ~~inventory~~of ~~for~~our ~~estimated~~financial ~~excess~~condition and ~~obsolescence~~results ~~equal~~of tooperations ~~the~~are ~~difference~~based ~~between~~upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the ~~cost~~United States of ~~inventory~~America. The preparation of these financial statements requires us to make estimates and ~~the~~judgments ~~estimated~~that ~~market~~affect ~~value~~the ~~based~~reported ~~upon~~amounts ~~assumptions~~of ~~about~~assets, ~~future~~liabilities, ~~demand~~revenues, expenses, and ~~market~~related ~~conditions~~disclosure of contingent assets and liabilities. We base our Ifestimates ~~actual~~on ~~market~~historical ~~conditions~~experience and on various other assumptions that are believed ~~less~~to ~~favorable~~be ~~than~~reasonable ~~those~~under wethe ~~project~~circumstances, the results of which form ~~additional~~the ~~write-downs~~basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may bediffer ~~required~~from these estimates under different assumptions or conditions.

~~Goodwill and~~Our ~~tradename: As~~significant ~~of October 4,~~accounting ~~2003,~~policies weare described ~~have approximately $360 million~~ in ~~goodwill~~Note ~~and tradename~~2 ~~assets. The fair value of the Carter’s tradename was estimated at the Acquisition~~ to beour ~~approximately~~consolidated ~~$220~~financial ~~million~~statements ~~using~~contained ain ~~discounted cash~~our ~~flow~~most ~~analysis,~~recently ~~which~~filed ~~examined~~annual ~~the~~report ~~hypothetical~~on ~~cost~~Form ~~savings that accrue as a result of our ownership of the tradename~~10-K. The ~~cash~~following ~~flows,~~discussion ~~which~~addresses ~~incorporated~~our ~~both~~critical ~~historical~~accounting ~~and projected~~policies, ~~financial~~which ~~performance,~~are ~~were~~those ~~discounted~~that ~~using~~require amanagement’s ~~discount~~most ~~rate~~difficult ofand ~~11%. The tradename was determined to have an~~subjective ~~indefinite~~judgments, ~~life. The~~often ~~carrying value of these assets is subject to annual impairment reviews~~ as ofa ~~the~~result ~~last day~~ of ~~each fiscal year. Factors affecting such impairment reviews include~~ the ~~continued~~need ~~market~~to ~~acceptance~~make ofestimates ~~our~~about ~~offered products and~~ the ~~development~~effect of ~~new products.~~ ~~Impairment~~matters ~~reviews~~that may also be triggered by 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~~inherently ~~on estimates of the future cash flows of the businesses~~uncertain.

~~Accrued expenses~~Revenue recognition: ~~Accrued~~We ~~expenses~~recognize ~~for~~wholesale ~~health~~and ~~insurance,~~mass ~~workers~~channel ~~compensation~~revenue after shipment of products to customers, ~~incentive~~when ~~compensation~~title passes and when all risks and rewards of ownership have transferred. In certain cases, in which ~~professional~~we ~~fees~~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 ~~other~~earned ~~outstanding~~when ~~obligations~~the ~~are~~product ~~assessed~~has ~~based~~been onshipped and when all risks and rewards of ~~actual~~ownership ~~commitments~~have transferred, ~~statistical~~the ~~trends~~sales price is fixed or determinable, and collectibility ~~estimates~~is ~~based~~reasonably onassured. In the ~~projections~~normal course of business, we grant certain accommodations and allowances ~~current~~to ~~expectations,~~our wholesale and ~~these~~mass ~~estimates~~channel ~~are~~customers. Such ~~updated~~amounts ~~periodically~~are reflected as reductions of net sales. 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 reserve for certain accommodations and allowances that we have granted to our wholesale and mass channel customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional ~~information~~allowance ~~becomes~~could ~~available~~be required.

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 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 of operations.19

19During 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.

~~Stock-based compensation arrangements~~Inventory: We ~~account~~ provide reserves for ~~stock~~slow-~~based~~moving ~~compensation on stock options under the intrinsic value method,~~inventory ~~whereby we record compensation expense~~ equal to the difference between the ~~exercise~~ ~~price~~cost of ~~the~~inventory ~~stock option~~ and the ~~fair~~estimated 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~~based ofupon ~~measuring~~assumptions ~~compensation~~about ~~cost~~future ~~on stock~~demand options with the fair value 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”~~market ~~(“SFAS 148”)~~conditions. ~~For~~If ~~stock~~actual ~~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~~conditions ~~of the~~are stock on the date of issuance or sale. Prior to the third quarter of 2003, in the absence of a public market for Carter’s common stock, management and the Board of Directors estimated the market value of Carter’s common stock for all option grant and stock issuance dates using an approach based upon a multiple of Adjusted EBITDA less ~~net debt. Adjusted EBITDA represents earnings before~~ ~~interest,~~favorable ~~income~~than ~~tax~~those ~~expense,~~we ~~depreciation and amortization~~project, ~~and~~additional ~~also excludes Acquisition-related non-recurring charges,~~ write-downs ofmay ~~long-lived~~be ~~assets, non-recurring charges-plant closure costs, and non-recurring charges-other~~required. ~~Adjusted EBITDA is not a measurement under generally accepted accounting principles.~~

~~RECENT~~Goodwill and tradename: As of July 3, 2004, we had approximately $360 ~~ACCOUNTING~~million ~~PRONOUNCEMENTS~~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%. 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 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 of the future cash flows of the businesses.

InAccrued ~~August 2001,~~expenses: Accrued ~~the~~expenses ~~Financial Accounting~~for ~~Standards~~health ~~Board~~insurance, ~~(“FASB”)~~workers ~~issued~~compensation, ~~SFAS~~incentive ~~No. 143~~compensation, ~~“Accounting for Asset Retirement~~professional ~~Obligations”~~fees, ~~(“SFAS~~and ~~143”). SFAS~~other ~~143 requires~~outstanding recording the fair market value of an asset retirement obligation as a liability in the period in which a legal obligation associated with the retirement of tangible long-lived assets is incurred (including certain lease obligations~~). The~~ ~~statement~~are ~~also~~assessed ~~requires~~based ~~recording~~on anactual ~~asset~~commitments, ~~offsetting~~statistical ~~the~~trends, ~~initial~~and ~~obligation~~estimates asbased anon ~~increase~~projections ~~to the carrying amount of the related long-lived asset~~ and ~~depreciation of that cost over the life of~~current ~~the asset. We adopted the provisions of SFAS 143 in the first quarter of 2003~~expectations, and ~~the~~these ~~impact~~estimates ofare ~~such~~updated ~~adoption~~periodically ~~was~~as ~~not~~additional ~~material~~information tobecomes ~~our financial position or results of operations for the third quarter or first nine months of 2003~~available.

InAccounting ~~April 2002,~~for ~~the FASB~~income ~~issued~~taxes: As ~~SFAS~~part ~~No.~~of ~~145,~~the ~~“Rescission~~process of ~~FASB~~preparing ~~Statements~~our consolidated ~~No.~~financial 4statements, ~~44,~~we ~~and~~are ~~64, Amendment~~required ofto ~~FASB~~estimate ~~Statement~~our ~~No.~~actual current ~~13,~~tax ~~and~~exposure ~~Technical~~(state, ~~Corrections”~~federal, ~~(“SFAS 145”~~and foreign)~~. SFAS~~, ~~145~~together ~~rescinds~~with ~~FASB Statement~~assessing ~~No.~~permanent 4,and ~~which~~temporary ~~required~~differences ~~all~~resulting ~~gains~~from ~~and~~differing ~~losses~~bases ~~from~~and treatment ~~extinguishments~~ of ~~debt~~items tofor ~~be aggregated~~tax and, ifaccounting ~~material~~purposes, ~~classified~~such as anthe ~~extraordinary~~carrying ~~item~~value of intangibles, ~~net~~deductibility of ~~the related~~expenses, ~~income~~depreciation ~~tax~~of ~~effect. As~~property, ~~a result~~plant, and ~~the~~equipment, ~~criteria~~and invaluation ~~Accounting~~of ~~Principles~~inventories. Temporary ~~Board~~differences ~~Opinion~~result 30in ~~will~~deferred ~~now~~tax beassets ~~used~~and toliabilities, ~~classify~~which ~~those~~are ~~gains~~included ~~and~~within ~~losses. The provisions~~our ofconsolidated ~~SFAS~~balance ~~145,~~sheets. We asmust ~~related~~then toassess the ~~rescission~~likelihood ofthat ~~FASB Statement No. 4,~~our ~~are~~deferred ~~effective~~tax ~~for~~assets ~~fiscal~~will ~~2003. In~~be ~~the first~~recovered ~~quarter~~from offuture ~~2003,~~taxable weincome. Actual ~~adopted~~results ~~the~~could ~~provisions~~differ offrom ~~SFAS~~this assessment ~~145~~if ~~and~~sufficient ~~the extraordinary~~taxable ~~item,~~income ofis ~~$7.6~~not ~~million,~~generated ~~recorded~~ in ~~our~~future ~~statement~~periods. To ~~of operations for~~ the ~~Predecessor~~extent ~~period~~we ~~from~~determine ~~December 31,~~the ~~2000~~need ~~through~~to ~~August 14,~~establish ~~2001~~a ~~will~~valuation beallowance ~~reclassified~~or inincrease ~~our~~such ~~Annual~~allowance ~~Report~~in ona ~~Form~~period, ~~10-K~~we asmust ~~a component of~~include ~~income~~an ~~before~~expense ~~income~~within ~~taxes~~the ~~of $12.5 million (pre-~~tax) ~~with~~provision in the ~~tax~~accompanying ~~benefit~~unaudited ofcondensed ~~$4.9~~consolidated ~~million~~statement ~~reclassified as a component~~ of ~~income taxes for the year ended January 3, 2004~~operations.

InStock-based compensation ~~July 2002~~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 ~~FASB~~the ~~issued~~exercise ~~SFAS~~price ~~No.~~of ~~146,~~the ~~“Accounting~~stock ~~for~~option ~~Costs~~and ~~Associated~~the ~~with~~fair ~~Exit~~market orvalue of the ~~Disposal~~underlying ~~Activities”~~stock ~~(“SFAS~~at ~~146”). SFAS 146~~the ~~sets~~date ~~forth~~of ~~various~~the ~~modifications~~option togrant. For ~~existing~~disclosure ~~accounting~~purposes ~~guidance~~only, ~~which~~we also ~~prescribes~~estimate the ~~conditions~~impact ~~which~~on ~~must~~our benet ~~met~~income inof ~~order~~applying ~~for~~the ~~costs~~fair ~~associated~~value ~~with~~method of ~~contract~~measuring ~~terminations~~compensation cost on stock options with the fair value, ~~facility~~prior ~~consolidations~~to our initial public offering, ~~and~~determined ~~employee~~under ~~relocations~~the ~~and~~minimum value method as provided ~~terminations~~by toStatement beof ~~accrued~~Financial ~~and~~Accounting ~~recorded~~Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” as ~~liabilities~~amended inby ~~financial~~SFAS ~~statements~~No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” ~~Accordingly~~For stock issued or sold outright to employees, ~~SFAS~~directors, ~~146~~or ~~may~~third ~~affect~~parties, we measure expense as the ~~timing~~difference ofbetween ~~recognizing~~the ~~any~~price ofpaid ~~our~~by ~~future~~the ~~restructuring~~recipient ~~costs~~and asthe ~~well~~fair asmarket value of the ~~amount~~stock ~~recognized~~on the date of issuance or sale. ~~SFAS~~Prior to ~~146~~our ~~also~~initial ~~establishes that~~public offering, in the ~~liability~~absence ~~should~~of ~~initially~~a bepublic ~~measured~~market for Carter’s, Inc.’s common stock, management and ~~recorded~~the atBoard ~~fair~~of Directors estimated the market value of Carter’s, Inc. ~~The~~’s ~~provisions~~common ofstock ~~SFAS~~for ~~146~~all ~~are~~option grants and stock ~~required~~issuances tousing bean ~~applied~~approach ~~prospectively~~that applies a multiple to ~~exit~~Adjusted orEBITDA. Adjusted ~~disposal~~EBITDA ~~activities~~represents ~~initiated~~earnings before byinterest, usincome ~~after~~tax ~~December 31~~expense, ~~2002. See~~depreciation and amortization, and also excludes ~~Note~~Acquisition-related 9charges, towrite-downs ~~the~~of ~~unaudited~~long-lived ~~condensed~~assets, ~~consolidated~~closure ~~financial~~costs, and ~~statements~~a ~~regarding~~deferred charge write-off. ~~our~~Adjusted ~~decision~~EBITDA tois ~~close~~not ~~two~~a ofmeasurement ~~our~~under ~~production~~accounting ~~facilities~~principles generally accepted in the United States of America.

~~In November 2002,~~FORWARD ~~the~~LOOKING FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees, including indemnifications, that an entity has issued and a rollforward of the entity’s product warranty liabilities. The disclosure provisions of FIN 45 were effective for financial statements of interim periods or annual periods ending after December 15, 2002. In addition, we adopted the recognition provisions of FIN 45 effective January 1, 2003 for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our financial position, results of operations, or cash flows.STATEMENTS

InStatements ~~December 2002,~~contained herein that relate to ~~the~~our ~~FASB~~future ~~issued~~performance, ~~SFAS~~including, ~~No.~~without ~~148~~limitation, ~~“Accounting~~statements ~~for~~with ~~Stock-Based~~respect ~~Compensation-Transition~~to ~~and~~our ~~Disclosure.” SFAS~~anticipated ~~148~~results ~~provides~~of ~~alternate~~operations ~~methods~~or level of ~~transition~~business for afiscal ~~voluntary change~~2004 toor any other future period, are forward-looking statements within the ~~fair~~meaning of ~~value~~the ~~based~~safe ~~method~~harbor provisions of ~~accounting~~the ~~for~~Private ~~stock-based~~Securities ~~employee~~Litigation Reform Act ~~compensation~~of 1995. ~~SFAS~~Such ~~148~~statements ~~also~~are ~~requires~~based on ~~that~~current ~~disclosures~~expectations ofonly ~~the~~and ~~pro~~are ~~forma~~subject ~~effect~~to ofcertain ~~using~~risks, ~~the~~uncertainties, ~~fair~~and assumptions. Should ~~value~~one ~~method~~or more of these ~~accounting~~risks ~~for~~or ~~stock-based~~uncertainties ~~employee~~materialize, ~~compensation~~or beshould ~~displayed~~underlying ~~more~~assumptions ~~prominently~~prove incorrect, ~~and~~actual inresults ~~tabular~~may ~~format~~vary materially from those anticipated, estimated, or projected. ~~Additionally,~~Among the factors that could ~~SFAS~~cause ~~148~~actual ~~requires~~results ~~disclosure~~to ofmaterially differ include a decrease in sales to or the loss ~~pro~~of ~~forma~~one ~~effect~~or more of ~~using~~our key customers, downward pressure on our prices, disruptions in foreign supply sources, negative publicity, the ~~fair~~loss ~~value~~of one or ~~method~~more of ~~accounting~~our major suppliers for ~~stock-based~~raw ~~employee~~materials, ~~compensation~~increased competition in ~~interim~~the baby ~~financial~~and young children’s apparel market, our substantial leverage which increases ~~statements. The~~our ~~transition~~exposure to interest rate risk and ~~annual~~could require us to dedicate a ~~disclosure~~substantial ~~requirements~~portion ~~were~~of ~~effective~~our ~~for~~cash usflow asto repay principal, the impact of governmental ~~December 28~~regulations and environmental risks applicable to our business, ~~2002~~and seasonal fluctuations in the children’s apparel business. ~~The~~These ~~interim~~risks ~~disclosure~~are described in our final ~~requirements~~prospectus ~~were~~dated ~~effective~~October ~~for~~23, 2003 under the ~~first~~headings ~~quarter~~“Risk ofFactors,” “Business-Competition; ~~fiscal~~Certain ~~2003~~Risks,” and “Statement ~~have~~Regarding ~~been reflected~~Forward-Looking inStatements.” We ~~Note~~undertake 1no obligation to ~~the~~publicly ~~unaudited~~update or ~~condensed~~revise ~~consolidated~~any ~~financial~~ forward-looking statements, whether as a result of new information, future events, or otherwise.

InITEM ~~May 2003, the FASB issued SFAS No~~3. ~~150, “Accounting for Certain Financial Instruments with~~ QUANTITATIVE ~~Characteristics~~AND ofQUALITATIVE ~~both~~DISCLOSURES ~~Liabilities~~ABOUT ~~and~~MARKET Equity” (“SFAS 150”). SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to our existing financial instruments effective July 6, 2003, the beginning of the first fiscal period after June 15, 2003. The FASB recently decided to defer the provisions of paragraphs 9 and 10 of this statement as they apply to mandatorily redeemable noncontrolling interests. We adopted SFAS 150 on June 1, 2003. The adoption of this statement did not have an effect on our financial position, results of operations, or cash flows.RISK

21In 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.

~~ITEM~~We 3contract for production with third parties primarily in the Far East and South and Central America. While ~~QUANTITATIVE~~these ~~AND~~contracts ~~QUALITATIVE~~are stated ~~DISCLOSURES~~in ~~ABOUT~~United ~~MARKET~~States ~~RISKS~~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 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 vendors worldwide, providing us with flexibility in our production should significant fluctuations occur between the United States and various local currencies. To date, such 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.

InOur ~~the~~operating ~~operation~~results ofare subject to risk from interest rate fluctuations on our debt, which carries ~~business~~variable interest rates. At July 3, 2004, weour ~~have~~outstanding ~~market~~debt ~~risk~~aggregated ~~exposures~~$204.9 ~~including~~million, ~~those~~of ~~related~~which to$91.8 ~~foreign~~million ~~currency~~bore ~~risk~~interest ~~and~~at ~~interest~~a variable rate, ~~risk.~~ so that an increase of 1% in the applicable ~~These~~rate ~~risks~~would increase our annual interest cost by $918,000 and could have an adverse effect on our ~~strategies~~net income and cash flow. Pursuant to ~~manage~~the provisions of our ~~exposure~~senior tocredit ~~them~~facility, ~~are~~we purchased ~~discussed~~an ~~below~~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.

WeOTHER 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 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 over 60 vendors worldwide, providing us with flexibility in our production should significant fluctuations occur between the United States and various local currencies. To date, such 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.RISKS

~~Our~~There ~~operating~~also ~~results~~ are ~~subject~~other torisks risk from interest rate fluctuations on debt, which carries variable interest rates. At October 4, 2003, outstanding debt aggregated $293.6 million, of which $119.6 million bore interest at a variable rate. An increase of 1% in the ~~applicable~~operation ~~rate would~~of ~~increase~~ our ~~annual~~business ~~interest~~specifically ~~cost~~related byto ~~$1,196,000 and could have an adverse~~raw ~~effect~~material onpricing ~~our net income~~ and ~~cash flow. Pursuant to the provisions of~~ our ~~credit~~global ~~facility,~~sourcing ~~we purchased an interest rate cap as an economic hedge against approximately $31~~network.~~3 million of variable rate debt. The cap rate is 7.0% and the arrangement expires on December 7, 2004.~~

~~OTHER~~The principal raw materials ~~RISKS~~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 ~~also~~currently ~~have~~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 ~~risks~~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 ~~operation~~interruption of production in offshore facilities, delay receipt of the products into the United States, or affect our ~~business~~operating ~~specifically~~income. Our ~~related~~future toperformance ~~raw~~may ~~material~~be ~~pricing~~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 ~~global~~financial condition and results of operations. We carefully select our sourcing ~~network~~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.

~~The~~We ~~principal~~continually ~~raw materials~~evaluate weopportunities ~~use~~to ~~are~~improve ~~finished~~our ~~fabrics~~products and reduce ~~trim~~our ~~materials~~costs. ~~Prices~~Our ~~for~~remaining ~~these materials are affected by~~sewing ~~changes~~facilities, located in ~~market~~Mexico, ~~demand~~currently ~~and~~provide ~~there~~us ~~can~~with bean noadvantageous ~~assurance that prices for these~~cost ~~and~~structure. If ~~other~~we ~~raw~~determine ~~materials will not increase~~ in the ~~near~~ future~~. These~~ that ~~materials~~we are ~~available~~able ~~from more than one supplier, which enables us~~ to ~~negotiate~~source ~~pricing. However,~~products ~~the~~currently ~~loss~~sewn ofin ~~one~~Mexico orat ~~more~~a ofsignificantly lower ~~these~~cost ~~suppliers~~with ~~could temporarily~~superior ~~interrupt~~quality ~~our supply~~elsewhere, ~~which~~we ~~could~~would ~~have~~develop ana ~~adverse~~plan ~~effect~~to ~~on our~~exit ~~sales~~such facilities and ~~increase~~incur ~~our~~substantial closure-related costs.

We ~~currently source~~ ~~substantially~~enter ~~all~~into ofvarious ~~our~~purchase ~~production~~order ~~from~~commitments ~~our~~with ~~offshore operations and third~~full-~~party~~package ~~manufacturers~~suppliers. We ~~located~~can incancel ~~foreign~~these ~~countries. As~~arrangements, aalthough ~~result~~in some instances, we may be ~~adversely~~subject ~~affected~~to ~~by political~~a ~~instability~~termination ~~resulting~~charge inreflecting ~~the disruption of trade from foreign~~a ~~countries,~~percentage ~~the imposition~~ of ~~new~~work ~~regulations~~performed ~~relating~~prior to ~~imports~~cancellation. Historically, ~~duties, taxes,~~such cancellations and ~~other~~related termination charges onhave ~~imports,~~occurred ~~any~~infrequently ~~significant~~and ~~decreases~~have innot ~~the~~had ~~value~~a ofmaterial ~~the~~impact ~~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~~business. ~~Our~~ ~~future performance may be subject to such factors~~However, ~~which~~as ~~are~~we ~~beyond~~rely ~~our~~more ~~control,~~heavily ~~and there can be no assurance that such factors would not have a material adverse effect~~ on our ~~financial condition~~full-package ~~and~~global ~~results of operations. We carefully select our~~ sourcing ~~agents~~network, ~~and~~we inexpect ~~an effort~~ to ~~mitigate~~incur ~~the~~more ~~possible disruption~~of inthese ~~product~~termination ~~flow~~charges, which wecould ~~place~~increase ~~production~~our incost ~~various countries we believe to be~~ of ~~lower~~goods ~~risk~~sold.

We are continually evaluating opportunities to improve our products and reduce our costs. Our remaining sewing facilities continue to provide us with an advantageous cost base. If we determine in the future that we are able to source those products at a significantly lower cost with superior quality, we would incur substantial plant-closure, severance, and other charges that we cannot currently predict related to exiting those facilities.22

~~We enter~~ITEM ~~into various purchase order commitments with full package suppliers~~4. We CONTROLS ~~can~~AND 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, these 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.PROCEDURES

22The 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) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer of Carter’s, Inc. and TWCC have concluded that our disclosure controls and procedures are adequate and effective.

~~ITEM~~We ~~4. DISCLOSURE~~have recently implemented ~~CONTROLS~~a ~~AND~~policy ~~PROCEDURES:~~that requires an additional monthly review by management of all inventory-related journal entries exceeding $500,000.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective.23

23PART II – OTHER INFORMATION

~~PART~~ITEM ~~II—OTHER~~1. ~~INFORMATION~~LEGAL PROCEEDINGS:

~~ITEM~~From 1time to time, we have been involved in various legal proceedings. We ~~LEGAL~~believe ~~PROCEEDINGS:~~that all such litigation is routine in 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.

~~From~~On ~~time~~August ~~to time~~21, we ~~have~~2002, ~~been~~a ~~involved~~lawsuit was filed against us in ~~various~~the ~~legal~~State ~~proceedings. We~~Court ~~believe~~of ~~that~~Fulton ~~all~~County, ~~such~~State of ~~litigation~~Georgia isby ~~routine~~T.N.S. inMills, ~~nature~~Inc. and ~~incidental~~ toBowling Green Spinning Company in which the ~~conduct~~plaintiffs are claiming damages of ~~our~~approximately ~~business~~$830,000 ~~and~~related weto an ~~believe~~alleged ~~that~~oral noguarantee ~~such litigation,~~of ifmoney ~~resolved~~owed ~~adversely~~ to ~~us,~~them ~~will~~by ~~have~~ a ~~material~~third-party ~~adverse~~vendor. On ~~effect~~July ~~on our~~27, ~~financial~~2004 ~~condition,~~the ~~results~~court ofgranted ~~operations,~~our ormotion for ~~cash~~summary ~~flows~~judgment.

~~During~~ITEM ~~2002, a lawsuit was filed against us in which the plaintiff is claiming damages of approximately $830,000 related to an alleged oral guarantee of money owed to it by a third-party vendor~~2. We ~~have~~CHANGES ~~not provided~~IN ~~for this exposure, as we believe that this claim is without merit and we intend to vigorously defend this matter.~~SECURITIES:

~~ITEM 2. CHANGES IN SECURITIES:~~None

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

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

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

~~ITEM~~The 4.Company ~~SUBMISSION~~held OFits ~~MATTERS~~Annual TOMeeting Aof Stockholders ~~VOTE~~on OFMay ~~SECURITY~~14, ~~HOLDERS:~~2004 (the “Annual Meeting”) for which proxies were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended.

InAt ~~August of 2003~~ the ~~shareholder~~Annual ofMeeting, ~~The~~two ~~William~~Class ~~Carter~~I ~~Company acted by unanimous written~~directors ~~consent~~were tonominated ~~elect~~for ~~Thomas~~re-election, ~~Whiddon~~and ~~to fill an empty seat on~~ the ~~board~~holders of ~~directors of The William~~ Carter’s, ~~Company~~Inc. ~~Following~~’s ~~that action, the board of~~common ~~directors~~stock ~~consisted~~elected ofboth ~~Frederick~~nominees J.as ~~Rowan,~~indicated ~~II,~~by ~~Bradley~~the M.following ~~Bloom,~~schedule ~~Ross~~of ~~M. Jones,~~votes ~~David Pulver, Paul Fulton, John R. Welch, and Mr. Whiddon.~~cast:

ITEM 5. OTHER INFORMATION:

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	—	—

~~None~~The 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.

24The holders of Carter’s, Inc.’s common stock approved the Company’s 2003 Equity Incentive Plan. A 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.

~~ITEM~~The 6holders of Carter’s, Inc.’s ~~EXHIBITS~~common ~~AND~~stock ~~REPORTS~~approved ONthe ~~FORM~~Company’s 8Amended 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-K:votes.

~~(a)~~ITEM ~~Exhibits~~5. OTHER INFORMATION:

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
32		Section 1350 Certification

None

~~(b) Reports on Form 8-K: None~~24

25ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

~~SIGNATURES~~(a) Exhibits:

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.

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

THE WILLIAM CARTER COMPANY
Date: November 17, 2003				/s/ FREDERICK J. ROWAN, II
			Frederick J. Rowan, II
		Chairman, President, and Chief Executive Officer
Date: November 17, 2003			/s/ MICHAEL D. CASEY
			Michael D. Casey
	Executive Vice President and Chief Financial Officer

(b) Reports on Form 8-K:

26On 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

Part I.

Financial Information

Exhibit Number

Description of Exhibits

Executive Vice President and Chief Financial Officer

Executive Vice President and
Chief Financial Officer

Filing Compare · CARTER WILLIAM CO