UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

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

Commission file numbers:

001-31829 and 333-22155

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CARTER'S, INC.THE WILLIAM CARTER COMPANY(Exact names of registrants as specified in their charters)

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

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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 our most recently completed second fiscal quarter, and accordingly Carter's, Inc.
does not meet the definition of an accelerated filer under Rule 12b-2 of the Securities Exchange Act of 1934.

Applicable
only to corporate issuers:

Carter's, Inc.
has one class of common stock. There were 27,993,360 shares of Carter's, Inc.'s common stock with a par value of $0.01 per share outstanding as of the close of business on
April 30, 2004.

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

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



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CARTER'S, INC.  AND THE WILLIAM CARTER COMPANY  INDEX TO REPORT ON FORM 10-Q  FOR THREE-MONTH PERIOD ENDED APRIL 3, 2004

|               |  |         |  |                                                                                                                             |  | Page
|-------------- |  | ------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|Part I.        |  |         |  | Financial Information                                                                                                       |  |     
|               |  | Item 1. |  | Financial Statements                                                                                                        |  |     
|               |  |         |  | Condensed Consolidated Balance Sheets as of April 3, 2004 (unaudited) and January 3, 2004                                   |  | 3   
|               |  |         |  | Unaudited Condensed Consolidated Statements of Operations for the three-month periods ended April 3, 2004 and April 5, 2003 |  | 4   
|               |  |         |  | Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods ended April 3, 2004 and April 5, 2003 |  | 5   
|               |  |         |  | Notes to the Unaudited Condensed Consolidated Financial Statements                                                          |  | 6   
|               |  | Item 2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 14  
|               |  | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                                  |  | 21  
|               |  | Item 4. |  | Controls and Procedures                                                                                                     |  | 22  
|Part II.       |  |         |  | Other Information                                                                                                           |  |     
|               |  | Item 1. |  | Legal Proceedings                                                                                                           |  | 23  
|               |  | Item 2. |  | Change in Securities                                                                                                        |  | 23  
|               |  | Item 3. |  | Defaults upon Senior Securities                                                                                             |  | 23  
|               |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                         |  | 23  
|               |  | Item 5. |  | Other Information                                                                                                           |  | 23  
|               |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                            |  | 23  
|Signatures     |  | 24     
|Certifications |  | 25     

2

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

|                                     |                                                                              | April 3,
2004                                                                                                                                                                                                                                                                                                                            |   | January 3,
2004                           
|------------------------------------ | ---------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------------
|
|ASSETS                               |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|Current assets:                      |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     | Cash and cash equivalents                                                    |                                                                                                                                                                                                                                                                                                                                          | $ | 38,156                                    
|                                     | Accounts receivable, net                                                     |                                                                                                                                                                                                                                                                                                                                          |   | 72,781                                    
|                                     | Inventories, net                                                             |                                                                                                                                                                                                                                                                                                                                          |   | 91,189                                    
|                                     | Prepaid expenses and other current assets                                    |                                                                                                                                                                                                                                                                                                                                          |   | 5,900                                     
|                                     | Deferred income taxes                                                        |                                                                                                                                                                                                                                                                                                                                          |   | 8,177                                     
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     |                                                                              | Total current assets                                                                                                                                                                                                                                                                                                                     |   |                                           
|                                     | Property, plant, and equipment, net                                          |                                                                                                                                                                                                                                                                                                                                          |   | 50,678                                    
|                                     | Tradename                                                                    |                                                                                                                                                                                                                                                                                                                                          |   | 220,233                                   
|                                     | Cost in excess of fair value of net assets acquired                          |                                                                                                                                                                                                                                                                                                                                          |   | 139,282                                   
|                                     | Licensing agreements, net of accumulated amortization of $13,125 and $11,875 |                                                                                                                                                                                                                                                                                                                                          |   | 1,875                                     
|                                     | Deferred debt issuance costs, net                                            |                                                                                                                                                                                                                                                                                                                                          |   | 7,188                                     
|                                     | Other assets                                                                 |                                                                                                                                                                                                                                                                                                                                          |   | 2,922                                     
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   | Total assets                              
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|Current liabilities:                 |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     | Current maturities of long-term debt                                         |                                                                                                                                                                                                                                                                                                                                          | $ | 927                                       
|                                     | Accounts payable                                                             |                                                                                                                                                                                                                                                                                                                                          |   | 25,372                                    
|                                     | Other current liabilities                                                    |                                                                                                                                                                                                                                                                                                                                          |   | 32,386                                    
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     |                                                                              | Total current liabilities                                                                                                                                                                                                                                                                                                                |   |                                           
|                                     | Long-term debt                                                               |                                                                                                                                                                                                                                                                                                                                          |   | 204,215                                   
|                                     | Deferred income taxes                                                        |                                                                                                                                                                                                                                                                                                                                          |   | 82,749                                    
|                                     | Other long-term liabilities                                                  |                                                                                                                                                                                                                                                                                                                                          |   | 9,816                                     
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     |                                                                              | Total liabilities                                                                                                                                                                                                                                                                                                                        |   |                                           
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     | Commitments and contingencies                                                |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     | Stockholders' equity:                                                        |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     |                                                                              | Carter's, Inc., preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at April 3, 2004 and January 3, 2004                                                                                                                                                                                    |   |                                           
|                                     |                                                                              | Carter's, Inc., common stock, voting; par value $.01 per share; 40,000,000 shares authorized; 27,985,360 shares issued and outstanding at April 3, 2004 and January 3, 2004 (TWCC's common stock, voting; par value $.01
per share; 200,000 shares authorized; 1,000 shares issued and outstanding at April 3, 2004 and January 3, 2004) |   |                                           
|                                     | Additional paid-in capital                                                   |                                                                                                                                                                                                                                                                                                                                          |   | 241,847                                   
|                                     | Retained earnings                                                            |                                                                                                                                                                                                                                                                                                                                          |   | 40,789                                    
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     |                                                                              | Total stockholders' equity                                                                                                                                                                                                                                                                                                               |   |                                           
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   | Total liabilities and stockholders' equity
|                                     |                                                                              |                                                                                                                                                                                                                                                                                                                                          |   |                                           

See accompanying notes to the unaudited condensed consolidated financial statements

3

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

|                                              |                                                       | For the
three-month periods ended |        
|--------------------------------------------- | ----------------------------------------------------- | --------------------------------- | -------
|
|Net sales                                     |                                                       | $                                 | 182,720
|Cost of goods sold                            |                                                       |                                   | 116,450
|                                              |                                                       |                                   |        
|Gross profit                                  |                                                       |                                   | 66,270 
|Selling, general, and administrative expenses |                                                       |                                   | 47,370 
|Plant closure costs                           |                                                       |                                   | 534    
|Royalty income                                |                                                       |                                   | (3,164 
|                                              |                                                       |                                   |        
|Operating income                              |                                                       |                                   | 21,530 
|Interest expense, net                         |                                                       |                                   | 4,624  
|                                              |                                                       |                                   |        
|Income before income taxes                    |                                                       |                                   | 16,906 
|Provision for income taxes                    |                                                       |                                   | 6,593  
|                                              |                                                       |                                   |        
|Net income                                    |                                                       | $                                 | 10,313 
|                                              |                                                       |                                   |        
|Carter's, Inc.                                |                                                       |                                   |        
|                                              | Basic net income per common share                     |                                   | $      
|                                              | Diluted net income per common share                   |                                   | $      
|                                              | Basic weighted average number of shares outstanding   |                                   |        
|                                              | Diluted weighted average number of shares outstanding |                                   |        

See
accompanying notes to the unaudited condensed consolidated financial statements

4

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

|                                               |                                                                                   | For the
three-month periods ended                    |                                          
|---------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities:          |                                                                                   |                                                      |                                          
|                                               | Net income                                                                        |                                                      | $                                        
|                                               | Adjustments to reconcile net income to net cash provided by operating activities: |                                                      |                                          
|                                               | Depreciation and amortization                                                     |                                                      |                                          
|                                               | Amortization of debt issuance costs                                               |                                                      |                                          
|                                               | Accretion of debt discount                                                        |                                                      |                                          
|                                               | Non-cash stock compensation expense                                               |                                                      |                                          
|                                               | Deferred tax provision (benefit)                                                  |                                                      |                                          
|                                               | Effect of changes in operating assets and liabilities:                            |                                                      |                                          
|                                               |                                                                                   | Accounts receivable                                  |                                          
|                                               |                                                                                   | Inventories                                          |                                          
|                                               |                                                                                   | Prepaid expenses and other assets                    |                                          
|                                               |                                                                                   | Accounts payable and other liabilities               |                                          
|                                               |                                                                                   |                                                      |                                          
|                                               |                                                                                   |                                                      | Net cash provided by operating activities
|                                               |                                                                                   |                                                      |                                          
|Cash flows from investing activities:          |                                                                                   |                                                      |                                          
|                                               |                                                                                   | Capital expenditures                                 |                                          
|                                               |                                                                                   | Proceeds from sale of property, plant, and equipment |                                          
|                                               |                                                                                   | Collections on loan                                  |                                          
|                                               |                                                                                   |                                                      |                                          
|                                               |                                                                                   |                                                      | Net cash used in investing activities    
|                                               |                                                                                   |                                                      |                                          
|                                               |                                                                                   | Cash flows from financing activities:                |                                          
|                                               |                                                                                   |                                                      | Payments of term loan                    
|                                               |                                                                                   |                                                      | Payments of capital lease obligations    
|                                               |                                                                                   |                                                      |                                          
|                                               |                                                                                   |                                                      |                                          
|                                               |                                                                                   |                                                      |                                          
|Net increase in cash and cash equivalents      |                                                                                   |                                                      | 2,095                                    
|Cash and cash equivalents, beginning of period |                                                                                   |                                                      | 36,061                                   
|                                               |                                                                                   |                                                      |                                          
|Cash and cash equivalents, end of period       |                                                                                   | $                                                    | 38,156                                   
|                                               |                                                                                   |                                                      |                                          

See
accompanying notes to the unaudited condensed consolidated financial statements

5

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

NOTE 1THE COMPANY:

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

Carter's, Inc.
conducts its operations and derives all of its operating income and cash flow through its wholly-owned subsidiary, The William Carter Company ("TWCC").
Carter's, Inc., together with its wholly-owned subsidiary TWCC (collectively "Carter's," "we," "us," and "our") design, source, manufacture, and market branded childrenswear under the Carter's, Carter's Classics, Child of
Mine,andTykeslabels. Our products are sourced through
contractual arrangements with numerous manufacturers throughout the world and through production at company-managed sewing facilities in Mexico. Our sewing operations in Costa Rica were closed in the
fourth quarter of fiscal 2003. (See Note 9 regarding the closure of our Costa Rican facilities). Products are manufactured for wholesale distribution to major domestic retailers and for our 170
retail stores that market our brand name merchandise and certain products manufactured by other companies. Our retail operations represented approximately 32% and 34% of our consolidated net sales in
the first quarters of fiscal 2004 and fiscal 2003.

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

NOTE 2BASIS OF PREPARATION:

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

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

6

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

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 quarter of fiscal 2003. Therefore, the accompanying unaudited consolidated financial statements for the first quarter of fiscal 2004 reflect our financial position as of
April 3, 2004 and for the 13-week period then ended. The first quarter of fiscal 2003 ended on April 5, 2003 and included 14 weeks of financial results.

During
the first quarter 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. 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 $431,000 in the first quarter of fiscal 2004 as a component of selling, general,
and administrative expenses on the accompanying unaudited condensed consolidated statements of operations rather than as a reduction of revenue. Co-op advertising arrangements in fiscal
2003 had been 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.

NOTE 3STOCK-BASED COMPENSATION:

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

The
following table illustrates, for disclosure purposes only, the effect on net income if compensation expense for our option grants had been determined based on the fair value as of
the

7

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grant
dates consistent with the methodology of SFAS 123 and SFAS 148 (dollars in thousands, except per share data):

For the
three-month periods endedApril 3,
2004

April 5,
2003Net income, as reported

$
10,313

$
6,910Add:Stock-based employee compensation (under APB 25) included in reported net income, net of related tax effects


41


4Deduct: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


(219
)

(133
)Pro forma net income

$
10,135

$
6,781Carter's, Inc.'s net income per common share:Basic-as reported

$
0.37

$
0.31Basic-pro forma

$
0.36

$
0.30Diluted-as reported

$
0.35

$
0.29Diluted-pro forma

$
0.34

$
0.28


For
basic 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
fiscal 2003. For basic options, using a fair value method, the fair value of each option at the date of the grant has been estimated to be $13.15 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% 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.

For
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 fiscal 2003. 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
fiscal 2003. These per share option values were calculated at the same assumed risk free interest rates shown above with an expected life of 10 years and expected volatility of 50.0%. No
dividends were assumed.

8

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NOTE 4INVENTORIES:

Inventories consisted of the following ($000):

April 3,
2004

January 3,
2004Finished goods

$
86,638

$
102,921Work in process


2,329


1,572Raw materials and supplies


2,222


267Total

$
91,189

$
104,760


NOTE 5CARTER'S, INC.'S STOCK TRANSACTIONS:

During the first quarter of fiscal 2004, we issued 200,000 options to purchase Carter's, Inc.'s common stock to certain employees. During the first quarter
of fiscal 2003, we issued 76,800 options to purchase Carter's, Inc.'s common stock to one of our directors and to certain employees.

No
compensation expense was recorded during the first quarters of fiscal 2004 and fiscal 2003 on these option grants as the fair market value of the options issued as of the date of
grant was deemed to equal the exercise price of the options.

NOTE 6GOODWILL AND OTHER INTANGIBLE ASSETS:

In connection with our 2001 acquisition by Berkshire Partners LLC and affiliates (the "Acquisition"), as more fully described in Note 1 "The Company" to
our consolidated financial statements in our most recently filed annual report on Form 10-K, we adopted provisions of SFAS No. 141, "Business Combinations"
("SFAS 141") and applied the required provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). 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
first quarters of fiscal 2004 and 2003 was $1.3 million and is expected to be $3.1 million for fiscal 2004.

NOTE 7EMPLOYEE BENEFIT PLANS:

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

9

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The
components of pension benefit expense charged to operations are as follows ($000):

For the
three-month periods endedApril 3,
2004

April 5,
2003Service costbenefits attributed to service during the period

$


$
Interest cost on accumulated pension benefit obligation


19


21Amortization of net actuarial loss





16Total net periodic pension benefit cost

$
19

$
37


The
components of post-retirement life and medical benefit expense charged to operations are as follows ($000):

For the
three-month periods endedApril 3,
2004

April 5,
2003Service costbenefits attributed to service during the period

$
22

$
20Interest cost on accumulated post-retirement benefit obligation


150


158Amortization of net actuarial loss





Total net periodic post-retirement benefit cost

$
172

$
178


NOTE 8SEGMENT INFORMATION:

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

Under
our previous method of evaluating and reporting the profitability of our segments, each segment's results included costs directly related to the segment's revenue and all other
costs were allocated based on the relationship to consolidated net sales or units produced to support each

10

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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 (terminated in
connection with our initial public offering, see Note 1 to the unaudited condensed consolidated financial statements), 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 "Summary of Significant Accounting
Policies" to the consolidated financial statements in our most recently filed annual report on Form 10-K.

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

|           |                         | For the
three-month periods ended |  
|---------- | ----------------------- | --------------------------------- | -
|
|Net sales: |                         |                                   |  
|           | Wholesale               |                                   | $
|           | Retail                  |                                   |  
|           | Mass Channel            |                                   |  
|           |                         |                                   |  
|           |                         | Total net sales                   |  
|           |                         |                                   |  
|EBITDA:    |                         |                                   |  
|           | Wholesale               |                                   | $
|           | Retail                  |                                   |  
|           | Mass Channel            |                                   |  
|           | Other reconciling items |                                   |  
|           |                         |                                   |  
|           |                         | Total EBITDA                      |  
|           |                         |                                   |  

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

11

---



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

For the
three-month periods endedApril 3,
2004

April 5,
2003EBITDA

$
26,868

$
23,186Depreciation and amortization expense


(5,338
)

(4,949
)Interest expense, net


(4,624
)

(7,002
)Provision for income taxes


(6,593
)

(4,325
)Net income

$
10,313

$
6,910


NOTE 9PLANT CLOSINGS:

In July 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 were held and used for production through the end of November 2003. Total employees terminated as of April 3, 2004
were approximately 1,492.

As
a result of these 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. During the first quarter of fiscal 2004, we
recorded $534,000 in plant closure costs comprised of $210,000 of severance and $324,000 of 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). Additionally, during the second
quarter of fiscal 2004, we expect to incur the remaining $0.2 million in additional severance and other exit costs.

Activity
associated with the plant closure reserves for the three-month period ended April 3, 2004 is as follows:

|                                         |       | January 3, 2004
Reserves |         | Provisions |   | Payments |         | April 3,
2004
Reserves
|---------------------------------------- | ----- | ------------------------ | ------- | ---------- | - | -------- | ------- | ----------------------
|Severance and other termination benefits |       | $                        | 274,000 |            | $ | 210,000  |         | $                     
|Other exit costs                         |       |                          |        |            |   | 324,000  |         |                       
|                                         |       |                          |         |            |   |          |         |                       
|                                         | Total |                          | $       | 274,000    |   | $        | 534,000 |                       
|                                         |       |                          |         |            |   |          |         |                       

NOTE 10EARNINGS PER SHARE:

In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share is based on the weighted average number of common shares outstanding during
the period, whereas diluted earnings per share also gives effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares include stock options. 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.

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

|                                                                            |                                                                   | For the
three-month periods ended
|--------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------
|
|Net income                                                                  |                                                                   | $                                
|Weighted average number of common and common equivalent shares outstanding: |                                                                   |                                  
|                                                                            | Basic number of common shares outstanding                         |                                  
|                                                                            | Dilutive effect of stock options                                  |                                  
|                                                                            |                                                                   |                                  
|                                                                            | Diluted number of common and common equivalent shares outstanding |                                  
|                                                                            |                                                                   |                                  
|                                                                            | Basic net income per common share                                 |                                  
|                                                                            | Diluted net income per common share                               |                                  

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

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

Our
fiscal year ends on the Saturday in December or January nearest to the last day of December. Consistent with this policy, fiscal 2003 ended on January 3, 2004 and fiscal 2004
will end on January 1, 2005. As a result, fiscal 2003 contained 53 weeks of financial results and fiscal 2004 will contain 52 weeks of financial results. The additional week in fiscal 2003 was
included in the first quarter of fiscal 2003. Therefore, the accompanying unaudited condensed consolidated financial statements for the first quarter of fiscal 2004 reflect our financial position as
of April 3, 2004 and for the 13-week period then ended. The first quarter of fiscal 2003 ended on April 5, 2003 and included 14 weeks of financial results.

RESULTS OF OPERATIONS

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

|                                              |  | Three-month periods ended |  
|--------------------------------------------- |  | ------------------------- | -
|
|Wholesale sales                               |  | 49.6                      | %
|Retail sales                                  |  | 32.4                      |  
|Mass Channel sales                            |  | 18.0                      |  
|                                              |  |                           |  
|Net sales                                     |  | 100.0                     |  
|Cost of goods sold                            |  | 63.7                      |  
|                                              |  |                           |  
|Gross profit                                  |  | 36.3                      |  
|Selling, general, and administrative expenses |  | 25.9                      |  
|Plant closure costs                           |  | 0.3                       |  
|Royalty income                                |  | (1.7                      | )
|                                              |  |                           |  
|Operating income                              |  | 11.8                      |  
|Interest expense, net                         |  | 2.6                       |  
|                                              |  |                           |  
|Income before income taxes                    |  | 9.3                       |  
|Provision for income taxes                    |  | 3.6                       |  
|                                              |  |                           |  
|Net income                                    |  | 5.6                       | %
|                                              |  |                           |  
|Number of retail stores at end of period      |  | 170                       |  

Three-month period ended April 3, 2004 compared to three-month period ended April 5, 2003

NET SALES.In the first quarter of fiscal 2004, consolidated net sales increased $16.7 million, or 10.1%, to
$182.7 million from $166.0 million in the first quarter of fiscal 2003. The increase over the

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prior
year reflects the growth in sales to the mass channel, including sales of ourChild of Minebrand to Wal-Mart, which launched in June
of 2003 and increased sales in our retail channel, partially offset by lower wholesale sales.

Total
wholesale sales decreased $6.0 million, or 6.3%, to $90.6 million in the first quarter of fiscal 2004 from $96.6 million in the first quarter of fiscal 2003.
Wholesale sales, excluding off-price sales, decreased $6.7 million, or 7.2%, to $86.7 million from $93.4 million in the first quarter of fiscal 2003. Such decrease
reflects a comparison to a 47% increase in wholesale sales in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. The decrease in the first quarter of fiscal 2004 as
compared to the first quarter of fiscal 2003 also reflects lower average prices in our baby and playwear product categories resulting from our focus on increasing core products as a percentage of our
total mix, partially offset by increased sleepwear sales. Our focus on core products has resulted in higher unit volume during the first quarter of fiscal 2004, most notably in the baby product
category, and such core products generally yield lower average prices per unit.

Mass
channel sales in the first quarter of fiscal 2004 increased $20.4 million to $32.9 million from $12.5 million in the first quarter of fiscal 2003. This revenue
growth reflects sales of ourChild of Minebrand that began selling to Wal-Mart in the second quarter of fiscal 2003. Also contributing to
this growth were increased sales of theTykesbrand sold to Target.

Retail
store sales were $59.2 million for the first quarter of fiscal 2004, an increase of $2.3 million, or 4.0%, from $56.9 million in the first quarter of fiscal
2003. Such revenue growth was driven by incremental sales of $3.7 million generated from new stores opened subsequent to April 5, 2003 and a comparable store sales increase of
$1.9 million, or 3.7%, based on 153 locations. Such increases were partially offset by the impact of a store closure of $0.3 million and an additional week of selling in the
first quarter of fiscal 2003 of $3.1 million. There were a total of 170 stores as of April 3, 2004, including one store opened in February of 2004. We plan to open eleven stores and
close five stores during the balance of fiscal 2004.

GROSS PROFIT.Our gross profit increased $5.7 million, or 9.3%, to $66.3 million in the first quarter of fiscal
2004 from $60.6 million in the first quarter of fiscal 2003. Gross profit as a percentage of net sales in the first quarter of fiscal 2004 decreased to 36.3% from 36.5% in the first quarter of
fiscal 2003. This decrease in gross profit, relative to sales, resulted primarily from a higher mix of mass channel revenues that generally yield lower margins than our wholesale and retail channels.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.Selling, general, and administrative expenses for the first quarter of fiscal
2004 increased $2.4 million, or 5.5%, to $47.4 million from $44.9 million in the first quarter of fiscal 2003. Selling, general, and administrative expenses, as a percentage of
net sales, decreased to 25.9% in the first quarter of fiscal 2004 from 27.1% in the first quarter of fiscal 2003 due to our ability to grow revenue at a faster rate than our selling, general, and
administrative expenses.

PLANT CLOSURE COSTS.In July of 2003, we decided to exit our Costa Rican sewing facilities given our ability to obtain lower
costs from third-party suppliers. We recorded approximately $210,000 of severance and $324,000 of other closure costs during the first quarter of fiscal 2004. Approximately $0.2 million of
remaining closure costs are expected to be incurred during the second quarter of fiscal 2004.

ROYALTY INCOME.We license the use of theCarter's, Carter's Classics,and Child of Minenames and sublicense theTykesname to certain licensees. Our royalty income in the first
quarter of fiscal 2004 increased $0.6 million, or 23.9%, to $3.2 million compared to $2.6 million in the first quarter of fiscal 2003. This increase resulted from royalties earned
on licensed sales of ourChild of Minebrand by our licensee partners who began shipping their products during the third quarter of fiscal 2003.

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OPERATING INCOME.Operating income for the first quarter of fiscal 2004 increased $3.3 million, or 18.1%, to
$21.5 million compared to $18.2 million in the first quarter of fiscal 2003. As a percentage of net sales, operating income increased to 11.8% in the first quarter of fiscal 2004
compared to 11.0% in the first quarter of fiscal 2003. This increase in operating income reflects the benefit from revenue growth, increased gross profit, and leveraging of operating expenses.

INTEREST EXPENSE, NET.Interest expense in the first quarter of fiscal 2004 decreased $2.4 million, or 34%, to
$4.6 million as compared to $7.0 million in the first quarter of fiscal 2003. This decrease is attributable to the redemption of approximately $61.3 million of our 10.875% senior
subordinated notes
in the fourth quarter of fiscal 2003 and lower variable interest rates on reduced levels of term loan indebtedness partially offset by the additional week of interest in the first quarter of fiscal
2003.

INCOME TAXES.We recorded a provision for income taxes of $6.6 million in the first quarter of fiscal 2004 compared to
$4.3 million in the first quarter of fiscal 2003. Our effective tax rate was approximately 39.0% during the first quarter of fiscal 2004 and 38.5% during the first quarter of fiscal 2003.

NET INCOME.As a result of the factors noted above, our first quarter 2004 net income was approximately $10.3 million,
as compared to approximately $6.9 million in the first quarter of fiscal 2003.

FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY

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

Net
accounts receivable at April 3, 2004 were $72.8 million compared to $40.7 million at April 5, 2003 and $65.3 million at January 3, 2004. The
increase over April 5, 2003 reflects the growth in revenue including the impact of sales of ourChild of Minebrand to Wal-Mart. Due
to the seasonal nature of our operations, the net accounts receivable balance at April 3, 2004 is not comparable to the net accounts receivable balance at January 3, 2004.

Net
inventories at April 3, 2004 were $91.2 million compared to $99.0 million at April 5, 2003 and $104.8 million at January 3, 2004. This
decrease over April 5, 2003 reflects the benefit of our focus on core products, which enables higher levels of forecast accuracy, higher service levels to our customers, and lower levels of
excess inventory. Lower inventory levels also reflect the benefit of the closure of our sewing facilities in Costa Rica, and our focus on inventory management. Due to the seasonal nature of our
operations, net inventories at April 3, 2004 are not comparable to net inventories at January 3, 2004.

Net
cash provided by operating activities for the first quarter of fiscal 2004 was $13.4 million compared to $12.3 million in the first quarter of fiscal 2003. The change
in net cash provided by operating activities in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003 is primarily
attributable to the growth in earnings and reductions in inventory partially offset by increases in accounts receivable and reductions in current liabilities.

We
have invested $4.4 million in capital expenditures during the first quarter of fiscal 2004 compared to $3.5 million during the first quarter of fiscal 2003. We plan to
invest an additional

16

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$20 million
in capital expenditures during the remainder of fiscal 2004. Major investments include the expansion of our distribution capabilities, retail store openings and remodeling, and
fixturing programs for wholesale and mass channel customers.

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

Effective
July 29, 2003, our credit facility was amended to, among other things, increase the amount of the commitments under the revolving loan facility from $60.0 million
to $80.0 million, provide for a 75 basis point reduction in the applicable interest margin by prepaying our existing Tranche B term loan and replacing it with a new Tranche C term loan, reduce
the amount of our mandatory loan prepayment requirement from 50% or 75% of excess cash flow to 25% or 50% of excess cash flow, depending on the applicable leverage ratio. Pursuant to the amendment, we
are also permitted to repurchase up to $15.0 million of additional senior subordinated notes, which we may consider from time to time.

The
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 the revolving loan facility. Subject to certain conditions in the 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.

On
March 22, 2004, we prepaid an additional $5.0 million of term loan indebtedness. At April 3, 2004, we had approximately $205.1 million of debt outstanding,
consisting of $113.1 million of senior subordinated notes (the "Notes"), $92.0 million in term loan borrowings, and no borrowings under the revolving loan facility, exclusive of
approximately $10.1 million of outstanding letters of credit. At April 3, 2004, we had approximately $69.9 million of financing available under our revolving loan facility. At
January 3, 2004, we had approximately $212.7 million of debt outstanding, consisting of $113.1 million of Notes, $99.6 million in term loan borrowings and no revolver
borrowings, exclusive of approximately $6.5 million of outstanding letters of credit. The revolver will be available to fund our working capital requirements, capital expenditures, and other
general corporate purposes.

After
giving effect to the prepayments of our term loan, described above, principal borrowings under the term loan are due and payable in fourteen quarterly installments of $231,792 from
June 30, 2004 through September 30, 2007 and four quarterly payments of approximately $22.2 million from December 31, 2007 through September 30, 2008. Interest on
the 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

17

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balance
of the revolving loan facility is payable in full on August 15, 2006, and interest is payable quarterly, or more frequently in the event we have chosen a Eurodollar rate option
available under the terms of the senior credit facility. No principal payments are required on the Notes prior to their scheduled maturity in August 2011. Beginning August 15, 2006, we
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, our semi-annual interest payment on the Notes was $9.5 million for each payment.
After giving effect to the redemption of $61.3 million of the principal amount of the Notes in November 2003, our semi-annual interest payment is now approximately
$6.2 million.

As
previously provided by a 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.

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

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

EFFECTS OF INFLATION AND DEFLATION

We are affected by inflation and changing prices primarily through the purchase of raw materials, increased operating costs and expenses, and fluctuations in
interest 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. Due to the
competitive nature of the children's apparel industry, there is no assurance that this trend will not continue. 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.

SEASONALITY

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements

18

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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.

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

Revenue recognition:We recognize wholesale and mass channel revenue after shipment of products to customers, when title
passes and when all risks and rewards of ownership have transferred. In certain cases, in which we retain the risk of loss during shipment, revenue recognition does not occur until the goods have
reached the specified customer. We consider revenue realized or realizable and earned when the product has been shipped and when all risks and rewards of ownership have transferred, the sales price is
fixed or determinable, and collectibility is reasonably assured. In the normal course of business, we grant certain accommodations and allowances to our wholesale and mass channel customers. Such
amounts are reflected as reductions of net sales. Retail store 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 allowance could be required.

During
the first quarter of 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. 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 $431,000 in the first quarter 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 had been
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.

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

Goodwill and tradename:As of April 3, 2004, we have approximately $360 million in goodwill and tradename
assets. The fair value of theCarter'stradename 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

19

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underlying
businesses. These estimated fair values are based on estimates of the future cash flows of the businesses.

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

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

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

FORWARD LOOKING STATEMENTS

Statements contained herein that relate to our future performance, including, without limitation, statements with respect to our anticipated results of operations
or level of business for 2004 or any other future period, are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Among the factors that could cause actual results to materially differ
include a decrease in sales to or the loss of one or more of our key customers, downward pressure on our prices, disruptions in foreign supply sources, negative publicity, the loss of one or more of
our major suppliers for raw materials, increased competition in the baby and young children's apparel market, our substantial leverage which increases our exposure to interest rate

20

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risk
and could require us to dedicate a substantial portion of our cash flow to repay principal, the impact of governmental regulations and environmental risks applicable to our business, and seasonal
fluctuations in the children's apparel business. These risks are described in our final prospectus dated October 23, 2003 under the headings "Risk Factors," "BusinessCompetition;
Certain Risks," and "Statement Regarding Forward-Looking Statements." We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We
contract for production with third parties primarily in the Far East and South and Central America. While these contracts are stated in United States dollars, there can be no
assurance that the cost for the future production of our products will not be affected by exchange rate fluctuations between the United States dollar and the local currencies of these contractors. Due
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.

Our
operating results are subject to risk from interest rate fluctuations on our debt, which carries variable interest rates. At April 3, 2004, our outstanding debt aggregated
$205.1 million, of which $92.0 million bore interest at a variable rate, so that an increase of 1% in the applicable rate would increase our annual interest cost by $920,000 and could
have an adverse effect on our net income and cash flow. Pursuant to the provisions of our credit facility, we purchased an interest rate cap as an economic hedge against approximately
$31.3 million of variable rate debt. The cap rate is 7.0% and the arrangement expires on December 7, 2004.

OTHER RISKS

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

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

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

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sourcing
agents, and in an effort to mitigate the possible disruption in product flow, we place production in various countries we believe to be of lower risk.

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

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

ITEM 4. CONTROLS AND PROCEDURES

TWCC's 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, TWCC's Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective.

Carter's, Inc.'s
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, Carter's, Inc.'s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective.

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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS:

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

On
August 21, 2002, a lawsuit was filed against us in the State Court of Fulton County, State of Georgia by T.N.S. Mills, Inc. and Bowling Green Spinning Company in which
the plaintiffs are claiming damages of approximately $830,000 related to an alleged oral guarantee of money owed to them by a third-party vendor. We have not provided for this exposure, as we believe
that this claim is without merit and we intend to vigorously defend this matter.

ITEM 2. CHANGES IN SECURITIES:

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES:

None

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

None

ITEM 5. OTHER INFORMATION:

None

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



|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            

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On
March 1, 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 February 24, 2004, Carter's, Inc. issued a press release announcing its financial results for the year ended January 3, 2004.

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SIGNATURES

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.

|                     | CARTER'S, INC.
THE WILLIAM CARTER COMPANY                                                                                 
|-------------------- | --------------------------------------------------------------------------------------------------------------------------
|Date: April 30, 2004 | /s/FREDERICK J. ROWAN, IIFrederick J. Rowan, II Chairman of the Board of Directors, President, and
Chief Executive Officer
|Date: April 30, 2004 | /s/MICHAEL D. CASEYMichael D. Casey Executive Vice President and Chief Financial
Officer                                  

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