Unworn clothes I sell on ebay.
Clothes with a few barely noticable marks, I give to friends.
Clothes which can be used for rags (charities sell the to businesses such as printers), or maybe of use to someone, or I think my friends won't like - I give to charity.
After I had my first baby, I kept some of his clothes for the next.
[Edited on 10/09/2007]