SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One) |                                                                                         
|---------- | ----------------------------------------------------------------------------------------
|ý          | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
|           | For the fiscal year ended December 30, 2007                                             
|or        
|o          | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|           | For the transition period
from                             to                           

Commission File No. 000-50593

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Cherokee International Corporation(Exact name of Registrant as specified in its charter)

|Delaware(State or Other Jurisdiction of
Incorporation or Organization)         | 95-4745032(I.R.S. Employer
Identification Number)
|------------------------------------------------------------------------------ | -------------------------------------------------
|2841 Dow Avenue
Tustin, California(address of the principal executive offices) | 92780(zip code)                                  

Registrant's telephone number, including area code(714) 544-6665Securities registered pursuant to Section 12(b) of the Act:

Title of class

Name of exchange on which registeredCommon Stock, $0.001 par value

The NASDAQ Stock Market LLC
(NASDAQ Global Market)


Securities
registered pursuant to Section 12(g) of the Act: None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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.

(1) Yes ý    No o    (2) Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

|Large accelerated filer o |  | Accelerated filer o |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company ý
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently
completed second fiscal quarter (June 29, 2007) was approximately $46,101,769.

As
of March 1, 2008, 19,453,557 shares of the Registrant's common stock, $0.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for our 2008 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.



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CHEROKEE INTERNATIONAL CORPORATION  Annual Report on Form 10-K  For the Fiscal Year Ended December 30, 2007

|            |  |                                                                                                              |  | Page
|----------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|PART I      |  |                                                                                                              |  |     
|Item 1.     |  | Business                                                                                                     |  | 1   
|Item 1A.    |  | Risk Factors                                                                                                 |  | 12  
|Item 1B.    |  | Unresolved Staff Comments                                                                                    |  | 19  
|Item 2.     |  | Properties                                                                                                   |  | 19  
|Item 3.     |  | Legal Proceedings                                                                                            |  | 20  
|Item 4.     |  | Submission of Matters to a Vote of Security Holders                                                          |  | 20  
|PART II     |  |                                                                                                              |  |     
|Item 5.     |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 21  
|Item 6.     |  | Selected Financial Data                                                                                      |  | 23  
|Item 7.     |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 25  
|Item 7A.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 40  
|Item 8.     |  | Financial Statements and Supplementary Data                                                                  |  | 41  
|Item 9.     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 80  
|Item 9A(T). |  | Controls and Procedures                                                                                      |  | 80  
|Item 9B.    |  | Other Information                                                                                            |  | 82  
|PART III    |  |                                                                                                              |  |     
|Item 10.    |  | Directors, Executive Officers and Corporate Governance                                                       |  | 83  
|Item 11.    |  | Executive Compensation                                                                                       |  | 83  
|Item 12.    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 83  
|Item 13.    |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 83  
|Item 14.    |  | Principal Accounting Fees and Services                                                                       |  | 83  
|PART IV     |  |                                                                                                              |  |     
|Item 15.    |  | Exhibits and Financial Statement Schedules                                                                   |  | 84  
|            |  | Signatures                                                                                                   |  | 87  

Certain statements in this Annual Report on Form 10-K, other than purely historical information, including estimates, projections, statements
relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are
identified by the words "believes," "projects," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and
similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from
the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is
included in the section entitled "Risk Factors" beginning on page 12 of this report. The information contained in this Annual Report on Form10-K should be read together with other
reports and documents that we file with the Securities and Exchange Commission (the "SEC") from time to time, including
Forms 10-Q and 8-K, which may supplement, modify, supersede or update those risk factors. Except as required by law, we undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Unless the context indicates otherwise, all references herein to "Cherokee International
Corporation," "the Company," "we," "us," and "our" refer collectively to Cherokee International Corporation and its subsidiaries.

Our fiscal years 2007, 2006, and 2005, ended on December 30, 2007, December 31, 2006, and January 1, 2006,
respectively.

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PART I

ITEM 1.    BUSINESS

Overview

We are a designer and manufacturer of power supplies for original equipment manufacturers ("OEMs"). Our advanced power supply products are typically custom
designed into mid- to high-end commercial applications in the computing and storage, wireless infrastructure, enterprise networking, telecom, medical and industrial markets.
Our power supply products are differentiated from those used in lower-end electronics, such as personal computers and mobile phones, by their complexity, high level of engineering content
and reliability. We strive to distinguish ourselves from our competitors by offering sophisticated engineering, design flexibility, innovative solutions, rapid prototype development and efficient,
low-cost manufacturing to our customers.

Our
principal executive offices are located at 2841 Dow Avenue, Tustin, California 92780, and our telephone number is (714) 544-6665. We maintain a website at www.cherokeepwr.com.Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
are available free of charge on our website or upon written request to 2841 Dow Avenue, Tustin, California 92780, Attention: Investor Relations as soon as reasonably practicable after the Company
electronically files such materials with the SEC. The contents of our website are not incorporated by reference in to
this Annual Report on Form 10-K and shall not be deemed "filed" under the Exchange Act.

We
operate worldwide and have facilities in Orange County, California; Bombay, India; Wavre, Belgium and Shanghai, China. In March 2007, we closed our manufacturing facility in
Guadalajara, Mexico. In May 2007, we sold this manufacturing facility located in Mexico and in December 2007 we sold our subsidiary, Cherokee Electronica, S.A. de C.V. Since November 1987, our
main office and U.S. manufacturing facility has been located in Tustin, California. On November 26, 2002, we reorganized from a California limited liability company into a Delaware corporation
by merging Cherokee International, LLC with and into Cherokee International Corporation.

We
completed our initial public offering of 6,600,000 shares of our common stock on February 25, 2004. The net proceeds from the offering were $86.5 million. We used
approximately $73.2 million of the net proceeds to repay certain outstanding indebtedness and accrued interest. In connection with the offering, we issued 6,283,796 shares of our common stock
upon conversion of the original principal amount of our outstanding senior convertible notes, and issued 4,071,114 shares of common stock upon exercise of our outstanding warrants.

Our Industry



Power supplies are an essential element in the supply, regulation and distribution of electrical power in electronic equipment. Generally, power supplies convert
alternating current, or AC, from a primary power source, such as a utility company, into a precisely controlled direct current, or DC. Virtually every electronic device that plugs into an AC wall
socket requires some type of AC/DC power supply. DC/DC converters modify one DC voltage level to other DC levels to meet the distinct power needs of various electronic subsystems and components. Power
supplies are also used to regulate and monitor voltages to protect electronic components from surges or drops in voltage, to perform functions that prevent electronic equipment from being damaged by
internal malfunction and to provide back-up power in the event that a primary power source fails.

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Power supplies are normally embedded in OEMs' products and deliver power critical to the function of those products. Although the power supply typically
constitutes less than 5% of the cost of the end product, it must efficiently and reliably convert power from the electric utility grid into the precise form and quality of power required by complex
electronic equipment, such as mainframe computers, enterprise servers, routers and networking equipment, wireless base stations, access networks, ultrasound machines, and industrial process control
and automation equipment. This equipment requires a precise and constant supply of electrical power, significantly more refined than the power provided by the electric utility grid.

On
average, the electric utility grid supplies quality power, free from surges, spikes or sags, 99.9% of the time. However, this still results in the equivalent of nine hours per year of
unavailable power. These nine hours of downtime often occur in many isolated interruptions of very short duration. In lower-end consumer electronics applications, a brief interruption of
power only interrupts operation for the time that the power is actually unavailable. In commercial applications, however, interruption in the power supply or an inability to regulate and distribute
the precise amount of power within the commercial application could cause the entire end product to fail, resulting in extensive downtime. This downtime could cause the OEM to lose revenue as a result
of customer dissatisfaction and may cause financial and operational damage to the end user of the OEM's product. As a result, OEMs are very selective in their choice of a power supply vendor
and place a high degree of importance on the vendor's reliability, emphasizing the quality of the products as well as the sophistication of the vendor's engineering capabilities.



Power supplies are designed for an OEM based on the needs of specific customer applications. Each of these applications may require a standard, modified standard
or custom designed power supply.



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To improve operating efficiencies and shorten the cycle time required to introduce new products, OEMs are relying on a smaller number of approved vendors,
including power supply vendors. We believe OEMs are choosing these select power supply vendors based on:



Competitive Strengths

We believe that we benefit from our competitive strengths in the industry due to the following reasons:



We specialize in providing AC/DC customized and modified standard power supplies. We have a highly talented team of engineers who have extensive experience in
designing customized and modified standard power supplies. We believe our engineering expertise and our database of product designs provides us with an advantage over our competition.



We provide our customers with competitive pricing and better service compared to our competition because of our strategically located design and engineering
facilities, which are located closer to our customers' design and manufacturing facilities. This proximity to our customers' design and manufacturing facilitates a faster turn around of changes to the
design of the product requested by our customers during the design and testing process, which improves efficiency, lowers cost, and provides our customers with better service. Therefore, the "point of
consumption" is an important part of our strategy of investing in operations, which we aim to locate in close proximity to our customers. With our design centers located in the United States, Europe,
and China we can provide a more efficient alternative to their design and engineering product demands.

We
are able to offer competitively priced manufactured products to our customers at lower costs to them due to our manufacturing facilities located in Shanghai, China and Bombay, India.
These facilities allow us the ability to provide low-cost manufacturing solutions for the more labor-
intensive aspects of our production process. Most of our products can be manufactured in multiple facilities, which gives us flexibility in meeting our customers' changing production requirements.



We believe our efficient operations will enable us in the future to generate stronger operating margins once our shipment volumes and capacity utilization
increases. We will achieve stronger margins by:



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We provide products to a number of leading OEMs. We believe our customers continue to seek long-term power-solution partners to act as an
extension of their own engineering teams and support their global manufacturing product needs over long product lifecycles. We have assembled a team of engineers focused on custom/modified standard
design with close relationships to our customers' engineering staffs. We believe these engineering relationships have allowed us to strengthen our overall relationships with our customers.



Because of the custom nature of our products, a significant portion of our sales are from sole source relationships with our customers. Our products are generally
used for the entire life cycle of a customer's end product, providing a base of recurring sales from year to year during that cycle. This life cycle can range anywhere from two to five years in
computing, storage and communications applications, and up to seven to fifteen years in industrial and medical applications. We have found that OEMs generally do not change vendors once a power
supply has been designed into a product.



The Company has been recognized by a number of our customers for providing superior quality and value. For the first time Cherokee was awarded the Prestigious Sun
Meritorious Performance supplier award for 2006 from Sun Microsystems. Suppliers are judged on their performance in the area of cost, quality and lead-time, along with strategic and
technical development.

Prototype
lead-time is a critical factor in a customer's selection of a power supply manufacturer. On average, we deliver custom product prototypes within 10 to
12 weeks of a "design win". This rapid prototyping capability along with our effort to reduce production time helps our customers meet their product development commitment dates and beat their
competitors to market. We provide our customers with short prototype lead times and fast time-to-production by:



Executive Officers of Cherokee

Jeffrey Frank, 53, joined Cherokee in September 2001 as President, Chief Executive Officer and a member of our
board of directors. Prior to joining Cherokee, Mr. Frank was President of Lambda LEI from July 2000 through September 2001. From May 1996 to March 2000, Mr. Frank was President of
Polestar Laboratories. Mr. Frank has over 24 years of experience in the electronics industry in which he spent twelve years with Deltec Electronics, a manufacturer of uninterruptible
power supplies that are marketed to OEM accounts globally.

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Linster W. Fox, 58, joined Cherokee in October 2005 as Executive Vice President, Chief Financial Officer and Secretary. Prior to joining
Cherokee, Mr. Fox worked at Anacomp, Inc., an international document management and multi-vendor services company, where he served as Executive Vice President, and Chief Financial
Officer, since November 2000. Prior to November 2000, Mr. Fox was Senior Vice President and Corporate Controller at Anacomp. Mr. Fox previously served in a variety of financial
management roles, as Vice President in Anacomp's corporate finance, international, technical services, engineering and manufacturing organizations. Prior to Anacomp, Mr. Fox worked for
DatagraphiX Inc., a designer and manufacturer of high-end computer output devices with sales and service organizations around the world. There he held several financial management
positions, including a five-year assignment in the U.K., as Director of Finance, with their European operations. Prior to DatagraphiX Inc., Mr. Fox worked in public
accounting in Washington D.C. with what is now PricewaterhouseCoopers. His clients included public, commercial and international companies. Mr. Fox is a Certified Public Accountant and a
graduate of Georgetown University.

Bassam Marawi, 48, joined Cherokee in October 2006 as Vice President of Research and Development. Prior to joining Cherokee
Mr. Marawi served as Director of Engineering at Flextronics. From August 2000 to October 2003 Mr. Marawi was senior manager at Dell Inc. From April 1994 to August 2000,
Mr. Marawi served as senior manager at Lucent Technologies, Bell labs. Mr. Marawi has over 24 years experience in power supplies and engineering management.

Alex Patel, 58, has served as our Vice President of Engineering since August 2002 and served as Director of Engineering from 1988 to 1993
and from March 1996 to August 2002. Mr. Patel was the Vice President of Engineering at Bikor from 1993 through March 1996, when we acquired substantially all of the assets of Bikor. Prior to
joining the Company in 1988, Mr. Patel was a Senior Development Engineer at GE and Leland Electrosystems for 11 years combined.

Mukesh Patel, 43, has served as our Executive Vice President of Global Operations since June 2005. Prior to June 2005, Mr. Patel
served as Cherokee's Vice President of Information Technology since August 1996. Prior to Cherokee, Mr. Patel served as Vice President of Operations at Bikor Corporation, until Cherokee
acquired substantially all of the assets of Bikor.

Howard Ribaudo, 49, has served as Vice President of Sales for Cherokee since February 2005. Mr. Ribaudo served as Vice President of
Global Accounts from March 1996 to February 2005, and served in various other capacities for Cherokee from 1988 through September 1993. Mr. Ribaudo served as Vice President of Sales and
Marketing for Bikor Corporation from September 1993 through March 1996, when we acquired substantially all of the assets of Bikor.

Michael Wagner, 42, has served as Vice President of Marketing for Cherokee since November 2001. Mr. Wagner served as Director of
Marketing for Lambda Electronics from July 1988 to October 2001.

Business Strategy

Our objective is to grow our business profitably by being the power supply partner of choice for select industry-leading OEMs who require sophisticated
power solutions. Key elements of our strategy include:



Over
the past few years, we have made a significant effort to enhance the processes and systems used in our interaction with customers. These enhancements include the addition of sales
administration and program management personnel who provide expanded customer service support, the implementation of a global account strategy to coordinate the sales efforts of our North American,
European and Asian operations for customers that require a global purchasing solution, and systems to

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improve
the efficiency of our order entry process. We believe these changes have resulted in increased sales and exemplary customer service to many of our existing customers. We intend to leverage our
competitive strengths, in-depth knowledge of our customers' needs and expanded product line to continue to increase sales to our existing customers. In addition, as OEMs reduce the
number of power supply vendors with whom they work, we continue to focus on increasing our business with existing customers.



We continue to invest in our internal sales force and our network of independent sales representatives, their focus and efforts have been on developing new
business from our existing customer relationships.

In
2007, we generated 81 design wins for all products within all regions, of which 56 were considered major design wins. In 2006, we generated 92 design wins for all products within all
regions, of which 53 were considered major design wins.



We plan to continue to broaden our existing product line and cross-sell products on a global basis to attract new customers in order to capture a
larger market share of our existing customers' business. We intend to leverage our portfolio of standard and modified standard products in order to market these products both directly and on a private
label and branded basis through available sales channels. We believe we have the ability and the opportunity to market custom products developed for one customer on a custom, modified standard or
standard basis, to other customers.



In 2006, we expanded our operations into the Far East where we opened a new facility in Shanghai, China; we were fully operational by the end of the second
quarter in 2006. The facility contains over 120,000 square feet of space with the capacity to accommodate sales, marketing, manufacturing, engineering and the requisite support personnel and functions
that will enable us to expand into Asia as well as address the manufacturing needs of our North American and European customers. By locating our manufacturing facilities closer to our customers' own
facilities, we are able to offer solutions with a lower cost base, increase production flexibility and decrease the lead times of our products.



Operating costs of our existing manufacturing facilities and related administrative expenses are relatively fixed, and should increase at a slower rate as sales
improve. In addition, we have the opportunity to leverage our engineering and sales staff for higher revenue programs without significant increases in staffing and related costs. The relatively fixed
cost structure of our business model should allow us to realize higher margins on incremental revenue. We believe that our available manufacturing capacity, combined with our manufacturing facility in
China, will be sufficient to accommodate significant future growth. Additionally, we intend to further drive efficiencies in manufacturing, and minimize labor, supply and manufacturing costs, through
the utilization of our facilities located outside of the United States.

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Competitive and Business Challenges



The design, manufacture and sale of power supplies are highly competitive. Some of our competitors have substantially greater net sales, resources and geographic
presence than we do. In addition, cancellations, reductions or delays in customers' orders or commitments or an increase in warranty product returns could have a greater effect on us than some of our
competitors because of our lower level of net sales.



Operating costs of our existing manufacturing facilities and related administrative expenses are relatively fixed and therefore cannot be easily reduced if sales
decline.



As a provider of power supplies to OEMs in the electronic equipment industries, our sales are dependent upon the success of these end markets and the
underlying products in which our power supplies are components. We have no control over, and cannot always accurately predict the demand in our customers' end markets.



A significant portion of our business is conducted internationally. Operating internationally subjects us to risks that we would not otherwise face, such as
political and economic instability, terrorism and civil unrest, difficulties in staffing and managing these operations, and fluctuations in foreign exchange rates.

Product Line

Our products cover a broad range of applications in the commercial end-market, from low to high power, ranging from 10 to 27,000 watts. Our power
supplies are self-contained units, range in weight from one-half of a pound to thirty pounds and are normally incorporated inside OEM's end products.

Most
of our power supplies are custom made, although we also produce some modified standard and standard products. We focus on designing and manufacturing mid- to
high-end custom and modified standard commercial power supplies because they typically have the highest margins. Our large database of custom and modified standard products allow us to
benefit from the opportunity to incorporate our existing engineering and designs into new customer products in order to expedite design and time-to-market. We introduced a
complementary line of DC/DC products in the commercial market to take advantage of the growing DC/DC market. Our DC/DC converters range from 20 to 500 watts. We will continue to focus on
selling our DC/DC products to existing AC/DC customers, as we believe there is an increased demand for these products and synergy with a complete distributed power application or "DPA" solution.

Customers

Our OEM customers are in diverse markets such as servers and storage, networking, wireless infrastructure, medical, high-end mainframes, industrial
process controls, and other electronic equipment industries. Most of these OEMs are Fortune 500 companies and leaders in their respective industries. Our top ten customers accounted for
approximately 50% of net sales for the year ended December 30, 2007, and approximately 51% for the year ended December 31, 2006. One customer accounted for more than 10% of net sales for
the year ended December 30, 2007, however no customer accounted for more than 10% of net sales for the year ended December 31, 2006. We derived

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approximately
50% of our net sales during the year ended December 30, 2007 and 52% of our net sales during the year ended December 31, 2006 from customers in North America. The remainder
of our net sales for such periods was to customers outside of North America, with the majority of these sales to customers in Europe and Asia. For the dollar amount of net sales attributable to
customers located by geographical region, please refer to Note 13 in our consolidated financial statements included in this Annual Report on Form10-K.

Sales and Marketing

We market our products and services in North America through an integrated sales approach involving account managers and independent sales representatives with
active support from design, engineering and production personnel. Our in-house account managers supervise customer relationships and oversee a nation-wide network of
commission-based independent sales representatives whose main purpose is to identify new opportunities. We market our products in Europe using a combination of a local direct sales team, independent
sales representatives, in-house account managers and a new developing Value Added Reseller (VAR) channel. We market our products in China using a combination of a local direct sales team
and independent sales representatives.

We
focus our efforts in expanding relationships with existing customers and aggressively targeting emerging OEM industry leaders with whom the opportunity exists to provide products and
services across a number of product families and through successive product generations. We focus our resources on markets that are growing relatively quickly and have the potential for significant
profit margins. One example of an emerging market is the deployment ofTriple Playvoice, video and data to the home. We see this as an opportunity to
provide power to a decentralizedAccess Networkthat will support the infrastructure for the smart home. We have already had success in powering systems
forAccess Networkin Europe and are looking to the Far East as potential markets for this technology.

Potential
customers are assigned to our in-house account managers who evaluate the customer against our customer selection criteria. On an ongoing basis, our engineering
personnel provide technical support to customers in the areas of product design changes, field performance and testing. Our collaborative relationships allow us to gain valuable knowledge about an
existing customer and its processes, which we believe gives us an advantage in obtaining future business from that customer.

Backlog

We generally sell our products pursuant to purchase orders rather than long-term contracts, and customers may generally cancel, reduce or postpone
orders or commitments. Backlog consists of purchase orders received for which we have not shipped product. A variety of conditions, both specific to the individual customer and generally affecting the
customer's industry, may cause customers to cancel, reduce or delay orders or commitments that were previously made or anticipated. At any time, a significant portion of our backlog may be subject to
postponement. Our backlog was approximately $55.3 million at February 29, 2008 and $46.8 million at February 28, 2007. Our backlog was approximately $45.3 million at
December 30, 2007, and $45.4 million at December 31, 2006. We expect a substantial majority of our backlog to be shipped within the next 12 months. We have also entered
into certain warehousing arrangements with some of our customers, whereby we have agreed to bear the risk and cost of carrying inventory. Under these arrangements, we deliver the power supplies
ordered by such customers to a third-party warehouse location, permit these customers to take delivery of the power supplies within a specified time period after our delivery of the products, and
invoice these customers for the products only after they have taken ultimate delivery and title has passed.

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Manufacturing Process and Quality Control

A typical power supply consists primarily of one or more printed circuit boards, electronic and electromagnetic components and a sheet metal chassis. The
production of our power supplies entails the assembly of structural hardware combined with a sophisticated assembly of circuit boards encompassing highly automated surface mount technology, or SMT.

In
response to market demands for increased quality and reliability, design complexity, and sophisticated technology, we have automated many electronic assembly and testing processes
which were traditionally performed manually and we have standardized our manufacturing processes to efficiently utilize our resources and optimize our capacities. Our manufacturing facilities are
designed to quickly produce a broad range of products at a low cost. At December 30, 2007 we had eleven SMT
lines located throughout our facilities. SMT permits reduction in board size by eliminating the need for holes in the printed circuit boards and by allowing components to be placed on both sides of a
board. Each SMT line is capable of placing as many as 40,000 parts per hour, with each machine hour equating to approximately 50 labor hours.

In
addition to increasing automation of our facilities, we have standardized our operations to include self-contained continuous flow manufacturing lines, which incorporate
flow solder machines, in circuit test machines, highly advanced computer controlled burn-in equipment, automated final test machines, ongoing reliability test equipment, and standardized
processes and measurements on all lines. Furthermore, manufacturing processes, quality systems, data collection and documentation are standardized across all facilities for smooth transition among
locations to accommodate optimal capacity utilization.

Most
of our customers require that their power supplies meet or exceed established international safety and quality standards. In response to this need, we design and manufacture power
supplies in accordance with the certification requirements of many international agencies, including Underwriters Laboratories Incorporated (UL) and Telcordia/Belcore in the United States; the
Canadian Standards Association (CSA) in Canada; Technischer Uberwachungs-Verein (TUV) and Verband Deutscher Electrotechniker (VDE), both in Germany; the British Approval Board for Telecommunications
(BABT) in the United Kingdom; and the European Telecommunications Standard Institute (ETSI) and International Electrotechnical Committee (IEC), both European standards organizations. In 2006, we
received certification from the China Compulsory Product Certification (CCC), Belgian Safety (CEBEC) and Taiwan's Bureau of Standards, Metrology and Inspection (BSMI) organizations.

Quality
and reliability are emphasized in both the design and manufacture of our products. In addition to testing throughout the design and manufacturing process, we test 100% of our
finished products using automated equipment and customer-approved tests. Prototypes are reviewed to ensure that they can be efficiently manufactured and an additional
out-of-box test or pre-ship audit is performed on randomly selected finished units to further ensuring manufacturing quality and integrity.

All
of our facilities in California, Belgium, China and India are currently ISO 9001:2000 certified. All facilities, excluding our India Facility, are also certified to the higher
ISO 14000 standard. In addition, our China Facility is OHSAS 18001:1999 certified.

We
are subject to federal, state and local environmental laws and regulations (in both the United States and abroad) that govern the handling, transportation and discharge of materials
into the environment, including into the air, water and soil. Environmental laws could become even more stringent in the future, imposing greater compliance costs and increasing risks and penalties
associated with their violation or the contamination of the environment. Should there be an environmental accident or violation related to our operations, our financial condition or results of
operations may be adversely affected. We could be held liable for significant penalties and damages under environmental

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laws
and could also be subject to a revocation of licenses or permits, which could materially and adversely affect our financial condition or results of operations.

The
following are two European Economic Community ("EEC") directives that are having an effect on the entire electronics industry, including the Company:

(1)   Restriction
of Hazardous Substances in Electrical and Electronic Equipment, more commonly known as RoHS. This European directive bans the use of certain elements that
are commonly found in components used to manufacture electrical and electronic assemblies. This directive became effective on July 1, 2006. The Company began manufacturing compliant products in
2006 and continues to work actively with its customers to ensure compliance. The Company is focused on consuming all non-compliant material on-hand within a reasonable period.
However, the Company may have to dispose of non-compliant materials in the future, which could adversely affect the financial performance of the Company. There is also a risk of fines
associated with non-compliance with the RoHS directive; however, the Company is not aware of any specific potential fines, and the Company anticipates complying with all provisions of this
legislation.

(2)   Waste
Electrical and Electronic Equipment, also known as WEEE. This directive became effective August 13, 2005 and requires manufacturers and importers to
properly recycle or dispose of such equipment at the end of its useful life. The Company believes it has limited exposure to the WEEE directive because its products are usually installed into another
user's system, but this directive may be interpreted and enforced differently in the future. If so, the Company may face significant risk of fines and costs associated with non-compliance
with the existing laws and regulations in the European Union. The Company began manufacturing compliant products in 2005, and continues to work actively with its customers to ensure compliance.

As
of December 30, 2007, the Company does not foresee any material estimated capital expenditures for environmental remediation's or related costs to our manufacturing facilities
in the future.

Suppliers

Our high-quality products and ability to provide such products in a relatively short time-to-market are in part the result of
a well-managed supply chain network. We typically design products using common components, thereby increasing our purchasing power and reducing inventory risk. Most of our raw materials,
including electronic and other components, sheet metal, transistors, mechanical parts and electrical wires, are readily available from several sources. Although some of our raw materials are sourced
from only one manufacturer, they are generally available in large quantities from a number of different suppliers.

Through
centralized purchasing, we have negotiated a number of volume discount purchase agreements to realize economies of scale at each facility. We generally purchase raw materials and
components directly from manufacturers and not from distributors to get the most current materials at a lower available cost, thereby further reducing our overall cost of production. We view our
suppliers as long-term partners with whom we strive to develop strong relationships. In our experience, the repeat business and confidence that these relationships offer our suppliers
often lead to a lower cost of materials.

Competition

The power supply manufacturing industry is highly fragmented and characterized by intense competition. According to Micro-Tech Consultants, in 2007
there were over 1,000 third-party AC/DC and DC/DC power supply manufacturers worldwide. No single company dominates the overall power supplies market and our competitors vary depending upon the
particular power conversion product

10

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category.
Our competitors include Emerson Network Power, Delta Electronics, TDK (Lambda), Power One, Lineage Power, Murata, Eltek-Valere, Vicor, and many other companies.

We
believe that the principal competitive factors in our targeted markets are length of time-to-market, manufacturing flexibility, technical knowledge, quality
and cost. We believe that, compared to our competition, we sell products with comparable or better quality characteristics at comparable prices.

Engineering and Product Development

Our engineering and product development activities are principally directed to the improvement of existing products and the development of new power supplies to
satisfy customer needs. As part of the collaborative relationships established by us with our key customers, we work closely with our customers to develop new products. Product development is
performed by a group of design engineers and technicians primarily located in Tustin, California and Wavre, Belgium. We also opened a Far East design center in our China Facility during the second
quarter of 2007.

Our
total expenditures for engineering and product development were $10.9 million, $9.5 million and $9.0 million for the years ended December 30, 2007,
December 31, 2006 and January 1, 2006, respectively.

Intellectual Property Matters

Historically, intellectual property rights have not been a significant competitive factor in the power supply industry. Accordingly, we have not expended
significant efforts to obtain patents, trademark registrations or other forms of intellectual property protection covering our brands and technologies. However, there is no guarantee that intellectual
property rights will not become more significant in the future, or that our competitors will not try to assert intellectual property rights to obtain a competitive advantage. Indeed, from
time-to-time we have received notices of alleged infringement and/or invitations to take licenses from third parties.

On
November 16, 2007, SynQor announced that it had filed a lawsuit against several of its competitors, including Cherokee International Corporation who was named in the complaint,
for infringement of two patents relating to bus converters and/or non-isolated point of load converters used in intermediate bus architectures. The patents at issue are U.S. patents
7,072,190 and 7,272,021. The suit was filed in Federal Court in the Eastern District of Texas. The Company intends to vigorously defend this lawsuit. Although the ultimate aggregate amount of monetary
liability or financial impact with respect to this lawsuit is subject to many uncertainties and is therefore not predictable with assurance, the final outcome of this lawsuit, if adverse, could have a
material adverse effect on our financial position, results of operations or cash flows.

Employees

At December 30, 2007, we employed 1,519 full-time employees at our facilities in the following capacities:

Function

U.S.

Europe

India

China

TotalManufacturing

260

181

432

406

1,279Engineering (including R&D)

47

35

1

26

109Quality Control

21

10

2

6

39Marketing

12

13



5

30General Administration

20

15

14

13

62Total

360

254

449

456

1,519


11

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None
of our North America or China employees are represented by a labor organization. Most of the employees in Belgium and India are represented by local unions that are subject to
collective bargaining agreements. Our union workers in India are currently working with an expired labor agreement. Management is currently negotiating to renew this agreement.

ITEM 1A.    RISK FACTORS

The following risk factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives,
intentions and expectations expressed in this Annual Report on Form 10-K. If any of the following risks and uncertainties or other risks and uncertainties not currently known to us
or not currently considered to be material actually occurs, our business, financial condition or operating results could be harmed substantially.

Risks Relating to Our Company and Industry

We are substantially dependent upon sales to a relatively small group of customers. The loss of one or more major customers, or the discontinuation or modification of these
customers' products, could materially and adversely affect the results of our operations.

Our
top ten customers accounted for approximately 50% of our net sales for the year ended December 30, 2007 and approximately 51% of our net sales for the year ended
December 31, 2006. In addition, one customer accounted for more than 10% of net sales in 2007. The loss of any of our major customers could have a material adverse effect on our financial
condition or results of operations. We do not have long-term contracts with our customers, and our customers use alternative
power supply providers for some or all of their products. We may not be able to maintain our customer relationships, and our customers may reduce or cancel their purchase orders, purchase power
supplies elsewhere or develop relationships with additional providers of power supplies, any of which could adversely affect our financial condition or results of operations. A significant change in
the liquidity or financial position of any of these customers could also have a material adverse effect on the collectibility of our accounts receivables, our liquidity and our future operating
results. Prior to, or at the end of, a product's life cycle, any of our customers may decide to discontinue or modify any of its products. In that event, the customer may no longer have a need for our
products or may choose to integrate a competitor's power supply into the customer's new or modified product. The resulting loss of revenues could also adversely affect our financial condition or
results of our operations.

Failure by our customers or us to keep up with rapid technological change in the electronic equipment industries could result in reduced sales for us.

Many
of our existing customers are in the electronic equipment industries, especially wireless infrastructure and networking, and produce products that are subject to rapid technological
change, obsolescence and large fluctuations in world-wide product demand. These industries are characterized by intense competition and end-user demand for increased product
performance at lower prices. We may not be able to properly assess developments in the electronic equipment industries or identify product groups or customers with the potential for continued and
future growth. Factors affecting the electronic equipment industries, in general, or any of our major customers or their products, in particular, could have a material adverse effect on our financial
condition or results of operations. For instance, as a provider of power supplies to OEMs in the electronic equipment industries, our sales are dependent upon the success of the underlying
products of which our power supplies are a component. We have no control over the demand for or success of these products. If our customers' products are not well received by, or if demand for their
products fails to develop among end-users, our customers may discontinue or modify the product or reduce the production of the product. Any of these events could lead to the cancellation
or reduction of orders for our power supplies that were previously made or anticipated, which could materially adversely affect our financial condition or results of operation.

12

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See
"Cancellations, reductions or delays in customers' orders or commitments, or an increase in the number of warranty product returns could have a material adverse impact on our financial condition
and results of operations" for more information. The markets for our products are characterized by rapidly changing technologies, increasing customer demands, evolving industry standards, frequent new
product introductions and shortening product life cycles. Generally, our customers purchase our power supplies for the life cycle of a product, which can range anywhere from two to fifteen years. The
development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and cost, as well as the accurate anticipation of technological and market
trends. As the life cycle of our customers' products shorten, we will be required to bid on contracts for replacement or next generation products to replace revenues generated from discontinued
products more frequently. These bids may not be successful. Even if we are successful, we may not be able to successfully develop, introduce or manage the transition of new products. Any failure or
delay in anticipating technological advances or developing and marketing new products that respond to any significant technological change or significant changes in customer demand could have a
material adverse effect on our financial condition or results of operations.

We face significant competition, including from some competitors with greater resources and geographic presence than us. Our failure to adequately compete could have a material
adverse effect on our business.

The
design, manufacture and sale of power supplies are highly competitive and characterized by increasing customer demands for product performance, shorter manufacturing cycles and lower
prices. Our competition includes numerous companies throughout the world, some of which have advantages over us in terms of labor and component costs and technology. Our principal competitors are
Emerson Network Power, Delta Electronics, TDK (Lambda), Power One, Lineage Power, Murata, Eltek-Valere, and Vicor. Some of our competitors have substantially greater net sales, resources and
geographic presence than we do. Competition from existing competitors or new market entrants may increase at any time. We also face competition from current and prospective customers that may design
and manufacture their own power supplies. In times of an economic downturn, or when dealing with high-volume orders, price may become a more important competitive factor, forcing us to
reduce prices and thereby adversely affecting our financial results. Some of our major competitors have also consolidated through merger and acquisition transactions. Consolidation among our
competitors is likely to create companies with increased market share, customer bases, proprietary technology and marketing expertise, and an expanded sales force. These developments may adversely
affect our ability to compete.

Cancellations, reductions or delays in customers' orders or commitments, or an increase in the number of warranty product returns could have a material adverse impact on our
financial condition and results of operations.

We
do not obtain long-term purchase orders or commitments from our customers, and customers may generally cancel, reduce or postpone orders or commitments. A variety of
conditions, both specific to the individual customer and generally affecting the customer's industry, may cause customers to cancel, reduce or delay orders or commitments that were previously made or
anticipated. At any time, a significant portion of our backlog may be subject to cancellation or postponement. For example, our entire $45.3 million backlog as of December 30, 2007 was
subject to cancellation upon the payment by our customers of cancellation fees that vary depending on individual purchase orders. We also enter into certain warehousing arrangements with some of our
customers, whereby we agree to bear the risk and cost of carrying inventory. Under these arrangements, we deliver the power supplies ordered by such customers to a third-party location, permit these
customers to take delivery of the power supplies within a specified time period after our delivery of the products, and invoice these customers for the products only after they have taken ultimate
delivery and title has passed. We may not be able to

13

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replace
cancelled, delayed or reduced orders or commitments in a timely manner or at all and in some instances may need to write-off inventory. Significant or numerous cancellations, as
well as reductions or delays in orders or commitments, including as a result of delays in or the failure to take delivery of products that are subject to such arrangements, by a customer or group of
customers, could materially adversely affect our financial condition or results of operations.

We
also offer our customers a warranty for products that do not function properly within a limited time after delivery. We regularly monitor and track warranty product returns and record
a provision for the estimated amount of future warranty returns based on historical experience and any notification we receive of pending warranty returns. We may experience greater warranty return
rates than we have in the past. Any significant increase in product failure rates and the resulting warranty credit returns could have a material adverse effect on our operating results for the period
or periods in which those warranty returns occur.

Our international manufacturing operations and our international sales subject us to risks associated with foreign laws, policies, economies and exchange rate
fluctuations.

We
have manufacturing operations located in Europe, India, and China. We may expand our operations into other foreign countries in the future. In addition, international sales have been,
and are expected to continue to be, an important component of our total sales. International sales represented 50% of our net sales for the year ended December 30, 2007 and 48% of our net sales
for the year ended December 31, 2006. Our manufacturing operations and international sales are subject to inherent risks, all of which could have a material adverse effect on our financial
condition or results of operations. For example, our European Division (Cherokee Europe) has two restructuring plans in place. The first one (the 1999 Europe restructuring) was inherited by us
in 2000 when we purchased this division from Panta Electronics, and the second (the 2003 Europe restructuring) was implemented in 2003 by us. Both of these plans were significantly impacted by
local labor laws and union labor negotiations, and required termination benefits. When we acquired Cherokee Europe in 2000, we inherited a liability of approximately $2.2 million to be paid
through 2010 as a result of the 1999 Europe restructuring. When we implemented the 2003 Europe restructuring, we recorded a $4.5 million expense to be paid through 2016. See
"Management's Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations." Other risks affecting our international operations include:



14

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Although we transact business primarily in U.S. dollars, a portion of our sales and expenses, including labor costs, are denominated in the Indian rupee, the Chinese renminbi ("RMB"),
the Euro and other European currencies. For the years ended December 30, 2007 and December 31, 2006, net sales in Europe accounted for 35% and 37% of our net sales, respectively.
Declines in the value of the U.S. dollar relative to the Euro impacted our revenue, cost of goods sold and operating margins for these periods and resulted in foreign currency transaction gains and
losses. Foreign currency translation gains or losses recorded in other comprehensive income, a component of equity, for the years ended December 30, 2007 and December 31, 2006 were a
gain of $1.2 million and a gain of $1.6 million, respectively. Historically, we have not actively engaged in substantial exchange rate hedging activities and do not intend to do so in
the future.

An interruption in delivery of component supplies could lead to supply shortages or a significant increase in our cost of materials.

We
are dependent on our suppliers for timely shipments of components, including components manufactured by us in our India facilities. We typically use a primary source of supply for
each component used in our products. Changing suppliers or establishing alternate primary sources of supply, if needed, could take a significant period of time, which in turn could result in supply
shortages and increased prices. In some cases, we source components from only one manufacturer. Substantially all of our revenues are derived from the sale of products that include components that we
source from only one manufacturer. In addition, many of our suppliers are located outside of the United States, and timely delivery from these suppliers may not occur due to interruptions in
transportation, import-export controls, tariffs, quotas, taxes and other market barriers, and political and economic stability in the country in which the components used in our products are produced
or the surrounding region. An interruption in supply could have a material adverse effect on our operations. Any shortages of particular components could increase product delivery times and costs
associated with manufacturing, thereby reducing gross margins. Additionally, these shortages could cause a substantial loss of business due to shipment delays. Any significant shortages or price
increases of components could have a material adverse effect on our financial condition or results of operations.

Our quarterly sales may fluctuate while our expenditures remain relatively fixed, potentially resulting in lower gross margins and volatility in our stock
price.

Our
quarterly results of operations have fluctuated in the past and may continue to fluctuate in the future. Fluctuations in customer needs, cancellations, reductions and delays in
orders and commitments may cause our quarterly results to fluctuate. See the risk factor above entitled "Cancellations,
reductions or delays in customers' orders or commitments or an increase in the number of warranty product returns could have a material adverse impact on our financial condition and results of
operations." Variations in volume production orders and in the mix of products sold by us have also significantly affected sales and gross profit. Sales are generally impacted by a combination of
these items and may also be affected by other factors. These factors include:



Many
of these factors are outside of our control. In addition, a substantial portion of our sales in a given quarter may depend on obtaining orders for products to be manufactured and
shipped in the same quarter in which those orders are received. As a result of this and other factors described above,

15

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sales
for future quarters are difficult to predict and our financial condition or results of operations in a given quarter may be below our expectations and our gross margins may decrease. Our expense
levels are relatively fixed and are based, in part, on expectations of future revenues. If revenue levels are below expectations, the market price of our common stock could fall substantially, and our
financial condition or results of operations could be materially adversely affected.

Our ability to successfully implement our business strategy is dependent on our ability to retain and attract key personnel.

Our
ability to successfully implement our business strategy depends to a significant degree on the efforts of Jeffrey M. Frank, President, Chief Executive Officer, and Director, Linster
W. Fox, Executive Vice President, Chief Financial Officer and Secretary, and Mukesh Patel, Executive Vice President,
Global Operations, along with other members of our senior management team. We believe that the loss of service of any of these executives could have a material adverse effect on our business. In
addition, we depend on highly skilled engineers and other personnel with technical skills that are in high demand and are difficult to replace. As a result, our ability to maintain and enhance product
and manufacturing technologies and to manage any future growth also depends on our success in attracting and retaining personnel with highly technical skills. The competition for these qualified
technical personnel may be intense if the relatively limited number of qualified and available power engineers continues. We may not be able to attract and retain qualified technical personnel.

Changes in government regulations or product certification could result in delays in shipment or loss of sales.

Our
operations are subject to general laws, regulations and government policies in the United States and abroad. Additionally, our product standards are certified by agencies in various
countries, including, among others, the United States, Canada, Asia, Germany and the United Kingdom. Changes in these laws, regulations, policies or certification standards could negatively affect the
demand for our products, result in the need to modify our existing products, increase time-to-production or affect the development of new products, each of which may involve
substantial costs, or loss of or delayed sales, and could have a material adverse effect on our financial condition or results of operations.

Environmental compliance could require significant expenditures and failure to so comply could result in fines or revocation of licenses or permits, any of which could
materially and adversely affect our financial condition or results of operations.

We
are subject to federal, state and local environmental laws and regulations (in both the United States and abroad) that govern the handling, transportation and discharge of materials
into the environment, including into the air, water and soil. Environmental laws could become even more stringent in the future, imposing greater compliance costs and increasing risks and penalties
associated with their violation or the contamination of the environment. Should there be an environmental accident or violation related to our operations, our financial condition or results of
operations may be adversely affected. We could be held liable for significant penalties and damages under environmental laws and could also be subject to a revocation of licenses or permits, which
could materially and adversely affect our financial condition or results of operations.

The
following are two European Economic Community ("EEC") directives that are having an effect on the entire electronics industry, including the Company:

(1)   Restriction
of Hazardous Substances in Electrical and Electronic Equipment, more commonly known as RoHS. This European directive bans the use of certain elements that
are commonly found in components used to manufacture electrical and electronic assemblies. This directive became effective on July 1, 2006. The Company began manufacturing compliant products in
2006 and continues to work

16

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actively
with its customers to ensure compliance. The Company is focused on consuming all non-compliant material on-hand within a reasonable period. However, the Company may
have to dispose of non-compliant materials in the future, which could adversely affect the financial performance of the Company. There is also a risk of fines associated with
non-compliance with the RoHS directive; however, the Company is not aware of any specific potential fines, and the Company anticipates complying with all provisions of this legislation.

(2)   Waste
Electrical and Electronic Equipment, also known as WEEE. This directive became effective August 13, 2005 and requires manufacturers and importers to
properly recycle or dispose of such equipment at the end of its useful life. The Company believes it has limited exposure to the WEEE directive because its products are usually installed into another
user's system, but this directive may be interpreted and enforced differently in the future. If so, the Company may face significant risk of fines and costs associated with non-compliance
with the existing laws and regulations in the European Union. The Company began manufacturing compliant products in 2005, and continues to work actively with its customers to ensure compliance.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control.

Our
operations are vulnerable to interruption by earthquakes, fires, electrical blackouts, power losses, telecommunications failures and other events beyond our control. Our executive
offices and key manufacturing and engineering facilities are located in Southern California. Because Southern California is an earthquake-prone area, we are particularly susceptible to the risk of
damage to, or total destruction of, our facilities in Southern California and the surrounding transportation infrastructure, which could affect our ability to make and transport our products. In
addition, California continues to face periodic shortages in its power supply. If rolling blackouts or other disruptions in power were to occur, our business and operations would be disrupted and our
business would be adversely affected. Our business interruption insurance may not be sufficient to compensate us for losses that may occur and would not compensate us for the loss of consumer goodwill
due to disruption of service.

Third parties may sue us for alleged infringement of their proprietary rights.

We have received, from time to time, notices of alleged infringement and/or invitations to take licenses from third parties asserting that they have patents (or
other intellectual property rights) that are
relevant to our present or contemplated business operations. There is no guarantee that we will be able to avoid incurring litigation costs related to such assertions. Intellectual property claims
could be successfully asserted against us, preventing us from using certain of our technologies, or forcing us to modify our technology or to pay license fees for use of that technology. Such
additional engineering expenses or licensing costs could have an adverse effect on the results of our operations. In addition, we could incur substantial expenses in defending against these claims,
whether or not we ultimately prevail against these claims.

On
November 16, 2007, SynQor announced that it had filed a lawsuit against several of its competitors, including Cherokee International Corporation who was named in the complaint,
for infringement of two patents relating to bus converters and/or non-isolated point of load converters used in intermediate bus architectures. The patents at issue are U.S. patents
7,072,190 and 7,272,021. The suit was filed in Federal Court in the Eastern District of Texas. The Company intends to vigorously defend this lawsuit. Although the ultimate aggregate amount of monetary
liability or financial impact with respect to this lawsuit is subject to many uncertainties and is therefore not predictable with assurance, the final outcome of this lawsuit, if adverse, could have a
material adverse effect on our financial position, results of operations or cash flows.

17

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Provisions of the agreements governing our debt will restrict our business operations.

At December 30, 2007, we had $46.6 million of 5.25% senior notes outstanding, and we had in place a $7.5 million senior revolving credit
facility (with no amounts outstanding) that is subject to a borrowing base comprised of eligible accounts receivable. Our outstanding indebtedness, including our 5.25% senior notes and any debt
incurred pursuant to the senior revolving credit facility, is secured by substantially all of our assets.

Cherokee
Europe maintains a working capital line of credit of approximately $4.5 million with Bank Brussels Lambert, a subsidiary of ING Belgie NV, a bank in Brussels,
which is denominated in Euros, collateralized by a pledge in first and second rank over a specific amount of business assets, requires Cherokee Europe to maintain a certain specific minimum solvency
ratio, and is cancelable at any time. In November 2007, ING Belgie NV restricted the Company from transferring funds from Europe to the US in the form of management and dividend fees. As of
December 30, 2007, Cherokee Europe had $2.1 million of outstanding borrowings under the line of credit. As of February 29, 2008, Cherokee Europe had $2.6 million
outstanding borrowings under the line of credit.

Cherokee
China entered into a loan contract in January 2007 with Industrial and Commercial Bank of China Ltd. ("ICBC") for a working capital line of credit. Pursuant to the
contract, ICBC agreed to
make advances up to the equivalent of approximately $3.4 million, expressed as RMB 25.0 million. The line of credit is collateralized by the Company's building in Shanghai, China. The
first term ended January 29, 2008, and was renewed and extended for an additional year, until January 2009. The contract is renewable annually, but is cancelable at any time. Beginning with its
initial borrowing under the contract, Cherokee China has agreed to deposit in the ICBC Shanghai Branch at least 90% of the operating revenue it collects. The cash from these deposits made into our
bank account are not restricted from our usage of these funds. As of December 30, 2007, Cherokee China had $1.3 million of outstanding borrowings under the line of credit and was in
compliance with all covenants. As of February 29, 2008, Cherokee China had $0.7 million of borrowings under the line of credit and was in compliance with all covenants.

We
may need to incur additional debt to continue to grow our business in the future. The agreements governing our debt contain a number of covenants that restrict our business
operations, including covenants limiting our ability to make investments, enter into mergers or acquisitions, dispose of assets, incur additional debt, grant liens, enter into transactions with
affiliates, redeem or repurchase our capital stock, repay other debt and pay dividends. As of December 30, 2007 and February 29, 2008, we were in compliance with our covenants set forth
in the agreements.

Our
ability to comply with covenants under agreements governing our debt may be affected by events that are beyond our control, including prevailing economic, financial and industry
conditions. Our failure to comply with the covenants or restrictions contained in agreements governing our debt could result in an event of default under these agreements, which could result in our
debt, together with accrued and unpaid interest, being declared immediately due and payable.

Our 5.25% Senior Notes mature on November 1, 2008, and we may be unable to repay or refinance this indebtedness upon maturity.

On
November 1, 2008, the $46.6 million aggregate principal amount outstanding under our 5.25% Senior Notes will become due and payable. We do not expect to have sufficient
cash available at the time of maturity to repay this indebtedness and are currently working with an investment banker to extend the maturity of these notes. We also cannot be certain that we will have
sufficient assets or cash flow available to support refinancing these notes at current market rates or on terms that are satisfactory to us. If we are unable to refinance on terms satisfactory to us,
we may be forced to refinance on terms that are materially less favorable, seek funds through other means such as a sale of

18

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some
of our assets, or otherwise significantly alter our operating plan, any of which could have a material adverse effect on our business, financial condition and results of operation.

Credit risks could materially and adversely affect our operations and financial condition.

Negative
or declining economic conditions can increase our exposure to our customers' credit risk. In particular, sales to larger customers are sometimes made through contract
manufacturers that do not have the same resources as those customers. Additionally, if one of our major customers experienced financial difficulties, losses could be in excess of our current
allowance. At December 30, 2007, one of our customers accounted for approximately 10.9% of our total net receivables and at December 31, 2006, another one of our customers accounted for
6.9% of our total net receivables. For the periods ended December 30, 2007, and December 31, 2006, our accounts receivable write-offs amounted to less than 1% of our net
accounts receivable balance. In the event our customers or those contract manufacturers experience financial difficulties and fail to meet their financial obligations to us, or if our recorded bad
debt provisions with respect to receivables obligations do not accurately reflect future customer payment levels, we could incur additional write-offs of receivables that are in excess of
our provisions, which could have a material adverse effect on our operations and financial condition. In addition, we depend on the continuing willingness of our suppliers to extend credit to us to
finance our inventory purchases. If suppliers become concerned about our ability to generate cash and service our debt, they may delay shipments to us or require payment in advance.

If we fail to meet the listing requirements of the Nasdaq Global Market and the Nasdaq determines to delist our common stock, the delisting would adversely affect the liquidity
of our common stock and the market price of our common stock could decline.

Our
Common stock is listed on the Nasdaq Global Market. In order to maintain that listing we must satisfy certain periodic reporting requirements under Marketplace
Rule 4310(c)(14). If we fail to file our Quarterly Reports on Form 10-Q or Annual Reports on Form 10-K timely, Nasdaq could delist our common stock from
the Nasdaq Global Market. If our common stock is delisted from the Nasdaq Global Market, the price of our common stock and the ability of our stockholders to trade in our common stock would be
adversely affected. In addition, such delisting could adversely affect our ability to obtain financing and could result in the loss of confidence by our investors, suppliers and employees.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

Our headquarters are located in Tustin, California. We own two manufacturing facilities, both of which are outside of the United States, and lease five other
manufacturing facilities and one warehouse facility. These facilities manufacture labor-intensive magnetic sub-assemblies that are distributed to our other facilities for incorporation
into our final products. In addition, we lease satellite offices located in England, France, Germany and Sweden, which serve as sales offices. All of our leases have renewal options as indicated in
the following table. We believe that our leased locations are adequate for our immediate needs and that additional or substitute space is available, if needed, to accommodate future growth and
expansion, or relocation. Please refer to Note 13 to our consolidated financial statements

19

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included
elsewhere in this Annual Report on Form 10-K for the amount of our long-lived assets outside the United States.

|Facilities         |  | Primary Activity                         |  | Approximate Square Footage |  | Owned/ Leased |  | Lease
Expiration
Date                 |  | Renewal Option              
|------------------ |  | ---------------------------------------- |  | -------------------------- |  | ------------- |  | ------------------------------------- |  | ----------------------------
|Tustin, California |  | Manufacturing
Engineering
Administrative |  | 86,000                     |  | Leased        |  | April 30, 2009                        |  | One five-year renewal       
|Tustin, California |  | Warehousing                              |  | 10,000                     |  | Leased        |  | April 30, 2009                        |  | One three-year renewal      
|Tustin, California |  | Warehousing                              |  | 10,000                     |  | Leased        |  | April 30, 2009                        |  | One three-year renewal      
|Irvine, California |  | Manufacturing
Engineering                |  | 31,000                     |  | Leased        |  | April 30, 2009                        |  | One five-year renewal       
|Wavre, Belgium     |  | Manufacturing
Engineering
Administrative |  | 178,000                    |  | Owned         |  | Not applicable                        |  | Not applicable              
|Bombay, India      |  | Manufacturing                            |  | 14,000                     |  | Leased        |  | September 19, 2011
September 24, 2012 |  | Unlimited five-year renewals
|Bombay, India      |  | Manufacturing                            |  | 17,000                     |  | Leased        |  | September 24, 2011                    |  | Unlimited five-year renewals
|Shanghai, China    |  | Manufacturing                            |  | 120,000                    |  | *Owned        |  | October 27, 2055                      |  | Not applicable              

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ITEM 3.    LEGAL PROCEEDINGS

In late March 2006, the Company learned that employees of its Indian subsidiary manufacturing operations had made certain unauthorized payments that may have been
in violation of the Foreign Corrupt Practices Act and local laws. The facility in India is used for the sole purpose of manufacturing products for other Company locations and, as such, does not
generate revenue or issue invoices to
external customers. It manufactures approximately 6% (by volume) of the products offered by the Company.

The
subject payments, in the aggregate, amount to approximately $40,000 in 2004 and 2005, and less than $10,000 in 2006. The Company retained outside counsel who conducted an internal
investigation into these payments. In January 2007, the Company's outside counsel met with the SEC to discuss the results of the internal investigation.

On
November 16, 2007, SynQor announced that it had filed a lawsuit against several of its competitors, including Cherokee International Corporation who was named in the complaint,
for infringement of two patents relating to bus converters and/or non-isolated point of load converters used in intermediate bus architectures. The patents at issue are U.S. patents
7,072,190 and 7,272,021. The suit was filed in Federal Court in the Eastern District of Texas. The Company intends to vigorously defend this lawsuit. Although the ultimate aggregate amount of monetary
liability or financial impact with respect to this lawsuit is subject to many uncertainties and is therefore not predictable with assurance, the final outcome of this lawsuit, if adverse, could have a
material adverse effect on our financial position, results of operations or cash flows.

During
the year ended December 30, 2007, we were not a party to any other material legal proceedings. We are occasionally a party to lawsuits relating to routine matters
incidental to our business. As with all litigation, we can provide no assurance as to the outcome of any particular lawsuit, and we note that litigation inherently involves significant costs.

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

None.

20

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)   Our
common stock is listed on the NASDAQ Global Market and is traded under the symbol "CHRK". The following table sets forth, for the quarterly periods indicated, the
range of high and low closing sale prices for our common stock.

Years EndedDecember 30, 2007

December 31, 2006High

Low

High

LowFirst Quarter

$
5.88

$
4.00

$
5.27

$
3.95Second Quarter

$
5.76

$
4.58

$
6.80

$
3.49Third Quarter

$
5.03

$
3.25

$
4.21

$
3.30Fourth Quarter

$
3.77

$
2.15

$
4.03

$
2.90


As
of February 25, 2008, there were approximately 27,764 holders of our common stock.

We
have not paid any cash dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

21

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The
graph below shows a comparison of cumulative total return for Cherokee International Corporation, the NASDAQ Composite index, and a peer group of four companies consisting of:
Murata, Magnetek Inc., Power-One Inc. and Vicor Corp. The graph tracks the performance of a $100 investment in our common stock, in the peer group, and the NASDAQ Composite
index, including the reinvestment of all dividends from February 20, 2004 (the first trading date of our common stock on NASDAQ) to December 30, 2007.

COMPARISON OF 4 YEAR CUMULATIVE TOTAL RETURN*Among Cherokee International Corporation, The NASDAQ Composite Index
And A Peer Group

GRAPHIC

---

2/20/04

1/2/05

1/1/06

12/31/06

12/30/07Cherokee International Corporation

100.00

58.24

27.94

24.42

13.39NASDAQ Composite

100.00

106.44

109.00

121.44

132.68Peer Group

100.00

86.90

62.42

60.87

53.70


The stock price performance included in this graph is not necessarily indicative of future stock price performance.

22

---



ITEM 6.    SELECTED FINANCIAL DATA

The selected consolidated financial data as of December 30, 2007 and December 31, 2006 and for the years ended December 30, 2007,
December 31, 2006 and January 1, 2006 are derived from our audited consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K. The
selected consolidated financial data as of January 1, 2006, January 2, 2005, and December 28, 2003, and for the years ended January 2, 2005 and December 28, 2003
have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. You should read the following financial information
together with the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing
elsewhere in this Annual Report on Form 10-K.

|                                           |         | December 30, 2007 |         | December 31, 2006 |   | January 1, 2006 |        | January 2, 2005 |         | December 28, 2003 |  
|------------------------------------------ | ------- | ----------------- | ------- | ----------------- | - | --------------- | ------ | --------------- | ------- | ----------------- | -
|
|Consolidated Statement of Operations Data: |         |                   |         |                   |   |                 |        |                 |         |                   |  
|Net sales                                  |         | $                 | 128,496 |                   | $ | 145,028         |        | $               | 122,079 |                   | $
|Cost of sales                              |         |                   | 102,904 |                   |   | 114,439         |        |                 | 97,181  |                   |  
|                                           |         |                   |         |                   |   |                 |        |                 |         |                   |  
|Gross profit                               |         |                   | 25,592  |                   |   | 30,589          |        |                 | 24,898  |                   |  
|Operating expenses                         |         |                   | 30,238  |                   |   | 28,874          |        |                 | 27,557  |                   |  
|Goodwill impairment                        |         |                   | 5,197   |                   |   |                |        |                 |        |                   |  
|Restructuring costs                        |         |                   | 155     |                   |   | 697             |        |                 |        |                   |  
|Asset impairment                           |         |                   |        |                   |   | 285             |        |                 |        |                   |  
|Long service award liability reduction     |         |                   |        |                   |   | (1,718          | )      |                 |        |                   |  
|Stock compensation expense                 |         |                   |        |                   |   |                |        |                 |        |                   |  
|Gain from insurance proceeds               |         |                   |        |                   |   |                |        |                 | (2,898  | )                 |  
|                                           |         |                   |         |                   |   |                 |        |                 |         |                   |  
|Operating income                           |         |                   | (9,998  | )                 |   | 2,451           |        |                 | 239     |                   |  
|Interest expense                           |         |                   | (2,804  | )                 |   | (2,786          | )      |                 | (2,852  | )                 |  
|Gain from sale of Mexico Facility building |         |                   | 430     |                   |   |                |        |                 |        |                   |  
|Gain from from sale of Mexico corporation  |         |                   | 431     |                   |   |                |        |                 |        |                   |  
|Other income (expense), net                |         |                   | 516     |                   |   | 335             |        |                 | 258     |                   |  
|                                           |         |                   |         |                   |   |                 |        |                 |         |                   |  
|Income (loss) before income taxes          |         |                   | (11,425 | )                 |   |                |        |                 | (2,355  | )                 |  
|Provision (benefit) for income taxes       |         |                   | (2,452  | )                 |   | (83             | )      |                 | 877     |                   |  
|                                           |         |                   |         |                   |   |                 |        |                 |         |                   |  
|Net income (loss)                          |         | $                 | (8,973  | )                 | $ | 83              |        | $               | (3,232  | )                 | $
|                                           |         |                   |         |                   |   |                 |        |                 |         |                   |  
|Net income (loss) per share:               |         |                   |         |                   |   |                 |        |                 |         |                   |  
|                                           | Basic   |                   | $       | (0.46             | ) | $               |       |                 | $       | (0.17             | )
|                                           | Diluted |                   | $       | (0.46             | ) | $               |       |                 | $       | (0.17             | )
|Weighted average shares outstanding:       |         |                   |         |                   |   |                 |        |                 |         |                   |  
|                                           | Basic   |                   |         | 19,387            |   |                 | 19,286 |                 |         | 19,230            |  
|                                           | Diluted |                   |         | 19,387            |   |                 | 19,298 |                 |         | 19,230            |  

23

---



|
|

|                                                     |  | December 30, 2007 |        | December 31, 2006 |   | January 1, 2006 |  | January 2, 2005 |        | December 28, 2003 |  
|---------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | --------------- |  | --------------- | ------ | ----------------- | -
|
|Other Financial Data:                                |  |                   |        |                   |   |                 |  |                 |        |                   |  
|Cash flow provided by (used in) operating activities |  | $                 | (3,820 | )                 | $ | 1,290           |  | $               | 1,314  |                   | $
|Capital expenditures                                 |  | $                 | 2,384  |                   | $ | 3,596           |  | $               | 8,144  |                   | $
|Depreciation and amortization                        |  | $                 | 3,148  |                   | $ | 3,362           |  | $               | 3,141  |                   | $
|Consolidated Balance Sheet Data:                     |  |                   |        |                   |   |                 |  |                 |        |                   |  
|Cash and cash equivalents                            |  | $                 | 8,484  |                   | $ | 8,881           |  | $               | 10,543 |                   | $
|Working capital                                      |  | $                 | (7,451 | )                 | $ | 41,105          |  | $               | 40,655 |                   | $
|Total assets                                         |  | $                 | 92,860 |                   | $ | 96,893          |  | $               | 91,318 |                   | $
|Total debt                                           |  | $                 | 46,630 |                   | $ | 46,630          |  | $               | 46,630 |                   | $
|Stockholders' equity (deficit)                       |  | $                 | 11,187 |                   | $ | 15,875          |  | $               | 16,462 |                   | $

24

---





ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following Management's Discussion and Analysis (the "MD&A") is provided as a supplement to, and should be read in conjunction with our consolidated financial
statements and the accompanying notes to the consolidated financial statements (the "Notes").

The
following MD&A is intended to help the reader understand the consolidated results of operations and financial condition of Cherokee International Corporation.

Forward-looking statements

Certain statements in this Annual Report on Form 10-K, other than purely historical information, including estimates, projections, statements
relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based
upon our current expectations about future events. When used in this Annual Report, the words "believes," "projects," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may,"
"will," "would," "will be," "will continue," "will likely result," and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although
not all forward-looking statements contain such words or expressions. These forward-looking statements generally relate to our plans, objectives and expectations for future operations. However, these
statements are subject to a number of risks and uncertainties affecting our
business. You should read this Annual Report completely and with the understanding that actual future results may be materially different from what we expect as a result of these risks and
uncertainties and other factors, which include, but are not limited to: (1) the potential delisting of the Company's common stock from the Nasdaq Global Market, (2) changes in general
economic and business conditions, domestically and internationally, (3) reductions in sales to, or the loss of, any of the Company's significant customers or in customer capacity generally,
(4) changes in the Company's sales mix to lower margin products, (5) increased competition in the Company's industry, (6) disruptions of the Company's established supply channels,
(7) the Company's level of debt and restrictions imposed by its debt agreements, and (8) the additional risk factors identified in Part I, Item 1 of this document. Except
as required by law, the Company undertakes no obligation to update any forward-looking statements, even though the Company's situation may change in the future.

Business

We are a designer and manufacturer of power supplies for OEMs. Our advanced power supply products are typically custom designed into mid- to
high-end commercial applications in the computing and storage, wireless infrastructure, enterprise networking, telecom, medical and industrial markets.

We
operate worldwide and have facilities in Orange County, California; Bombay, India; Wavre, Belgium (Europe) and Shanghai, China. In March 2007 we closed our facility in Guadalajara,
Mexico. In May 2007 we sold our manufacturing facility in Guadalajara, Mexico and, on December 12, 2007, we sold our subsidiary, Cherokee Electronica, S.A. de C.V. We were founded in
1978 in Orange County, California. As we expanded our business and customer base, we opened facilities in Bombay, India, Guadalajara, Mexico, and Shanghai, China. In June 2000, we acquired Cherokee
Europe, which added a manufacturing facility in Wavre, Belgium to our manufacturing capacity and enabled us to better serve the European market.

25

---



We
generate the majority of our sales in four market sectors, datacom, telecom, industrial and medical. For the year ended December 30, 2007, our revenues by market sector
consisted of 46% datacom, 30% telecom, and 24% for the industrial and medical sectors.

Basis of Reporting



We recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and
collectibility is probable. We recognize revenue in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition.Sales are recorded
net of discounts, which are estimated at the time of shipment based upon historical data. Changes in assumptions regarding the rate of sales discounts earned by our customers could impact our results.

We
generally recognize revenue at the time of shipment because this is the point at which revenue is earned and realizable and the earnings process is complete. For most shipments, title
to shipped goods transfers at the shipping point, so the risks and rewards of ownership transfer once the product leaves our facility or third-party hub. Revenue is only recognized when collectibility
is reasonably assured. Shipping and handling fees are included in revenue, with related costs recorded to cost of sales.



The principal elements comprising cost of sales are raw materials, labor and manufacturing overhead. Raw materials account for a large majority of our costs of
sales. Raw materials include magnetic sub-assemblies, sheet metal, electronic and other components, mechanical parts and electrical wires. Direct labor costs primarily include costs of
hourly employees. Manufacturing overhead includes salaries, and the direct expense and allocation of costs attributable to manufacturing for lease costs, depreciation on property, plant and equipment,
utilities, property taxes and repairs and maintenance.



Operating expenses include engineering costs, selling and marketing costs and general and administrative expenses. Engineering costs primarily include salaries
and benefits of engineering
personnel, safety approval and quality certification fees, and depreciation on equipment and consulting and professional services. Selling and marketing expenses primarily include salaries and
benefits to account managers and commissions to independent sales representatives. Administrative expenses primarily include salaries and benefits for certain management and administrative personnel,
professional fees and information system costs. Operating expenses also include the direct expense and allocation of costs attributable to these departments for lease costs, depreciation on property,
plant and equipment, utilities, property taxes and repairs and maintenance.



We record restructuring charges in accordance with SFAS No. 146,Accounting for Costs Associated with Disposal
Activities, which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, in contrast to the date of an
entity's commitment to an exit plan. These charges include costs related to personnel severance. Calculation of the restructuring reserves includes management's judgment regarding closed facilities,
which include assumptions about the length of time it will take to close the operation. Changes in these estimates may impact our operating results.

26

---



Critical Accounting Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable based upon the information currently available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Any future changes to these estimates and
assumptions could have a material effect on our reported amounts of revenue, expenses, assets and liabilities. The significant accounting policies that we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following:



We recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and
collectibility is probable. We recognize revenue in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition.Sales are recorded
net of discounts, which are estimated at the time of shipment based upon historical data. Changes in assumptions regarding the rate of sales discounts earned by our customers could impact our results.

We
generally recognize revenue at the time of shipment because this is the point at which revenue is earned and realizable and the earnings process is complete. For most shipments, title
to shipped goods transfers at the shipping point, so the risks and rewards of ownership transfer once the product leaves our facility or third-party hub. Revenue is only recognized when collectibility
is reasonably assured. Shipping and handling fees are included in revenue with related costs recorded to cost of sales.

The
Company has entered into arrangements with certain customers whereby products are delivered to a third-party warehouse location for interim storage until subsequently shipped and
accepted by our customers. Revenues from these sales are recognized upon shipment from the third-party warehouse location to the customers, when title has passed. The Company generally offers a
one-year warranty for defective products. Warranty charges have been insignificant during the periods presented.



In our North American and European operations we perform ongoing credit evaluations of our customers, the customer's current credit worthiness and various other
factors, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based
upon our historical experience and any specific customer collection issues that we have identified. While credit losses have historically been within our expectations and the provisions established,
we might not continue to experience the same credit loss rates that we have in the past. A significant portion of our accounts receivable are concentrated in a small number of customers. A significant
change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectibility of our accounts receivable, our liquidity and our future
operating results. As of December 30, 2007, and December 31, 2006, our top ten customers accounted for approximately 50% and 41% of our accounts receivables, respectively.



The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit
losses. The Company generally does not charge interest on customer balances.

27

---





Foreign subsidiary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect on the balance sheet date. Revenues,
costs and expenses are translated at the average exchange rate during the period. Transaction gains and losses are included in results of operations and have not been significant for the periods
presented. The functional currency of Cherokee Europe is the Euro. The functional currency of Cherokee India, Powertel and Cherokee China is the U.S. dollar, as the majority of transactions are
denominated in U.S. dollars. Translation adjustments related to Cherokee Europe are reflected as a component of stockholders' equity in other comprehensive income (loss).



We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory and the current estimated market value of the inventory using
the weighted average cost method. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our historical usage data and estimates
of future demand. Since substantially all of our products are manufactured according to firm purchase orders and customer forecasts, we evaluate the potential of recovery from our customers when
customized products approach end-of-life. Our customers are generally liable for inventory costs we incur for order cancellations that occur after we have committed resources
to procure or manufacture product. We also regularly evaluate inventory that is non-compliant with the RoHS directive to determine if additional reserves are needed to cover for potential
obsolescence. We have not established a separate reserve for non-RoHS compliant inventory above what our normal calculations would require.

Our
industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. As demonstrated during the past five years, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a
short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition,
our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our
inventory were determined to be overvalued, we would be required to recognize additional expense in our cost of sales at the time of such determination. Likewise, if our inventory is determined to be
undervalued, we may have over reported our costs of sales in previous periods and would be required to recognize additional operating income at the time such inventory is sold. Therefore, although we
make every reasonable effort to ensure the accuracy of our estimates of future product demand, any significant unanticipated changes in demand or technological developments could have a material
effect on the value of our inventory and our reported operating results.



We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected
timing of the reversals of existing temporary differences. If our future taxable income is significantly higher than expected and/or we are able to utilize our tax attributes, we may be required to
reverse all or a significant part of our valuation allowance against such deferred tax assets which could substantially reduce our effective tax rate for such period. Therefore, any significant
changes in statutory tax rates or the amount of our valuation allowance could have a material effect on the value of our deferred tax assets and liabilities and our reported financial results. In
fiscal year 2007, we generated $1.6 million of tax assets from pretax losses

28

---



in
our European operations. The years immediately preceding 2007 were profitable and our business plans project future profitable years that will utilize these assets. We will continue to evaluate
their valuation in future reporting periods. Thus, the Company has determined that a valuation allowance is not required with respect to the deferred tax assets generated from our European operations.
Recovery is dependent on achieving our forecast of future operating income over a protracted period of time. The Company will review the forecast in relation to actual results and expected trends on
an ongoing basis. Failure to achieve our operating income targets may change the Company's assessment regarding the recoverability of its net deferred tax assets and such change could result in a
valuation allowance being recorded against some or all of the deferred tax assets. Any increase in a valuation allowance would result in additional tax expense and could have a significant impact on
the Company's earnings in future periods.

The
preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that
affect the reported amount of tax-related assets and liabilities and income tax provisions. The Company's effective tax rate may be subject to fluctuations during the fiscal year as new
information is obtained which may affect the assumptions management uses to estimate the annual effective tax rate including mix of pre-tax earnings in the various tax jurisdictions in
which it operates.

The
Company adopted FIN 48,Accounting for Uncertainty in Income Taxeson January 1, 2007. As a result of adoption, the
Company recognized a cumulative effect adjustment of less than $0.1 million to the January 1, 2007 accumulated deficit balance. At January 1, 2007, we had $1.8 million of
gross unrecognized tax benefits, of which $0.6 million would reduce our effective tax rate if recognized. Of the total unrecognized tax benefits at the adoption date, $1.2 million was
recorded as a reduction to deferred tax assets, which caused a corresponding reduction in our valuation allowance of $1.2 million. To the extent such portion of unrecognized tax benefits is
recognized at a time such valuation allowance no longer exists, the recognition would impact our effective tax rate. At December 30, 2007, we have $0.3 million of gross unrecognized tax
benefits, of which $0.3 million would reduce our effective tax rate if recognized. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in
income tax expense. As of December 30, 2007, we have less than $0.1 million of accrued interest and penalties related to uncertain tax positions.

The
tax years 1997 to 2006 remain open to examination by the major taxing jurisdictions to which we are subject. The Company is currently under examination in India for certain years
between 2000 and 2005 and in the United States for the year 2005. In the fourth quarter of 2007 we sold our Mexican subsidiary and are no longer subject to examinations in Mexico. The Company is
scheduled to begin an audit of 2005 and 2006 in Belgium beginning in the first quarter of 2008. Due to the potential resolution of the examinations, it is reasonably possible that the unrecognized tax
benefits at December 30, 2007 may change within the next twelve months by a range of $0 to $0.3 million.

United
States income taxes are not provided on undistributed earnings from certain foreign subsidiaries. Those earnings are considered to be permanently re-invested in
accordance with the Accounting Principles Board (APB) Opinion 23.



Belgium taxes for unrealized foreign exchange gains on an intercompany loan considered permanently re-invested are provided for as a component of
other comprehensive income. Foreign exchange gains were recognized as Belgium taxable income in 2005 and 2006 from repayments of the loan. No foreign exchange gains were recognized in 2007. See
further discussion in Note 3 to the accompanying consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data."

29

---





We review the recoverability of the carrying value of goodwill on an annual basis or more frequently when an event occurs or circumstances change to indicate that
an impairment of goodwill has possibly occurred. The determination of whether any potential impairment of goodwill exists is based upon a comparison of the fair value of the reporting unit to the
accounting value of its net assets.

We
also review the recoverability of the carrying value of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of these assets is determined based upon the forecasted undiscounted future net cash flows from the operations to which the assets relate, utilizing our best estimates,
appropriate assumptions and projections at the time.

These
projected future cash flows may vary significantly over time as a result of increased competition, changes in technology, fluctuations in demand, consolidation of our customers and
reductions in average selling prices. If the carrying value is determined not to be recoverable from future operating cash flows, the asset would be deemed impaired and an impairment loss would be
recognized to the extent the carrying value exceeded the estimated fair market value of the asset.

Based
on our annual assessment of the fair value of our Cherokee Europe subsidiary in accordance with SFAS 142, we recorded a goodwill impairment charge of $5.2 million
during the year ended December 30, 2007 to properly report goodwill at its fair value. This required evaluation includes the application of discounted cash flow analysis with fair market
assessments.



The Company adopted SFAS 123R on January 2, 2006 using the "modified prospective" method as permitted by SFAS 123R. Under this transition
method, stock compensation cost recognized beginning in the first quarter of fiscal year 2006 includes: (a) compensation cost for all share-based payments granted subsequent to
February 25, 2004 and prior to January 2, 2006 but not yet vested as of January 2, 2006, based on the grant-date fair value estimated in accordance with the provisions
of
SFAS 123R, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. In accordance with the modified prospective method of adoption, the Company's results of operations and financial position for prior periods have not been
restated. At the date of the adoption, the unamortized expense for options issued prior to January 2, 2006 was $2.3 million, which will be amortized as stock compensation costs through
December 2010. All grants are made at prices based on the fair market value of the stock on the date of grant. Outstanding options generally vest four years from the grant date, with certain limited
exceptions, and expire up to ten years after the grant date.

The
Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option pricing formula
with the assumptions included in the table under "Stock-Based Compensation" in Note 3 to the accompanying Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data." The Company uses historical data, among other factors, to estimate the expected price volatility and the expected forfeiture rate. For options granted prior to January 2,
2006, the Company used the expected option life of 5 years. For options granted following the Company's adoption of SFAS 123R, the expected life was increased to 6.25 years using
the "simplified method" under SAB 107 (an expected term based on the mid-point between the vesting date and the end of the contractual term). The options have a maximum contractual
term of 10 years and generally vest as to 25% of the underlying stock on each anniversary of the date of grant, subject to accelerated vesting in the event of a change in control of the
Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.

30

---



Results of Operations

The following table sets forth selected items from our statements of operations as a percentage of our net sales for the periods indicated:

December 30, 2007

December 31, 2006

January 1, 2006Net sales

100.0
%
100.0
%
100.0
%Cost of sales

80.1

78.9

79.6Gross profit

19.9

21.1

20.4Operating expenses

23.6

19.4

20.2Operating income

(3.7
)
1.7

0.2Interest expense

(2.2
)
(1.9
)
(2.3
)Goodwill impairment

(4.0
)


Gain on sale of Mexico Facility building

0.3



Gain on sale of Mexico Corporation

0.4



Other income, net

0.4

0.2

0.2Income (loss) before income taxes

(8.8
)


(1.9
)Provision (benefit) for income taxes

(1.9
)
(0.1
)
0.7Net income (loss)

(6.9
)%
0.1
%
(2.6
)%


Year Ended December 30, 2007 Compared to Year Ended December 31, 2006



Net sales decreased by approximately 11.4%, or $16.5 million, to $128.5 million for the year ended December 30, 2007 from
$145.0 million for the year ended December 31, 2006.

The
$16.5 million decrease from 2006 sales was due to the decrease in the following markets, telecom decreased by $10.9 million, datacom decreased by $3.3 million
and industrial and medical decreased by $2.3 million. The decrease of $10.9 million in telecom sales was related to a decline in sales from two specific customers. One customer placed a
large order in 2006 and had lower production volumes in 2007. The other customer's product reached its end of life. The decrease of $3.3 million in datacom sales was due to engineering or
customer rollout delays. The decrease of $2.3 million in industrial and medical sales was related to a large customer in Mexico in which the product manufactured was moved to China and
converted to a consignment hub inventory. For the year ended December 30, 2007, currency fluctuations offset $3.7 million of the decrease in net sales related to our Cherokee Europe
operation. Management expects the delays in the rollout of new programs during 2007 to be temporary and for these programs to be rolled out and generate sales in 2008.



Gross profit decreased by approximately 16.3%, or $5.0 million, to $25.6 million for the year ended December 30, 2007 from
$30.6 million for the year ended December 31, 2006. Gross margin for the year ended December 30, 2007 decreased to 19.9% of net sales from 21.1% in the prior year.

For
the year ended December 30, 2007, the decrease in gross profit was primarily related to lower sales volume, which had an adverse effect on fixed absorption costs and labor
rate efficiencies compared to the year ended December 31, 2006. In addition, $0.3 million was related to temporarily higher factory overhead costs caused by running dual operations in
Mexico and China. For the year ended December 30, 2007, currency fluctuations offset $0.6 million of the decrease in gross profit related to our Cherokee Europe operation.

31

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Operating expenses for the year ended December 30, 2007 increased by $7.5 million, or 26.5%, to $35.6 million from $28.1 million for
the year ended December 31, 2006. The majority of the increase in 2007 from 2006 was related to a goodwill impairment charge of $5.2 million during the year ended December 30,
2007 to properly report goodwill at its fair value based on our annual assessment of the fair value of our Cherokee Europe subsidiary in accordance with SFAS 142. This required evaluation
includes the application of discounted cash flow analysis with fair market assessments. It was also related to a $1.7 million increase in expenses in 2007 that was due to a favorable impact in
2006 as a result of a Belgium regulatory law change. This change in law reduced the overall cost and associated liability of Cherokee Europe's long-term employment and service award plan.
The additional increase of $0.6 million in operating expenses in 2007 from 2006 are as follows:

For
the year ended December 30, 2007, engineering and development costs increased by $1.4 million compared to the year ended December 31, 2006, due to the increase
in headcount to support our increase in new product developments. Engineering and development expense was higher by $0.8 million in 2007 compared to the prior period in 2006 in our North
America and Europe businesses due to ongoing design and development of active projects. Expenses for our China operation were higher by $0.3 million for the year ended December 30, 2007
compared to the prior year in 2006. We currently have a development team of twenty-six engineers in China compared to seven a year ago. This investment follows our strategic plan to
increase the level of our engineering resources in China to enable us to increase our design activity and allow us to market our products locally, and provide engineering support to our North American
and European operations. For the year ended December 30, 2007, currency fluctuations accounted for $0.3 million of the increase in engineering and development costs related to our
Cherokee Europe operation.

Selling
and marketing expense consists primarily of sales salaries and commissions, travel, advertising and marketing expenses. For the year ended December 30, 2007, selling and
marketing expense increased by $0.3 million compared to the year ended December 31, 2006, of which $0.4 million is related to a decrease during the prior period in 2006 due to a
mutual release agreement made with a former business partner over sales commissions. The agreement released both parties from obligations arising from past transactions. For the year ended
December 30, 2007, currency fluctuations accounted for an additional $0.2 million of the increase in selling and marketing expense related to our Cherokee Europe operation. However,
these increases were offset by a decrease of $0.3 million in sales commissions due to lower sales and lower personnel expenses.

General
and administrative expense consists primarily of salaries and other expense for management, finance, human resources and information systems. For the year ended
December 30, 2007, general and administrative expense decreased by $0.3 million compared to the year ended December 31, 2006. Bonuses were lower by $0.8 million in 2007
compared to 2006 due to the Company not meeting its performance goals in 2007. Professional fees were lower by $0.3 million in 2007 compared to 2006. Offsetting the decreases were increases of
$0.3 million in overall salaries, $0.2 million increase in stock compensation costs related to options under SFAS 123R, and $0.1 million in redundant expenses during the
transition of operations from Mexico to China. For the year ended December 30, 2007, general and administrative expense for Cherokee Europe was higher by $0.2 million due to currency
fluctuations.

During
the third quarter ended October 1, 2006, the Company announced the planned closure of its Mexico Facility. For the year ended December 30, 2007, severance and
facility closure costs decreased by $0.8 million compared to the year ended December 31, 2006. The Company incurred $0.2 million of operating costs related to severance and
facility closure costs for its Mexico Facility in 2007 compared to $1.0 million in the prior year, of which $0.3 million was related to asset impairment costs.

32

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As a result of the factors discussed above, operating income decreased to a loss of $10.0 million for the year ended December 30, 2007 compared to
income of $2.5 million for the year ended December 31, 2006. Operating margin decreased to a loss of 7.8% from income of 1.7% in the prior year. For the year ended December 30,
2007, currency fluctuations accounted for $0.1 million of the decrease in operating income related to our Cherokee Europe operation.



For the year ended December 30, 2007, the Company recorded a net gain of $0.4 million related to the sale of the Mexico Facility building. See
Note 10 to the accompanying Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data."



For the year ended December 30, 2007, the Company recorded a net gain of $0.4 million related to the sale of the Mexico corporation. See
Note 10 to the accompanying Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data."



The benefit for income taxes for the year ended December 30, 2007 increased by $2.4 million to a $2.5 million benefit, compared to a
$0.1 million in benefit for the year ended December 31, 2006.

The
increase in the benefit for income taxes from 2006 was due largely to a current year net operating loss in Belgium expected to be realized in the foreseeable future, and was
therefore recognized as a deferred tax asset. Additionally, the Company released a FIN 48 liability in conjunction with the settlement of an audit in the Netherlands. Entities with net
operating loss carry-forwards in 2006 continued to generate net operating losses in 2007. The US division continued to utilize deferred tax assets and generate a net operating loss carryforward. The
valuation allowance on our deferred tax assets for the year ended December 30, 2007 decreased by $1.9 million to $52.7 million, compared to $54.6 million for the year ended
December 31, 2006. In fiscal year 2007, we generated $1.6 million of tax assets from pretax losses in our European operations. The years immediately preceding 2007 were profitable and
our business plans project future profitable years that will utilize these assets. We will continue to evaluate their valuation in future reporting periods. The Company has determined that a valuation
allowance is not required with respect to certain foreign deferred tax assets. Recovery is dependent on achieving our forecast of future operating income over a protracted period of time. The Company
will review the forecast in relation to actual results and expected trends on an ongoing basis. Failure to achieve our operating income targets may change the Company's assessment regarding the
recoverability of its net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of the deferred tax assets. Any increase in a valuation allowance
would result in additional tax expense and could have a significant impact on the Company's earnings in future periods.

Provision
for income taxes for the year ended December 30, 2007 and December 31, 2006 was calculated separately by each of the tax jurisdictions within the relevant country
of operation. For the year ended December 31, 2006 one of the divisions with pre-tax income had no NOL to offset for the year, and therefore, taxes were owed. For the year ended
December 30, 2007 this division generated a net operating loss which is expected to be utilized in the foreseeable future.

Our
China operation is not subject to taxes for five years beginning in 2008 due to a tax holiday.

33

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See
the further discussion of the income tax provision and net operating loss carry-forwards in Note 14 to the accompanying Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data."



As a result of the factors discussed above, we recorded a net loss of $9.0 million for the year ended December 30, 2007, compared to net income of
$0.1 million for the year ended December 31, 2006.

Year Ended December 31, 2006 Compared to Year Ended January 1, 2006



Net sales increased by approximately 18.8%, or $22.9 million, to $145.0 million for the year ended December 31, 2006 from
$122.1 million for the year ended January 1, 2006.

The
increase in net sales was primarily due to the increase in demand for products from a few of our larger customer programs in the telecom and datacom market segments. The growth in
these two market sectors accounted for approximately 77.7%, or $17.8 million, of the net sales increase in 2006 from 2005, while the remaining 22.3% increase was from the industrial and medical
sectors. Revenues generated from shipments to our top ten customers increased by $9.0 million over 2005, including a $3.1 million increase in sales to one of our largest customers.



Gross profit increased by approximately 22.9%, or $5.7 million, to $30.6 million for the year ended December 31, 2006 from
$24.9 million for the year ended January 1, 2006. Gross margin for the year ended December 31, 2006 increased to 21.1% from 20.4% in the prior year.

The
increase in gross profit was due primarily to the increase in revenues and the resulting gain of contribution margin on those revenues, combined with a different product mix during
2006. The increase in gross margin was due to lower labor cost from the transitioning of production to our new China facilities, combined with a favorable change in product mix. This was offset by
$0.7 million of increased transition cost in factory labor and overhead related to the transitioning of production from Mexico to our new China facilities and $0.3 million of additional
surplus and obsolescence related to the Mexico move.



Operating expenses for the year ended December 31, 2006 increased by $3.5 million, or 14.1%, to $28.1 million from $24.7 million for
the year ended January 1, 2006. A total of $2.9 million of the increase in expenses was due to the impact of insurance proceeds received in 2005. Cherokee Europe was compensated for the
replacement value of assets destroyed in the 2004 fire.

In
2006 the Company incurred $1.0 million of operating costs related to severance and facility closure costs related to the planned closure of our Mexico facility. The Company
incurred $0.7 million of stock compensation costs related to the adoption of SFAS 123R during 2006. In addition, operating expenses in 2006 for our Shanghai, China facility increased by
$0.3 million compared to 2005 due to the plant becoming fully operational in 2006. There were also $0.4 million of legal and professional fees incurred to resolve the India unauthorized
payment issue discussed in Note 9India Matter. Bonuses and commissions were $1.6 million higher in 2006 compared to 2005 because we achieved our revenue and financial
performance targets for 2006, but not for 2005. In 2005 we incurred $1.1 million of consulting and professional fees related to readiness efforts for compliance with Section 404 of the
Sarbanes-Oxley Act, compared to no costs during 2006. There was also a reduction of $1.0 million of

34

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sales
and general administrative costs in Europe during 2006. In addition, we incurred $0.5 million of redundant selling and general administrative costs from the closure of our Mexico
facility. The cumulative increase in operating expense was partially offset by a decrease of $1.7 million to our Cherokee Europe employee long service award plan liability due to a Belgium
regulatory law change in the carrying amount of the reserve on the statutory balance sheet.



As a result of the factors discussed above, operating income increased by 925%, or $2.2 million, to $2.4 million for the year ended
December 31, 2006 from $0.2 million for the year ended January 1, 2006. Operating margin increased to 1.7% from 0.2% in the prior year.



The provision for income taxes for the year ended December 31, 2006 decreased by $1.0 million to a $0.1 million benefit, compared to a
$0.9 million in expense for the year ended January 1, 2006.

The
decrease in the provision for income taxes from 2005 was due largely to the decrease in income before income taxes for entities without net operating loss carry-forwards and the
release of a tax contingency reserve related to India. Entities with net operating loss carry-forwards in 2005 continued to generate net operating losses in 2006. The valuation allowance on our
deferred tax assets for the year ended December 31, 2006 decreased by $2.0 million to $54.6 million, compared to $56.6 million for the year ended January 1, 2006.

Provision
for income taxes for the year ended December 31, 2006 and January 1, 2006 was calculated separately by each of the tax jurisdictions within the relevant country
of operation. In spite of our overall loss for the year, some of our divisions generated taxable income for the year. For the years ended January 1, 2006 and December 31, 2006, one of
the division's taxable income was offset with net operating losses (NOL's) that carried forward, while other divisions had no NOL's to offset their income for the year,
and therefore, taxes were owed.

Our
China operation is not subject to taxes for five years beginning in 2008 due to a tax holiday.

See
the further discussion of the income tax provision and net operating loss carry-forwards in Note 14 to the accompanying consolidated financial statements included in
Item 8, "Financial Statements and Supplementary Data."



As a result of the factors discussed above, we recorded net income of $0.1 million for the year ended December 31, 2006, compared to net loss of
$3.2 million for the year ended January 1, 2006.

Liquidity and Capital Resources

Cash Flows

Year Ended December 30, 2007 Compared to Year Ended December 31, 2006

Net cash used by operating activities for the year ended December 30, 2007 was $3.8 million, compared to net cash provided by operating activities
of $1.3 million for the year ended December 31, 2006.

35

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Net cash used in operating activities for the year ended December 30, 2007 reflected a net loss of $9.0 million which was primarily a result of $16.5 million lower
revenues in 2007 compared to the comparable period in 2006 and a $5.2 million impairment charge related to the write down of goodwill to its fair value under the guidance of SFAS 142,
offset by a $0.9 million gain in the sale of assets held for sale related to the sale of the Mexico Facility building and the sale of the Mexico Corporation, a $2.2 million increase in
deferred income taxes primarily due to the generation of a net operating loss carryforward in Belgium, a $2.7 million increase in accounts receivable, a $0.1 million increase in deposits
and other assets, a $1.4 million decrease in accrued liabilities and restructuring costs, a $0.1 million decrease in accrued compensation and benefits, and a $1.2 million decrease
in other long-term liabilities. This was offset by the $5.2 million goodwill impairment charge included in the net loss as mentioned above, $3.1 million in depreciation and
amortization, and a $0.1 million in amortization of deferred financing costs, $0.9 million of stock-based compensation related to SFAS 123R, a $2.8 million decrease in
inventories due to improved logistics from our China Facility and increased management focus on raw materials and hub levels of inventory, a $1.0 million decrease in prepaid expenses and other
current assets, and an increase of $0.7 million in accounts payable.

Net
cash provided by operating activities was $1.3 million for the year ended December 31, 2006. Of this amount a total of $0.1 million was related to net income,
$3.4 million to depreciation and amortization, $0.3 million to an asset impairment charge related to closure of our Mexico Facility, $0.1 million to amortization of deferred
financing costs, $0.7 million of stock-based compensation related to SFAS 123R, $0.6 million to deferred income taxes, and $2.1 million to accrued compensation and benefits
mainly related to an increase in commission and bonus plan liabilities as of December 31, 2006. This was offset by a $1.4 million increase in accounts receivable, a $1.0 million
increase in inventories, a $0.7 million increase in prepaid expenses and other assets, a $0.1 million increase in deposits and other assets, a $0.2 million decrease in accounts
payable, a $1.2 million decrease in accrued liabilities and restructuring costs, and a $1.5 million decrease in other long-term obligations mainly due to the
$1.7 million decrease recorded as the result of the change in Belgium law related to long term employment liabilities.

Net
cash used in investing activities for the year ended December 30, 2007 was $0.8 million, in which $2.4 million was related to capital expenditures. We invested
$1.9 million in our China facility. We received $1.7 million of proceeds from the sale of the Mexico Facility building and the sale of the Mexico Corporation in 2007.

Net
cash used in investing activities for the year ended December 31, 2006 was $3.6 million, all of which related to capital expenditure purchases invested in our China
facility.

Net
cash provided by financing activities for the year ended December 30, 2007 was $3.7 million. During the third quarter ended September 30, 2007, Cherokee Europe
borrowed $2.1 million from the line of credit with Bank Brussels Lambert, a subsidiary of ING Belgie NV. As of December 30, 2007, the $2.1 million outstanding balance
remained due to the Bank Brussels Lambert. In January 2007, we opened a credit facility with the Industrial and Commercial Bank of China Ltd., or ICBC. Pursuant to the loan contract, ICBC will
advance up to the equivalent of approximately $3.4 million, expressed as RMB 25.0 million. The line is collateralized by the Company's building in Shanghai, China. During the first
quarter of 2007, Cherokee China borrowed $1.3 million under this credit facility to support working capital requirements as China built inventory and incurred value-added tax on local
purchases. As of December 30, 2007, the outstanding balance of $1.3 million remained due to ICBC. During the year ended December 30, 2007, $0.3 million of proceeds were
received from the employee stock purchase plan and the exercise of stock options.

Net
cash provided for by financing activities was $0.2 million for the year ended December 31, 2006. The $0.2 million was related to the net proceeds from the sale
of common stock through our Employee Stock Purchase Plan.

36

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Liquidity

We expect our liquidity requirements will be primarily for working capital and capital expenditures, including repayment of our senior notes due
November 1, 2008. As of December 30, 2007, we had cash and cash equivalents of $8.5 million, negative working capital of $7.5 million due to the $46.6 million of
senior notes due November 1, 2008 reclassed from long-term debt to current liabilities, no outstanding borrowings under our main revolving credit facility and borrowing base
availability of $7.5 million under the same facility. Our revolving line of credit with General Electric Capital Corporation matures in August 2008. The Company plans to renew this line with
the existing lender or a new lender after the extension of our senior bond obligations is executed. Historically, we have financed our operations with cash from operations supplemented by borrowings
from credit facilities and debt and equity issuances. Besides our credit line in the United States, Cherokee Europe also maintains a working capital line of credit of approximately
$4.5 million, expressed as Euros 3.0 million, with Bank Brussels Lambert, a subsidiary of ING Belgie NV, a bank in Brussels, which is denominated in Euros, and is collateralized
by a pledge in first and second rank over a specific amount of business assets. Our access to the line is limited to $4.0 million because $0.5 million is committed to minimum guarantees
on specific collections and payments. The facility requires Cherokee Europe to maintain a certain solvency ratio and is cancelable at any time. The current revolving line of credit with ING
Belgie NV prohibits the transfer of cash outside of Belgium to the U.S. in the form of management and dividend fees until August, 2008. During the third quarter ended September 30, 2007,
Cherokee Europe borrowed $2.1 million from the line of credit which remained outstanding as of December 30, 2007.

In
January 2007, we opened a credit facility with the Industrial and Commercial Bank of China Ltd., or ICBC. Pursuant to the contract, ICBC will advance up to the equivalent of
approximately $3.4 million, expressed as RMB 25.0 million. The line is collateralized by the Company's building in Shanghai, China. Interest is payable monthly at a fixed rate based on
the transaction date of our borrowings, the rates vary according to the specific dates and are announced by the People's Bank of China. The first term ended January 29, 2008, and was renewed
and extended for an additional year, until January 2009. The contract is renewable annually, but is cancelable at any time. This facility is intended for working capital requirements in China,
especially as our China subsidiary builds inventory for export to the United States and Europe and incur value-added tax on local purchases that can only be recovered through in-country
sales of our product. As of December 30, 2007, Cherokee China had $1.3 million of borrowings under this line of credit since April 1, 2007.

Subject
to the refinancing risk described below under Contractual Obligations and Item 1A. Risk Factors, we believe our cash flow from operations and our credit lines in the
United States, Europe and China, are sufficient to meet our operating cash requirements for at least the next twelve months. However, this assumes that we are successful in extending the maturity date
of our senior bonds that come due in November 2008. If this extension is not successful, the Company does not have the liquidity resources to pay this $46.6 million obligation.

The
prior two years, 2006 and 2005, were unusual in that we financed the building, capital expenditures and start-up working capital requirements of our new Shanghai facility
entirely from internally generated cash. Our ongoing current and future liquidity needs primarily arise from working capital requirements and capital expenditures that have now returned to comparable
historical levels as we have completed the construction of our plant in China. This assumes that we are successful in extending the maturity date of our senior bonds. Our historical capital
expenditures have primarily resulted from investments in equipment to increase or replace manufacturing capacity and to improve manufacturing efficiencies.

For
2007, we originally expected global capital expenditures to be approximately $2.9 million. However, we spent $2.5 million. Most of this spending was in our investments
in our manufacturing equipment at our facilities, of which $1.9 million was spent on our China facility. In 2006, our China

37

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facility
required $3.0 million and in 2005, our initial investment into our China facility required $5.5 million, over two times the anticipated spending for 2007. In 2008 we expect our
capital expenditures to be $1.7 to $2.1 million.

As
of December 30, 2007, we had approximately $46.6 million of senior notes bearing an annual interest rate of 5.25%, payable semi-annually. These notes become
due on November 1, 2008. In February 2008 the Company engaged Houlihan Lokey to work with our bondholders to extend the maturity of our $46.6 million in senior bond obligations from
November 2008. At the time of filing this Annual Report on Form 10-K, unequivocal commitments with defined terms were not available from the majority of our bondholders agreeing to
extend the maturity date. Current
conditions in the U.S. financial markets have not helped us complete this extension. However, we, through our investment bankers, have been and continue to be in active negotiations with a majority of
the bondholders and expect resolution in the near future. It is possible to receive an agreement of the majority by obtaining commitment from several combinations of two holders. An extended agreement
will result in higher than existing interest rates and other terms that the Company has adequate liquidity to handle.

Our
plan for 2008 through 2009 projects is that we will have adequate cash flow to support refinancing these notes at current market rates. However, if the extension of our senior bonds
maturing in November 2008 is not successful, the Company does not have the liquidity resources to pay this $46.6 million obligation.

Contractual Obligations

As of December 30, 2007, our borrowings consisted of approximately $46.6 million of senior notes, and no outstanding borrowings under our revolving
credit facility.

Our
senior notes bear interest at 5.25% annually, and mature on November 1, 2008. We are required to make semi-annual interest payments to holders of the senior notes,
payable in cash on May 1 and November 1 of each year. The senior notes are secured by a second-priority lien on substantially all of our domestic assets and by a pledge of 65% of the
equity of certain of our foreign subsidiaries. The Company does not have sufficient cash available at the time of maturity to repay this indebtedness and is actively seeking to refinance this
obligation. The Company acknowledges that it may not be able to refinance this obligation at comparable interest rates to the 5.25% annual interest rate in the past, and any refinancing may be on
terms that are materially less favorable. In addition, if the Company is not able to obtain satisfactory financing, the Company may be forced to sell some of its assets or to otherwise significantly
alter its operating plan.

On
November 1, 2007, the Company and General Electric Capital Corporation amended the Credit Facility for the revolving line of credit dated February 24, 2004. As of
December 30, 2007, our borrowing base was $7.5 million under the amended Credit Facility and our eligible accounts receivable was $10.3 million. The Credit Facility matures in
August 2008. We plan to use funds available under the Credit Facility to finance working capital and other cash requirements as needed. The Credit Facility is our senior obligation and ranks equal in
right of payment with our existing and future permitted senior debt (including our senior notes), and senior in right of payment to our future permitted subordinated debt. The Credit Facility is
secured by a first-priority lien, subject to permitted encumbrances, on substantially all of our domestic assets and by a pledge of 65% of the equity of certain of our foreign subsidiaries.

The
agreements governing the Credit Facility and our senior notes contain covenants that restrict our business operations, including covenants limiting our ability to make investments,
enter into mergers or acquisitions, dispose of assets, incur additional debt, grant liens, enter into transactions with affiliates, redeem or repurchase our capital stock, repay other debt and pay
dividends, and contain a financial ratio test based on senior leverage. The agreements also contain customary events of default, including defaults in the payment of principal or interest, defaults in
the compliance with the covenants

38

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contained
in the agreements governing our debt, cross defaults to other material debt and bankruptcy or other insolvency events. In March 2008, General Electric Capital Corporation modified the
amended credit agreement effective as of December 30, 2007 for a balance sheet covenant issue resulting from the capitalization of intercompany debt with our Dutch holding company during 2007.

During
the quarter ended September 30, 2007, Cherokee Europe borrowed $2.1 million from the line of credit which remained outstanding as of December 30, 2007.

As
of December 30, 2007, Cherokee China had $1.3 million of borrowings under this line of credit.

As
of December 30, 2007, we were in compliance with all of the covenants set forth in the principal agreements governing our debt.

In
July 2007, Cherokee Europe borrowed short-term funds of $0.6 million from ING Belgie NV, and repaid the amount as of December 25, 2007.

For
a more detailed discussion related to the above financial instruments and obligations, see the subsection entitled "Debt" contained in Note 6 to the accompanying Consolidated
Financial Statements included in Item 8, "Financial Statements and Supplementary Data."

We
have operating lease obligations relating to our facilities in Tustin and Irvine, California and Bombay, India.

We
have purchase commitments primarily with vendors and suppliers for the purchase of inventory and for other goods, services, and equipment as part of the normal course of business.
These commitments are generally evidenced by purchase orders that may or may not include cancellation provisions. Based on current expectations, we do not believe that any cancellation penalties we
incur under these obligations would have a material adverse effect on our consolidated financial condition or results of operations.

In
2008, we have $1.1 million of scheduled distributions to be paid to participants from the deferred compensation plan of which the funds for these payments have been transferred
into the Company's deferred compensation plan.

The
maturities of our long-term debt, including capital leases, and future payments relating to our operating leases and other obligations as of December 30, 2007 are
as follows (in thousands):

Contractual Obligations

2008

2009

2010

2011

2012

Thereafter

TotalDebt-senior notes

$
46,630

$


$


$


$


$


$
46,630Operating leases


1,611


568


43


18


6


103


2,349Purchase order commitments


16,884

















16,8841999 Europe restructuring


165


342


55











5622003 Europe restructuring


266


259


238


195


151


221


1,330Long service award


53


107


204


25


20


554


963Deferred compensation


1,119














237


1,356Advances for research and development


79


61


61


63


64


340


668Unrecognized tax benefits


307

















307Total

$
67,114

$
1,337

$
601

$
301

$
241

$
1,455

$
71,049


The long-term liability for accrued pension costs included on the consolidated balance sheet is excluded from the table above.
Cherokee is unable to estimate the timing of payments for these costs. During the year ended December 30, 2007, the Company contributed approximately $0.3 million. In 2008 the Company
expects to contribute $0.4 million.

39

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Inflation

We do not believe that inflation has had a material impact on our financial position, results of operations or prices.

New Accounting Pronouncements

For a discussion of the impact of recently issued accounting pronouncements, see the subsection entitled "Recent Accounting Pronouncements" contained in
Note 3 of the Notes to Consolidated Financial Statements under "Item 8. Financial Statements and Supplementary Data."

Quarterly Financial Data

Quarterly Financial Data For The  Years ended December 30, 2007 and December 31, 2006 By Quarters (unaudited)  (in thousands, except per share amounts)

|                                    |  | December 30, 2007,
Quarter Ended, |        | December 31, 2006,
Quarter Ended,
|----------------------------------- |  | --------------------------------- | ------ | ---------------------------------
|
|Net sales                           |  | $                                 | 30,020 |                                  
|Gross profit                        |  |                                   | 5,717  |                                  
|Operating income (loss)             |  |                                   | (2,119 | )                                
|Net income (loss)                   |  |                                   | (2,022 | )                                
|Basic net income (loss) per share   |  | $                                 | (0.10  | )                                
|Diluted net income (loss) per share |  | $                                 | (0.10  | )                                

|
|

|                        |  | December 30, 2007,
Quarter Ended, |   | December 31, 2006,
Quarter Ended, |  
|----------------------- |  | --------------------------------- | - | --------------------------------- | -
|
|Net sales               |  | 100.0                             | % | 100.0                             | %
|Gross profit            |  | 19.0                              |   | 18.8                              |  
|Operating income (loss) |  | (7.1                              | ) | (8.5                              | )
|Net income (loss)       |  | (6.7                              | ) | (5.6                              | )

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk relating to our operations results primarily from changes in foreign currency exchange rates and short-term interest rates. We did not
have any derivative financial instruments at December 30, 2007.

We
had no variable rate debt outstanding at December 30, 2007. However, any debt we incur under the Credit Facility and the Cherokee Europe line of credit will bear interest at a
variable rate. We cannot predict market fluctuations in interest rates and their impact on any variable rate debt we may incur in the future, nor can there be any assurance that fixed rate
long-term debt will be available to us at favorable rates, if at all.

The
functional currency for our European operations is the Euro. We are, therefore, subject to a certain degree of market risk associated with changes in foreign currency exchange rates.
This risk is mitigated by the fact that our revenues and expenses are generally both transacted in Euros, thereby reducing the risk of foreign currency fluctuation on our European operations. The net
effect on our operating income for foreign currency exchange rate fluctuations as of and for the year ended December 30, 2007, accounted for a $0.1 million decrease in our income.
Historically, we have not actively engaged in exchange rate-hedging activities.

40

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PageReport of Independent Registered Public Accounting Firm

42Report of Independent Registered Public Accounting Firm

43Consolidated Balance Sheets as of December 30, 2007 and December 31, 2006

44Consolidated Statements of Operations for the years ended December 30, 2007, December 31, 2006 and January 1, 2006

45Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Operations for the years ended December 30, 2007, December 31, 2006 and January 1, 2006

46Consolidated Statements of Cash Flows for the years ended December 30, 2007, December 31, 2006 and January 1, 2006

47Notes to Consolidated Financial Statements

48Schedule II: Valuation and Qualifying Accounts

79


41

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders

Cherokee International Corporation

We have audited the accompanying consolidated balance sheets of Cherokee International Corporation and subsidiaries (the Company) as of December 30, 2007
and December 31, 2006 and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive operations and cash flows for each of the two years in the period
ended December 30, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cherokee International Corporation and subsidiaries as of
December 30, 2007 and December 31, 2006 and the results of their operations and their cash flows for each of the two years in the period ended December 30, 2007 in conformity with
U.S. generally accepted accounting principles.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated
financial statements, the Company has 5.25% Senior Notes in the amount of $46.6 million that are included in current liabilities as of December 30, 2007, that mature on
November 1, 2008, and become due and payable. The Company's management anticipates that there will not be sufficient cash balances available to repay the outstanding debt at its maturity. These
circumstances create substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 3. The consolidated
financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.

As
discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation and its method of quantifying errors
effective January 2, 2006.

/s/
MAYER HOFFMAN MCCANN P.C.

MAYER
HOFFMAN MCCANN P.C.

Orange
County, California
March 26, 2008

42

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors of
Cherokee International Corporation
Tustin, California

We
have audited the accompanying consolidated statements of operations, stockholders' equity (deficit) and comprehensive operations, and cash flows the year ended January 1, 2006
of Cherokee International Corporation and subsidiaries (the Company). Our audit also included the financial statement schedule for the year ended January 1, 2006 listed in the Index at
Item 15(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Cherokee International Corporation and
subsidiaries for the year ended January 1, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/
DELOITTE & TOUCHE LLP

Costa
Mesa, California

April 17,
2006

43

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CHEROKEE INTERNATIONAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In Thousands, Except Share and Per Share Amounts)

|                                                                                                                                                                               |                            | December 30, 2007 |          | December 31, 2006 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ----------------- | -------- | ----------------- | -
|ASSETS                                                                                                                                                                         |                            |                   |          |                   |  
|CURRENT ASSETS:                                                                                                                                                                |                            |                   |          |                   |  
|Cash and cash equivalents                                                                                                                                                      |                            | $                 | 8,484    |                   | $
|Accounts receivable, net of allowance for doubtful accounts of $297 and $292 at December 30, 2007 and December 31, 2006, respectively                                          |                            |                   | 31,237   |                   |  
|Inventories, net                                                                                                                                                               |                            |                   | 28,021   |                   |  
|Prepaid expenses and other current assets                                                                                                                                      |                            |                   | 1,583    |                   |  
|Deferred income taxes                                                                                                                                                          |                            |                   | 363      |                   |  
|                                                                                                                                                                               |                            |                   |          |                   |  
|                                                                                                                                                                               | Total current assets       |                   |          | 69,688            |  
|Property and equipment, net                                                                                                                                                    |                            |                   | 19,194   |                   |  
|Deposits and other assets                                                                                                                                                      |                            |                   | 1,515    |                   |  
|Deferred financing costs, net of accumulated amortization of $494 and $364 at December 30, 2007 and December 31, 2006, respectively                                            |                            |                   | 86       |                   |  
|Deferred income taxes-long-term portion                                                                                                                                        |                            |                   | 1,257    |                   |  
|Goodwill                                                                                                                                                                       |                            |                   | 1,120    |                   |  
|                                                                                                                                                                               |                            |                   |          |                   |  
|Total Assets                                                                                                                                                                   |                            | $                 | 92,860   |                   | $
|                                                                                                                                                                               |                            |                   |          |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                                                                                                 |                            |                   |          |                   |  
|CURRENT LIABILITIES:                                                                                                                                                           |                            |                   |          |                   |  
|Accounts payable                                                                                                                                                               |                            | $                 | 15,140   |                   | $
|Accrued liabilities                                                                                                                                                            |                            |                   | 4,667    |                   |  
|Accrued compensation and benefits                                                                                                                                              |                            |                   | 6,876    |                   |  
|Accrued restructuring costs                                                                                                                                                    |                            |                   | 431      |                   |  
|Borrowings under revolving line of credit                                                                                                                                      |                            |                   | 3,395    |                   |  
|Current debt                                                                                                                                                                   |                            |                   | 24,485   |                   |  
|Current debt payable to affiliates                                                                                                                                             |                            |                   | 22,145   |                   |  
|                                                                                                                                                                               |                            |                   |          |                   |  
|                                                                                                                                                                               | Total current liabilities  |                   |          | 77,139            |  
|Long-term debt                                                                                                                                                                 |                            |                   |         |                   |  
|Long-term debt payable to affiliates                                                                                                                                           |                            |                   |         |                   |  
|                                                                                                                                                                               |                            |                   |          |                   |  
|                                                                                                                                                                               | Total long-term debt       |                   |          |                  |  
|Other long-term liabilities                                                                                                                                                    |                            |                   | 4,534    |                   |  
|                                                                                                                                                                               |                            |                   |          |                   |  
|Total Liabilities                                                                                                                                                              |                            |                   | 81,673   |                   |  
|                                                                                                                                                                               |                            |                   |          |                   |  
|Commitments and contingencies (Note 9)                                                                                                                                         |                            |                   |          |                   |  
|STOCKHOLDERS' EQUITY (DEFICIT):                                                                                                                                                |                            |                   |          |                   |  
|Common stock: $0.001 par value; 60,000,000 shares authorized; 19,453,557 and 19,337,709 shares issued and outstanding at December 30, 2007 and December 31, 2006, respectively |                            |                   | 19       |                   |  
|Paid-in capital                                                                                                                                                                |                            |                   | 186,035  |                   |  
|Accumulated deficit                                                                                                                                                            |                            |                   | (178,323 | )                 |  
|Accumulated other comprehensive income                                                                                                                                         |                            |                   | 3,456    |                   |  
|                                                                                                                                                                               |                            |                   |          |                   |  
|                                                                                                                                                                               | Total stockholders' equity |                   |          | 11,187            |  
|                                                                                                                                                                               |                            |                   |          |                   |  
|Total Liabilities and Stockholders' Equity                                                                                                                                     |                            | $                 | 92,860   |                   | $
|                                                                                                                                                                               |                            |                   |          |                   |  

See notes to consolidated financial statements.

44

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CHEROKEE INTERNATIONAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (In Thousands, Except Per Share Amounts)

|                                                                                      |                                                                                                       | Years Ended              |        
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------ | -------
|
|Net sales                                                                             |                                                                                                       | $                        | 128,496
|Cost of sales (including stock compensation expense of $53, $79 and $0, respectively) |                                                                                                       |                          | 102,904
|                                                                                      |                                                                                                       |                          |        
|                                                                                      | Gross profit                                                                                          |                          |        
|Operating Expenses:                                                                   |                                                                                                       |                          |        
|                                                                                      | Engineering and development (including stock compensation expense of $273, $205 and $0, respectively) |                          |        
|                                                                                      | Selling and marketing (including stock compensation expense of $156, $117 and $0, respectively)       |                          |        
|                                                                                      | General and administrative (including stock compensation expense of $413, $329 and $0, respectively)  |                          |        
|                                                                                      | Goodwill impairment                                                                                   |                          |        
|                                                                                      | Restructuring costs                                                                                   |                          |        
|                                                                                      | Asset impairment                                                                                      |                          |        
|                                                                                      | Long term employment liabilities reduction                                                            |                          |        
|                                                                                      | Gain from insurance proceeds                                                                          |                          |        
|                                                                                      |                                                                                                       |                          |        
|                                                                                      |                                                                                                       | Total operating expenses |        
|                                                                                      |                                                                                                       |                          |        
|                                                                                      | Operating income (loss)                                                                               |                          |        
|                                                                                      | Interest expense                                                                                      |                          |        
|                                                                                      | Gain on sale of Mexico Facility building                                                              |                          |        
|                                                                                      | Gain on sale of Mexico corporation                                                                    |                          |        
|                                                                                      | Other income, net                                                                                     |                          |        
|                                                                                      |                                                                                                       |                          |        
|Loss before income taxes                                                              |                                                                                                       |                          | (11,425
|                                                                                      | Provision (benefit) for income taxes                                                                  |                          |        
|                                                                                      |                                                                                                       |                          |        
|                                                                                      | Net income (loss)                                                                                     |                          | $      
|                                                                                      |                                                                                                       |                          |        
|Net loss per share:                                                                   |                                                                                                       |                          |        
|                                                                                      | Basic                                                                                                 |                          | $      
|                                                                                      | Diluted                                                                                               |                          | $      
|Weighted average shares outstanding:                                                  |                                                                                                       |                          |        
|                                                                                      | Basic                                                                                                 |                          |        
|                                                                                      | Diluted                                                                                               |                          |        

See
notes to consolidated financial statements.

45

---





CHEROKEE INTERNATIONAL CORPORATION AND SU` BSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND        COMPREHENSIVE OPERATIONS        (In Thousands, Except
Shares)

|                                                                                     |                                                                                    | Common Stock                       |  |   |    |  |   | Accumulated
Other
Comprehensive
Income (Loss) |  |   |         
|------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | ---------------------------------- |  | - | -- |  | - | --------------------------------------------- |  | - | --------
|
|
|BALANCE,
January 2, 2005                                                             |                                                                                    | 19,206,207                         |  | $ | 19 |  | $ | 183,713                                       |  | $ | (165,666
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|Comprehensive income (loss):                                                         |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Net loss                                                                           |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Foreign currency translation                                                       |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     |                                                                                    | Total comprehensive income (loss): |  |   |    |  |   |                                               |  |   |         
|Issuance of common stock under employee stock plans                                  |                                                                                    | 53,405                             |  |   |    |  |   | 158                                           |  |   |         
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|BALANCE,
January 1, 2006                                                             |                                                                                    | 19,259,612                         |  | $ | 19 |  | $ | 183,871                                       |  | $ | (168,898
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|Cumulative effect of adjustments from the adoption of SAB 108, net of taxes (Note 3) |                                                                                    |                                    |  |   |    |  |   |                                               |  |   | (558    
|Comprehensive income (loss):                                                         |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Net income                                                                         |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Foreign currency translation adjustments                                           |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Tax effect of foreign currency translation adjustments                             |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Pension benefit adjustment to initially apply SFAS 158, net of tax benefit of $908 |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     |                                                                                    | Total comprehensive income (loss): |  |   |    |  |   |                                               |  |   |         
|Issuance of common stock under employee stock plans                                  |                                                                                    | 78,097                             |  |   |    |  |   | 212                                           |  |   |         
|Stock compensation                                                                   |                                                                                    |                                    |  |   |    |  |   | 730                                           |  |   |         
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|BALANCE,
December 31, 2006                                                           |                                                                                    | 19,337,709                         |  | $ | 19 |  | $ | 184,813                                       |  | $ | (169,373
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|Comprehensive income (loss):                                                         |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Net loss                                                                           |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Foreign currency translation adjustments                                           |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Tax effect of foreign currency translation adjustments                             |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | Pension adjustment under SFAS 158, net of tax effect of $1,020                     |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     | FIN 48 adjustment                                                                  |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|                                                                                     |                                                                                    | Total comprehensive income (loss): |  |   |    |  |   |                                               |  |   |         
|Issuance of common stock under employee stock plans                                  |                                                                                    | 115,848                            |  |   |    |  |   | 327                                           |  |   |         
|Stock compensation                                                                   |                                                                                    |                                    |  |   |    |  |   | 895                                           |  |   |         
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         
|BALANCE,
December 30, 2007                                                           |                                                                                    | 19,453,557                         |  | $ | 19 |  | $ | 186,035                                       |  | $ | (178,323
|                                                                                     |                                                                                    |                                    |  |   |    |  |   |                                               |  |   |         

See notes to consolidated financial statements.

46

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CHEROKEE INTERNATIONAL CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In Thousands)

|                                                                                                   |                                                   | Years Ended                                         |       
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | ------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |                                                   |                                                     |       
|Net income (loss)                                                                                  |                                                   | $                                                   | (8,973
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                   |                                                     |       
|                                                                                                   | Depreciation and amortization                     |                                                     |       
|                                                                                                   | Goodwill impairment                               |                                                     |       
|                                                                                                   | Asset impairment                                  |                                                     |       
|                                                                                                   | (Gain) loss on sale / disposition of fixed assets |                                                     |       
|                                                                                                   | Gain on sale of Mexico corporation                |                                                     |       
|                                                                                                   | Amortization of deferred financing costs          |                                                     |       
|                                                                                                   | Stock-based compensation                          |                                                     |       
|                                                                                                   | Write-off of deferred financing costs             |                                                     |       
|                                                                                                   | Deferred income taxes                             |                                                     |       
|Net change in operating assets and liabilities:                                                    |                                                   |                                                     |       
|                                                                                                   | Accounts receivable, net                          |                                                     |       
|                                                                                                   | Inventories, net                                  |                                                     |       
|                                                                                                   | Prepaid expenses and other current assets         |                                                     |       
|                                                                                                   | Deposits                                          |                                                     |       
|                                                                                                   | Accounts payable                                  |                                                     |       
|                                                                                                   | Accrued liabilities and restructuring             |                                                     |       
|                                                                                                   | Accrued compensation and benefits                 |                                                     |       
|                                                                                                   | Accrued interest payable                          |                                                     |       
|                                                                                                   | Other long-term liabilities                       |                                                     |       
|                                                                                                   |                                                   |                                                     |       
|                                                                                                   |                                                   | Net cash provided by (used in) operating activities |       
|                                                                                                   |                                                   |                                                     |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |                                                   |                                                     |       
|Additions to property and equipment                                                                |                                                   |                                                     | (2,384
|Net sales (purchases) of short-term investments                                                    |                                                   |                                                     |      
|Proceeds from sale of property and equipment (net of $0.1 million of selling costs)                |                                                   |                                                     | 1,138 
|Proceeds from sale of Mexico corporation                                                           |                                                   |                                                     | 439   
|                                                                                                   |                                                   |                                                     |       
|                                                                                                   | Net cash used in investing activities             |                                                     |       
|                                                                                                   |                                                   |                                                     |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |                                                   |                                                     |       
|Borrowings on revolving lines of credit                                                            |                                                   |                                                     | 3,395 
|Proceeds from exercise of options and employee stock purchases                                     |                                                   |                                                     | 327   
|                                                                                                   |                                                   |                                                     |       
|                                                                                                   | Net cash provided by financing activities         |                                                     |       
|                                                                                                   |                                                   |                                                     |       
|Effect of exchange rate changes on cash                                                            |                                                   |                                                     | 508   
|                                                                                                   |                                                   |                                                     |       
|Net decrease in cash and cash equivalents                                                          |                                                   |                                                     | (397  
|Cash and cash equivalents, beginning of period                                                     |                                                   |                                                     | 8,881 
|                                                                                                   |                                                   |                                                     |       
|Cash and cash equivalents, end of period                                                           |                                                   | $                                                   | 8,484 
|                                                                                                   |                                                   |                                                     |       
|SUPPLEMENTAL INFORMATION                                                                           |                                                   |                                                     |       
|Cash paid during the year for interest                                                             |                                                   | $                                                   | 2,623 
|                                                                                                   |                                                   |                                                     |       
|Cash paid during the year for income taxes                                                         |                                                   | $                                                   | 263   
|                                                                                                   |                                                   |                                                     |       
|NON-CASH ITEMS                                                                                     |                                                   |                                                     |       
|Adjustment to pension liability related to SFAS 158, net of tax                                    |                                                   | $                                                   | 1,980 
|                                                                                                   |                                                   |                                                     |       
|Adoption of SAB 108 to expense VAT related to fixed asset                                          |                                                   | $                                                   |      
|                                                                                                   |                                                   |                                                     |       

See notes to consolidated financial statements.

47

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CHEROKEE INTERNATIONAL CORPORATION AND SUBSIDIARIES    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    YEARS ENDED DECEMBER 30, 2007, DECEMBER 31, 2006 AND JANUARY 1, 2006

1. ORGANIZATION

Cherokee International Corporation reorganized from a California limited liability company and consummated a debt restructuring (the "Restructuring") through a
series of transactions collectively referred to as the "Transactions" in November 2002. On November 26, 2002, Cherokee International, LLC, a California limited liability company (the
"LLC"), merged with and into Cherokee International Corporation, a Delaware Corporation (the "Company"), with the Company as the surviving entity pursuant to the Agreement and Plan of Merger ("Merger
Agreement"). References herein to "Cherokee" and the "Company" refer to Cherokee International, LLC and its consolidated subsidiaries prior to the reorganization and Cherokee International
Corporation and its consolidated subsidiaries after the reorganization, and all references to common stock for periods before the reorganization mean our then-issued and outstanding
membership interests. As a result of the Transactions, the former unit holders of the LLC became stockholders of the Company, with each of them receiving a number of shares based on their
percentage ownership in the LLC. Prior to this exchange, the Company had no operating assets or liabilities and had not yet conducted any operations. On November 27, 2002, as part of the
Transactions, the Company amended its previous credit facility, issued $41.0 million of Second Lien Notes, and completed an exchange offer with respect to $100.0 million of its
101/2% Senior Subordinated Notes for $53.4 million of 12% Pay-In-Kind Senior Convertible Notes, $46.6 million of 5.25% Senior Notes and warrants to
purchase shares of the Company's common stock.



The Company completed its initial public offering of 6,600,000 shares of its common stock, par value $0.001 per share ("Common Stock"), on February 25,
2004, at a price of $14.50 per share. The net proceeds to the Company from this offering after paid and accrued offering costs of $9.2 million were $86.5 million. The Company used
approximately $73.2 million of the net proceeds to repay certain outstanding indebtedness and accrued interest. Immediately prior to the consummation of the offering, the Company completed a
1-for-3.9 reverse stock split of its outstanding Common Stock. All shares, per share and conversion amounts relating to common stock, warrants and stock options included in the
accompanying consolidated financial statements and footnotes have been restated to reflect the reverse stock split for all periods presented. Also in connection with the offering, the Company issued
6,283,796 shares of Common Stock upon conversion of the original principal amount of its outstanding senior convertible notes of $53.4 million, and issued 4,071,114 shares of Common Stock upon
the exercise of outstanding warrants.

2. LINE OF BUSINESS

The Company is a designer and manufacturer of power supplies for original equipment manufacturers ("OEMs"). Its advanced power supply products are typically
custom designed into mid- to high-end commercial applications in the computing and storage, wireless infrastructure, enterprise networking, telecom, medical and industrial
markets.

48

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3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

On
November 1, 2008, the $46.6 million aggregate principal amount outstanding under our 5.25% Senior Notes will become due and payable. We do not expect to have sufficient
cash available at the time of maturity to repay this indebtedness and are currently working with an investment banker to extend the maturity of these notes. We also cannot be certain that we will have
sufficient assets or cash flow available to support refinancing these notes at current market rates or on terms that are satisfactory to us. If we are unable to refinance on terms satisfactory to us,
we may be forced to refinance on terms that are materially less favorable, seek funds through other means such as a sale of some of our assets, or otherwise significantly alter our operating plan, any
of which could have a material adverse effect on our business, financial condition and results of operation.

In
February 2008, the Company engaged Houlihan Lokey to work with our bondholders to extend the maturity of our $46.6 million in senior bond obligations beyond November 2008. At
the time of filing this Annual Report on Form 10-K, unequivocal commitments with defined terms were not available from the majority of our bondholders agreeing to extend the
maturity date. Current conditions in the U.S. financial markets have not helped us complete this extension. However, we, through our investment bankers, have been, and continue to be in; active
negotiations with a majority of the bondholders and expect resolution in the near future. It is possible to receive an agreement of the majority by obtaining commitment from several combinations of
two holders. An extended agreement is expected to result in higher than existing interest rates and other terms that the Company has adequate liquidity to handle.



The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries, Cherokee Europe SCA and related entities
("Cherokee Europe"), Cherokee India Pvt. Ltd. ("India"), Powertel India Pvt. Ltd. ("Powertel"), and Cherokee International (China) Power Supply LLC ("Cherokee China"), and its
formerly owned subsidiary Cherokee Electronica, S.A. DE C.V. ("Cherokee Mexico") included in the year ended December 30, 2007 and prior years. Inter-company accounts and transactions
have been eliminated.



The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the amounts of revenues and
expenses during the reporting period. Actual results could differ from such estimates.



The Company's fiscal years 2007, 2006, and 2005 ended on December 30, 2007, December 31, 2006, and January 1, 2006, respectively. The fiscal
year ended December 30, 2007 included 52 weeks,

49

---



the
fiscal year ended December 31, 2006 included 52 weeks, and the fiscal year ended January 1, 2006 included 52 weeks.



Foreign subsidiary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect on the balance sheet date. Revenues,
costs and expenses are translated at the
average exchange rate during the period. Transaction gains and losses are included in results of operations and have not been significant for the periods presented. The functional currency of Cherokee
Europe is the Euro. The functional currency of Cherokee Mexico, India, Powertel and Cherokee China is the U.S. dollar, as the majority of transactions are denominated in U.S. dollars. Translation
adjustments related to Cherokee Europe are reflected as a component of stockholders' equity in other comprehensive income (loss).



All highly liquid debt instruments purchased with an original maturity date of three months or less are considered to be cash equivalents.



Inventories are valued at the lower of weighted average cost or market. Inventory costs include the cost of material, labor and manufacturing overhead and consist
of the following amounts, net of reserves for surplus and obsolescence (in thousands):

December 30, 2007

December 31, 2006Raw material

$
16,547

$
20,991Work-in-process


4,696


4,034Finished goods


6,778


4,966$
28,021

$
29,991


As
of December 30, 2007 and December 31, 2006, the reserve for excess inventory and obsolescence was $3.1 million and $4.4 million, respectively, including
management's assessment of reserves for surplus and obsolescence for non-compliant material related to the Restriction of Hazardous Substances in Electrical and Electronic Equipment
directive.

During
the year ended December 30, 2007, the Company wrote off $2.1 million of inventory reserved under the excess inventory and obsolescence reserve account, of which
$1.4 million was related to excess and obsolete materials with no current or future usage in product demands. In addition, $0.7 million was related to the decrease in future customer
demand of product as a result of the restructuring and closure of the Company's Guadalajara, Mexico facility. For the year ended December 31, 2006, the Company wrote off $1.2 million of
inventory reserved under the excess inventory and obsolescence reserve account.

50

---





Depreciation and amortization of property and equipment are provided using the straight-line method over the following estimated useful lives:

Buildings and improvements

5-50 yearsMachinery and equipment

5-10 yearsDies, jigs and fixtures

3 yearsComputers, software, office equipment and furniture

3-5 yearsAutomobiles and trucks

5 yearsLeasehold improvements

Lesser of 5 years
or lease term




The Company capitalizes costs directly related to financing agreements and certain qualified debt restructuring costs, and amortizes these costs as additional
interest expense over the terms of the related debt.

Net
deferred financing costs are comprised of the following as of December 30, 2007 and December 31, 2006 (in thousands):

December 30, 2007

December 31, 2006Deferred financing costs

$
580

$
580Accumulated amortization


(494
)

(364
)Deferred financing costs, net

$
86

$
216


During
the years ended December 30, 2007 and December 31, 2006, the Company amortized deferred financing costs of $0.1 million and $0.1 million, respectively.



The Company adopted Statement of Financial Accounting Standard ("SFAS") 142,Goodwill And Other Intangible Assets,
effective January 1, 2002. SFAS 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment annually,
or more frequently, when events or circumstances indicate that their carrying value may be impaired. The Company performs its impairment test annually at the end of the third quarter.

In
compliance with the requirements of SFAS 142, the Company has determined that its reporting units consist of two operating segments: Cherokee North America which consists of
the United States, India and China operations, and Cherokee Europe, which consists of the European operations. All goodwill has been assigned to the Cherokee Europe reporting unit. Based on our annual
assessment of the fair value of our Cherokee Europe subsidiary in accordance with SFAS 142, we recorded a goodwill impairment charge of $5.2 million during the year ended
December 30, 2007 to properly report goodwill at its fair value. This required evaluation includes the application of discounted cash flow analysis with fair market assessments. There were no
events or circumstances for the years ended December 31, 2006, and January 1, 2006 that indicated impairment.



The Company accounts for the impairment and disposition of long-lived assets in accordance with SFAS 144,Accounting
for Impairment or Disposal of Long-Lived Assets. In accordance with SFAS 144, long-lived assets to be held and used are reviewed for events or
changes in circumstances, which

51

---



indicate
that their carrying value may not be recoverable. For the years ended December 30, 2007 and January 1, 2006 there were no charges. For the year ended December 31, 2006,
the Company recorded $0.3 million of impairment charges on the value of such assets. In 2006, the Company identified certain long-lived assets associated with the restructuring and
closure of the Mexico Facility whose carrying value would not be recoverable from future cash flows and recorded an impairment charge. These assets consisted of machinery and equipment, computer
technology and equipment, and office furniture and equipment. The majority of these assets were written off because the Company considered them to have no market value. None of the impairment charges
included cash components.



The amounts recorded for cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The amounts recorded for long-term debt and borrowings under our revolving lines of credit approximate fair value, as
interest is tied to, or approximates, current market rates.



The Company accounts for income taxes in accordance with SFAS 109,Accounting for Income Taxes. In
accordance with SFAS 109, deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for
financial reporting and their tax basis and carry-forwards to the extent they are realizable. A deferred tax provision or benefit results from the net change in deferred tax assets and liabilities
during the period. A deferred tax asset valuation allowance is recorded if it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized.

As
of December 30, 2007, deferred tax assets include $27.8 million relating to a tax basis step up from a re-capitalization transaction in 1999 and
$22.8 million of net operating loss (NOL) carry-forwards. The Company has recorded a valuation allowance against a significant portion of its deferred tax assets.

The
income tax benefit of $2.5 million for the year ended December 30, 2007, reflects the following: $0.5 million benefit from the release of a FIN48 liability
related to audits settled during the year and cash refunds received, $0.2 million provision for foreign withholding and income taxes incurred during the year, and $2.2 million income tax
benefit from the net operating loss generated in the current year by Cherokee Europe that is expected to be realized in 2009 and 2010.



Belgium taxes for unrealized foreign exchange gains on an intercompany loan considered permanently re-invested are provided for as a component of
other comprehensive income (loss).



We recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and
collectibility is probable. We recognize revenue in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition. Sales are recorded
net of discounts, which are estimated at the time of shipment based upon historical data. Changes in assumptions regarding the rate of sales discounts earned by our customers could impact our results.

We
generally recognize revenue at the time of shipment because this is the point at which revenue is earned and realizable and the earnings process is complete. For most shipments, title
to shipped goods transfers at the shipping point, so the risks and rewards of ownership transfer once the product

52

---



leaves
our facility or third-party hub. Revenue is only recognized when collectibility is reasonably assured. Shipping and handling fees are included in revenue with related costs recorded to cost of
sales.

The
Company has entered into arrangements with certain customers whereby products are delivered to a third-party warehouse location for interim storage until subsequently shipped and
accepted by our customers. Revenues from these sales are recognized upon shipment from the third-party warehouse location to the customers, when title has passed. The Company generally offers a
one-year warranty for defective products. Warranty charges have been insignificant during the periods presented.



The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit
losses. The Company generally does not charge interest on customer balances.



In December 2004, SFAS 123R,Share-Based Payment, was issued. SFAS 123R is a revision of
SFAS 123,Accounting for Stock Based Compensation, and supersedes APB 25. Among other items, SFAS 123R eliminates the use of
APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant
date fair value of those awards, in the financial statements. The Company was required to adopt SFAS 123R effective on January 2, 2006. SFAS 123R permits companies to adopt its
requirements using either a "modified prospective" method, or a "modified retrospective" method. Under
the "modified prospective" method, compensation cost is recognized in the financial statements beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of
SFAS 123R. Under the "modified retrospective" method, the requirements are the same as under the "modified
prospective" method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123.

The
Company currently uses the Black-Scholes standard option-pricing model to measure the fair value of stock options granted to employees and nonemployees. While SFAS 123R
permits the Company to continue to use such a model, the standard also permits the use of a "lattice" model. The Company is continuing to use the
Black-Scholes model to measure the fair value of employee stock options upon the adoption of SFAS 123R.

SFAS 123R
also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an
operating cash flow as required under prior literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options.

The
Company adopted SFAS 123R on January 2, 2006 using the "modified prospective" method as permitted by SFAS 123R. Under this transition method, stock compensation
cost recognized beginning in the first quarter of fiscal year 2006 includes: (a) compensation cost for all share-based payments granted subsequent to February 25, 2004 and prior to
January 1, 2006 but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R, and
(b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of
SFAS 123R. In accordance with the modified prospective method of adoption, the Company's results of operations and financial position for prior periods have not been restated. At the date of
the adoption, the

53

---



unamortized
expense for options issued prior to January 2, 2006 was $2.3 million, which will be amortized as stock compensation costs through December 2010. Stock based compensation
costs expensed during the year ended December 30, 2007 were $0.9 million, and $0.7 million was recorded during the year ended December 31, 2006. No stock compensation costs
were recorded during the year ended January 1, 2006.

All
grants are made at prices based on the fair market value of the stock on the date of grant. Outstanding options generally vest over periods ranging from two to four years from the
grant date and generally expire up to ten years after the grant date.

The
Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option pricing formula
with the assumptions included in the table below. The Company uses historical data, among other factors, to estimate the expected price volatility and the expected forfeiture rate. For options granted
prior to January 2, 2006, the Company used the expected option life of 5 years. For options granted following the Company's adoption of SFAS 123R, the expected life was increased
to 6.25 years using the "simplified method" under SAB 107 (an expected term based on the mid-point between the vesting date and the end of the contractual term). The use of
the simplified method requires our option plan to be consistent with a "plain vanilla" plan and was originally permitted through December 31, 2007 under SAB 107. In December 2007, the
SEC issued SAB 110,Share-Based Payment, to amend the SEC's views discussed in SAB 107 regarding the use of the simplified method in
developing an estimate of expected life of share options in accordance with SFAS 123R. SAB 110 is effective for the Company beginning December 31, 2007. The Company will continue
to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life, in accordance with SAB 107, as amended by SAB 110. The options
have a maximum contractual term of 10 years and generally vest pro-rata over four years. The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of grant for the estimated life of the option.

The
following weighted-average assumptions were used to estimate the fair value of options granted during the years ended December 30, 2007, December 31, 2006, and
January 1, 2006 using the Black-Scholes option pricing formula.

Years EndedDecember 30, 2007

December 31, 2006

January 1, 2006Dividend yield

0.0
%
0.0
%
0.0
%Expected volatility

54.8
%
58.3
%
52.6
%Risk free interest rate

4.97
%
4.78
%
3.97
%Expected lives

6.25 years

6.25 years

5.0 yearsForfeiture rates

12.64% - 22.79
%
15.79% - 16.35
%



Since
its inception on February 16, 2004, a total of 400,000 shares of common stock had been reserved for issuance under the 2004 Employee Stock Purchase Plan ("ESPP"). Under the
terms of the ESPP, the Company's U.S. employees, nearly all of whom are eligible to participate, can choose to have up to a maximum of 15% of their eligible annual base earnings withheld, subject to
an annual maximum of $25,000 or 2,100 shares per offering period, to purchase our common stock. The purchase price of the stock is 85% of the lower of the closing price at the beginning of each
six-month offering period or at the end of each six-month offering period. The Company recognizes compensation cost for its ESPP under SFAS 123R.

54

---



In
accordance with SFAS 148, and as required by SFAS 123R, the required pro forma disclosure, for periods prior to adoption of SFAS 123R, is shown below (in
thousands except per share amounts):

|                                                                                                                                                     |         |     |  | Year Ended |       
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | --- |  | ---------- | ------
|
|Net income (loss), as reported                                                                                                                       |         |     |  | $          | (8,973
|Stock-based employee compensation related to stock options included in net income (loss), as reported, net of tax                                    |         |     |  |            |      
|Total stock-based employee compensation expense determined under the fair value based method for all awards (under provisions of APB 25), net of tax |         | (a) |  |            | (381  
|                                                                                                                                                     |         |     |  |            |       
|Net losspro forma                                                                                                                                   |         |     |  | $          | (9,354
|                                                                                                                                                     |         |     |  |            |       
|Net income (loss) per share, as reported:                                                                                                            |         |     |  |            |       
|                                                                                                                                                     | Basic   |     |  |            | $     
|                                                                                                                                                     |         |     |  |            |       
|                                                                                                                                                     | Diluted |     |  |            | $     
|                                                                                                                                                     |         |     |  |            |       
|Pro forma net loss per share:                                                                                                                        |         |     |  |            |       
|                                                                                                                                                     | Basic   |     |  |            | $     
|                                                                                                                                                     |         |     |  |            |       
|                                                                                                                                                     | Diluted |     |  |            | $     
|                                                                                                                                                     |         |     |  |            |       

---



The Company is a designer and manufacturer of power supplies for OEMs in the computing and storage, wireless infrastructure, enterprise networking, medical
and industrial markets. Operating segments are defined as components of the Company's business for which separate financial information is available that is evaluated by the Company's chief operating
decision maker (its Chief Executive Officer) in deciding how to allocate resources and in assessing performance. The Company's operating segments consist of its United States, India, and China
operations, which constitute Cherokee North America, and Cherokee Europe. These operating segments have been aggregated into a single reporting segment based on their similar economic characteristics
and common operating characteristics, including comparable gross profit margins and common products, production processes, customers, distribution channels and regulatory requirements.



The Company presents both basic and diluted earnings (loss) per share ("EPS") amounts. Basic EPS is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period. The
Company uses the treasury stock method to calculate the impact of stock compensation. Common equivalent shares are excluded from the computation in periods in which they have an
anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are
excluded from the calculation of diluted EPS. Dilutive stock options have an

55

---



anti-dilutive
effect on EPS in a period with a net loss; therefore, are excluded from the EPS computation.



In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements("SAB 108"). SAB 108 was issued in order to eliminate the diversity of practice surrounding how
public companies quantify financial statement misstatements.

Historically
Cherokee evaluated uncorrected differences using the "roll-over" method, which focused primarily on the impact of uncorrected differences, including the reversal
of prior-year uncorrected differences, on the current-year consolidated statement of operations. As required by SAB 108, Cherokee must now evaluate misstatements under a
"dual approach" method, which requires quantification under both the "roll-over" and the "iron curtain" methods. The "iron curtain" method quantifies misstatements based on the effects of
correcting the period-end consolidated balance sheet.

In
accordance with the transition provisions of SAB 108, Cherokee recorded adjustments totaling $0.6 million to the beginning accumulated deficit for the year ended
December 31, 2006 and $0.7 million to accumulated other comprehensive income. These adjustments were considered to be immaterial to our consolidated statements of operations and our
other comprehensive income (loss) in prior years, under the "roll-over" method. The components of the adjustment are detailed in the tables below:

|                           |       |     |  | Year Ended (in thousands) |     
|-------------------------- | ----- | --- |  | ------------------------- | ----
|
|Debit (Credit)             |       |     |  |                           |     
|Mexico cost of sales       |       | (a) |  | $                         | (284
|U.S. cost of sales         |       | (b) |  |                           | (211
|China cost of sales        |       | (c) |  |                           | 117 
|India cost of sales        |       | (d) |  |                           | 98  
|                           |       |     |  |                           |     
|Cost of sales              |       |     |  | $                         | (280
|Provision for income taxes |       | (g) |  | $                         | (17 
|                           |       |     |  |                           |     
|                           | Total |     |  |                           | $   
|                           |       |     |  |                           |     

56

---





|                                       |  |     |     | Balance at
January 1, 2006 |         | SAB 108 Adjustment |   | Balance at
January 2, 2006 |       
|-------------------------------------- |  | --- | --- | -------------------------- | ------- | ------------------ | - | -------------------------- | ------
|
|Debit (Credit)                         |  |     |     |                            |         |                    |   |                            |       
|                                       |  |     | (a) |                            | $       |                   |   | $                          | (7    
|                                       |  |     | (e) |                            |         |                   |   |                            | 1,051 
|                                       |  |     | (b) |                            |         |                   |   |                            | 290   
|                                       |  |     |     |                            |         |                    |   |                            |       
|Inventories, net                       |  |     |     | $                          | 26,851  |                    | $ | 1,334                      |       
|                                       |  |     |     |                            |         |                    |   |                            |       
|Property and equipment, net            |  | (c) |     | $                          | 19,268  |                    | $ | (117                       | )     
|                                       |  |     |     |                            |         |                    |   |                            |       
|                                       |  |     | (a) |                            | $       |                   |   | $                          | (784  
|                                       |  |     | (d) |                            |         |                   |   |                            | (98   
|                                       |  |     | (e) |                            |         |                   |   |                            | (1,051
|                                       |  |     |     |                            |         |                    |   |                            |       
|Accounts payable                       |  |     |     | $                          | (11,658 | )                  | $ | (1,933                     | )     
|                                       |  |     |     |                            |         |                    |   |                            |       
|Accrued liabilities                    |  | (g) |     | $                          | (6,028  | )                  | $ | (220                       | )     
|                                       |  |     |     |                            |         |                    |   |                            |       
|                                       |  |     | (f) |                            | $       |                   |   | $                          | (476  
|                                       |  |     | (h) |                            |         |                   |   |                            | 160   
|                                       |  |     |     |                            |         |                    |   |                            |       
|Other long-term obligations            |  |     |     | $                          | (4,790  | )                  | $ | (316                       | )     
|                                       |  |     |     |                            |         |                    |   |                            |       
|Accumulated other comprehensive income |  | (f) |     | $                          | (1,470  | )                  | $ | 694                        |       
|                                       |  |     |     |                            |         |                    |   |                            |       
|Accumulated deficit                    |  |     |     | $                          | 168,898 |                    | $ | 558                        |       
|                                       |  |     |     |                            |         |                    |   |                            |       

---

Notes (a)
through (h) refer to one or both of the two tables above.

57

---





In June 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income Taxes. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109,Accounting for Income
Taxes, by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. Under FIN 48, the financial statement effects of a tax position should initially be recognized when it is more likely than not, based on the technical merits, that the position
will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially, and subsequently, be measured as the
largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority. FIN 48 was effective for fiscal years
beginning after December 15, 2006.

In
accordance with the adoption of FIN 48 on January 1, 2007, we recognized a cumulative-effect adjustment of less than $0.1 million to the opening balance of
accumulated deficit. See Notes 3 and 14, "Income Taxes," for additional information.

In
September 2006, the FASB issued SFAS 157,Fair Value Measurements. This Statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies to accounting pronouncements that require or
permit fair value measurements, except for share-based payments transactions under FASB Statement No. 123 (Revised)Share-Based Payment. This
Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, except for non-financial assets and liabilities, for which this Statement
will be effective for years beginning after November 15, 2008. The Company has evaluated the effect of implementing the Statement on its financial position and operations and has determined
that the impact of implementing the Statement will increase (or decrease) the fair value of its derivative financial instruments by an immaterial amount. The Company will consider the application of
this Statement when computing fair value for financial reporting purposes beginning in 2008.

In
February 2007, the FASB issued SFAS 159The Fair Value Option for Financial Assets and Financial Liabilities. This Statement
permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159
is effective for financial statements issued for fiscal years beginning after November 15, 2007, although early application is allowed. The Company will not be electing the fair value option
for financial assets or liabilities existing on the December 31, 2007 adoption date. The Company will consider the applicability of the fair value option for assets acquired or liabilities
incurred in future transactions.

In
December 2007, the FASB issued SFAS 141(R),Business Combinations, and SFAS 160,Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51. These pronouncements are required to be adopted concurrently and are effective for business
combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited,
thus the provisions of these pronouncements will be effective for us in fiscal year 2009. We do not have any minority interests and do not expect the adoption of SFAS 160 to have a material
effect on our financial position or consolidated financial statements.

In
December 2007, the SEC published SAB 110,Share-Based Payment. The interpretations in SAB 110 express the SEC staff's
views regarding the acceptability of the use of a "simplified" method, as discussed in SAB 107, in developing an estimate of expected term of share options in accordance with FASB Statement
No. 123 (Revised)Share-Based Payment. The use of the simplified method

58

---



requires
our option plan to be consistent with a "plain vanilla" plan and was originally permitted through December 31, 2007 under SAB 107. In December 2007, the SEC issued
SAB 110,Share-Based Payment, to amend the SEC's views discussed in SAB 107 regarding the use of the simplified method in developing an
estimate of expected life of share options in accordance with FAS No. 123(R). SAB 110 is effective for the Company beginning December 31, 2007. The Company will continue to use
the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life, in accordance with SAB 107, as amended by SAB 110.

In
March 2008, the FASB issued SFAS 161,Disclosures about Derivative Instruments and Hedging Activities,an amendment of
SFAS 133. This statement requires enhanced disclosures about derivative instruments and hedging activities within an entity by requiring the disclosure of the fair values of derivative
instruments and their gains and losses in a tabular format. It provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit
riskrelated, and it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. It is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. The Company is evaluating the impact of the adoption of
SFAS 161 and believes there will be no material impact on our consolidated financial statements or financial operations.

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

December 30, 2007

December 31, 2006Land

$
1,665

$
1,891Buildings and improvements


7,100


7,294Machinery and equipment


26,787


26,834Dies, jigs and fixtures


1,464


1,198Computers, software, office equipment and furniture


3,762


3,784Automobiles and trucks


170


181Leasehold improvements


9,147


8,682Construction in progress


851


602$
50,946

$
50,466Less accumulated depreciation and amortization


(31,752
)

(30,578
)$
19,194

$
19,888


As
of December 30, 2007 and December 31, 2006, none of the Company's assets were under capital lease agreements. Depreciation and amortization expense for the years ended
December 30, 2007, December 31, 2006, and January 1, 2006 was $3.1 million, $3.4 million, and $3.1 million, respectively.

In
May 2007, the Company completed the sale of the Mexico building and in December 2007 the Company completed the sale of the Mexico corporation. See further discussion in Note 10
to the accompanying consolidated financial statements.

5. NET INCOME (LOSS) PER SHARE

In accordance with SFAS 128,Earnings Per Share, basic income (loss) per share is based upon the weighted
average number of common shares outstanding. For the year ended December 30, 2007, all 2,791,579 of outstanding stock options were excluded from the calculation of diluted income (loss) per
share as their effect would have been anti-dilutive due to the net loss for the year. For the year ended December 31, 2006, 2,297,054 of outstanding stock options were excluded from
the calculation of

59

---



diluted
income (loss) per share as their exercise prices would render them anti-dilutive. For the year ended January 1, 2006, all 2,270,115 shares subject to outstanding stock
options were excluded from the calculation of diluted income (loss) per share as their effect would have been anti-dilutive due to the net loss for the year.

The
following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

Years EndedDecember 30, 2007

December 31, 2006

January 1 2006Net income (loss)

$
(8,973
)
$
83

$
(3,232
)Shares:Weighted-average common shares outstandingbasic


19,387


19,286


19,230Effect of dilutive securities:Outstanding stock options





12


Weighted-average common shares outstandingdiluted


19,387


19,298


19,230Net income (loss) per share:Basic

$
(0.46
)
$


$
(0.17
)Diluted

$
(0.46
)
$


$
(0.17
)


6. DEBT

Debt consists of the following at December 30, 2007 and December 31, 2006 (in thousands):

December 30, 2007

December 31, 20065.25% senior notes, current portion

$
46,630

$
5.25% senior notes, long-term portion





46,630Total debt

$
46,630

$
46,630


Presented
below is the Company's debt and debt payable to affiliates at December 30, 2007 and December 31, 2006 (in thousands):

December 30, 2007

December 31, 2006Debt:Current

$
24,485

$
Long-term debt





24,485Debt payable to affiliates:Current


22,145


Long-term debt





22,145Total debt

$
46,630

$
46,630


As
of December 30, 2007, all of the Company's debt is scheduled to be repaid in 2008.

60

---



The debt includes the Company's senior notes, which mature on November 1, 2008. Interest on the senior notes is payable in cash on May 1 and November 1 of each year.
The senior notes are secured by a second-priority lien on substantially all of the Company's domestic assets and by a pledge of 65% of the equity of certain of the Company's foreign subsidiaries. As
of December 30, 2007, the Company was in compliance with all of the covenants set forth in the principal agreements governing the 5.25% senior secured notes due in 2008. The Company does not
currently have sufficient funds to repay these notes and is actively seeking to refinance this obligation; however, given the current credit market conditions the Company acknowledges that it may not
be able to refinance this obligation at comparable interest rates to the 5.25% annual interest rate in the past, and any refinancing may be on terms that are materially less favorable. In addition, if
the Company is not able to obtain satisfactory financing, the Company may be forced to sell some of its assets or to otherwise significantly alter its operating plan.

The
Company's primary line of credit is its senior revolving credit facility with General Electric Capital Corporation (the "Credit Facility"). In order to increase borrowing capacity
that was in effect lowered by historical earnings before interest, taxes, depreciation and amortization expense ("EBITDA") covenant, the Company approached General Electric Capital Corporation on
re-negotiating our Credit Facility. On November 1, 2007, the Company and General Electric Capital Corporation amended the credit agreement for the revolving line of credit dated
February 24, 2004. The amended Credit Facility provides for borrowings of up to the lesser of $7.5 million or 85% of eligible domestic accounts receivable. As of December 30,
2007, our borrowing base was $7.5 million, our eligible accounts receivable was $10.3 million. The Credit Facility matures in August 2008. Prior to November 1, 2007, the
borrowings bore interest, at the Company's option, at a rate per annum equal to LIBOR plus 2.5% or the agent bank's base rate plus 1.0%. Effective November 1, 2007, the borrowings bear
interest, at the Company's option, at a rate per annum equal to LIBOR plus 3.5% or the agent bank's base rate plus 2.0%. In addition to paying interest on outstanding principal, the Company is
required to pay a commitment fee to the lenders under the credit facility in respect of the average daily balance of unused loan commitments at a rate of 1.0% per annum effective November 1,
2007. Prior to November 1, 2007 the rate was 0.5% per annum. In lieu of a maximum senior leverage multiple covenant, the new amended Credit Facility effective November 1, 2007 includes a
minimum EBITDA target for the fourth quarter of 2007, which the Company was in compliance with at December 30, 2007. In 2008, quarterly minimum EBITDA targets will be established. Prior to
November 1, 2007, the EBITDA covenant limited our borrowing to the lower of the borrowing base or two times our EBITDA as defined by the prior credit agreement. The Credit Facility is secured
by a first-priority lien, subject to permitted encumbrances, on substantially all of the Company's domestic assets and by a pledge of 65% of the equity of certain of the Company's foreign
subsidiaries. The Credit Facility contains certain restrictive covenants including the minimum EBITDA target. In March 2008, General Electric Capital Corporation modified the amended credit agreement
effective as of December 30, 2007 for a balance sheet covenant issue resulting from the capitalization of intercompany debt with our Dutch holding company during 2007. As of December 30,
2007, there were no borrowings outstanding under the Credit Facility, and the Company was in compliance with all of the covenants under the Credit Facility.

Cherokee
Europe maintains a working capital line of credit of approximately $4.5 million, expressed as Euros 3.0 million, with Bank Brussels Lambert, a subsidiary of ING
Belgie NV, a bank in Brussels, which is denominated in Euros, collateralized by a pledge in first and second rank over a specific amount of business assets, requires Cherokee Europe to maintain
a certain specific minimum solvency ratio and is cancelable at any time. Our access to the line is limited to $4.0 million because $0.5 million is committed to minimum guarantees on
specific collections and payments. In November 2007, ING Belgie NV restricted the Company from transferring funds from Europe to the U.S. in the form of management and dividend fees. During the
quarter ended September 30, 2007, Cherokee Europe borrowed $2.1 million from the line of credit which remained outstanding as of December 30, 2007. As of December 30, 2007,
Cherokee Europe was in compliance with all covenants.

61

---



In
January 2007, Cherokee China entered into a loan contract with Industrial and Commercial Bank of China Ltd. ("ICBC") for a working capital line of credit. Pursuant to the
contract, ICBC agreed to make advances up to the equivalent of approximately $3.4 million, expressed as RMB 25.0 million. The line of credit is collateralized by the Company's building
in Shanghai, China. The first term ended January 29, 2008, and was renewed and extended for an additional year, until January 2009. The contract is renewable annually, but is cancelable at any
time. Interest is payable monthly at a fixed rate based on the transaction date of our borrowings, the rates vary according to the specific dates and are announced by the People's Bank of China, which
was 6.55% at January 29, 2007 and 6.04% at March 20, 2007, based on dates amounts were borrowed. Beginning with its initial borrowing under the contract, Cherokee China has agreed to
deposit in the ICBC Shanghai Branch at least 90% of the operating revenue it collects. The cash from these deposits made into our bank account are not restricted from our usage of these funds. As of
December 30, 2007, Cherokee China had $1.3 million of borrowings under the line of credit and was in compliance with all covenants.

In
July 2007, Cherokee Europe borrowed short-term funds of $0.6 million from ING Belgie NV, and repaid the amount as of December 25, 2007. The loan
arrangement was over six months, with monthly payments of $96,000 to be repaid by December 25, 2007. The loan bore a 5.3% interest rate.

7. OTHER LONG-TERM LIABILITIES

Other long-term liabilities consist of the following (in thousands):

Years EndedDecember 30, 2007

December 31, 20061999 Europe restructuring liabilities

$
561

$
6762003 Europe restructuring liabilities


1,330


1,421Long service award liabilities


963


818Pension liability-SFAS 158


1,748


2,671Deferred compensation


1,356


1,105Advances for research and development


668


597Subtotal

$
6,626

$
7,288Less current portion


(2,092
)

(573
)$
4,534

$
6,715


Estimated
payments required under other long-term obligations as of December 30, 2007 are as follows (in thousands):

1999 Europe
Restructuring

2003 Europe
Restructuring

Long Service
Award2008


164


266


532009


342


259


1072010


55


238


2042011





195


252012





151


20Thereafter





221


554Subtotal

$
561

$
1,330

$
963Less current portion


(164
)

(266
)

(53
)$
397

$
1,064

$
910


62

---



The
Company's long term pension liability is greatly affected by the prevailing discount rate when calculating its liability under SFAS 158. The lower prevailing rates in 2006
resulted in the increase in the liability while the higher prevailing rate in 2007 significantly decreased the liability.

As
of December 30, 2007, the Company has a recorded liability of $1.4 million, for employee and non-employee director contributions and investment activity to
date under the deferred compensation plan, the current portion of $1.1 million is recorded under accrued compensation and benefits and the long-term portion of $0.2 million
is recorded in other long-term liabilities.

8. CHEROKEE EUROPE RESTRUCTURING

Prior to the Company's acquisition of Cherokee Europe, the facility implemented a restructuring plan (the "1999 Europe Restructuring"). The
1999 Europe Restructuring liability of $2.2 million assumed by the Company was comprised entirely of termination benefits to be paid through 2010. The Company paid $0.2 million,
$0.2 million, and $0.2 million in benefits during the years ended December 30, 2007, December 31, 2006, and January 1, 2006, respectively, under the
1999 Europe Restructuring.

In
June 2003, the Company received approval for a restructuring plan (the "2003 Europe Restructuring") of its operations in Europe from the Workers Union and the appropriate
governmental authorities in Belgium. The 2003 Europe Restructuring involved the elimination of 61 operational and administrative positions at the Cherokee Europe facility in Belgium due to
unfavorable economic conditions in that market. All of the terminations were completed in 2003. Pursuant to the 2003 Europe Restructuring, the Company recorded a termination benefits charge of
$4.5 million for the year ended December 28, 2003, to be paid through 2016. The Company paid $0.4 million, $0.3 million, and $0.4 million in benefits during the
years ended December 30, 2007, December 31, 2006, and January 1, 2006, respectively, under the 2003 Europe Restructuring.

63

---



A
reconciliation of the 1999 Europe Restructuring and 2003 Europe Restructuring liabilities for the year ended December 30, 2007 and prior years is as follows (in
thousands):

1999 Europe Restructuring

2003 Europe RestructuringBalance as of December 29, 2002

$
1,052

$
Provision





4,474Payments


(206
)

(1,942
)Foreign exchange rate effect


182


282Balance as of December 28, 2003


1,028


2,814Provision


165


(54
)Payments


(231
)

(1,122
)Foreign exchange rate effect


66


129Balance as of January 2, 2005


1,028


1,767Provision


27


259Payments


(163
)

(368
)Foreign exchange rate effect


(122
)

(206
)Balance as of January 1, 2006


770


1,452Provision


50


99Payments


(224
)

(285
)Foreign exchange rate effect


80


155Balance as of December 31, 2006


676


1,421Provision


50


117Payments


(193
)

(362
)Foreign exchange rate effect


28


154Balance as of December 30, 2007

$
561

$
1,330Less current portion


(164
)

(266
)Due after one year

$
397

$
1,064


The
provision under the restructuring liability is updated annually to adjust for the expected future obligations.

9. COMMITMENTS AND CONTINGENCIES

The Company leases certain of its manufacturing facilities under non-cancelable operating leases through 2055. One of the manufacturing facilities is
leased from an entity controlled by a former director of the Company. Rental expense for the years ended December 30, 2007, December 31, 2006 and January 1, 2006 totaled
approximately $1.7 million, $1.7 million and $1.6 million (including $1.2 million, $1.2 million and $1.1 million to an entity controlled by a former
director), respectively.

64

---



As
of December 30, 2007, the Company has no capital lease contracts. A summary of the Company's operating lease commitments as of December 30, 2007 is as follows (in
thousands):

Year ending December 30:2008

$
1,6112009


5682010


432011


182012


6Thereafter


103Total minimum lease payments

$
2,349


As
of December 30, 2007, total future minimum payments for operating leases aggregated to $2.3 million, of which $1.6 million is payable to an entity controlled by a
former director of the Company.



The Company has agreed to indemnify the former owners of Cherokee Europe for product liability, environmental hazard and employment practice claims relating
solely to post-acquisition business. The Company also indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware, and various lessors in
connection with facility leases for certain claims arising from such facility or lease. The maximum amount of potential future payments under such indemnifications is not determinable.

The
Company has not incurred significant amounts related to these guarantees and indemnifications, and no liability has been recorded in the consolidated financial statements for
guarantees and indemnifications as of December 30, 2007, and December 31, 2006.



The Company adopted a cash incentive program for certain executives, which provides for cash incentive payments of up to 120% of base salary subject to attainment
of corporate goals and objectives approved by the Company's board of directors. In addition, the Company has entered into severance agreements with certain executives and managers, which provide
payments to the executive or manager if they are, terminated other than for cause or because of a change in control, as defined in the applicable severance agreement. Certain of the severance
agreements provide additional benefits, including acceleration of stock options, in the event of termination in connection with a change of control, as defined in the applicable severance agreement.

On
February 29, 2008, the Company entered into an amendment to the Company's existing severance agreements for the Company's President and Chief Executive Officer, Vice President,
Chief Financial Officer and Secretary, and Executive Vice President of Global Operations. Also, on February 29, 2008, the Company entered into a new severance agreement with its Vice President
of Engineering. See further discussion in Note 16 to the accompanying consolidated financial statements.



In the first quarter of 2006, we executed a mutual release agreement with a former business partner. The agreement released both parties from obligations arising
from past transactions. As a result of this agreement, we made a one-time adjustment to reduce our selling and marketing expense by $0.4 million during the quarter ended
April 2, 2006.

65

---







In late March 2006, the Company learned that employees of its Indian subsidiary manufacturing operations had made certain unauthorized payments that may have been
in violation of the Foreign Corrupt Practices Act and local laws. The facility in India is used for the sole purpose of manufacturing products for other Company locations and, as such, does not
generate revenue or issue invoices to external customers. It manufactures approximately 6% (by volume) of the products offered by the Company.

The
subject payments, in the aggregate, amounted to approximately $40,000 in each of the years ended January 2, 2005 and January 1, 2006, and less than $10,000 in the year
ended December 31, 2006. The Company retained outside counsel who conducted an internal investigation into these payments. In January 2007, the Company's outside counsel met with the SEC to
discuss the results of the internal investigation.



On November 16, 2007, SynQor announced that it had filed a lawsuit against several of its competitors, including Cherokee International Corporation who was
named in the complaint, for infringement of two patents relating to bus converters and/or non-isolated point of load converters used in intermediate bus architectures. The patents at issue
are U.S. patents 7,072,190 and 7,272,021. The suit was filed in Federal Court in the Eastern District of Texas. The Company intends to vigorously defend this lawsuit. Although the ultimate aggregate
amount of monetary liability or financial impact with respect to this lawsuit is subject to many uncertainties and is therefore not predictable with assurance, the final outcome of this lawsuit, if
adverse, could have a material adverse effect on our financial position, results of operations or cash flows.

10. RESTRUCTURING COSTS AND ASSET IMPAIRMENT CHARGES FOR CLOSURE OF GUADALAJARA, MEXICO FACILITY

During the quarter ended October 1, 2006, the Company announced the planned closure of its Mexican facilities and a related restructuring plan, which was
accounted for in accordance with SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities. The Mexico Facility encompassed
35,000 square feet in one building and had been in operation since 1988, employing approximately 250 full-time and temporary employees in the production of power supplies.

The
restructuring and closure of our Mexico Facility was completed by the end of the second quarter of 2007. The cumulative costs for the closure of the Mexico Facility were
$1.5 million ($1.3 million of which were recorded in 2006). This was made up of $0.9 million restructuring, $0.3 million asset impairment and $0.3 million additional
excess and obsolescence reserve. During the third quarter ended July 1, 2007, there was a reversal of $38,000 to severance costs due to the transfer and relocation of an employee from the
Mexico Facility to our Tustin Facility. The remaining accrued balance for severance and stay bonuses was paid on July 1, 2007 to the remaining employees.



The Company began actively searching for a buyer for the Mexico Facility building during the quarter ended October 1, 2006; however, in accordance with
SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the related assets were not classified as assets held for
sale in the condensed consolidated balance sheets prior to April 1, 2007, because the Company did not meet the criterion that "the asset (disposal group) is available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets", due to our continued utilization of assets in our ongoing operations at our Mexico Facility.

66

---



The
Company ceased operations in Mexico in March 2007, and reclassified the net book value of $0.7 million for the building and the related assets to assets held for saleon the condensed consolidated
balance sheet as of April 1, 2007, in accordance with SFAS 144. In addition,
depreciation of the assets related to this sale was suspended as of April 1, 2007. There was no impairment charge to the related assets because management determined that the measurement value,
the net book value, was lower than the estimated fair value less cost to sell.

On
February 22, 2007, Cherokee Electronica, S.A. de C.V. ("Cherokee Mexico"), a subsidiary of Cherokee International Corporation, a Delaware corporation (the "Company"),
entered into a Purchase and Sale Agreement (the "Agreement") with Inmobiliaria Hondarribia, S.A. de C.V. (the "Buyer") for the sale of Cherokee Mexico's 35,000-foot manufacturing
facility in Guadalajara, Mexico. The Agreement provided that the Buyer pay Cherokee Mexico an aggregate purchase price of approximately US $1.2 million of which a 15% deposit, approximately US
$182,000, was paid on February 22, 2007. On May 24, 2007, the sale of the building was completed, and the remaining 85% of the sales price was transferred into the Company's bank
account. The Company also collected the value added tax on the building in addition to the sales price and paid the taxes collected to the Mexican government in June 2007. The net gain of the sale
recorded during the quarter ended July 1, 2007, was $0.4 million, net of $0.1 million related to the cost to sell the assets which was deducted from the gain.



On December 12, 2007 Cherokee International Corporation sold Cherokee Electronica, S.A. de C.V. corporation and capital stock. The Company received
the proceeds from the sale on December 13, 2007. The net gain of the sale was $0.4 million.



During the quarter ended October 1, 2006, the Company performed an impairment review in accordance with SFAS 144,Accounting
for the Impairment and Disposal of Long-Lived Assets,to determine whether any of its long-lived assets located at the Mexico Facility were impaired.
The Company identified certain long-lived assets associated with the restructuring and closure of the Mexico Facility whose carrying value would not be recoverable from future cash flows
and recorded an impairment charge of $0.3 million for these assets. These assets consisted of machinery and equipment, computer technology and equipment, and office furniture and equipment. The
majority of these assets were written off because the Company considered them to have no market value. None of the impairment charges included cash components.



In accordance with SFAS 146, employee severance, contract termination and other exit costs are recorded at their estimated fair value when they are
incurred. During the quarter ended July 1, 2007,
there was a reversal of $38,000 to severance costs due to the transfer and relocation of an employee from the Mexico Facility to our Tustin Facility.

There
were $0.2 million of employee severance and stay bonus costs during the first six months of 2007, which included a pro-rata portion from August 10, 2006,
the communication date, through July 1, 2007, of an estimated amount of statutorily required severance payments and management performance stay-on bonuses incurred for employees at
the Mexico Facility. The Company paid $0.6 million of severance and related expenses to the remainder of employees terminated during the quarter ended July 1, 2007. All severance charges
were settled with cash as of July 1, 2007.

67

---



A
summary of the restructuring costs and reserve activity for the year ended December 30, 2007 is as follows (in thousands):

Restructuring Liabilities at December 31, 2006

Restructuring Charges

Cash Paid

Restructuring Liabilities at December 30, 2007Severance and bonuses

$
429

$
155

$
(584
)
$
Total Restructuring Costs

$
429

$
155

$
(584
)
$



11. STOCKHOLDERS' EQUITY



In July 2003, the Company adopted the Cherokee International Corporation 2002 Stock Option Plan (the "2002 Stock Option Plan") under which up to 1,410,256 shares
of the Company's common stock may be issued pursuant to the grant of non-qualified stock options to the directors, officers, employees, consultants and advisors of the Company and its
subsidiaries. In connection with the adoption of the 2002 Stock Option Plan, the Company granted 1,087,327 stock options. The options typically vest over a four-year period, have a
ten-year contractual life, range in exercise price from $5.85 to $10.34 per share and were granted with exercise prices at or above fair value as determined by Cherokee's Board of
Directors based on income and market valuation methodologies. In February 2004, the Company granted options to purchase 328,320 shares of common stock at an exercise price of $14.50 and terminated the
2002 Stock Option Plan. As of December 30, 2007, the Company had granted a total of 1,415,647 options to purchase shares of common stock under the 2002 Stock Option Plan, which includes options
to purchase shares that were cancelled and subsequently re-granted.



On February 16, 2004, the Company adopted the 2004 Omnibus Stock Incentive Plan (the "2004 Plan"), which provided for the issuance of 800,000 shares of
common stock. The 2004 Plan also provides for an annual increase to be added on the first day of the Company's fiscal year equal to the lesser of (i) 450,000 shares or (ii) 2% of the
number of outstanding shares on the last day of the immediately preceding fiscal year. As of December 30, 2007 a total of 2,926,070 shares of the Company's common stock were reserved for
issuance under the 2004 Plan. Any officer, director, employee, consultant or advisor of the Company is eligible to participate in the 2004 Plan. The 2004 Plan provides for the issuance of stock-based
incentive awards, including stock options, stock appreciation rights, restricted stock, deferred stock, and performance shares. As of December 30, 2007, the Company had granted options to
purchase 2,329,489 shares of common stock under the 2004 Plan, which included 308,153 options issued as partial compensation to non-employee directors. During the year ended
December 30, 2007, the Company granted a total of 745,500 options to purchase shares of common stock under the 2004 Plan, which includes options to purchase shares that were cancelled and
subsequently re-granted. The aggregate fair value for options granted during 2007 was $2,143,000, which will be amortized as stock compensation costs over 6.25 years.

68

---



Information
with respect to stock option activity and stock options outstanding under both stock option plans is as follows:

Number of Shares

Option Exercise Price Per Share

Weighted Average Exercise Price Per Share

Weighted-Average Remaining Contractual Term (in years)

Aggregate Intrinsic ValueOptions outstanding, January 1, 2003



$


$
Options granted (weighted average fair value of $0.59 per share)

1,087,327

$
5.85 - 10.34

$
6.74Options exercised







Options forfeited

(6,410
)
$
5.85 - 10.34

$
6.75Options outstanding, December 28, 2003

1,080,917

$
5.85 - 10.34

$
6.78Options granted (weighted average fair value of $6.57 per share)

527,320

$
6.96 - 14.50

$
13.32Options exercised

(6,056
)
$
5.85 - 10.34

$
6.42Options forfeited

(167,417
)
$
5.85 - 14.50

$
7.72Options outstanding, January 2, 2005

1,434,764

$
5.85 - 14.50

$
9.05Options granted (weighted average fair value of $2.12 per share)

1,227,489

$
2.97 - 7.26

$
4.56Options exercised







Options forfeited

(392,138
)
$
3.89 - 14.50

$
9.91Options outstanding, January 1, 2006

2,270,115

$
2.97 - 14.50

$
6.47Options granted (weighted average fair value of $2.22 per share)

157,500

$
3.18 - 6.76

$
3.69Options exercised







Options forfeited

(130,561
)
$
3.19 - 14.50

$
7.27Options outstanding at December 31, 2006

2,297,054

$
2.97 - 14.50

$
6.23Options granted (weighted average fair value of $2.87 per share)

745,500

$
4.40 - 5.54

$
4.95Options exercised

(30,000
)
$
2.97 - 3.75

$
3.19Options forfeited

(220,975
)
$
3.19 - 14.50

$
5.64Options outstanding at December 30, 2007

2,791,579

$
2.97 - 14.50

$
5.97

7.49

$
Options vested and expected to vest in the future at December 30, 2007

2,463,011




$
6.14

7.29

$
Options exercisable at December 30, 2007

1,464,005




$
6.75

6.42

$



69

---



|
|

Options Outstanding

Options ExercisableRange of
Exercise
Prices

Number of Shares

Weighted Average Remaining Contractual Life in Years

Weighted Average Exercise Price

Number of Shares

Weighted Average Exercise Price$2.97 - 3.18

112,500

8.07

$
3.01

43,750

$
2.99$3.19

498,900

7.94

$
3.19

271,950

$
3.19$3.49 - 4.77

177,500

8.33

$
3.86

54,375

$
3.75$4.94

625,500

9.50

$
4.94



$
$4.97 - 5.54

80,000

9.49

$
5.13



$
$5.85

627,930

5.58

$
5.85

627,930

$
5.85$7.26

284,000

7.20

$
7.26

142,000

$
7.26$8.07

30,000

6.93

$
8.07

22,500

$
8.07$10.34

140,249

5.58

$
10.34

140,249

$
10.34$14.50

215,000

6.13

$
14.50

161,251

$
14.502,791,579

7.49

$
5.97

1,464,005

$
6.75




On February 16, 2004, the Company adopted the 2004 Employee Stock Purchase Plan (the "ESPP"). The ESPP provides for an annual increase to be added on the
first day of the Company's fiscal year equal to the lesser of (i) 250,000 shares or (ii) 1% of the number of outstanding shares on the last day of the immediately preceding fiscal year.
As of December 30, 2007, a total of 742,019 shares of common stock were reserved for issuance under the plan. The ESPP, which is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, is implemented utilizing six-month offerings with purchases occurring at six-month intervals, with a new offering
period commencing on the first trading day on or after May 15 and November 15 and ending on the last trading day on or before November 14 or May 14, respectively. The
Compensation Committee of the Company's Board of Directors oversees administration of the ESPP. Employees are eligible to participate if they are employed for at least 20 hours per week and
more than 5 months in a calendar year by the Company, subject to certain restrictions. The ESPP permits eligible employees to purchase common stock through payroll deductions, which may not
exceed 15% of an employee's compensation. The price of common stock purchased under the ESPP is 85% of the lower of the fair market value of the common stock at the beginning of each
six-month offering period or on the applicable purchase date. Employees may end their participation in an offering at any time during the offering period, and participation ends
automatically upon termination of employment. The Compensation Committee may at any time amend or terminate the ESPP, except that no such amendment or termination may adversely affect shares
previously issued under the ESPP. As of December 30, 2007, 236,016 shares of common stock had been issued under the ESPP.



On February 16, 2004, the Company adopted two executive deferred compensation plans for the benefit of certain designated employees and
non-employee directors of the Company. The plans were amended on January 1, 2008 to comply with the regulations for nonqualified deferred compensation arrangements under Internal
Revenue Code (IRC) Section 409A. The plans allow participating employees and non-employee directors to make pre-tax deferrals of up to 100% of their annual base salary
and bonuses, and retainer fees and meeting fees, respectively. The plans allow the Company to make matching contributions and employer profit sharing credits at the sole discretion of the Company. A
participant's interest in each matching contribution and employer profit sharing credit, if any, vests in full no later than after 3 years.

70

---



As of December 30, 2007, the Company has a recorded liability of $1.4 million, for employee and non-employee director contributions and investment activity to
date, the current portion of $1.1 million is recorded under accrued compensation and benefits and the long-term portion of $0.2 million is recorded in other
long-term liabilities. As of December 31, 2006 the Company had a recorded liability of $1.1 million which was recorded in other long-term liabilities. The Company
has provided no matching contributions during the year ended December 30, 2007 and prior years.

In
January 2008, we paid $0.6 million of scheduled distributions to participants from the deferred compensation plan.

12. RETIREMENT PLANS

Cherokee Europe maintains a pension plan for certain levels of staff and management that includes a defined benefit feature. The following represents the amounts
related to this defined benefit plan (in thousands):

|                                                                                             |                                                | Years Ended |  
|-------------------------------------------------------------------------------------------- | ---------------------------------------------- | ----------- | -
|
|Change in Benefit Obligation:                                                                |                                                |             |  
|                                                                                             | Benefit obligation, beginning of period        |             | $
|                                                                                             | Benefits paid                                  |             |  
|                                                                                             | Effect of exchange rate changes                |             |  
|                                                                                             | Service cost                                   |             |  
|                                                                                             | Plan participant's contributions               |             |  
|                                                                                             | Interest cost                                  |             |  
|                                                                                             | Actuarial loss                                 |             |  
|                                                                                             |                                                |             |  
|                                                                                             | Benefit obligation, end of period              |             | $
|                                                                                             |                                                |             |  
|Change in Plan Assets:                                                                       |                                                |             |  
|                                                                                             | Fair value of plan assets, beginning of period |             | $
|                                                                                             | Benefits paid                                  |             |  
|                                                                                             | Effect of exchange rate changes                |             |  
|                                                                                             | Actual return on plan assets                   |             |  
|                                                                                             | Employer contribution                          |             |  
|                                                                                             | Plan participants' contributions               |             |  
|                                                                                             |                                                |             |  
|                                                                                             | Fair value of plan assets, end of period       |             | $
|                                                                                             |                                                |             |  
|                                                                                             | Unfunded status                                |             | $
|                                                                                             | Unrecognized net actuarial gain                |             |  
|                                                                                             |                                                |             |  
|                                                                                             | Accrued pension liability                      |             | $
|                                                                                             |                                                |             |  
|Information for pension plans with accumulated benefit obligations in excess of plan assets: |                                                |             |  
|                                                                                             | Projected benefit obligation                   |             | $
|                                                                                             | Accumulated benefit obligation                 |             | $
|                                                                                             | Fair value of assets                           |             | $
|Components of Net Periodic Benefit Cost:                                                     |                                                |             |  
|                                                                                             | Service cost                                   |             | $
|                                                                                             | Interest cost                                  |             |  
|                                                                                             | Expected return on plan assets                 |             |  
|                                                                                             | Amortization of net (gain)/loss                |             |  
|                                                                                             |                                                |             |  
|                                                                                             | Net periodic benefit cost                      |             | $
|                                                                                             |                                                |             |  

71

---



|
|

|                                                        |  | Years Ended |  
|------------------------------------------------------- |  | ----------- | -
|
|Weighted average assumptions used:                      |  |             |  
|For determining benefit obligations at the years ended: |  |             |  
|Discount rate                                           |  | 5.50        | %
|Salary increase                                         |  | 3.75        | %
|For determining net periodic cost for years ended:      |  |             |  
|Discount rate                                           |  | 4.50        | %
|Salary increase                                         |  | 3.75        | %
|Expected return on assets                               |  | 4.50        | %
|Pension plan assets:                                    |  |             |  
|Guaranteed insurance contracts                          |  | 100         | %

All
plan funds are invested with Fortis AG, an insurance company in Europe, which guarantees the plan a fixed rate of return based on rates in effect at the time of deposit. Returns may
be higher than the fixed rates due to a profit sharing provision and are dependent on the overall investment results of Fortis AG. In general, the assets of the insurance contracts are primarily
invested in Euro bonds with only a small portion in equities.

The
Company expects to contribute approximately $400,000 to the pension plan in fiscal 2008.

Estimated future pension benefit payments (in thousands):2008

$
4112009


8272010


1,7692011


6452012


347Years 2013 - 2017

$
2,708


The
Company maintains a retirement plan (the "401(k) Plan") in which substantially all domestic employees as of January 1, 2008 are eligible to participate in after completing
three months of employment. Prior to January 1, 2008, employees were eligible to participate in the plan after six months of employment. The Company adopted the safe harbor method in operating
the 401(k) Plan effective January 1, 2008. As of January 1, 2008, under the safe harbor method, the 401(k) Plan allows participating employees to contribute up to 50% of the employee's
pretax compensation, with the Company matching up to 3.5% of the first 6% of employee contributions. Company contributions fully vest and are non-forfeitable after the participant has
completed two years of service. Prior to January 1, 2008, the Company allowed participating employees to contribute up to 15% of the employee's pretax compensation, with the Company making
discretionary matching contributions. Company contributions were fully vested and non-forfeitable after the participant completed five years of service. For the years ended
December 30, 2007, December 31, 2006, and January 1, 2006, the Company elected to contribute approximately $361,000, $312,000, and $280,000, respectively, to the 401(k) Plan.
Beginning with the year ended December 31, 2006, the Company made quarterly employer contributions to the 401(k) Plan. Prior to January 2, 2006, employer contributions were generally
made after the calendar year end. Participants pay administrative costs associated with the 401(k) Plan.

72

---



13. CONCENTRATIONS

The Company recorded net sales of greater than 10% of total net sales from the following customers:

Years EndedCustomer

December 30, 2007

December 31, 2006

January 1, 2006A

*

*

10.4
%B

11.6
%
*

*


---

The
Company has outstanding accounts receivable balances of greater than 10% of total net receivables from the following customers:

As ofCustomer

December 30, 2007

December 31, 2006A

*

*B

10.6
%
*


---

Although
not anticipated, a decision by a major customer to decrease the amount purchased from the Company or to cease purchasing the Company's products could have an adverse effect on
the Company's future financial position and results of operations.

The
Company sells its power supply products to OEMs in the computing and storage, wireless infrastructure, enterprise networking, medical and industrial markets. These activities
are managed as a single business and have been aggregated into a single reportable operating segment. For the years ended December 30, 2007, December 31, 2006, and January 1,
2006, net sales by region were as follows (in thousands):

Years EndedDecember 30, 2007

December 31, 2006

January 1, 2006North America (primarily United States)

$
64,116

$
75,264

$
63,157Europe


45,193


53,201


50,399Asia


18,833


16,182


8,051Other


354


381


472$
128,496

$
145,028

$
122,079


The
Company's long-lived assets located outside of the United States were $17.6 million and $18.2 million as of December 30, 2007 and December 31,
2006, respectively.

14. INCOME TAXES

Income (loss) before income taxes consists of the following components (in thousands):

Years EndedDecember 30, 2007

December 31, 2006

January 1, 2006United States

$
3,785

$
7,218

$
4,604Foreign


(15,210
)

(7,218
)

(6,959
)$
(11,425
)
$


$
(2,355
)


73

---



The
provision for current and deferred income taxes consists of the following (in thousands):

Years EndedDecember 30, 2007

December 31, 2006

January 1, 2006Current:Federal

$


$


$
(51
)State


11





Foreign


(227
)

653


403Total current

$
(216
)
$
653

$
352Deferred:Federal

$


$


$
State








Foreign


(2,236
)

(736
)

525Total deferred

$
(2,236
)
$
(736
)
$
525Provision (benefit) for income taxes

$
(2,452
)
$
(83
)
$
877


The
Company's effective tax rate differs from the federal statutory rate of 34% as follows (in thousands):

Years EndedDecember 30, 2007

December 31, 2006

January 1, 2006Worldwide pre-tax income (loss) at 34%

$
(3,885
)
$


$
(801
)State tax, net of federal benefit


159


168


Foreign income not subject to U.S. tax (benefit)


3,327


935


847Goodwill impairment


1,767





Foreign taxes


(2,590
)

(305
)

769Disposal of foreign subsidiary


(3,272
)




Change in valuation allowance


1,501


(782
)

248Other


541


(99
)

(186
)Provision (benefit) for income taxes

$
(2,452
)
$
(83
)
$
877


74

---



The
Company's deferred income taxes are comprised of the following (in thousands):

Years EndedDecember 30, 2007

December 31, 2006Net deferred income taxesInventory reserves

$
813

$
1,487Nondeductible reserves


423


607Net operating loss carry-forwards


22,870


24,223Fixed assets


673


418Tax basis step up from 1999 re-capitalization


27,825


32,653Other


21


326Compensation and pension


1,841


2,997Credits


579


954Capital loss carryforward


3,892


Foreign exchange gain


(534
)

(4,597
)Deferred fire gain


(653
)

(661
)Deferred state taxes


(3,458
)

(3,537
)54,292


54,870Valuation allowance


(52,672
)

(54,587
)Net deferred tax asset

$
1,620

$
283


In
the opinion of management, it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. Accordingly, management has determined that a
full valuation allowance was required as of December 30, 2007 and December 31, 2006 for U.S. and certain foreign deferred tax assets. At December 30, 2007, we had
$1.6 million of tax benefits from our European operations on the balance sheet. There is no reserve against this tax asset. These benefits were created in fiscal year 2007 from tax losses. The
years immediately preceding 2007 were profitable and our business plans project future profitable years that will utilize this asset. Cherokee Europe operations have a history of profits and in the
opinion of management, it is more likely than not that the Company will realize the deferred tax assets. Cherokee Europe has a long term deferred tax liability related to a prior year gain which is
recognized over several years for Belgium tax purposes.

Federal
and state NOL carry-forwards at December 30, 2007, are $50.0 million and $39.6 million, respectively. Federal NOL carry-forwards begin expiring in 2022 and
state NOL carry-forwards begin expiring in 2014. Foreign NOL carry-forwards are $10.5 million at December 30, 2007, the majority of which have an infinite carryforward period.

Our
China operation is not subject to taxes for five years beginning in 2008 due to a tax holiday.

U.S.
deferred income taxes were not provided for on undistributed earnings from non-U.S. subsidiaries. Those earnings are considered to be permanently reinvested in
accordance with Accounting Principles Board (APB) Opinion 23.

The
Company adopted FIN 48,Accounting for Uncertainty in Income Taxeson January 1, 2007. As a result of adoption, the
Company recognized a cumulative effect adjustment of less than $0.1 million to the January 1, 2007 accumulated deficit balance. At January 1, 2007, we had $1.8 million of
gross unrecognized tax benefits, of which $0.6 million would reduce our effective tax rate if recognized. Of the total unrecognized tax benefits at the adoption date, $1.2 million was
recorded as a reduction to deferred tax assets, which caused a corresponding reduction in our valuation allowance of $1.2 million. To the extent such portion of unrecognized tax benefits is
recognized at a time such valuation allowance no longer exists, the recognition would impact our effective tax rate. During the second quarter of 2007 the Company effectively settled a Netherlands
examination of the years 2002 through

75

---



2006.
As a result of the Netherlands settlement, the Company reduced the liability for unrecognized tax benefits by $0.3 million during the second quarter of 2007. The Company received
$0.2 million of refunds from the Dutch government during the third quarter of 2007. In the fourth quarter of 2007 the Company received a favorable ruling on one of three tax years in India and
as a result reduced the liability for unrecognized tax benefits by approximately $0.1 million. At December 30, 2007, we have $0.3 million of gross unrecognized tax benefits, of
which $0.3 million would reduce our effective tax rate if recognized. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in income tax
expense. As of December 30, 2007, we have less than $0.1 million of accrued interest and penalties related to uncertain tax positions.

A
reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits including accrued interest and penalties is as follows (in millions):

Gross unrecognized tax benefits at January 1, 2007

$
1.8Gross increases for tax positions of prior years


Gross decreases for tax positions of prior years


(0.6
)Current year tax positions


Settlements


Lapse of statute of limitations


Disposition of legal entity


(0.9
)Gross unrecognized tax benefits at December 30, 2007

$
0.3


The
tax years 1997 to 2006 remain open to examination by the major taxing jurisdictions to which we are subject. The Company is currently under examination in India for certain years
between 2000 and 2005 and in the United States for the year 2005. In the fourth quarter of 2007 we sold our Mexican subsidiary and are no longer subject to examinations in Mexico. The Company is
scheduled to begin an audit of 2005 and 2006 in Belgium beginning in the first quarter of fiscal 2008. Due to the potential resolution of the examinations, it is reasonably possible that the
unrecognized tax benefits at December 30, 2007, may change within the next twelve months by a range of $0 to $0.3 million.

15. GAIN FROM INSURANCE PROCEEDS (CHEROKEE EUROPE FIRE)

On January 19, 2004, the Company experienced a fire in part of its facility in Belgium, which destroyed certain inventory, property and equipment. The
Company was fully insured for the replacement value of the destroyed items, subject to a $5,000 deductible. As of January 2, 2005, the Company had received $3.4 million in insurance
proceeds. Within operating expenses for the year ended January 2, 2005, the Company recorded a loss related to the destroyed inventory, property and equipment.

During
the year ended January 1, 2006 we received additional insurance proceeds to compensate us for the replacement value of the assets destroyed. The total recoveries of
$6.7 million resulted in a $2.9 million gain reported in the year ending January 1, 2006. As of December 31, 2006, the Company had been reimbursed for the values of the
damaged property.

76

---



The
following amounts were recorded in our consolidated financial statements for the year ended January 1, 2006 (in thousands):

Write-off of destroyed assets:Inventory

$
2,437Warehouse and equipment, net book value


158Supplies and other expenses


1,203Total destroyed assets

$
3,798Insurance proceeds:Proceeds received in year ended December 31, 2004

$
3,385Proceeds received in year ended December 31, 2005


3,311Total recoveries

$
6,696


16. SUBSEQUENT EVENTS



On February 1, 2008 the Company engaged an investment banker to work on securing the extension of the maturity date of the Senior Notes currently due on
November 1, 2008.



On February 29, 2008, the Company entered into an amendment to the Company's existing severance agreement with each of Jeffrey M. Frank, the Company's
President and Chief Executive Officer, Linster W. Fox, the Company's Executive Vice President, Chief Financial Officer and Secretary, and Mukesh Patel, the Company's Executive Vice President of Global
Operations. These executives' existing severance agreements provide for certain severance payments to be made in the event that the
executive's employment is terminated by the Company without cause. The amendments provide that, if severance is triggered under the executive's severance agreement, the executive's severance benefit
will consist of a cash payment equal to two times the executive's current base salary at the time of termination and continued medical benefits for up to two years. In the case of Mr. Patel,
the amendment further amends his severance agreement to provide that if he terminates his employment with the Company for good reason within one year following a change in control event, he will be
entitled to the severance benefits described above. The amendments further amend Mr. Frank's and Mr. Fox's severance agreements to provide that each of them may terminate employment for
any reason within two years following a change in control of the Company and, in such event, they will be entitled to: a cash payment equal to two times the executive's current base salary at the time
of termination; a prorata cash payment equal to the executive's annual bonus at the time of termination (calculated as if the Company achieved financial performance equal to that set forth in the
then-most current budget approved by the Company's Board of Directors); immediate vesting of all outstanding stock options; continued medical benefits for up to two years; a cash payment
equal to the amount forfeited by the executive under the Company's 401(k) or similar plan; use of an executive outplacement service in an amount not to exceed $50,000 or a lump-sum cash
payment in lieu thereof; and any additional benefits then due or earned under applicable plans or programs of the Company.

On
February 29, 2008, the Company also entered into a severance agreement with Alex Patel, the Company's Vice President of Engineering. The severance agreement provides that, in
the event Mr. Patel's employment is terminated either by the Company without cause or by Mr. Patel for good reason within one year following a change in control event, Mr. Patel
will be entitled to receive a cash payment equal to one times his then current annual base salary and continued medical benefits for up to one year. Mr. Patel's right to receive severance
benefits under the severance agreement is subject to his execution of a release of claims in favor of the Company upon the termination of his employment. The severance agreement also includes certain
confidentiality, non-solicitation and inventions covenants in favor of the Company.

77

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE

To
the Board of Directors and Stockholders

CHEROKEE INTERNATIONAL CORPORATION:

We have audited the consolidated financial statements of Cherokee International Corporation and Subsidiaries as of December 30, 2007 and
December 31, 2006, and for each of the two years in the period ended December 30, 2007, and have issued our report thereon dated March 26, 2008 which expressed substantial doubt
about the Company's ability to continue as a going concern. Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The
information included in the accompanying Schedule IIValuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and
is not a required part of the basic consolidated financial statements. Such information for each of the two years in the period ended December 30, 2007 has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements
taken as a whole.

/s/    MAYER
HOFFMAN MCCANN P.C.

MAYER
HOFFMAN MCCANN P.C.

Orange
County, California
March 26, 2008

78

---





CHEROKEE INTERNATIONAL CORPORATION  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS  (in thousands)

|                                 |  | Balance At Beginning of Period |     | Charged to Cost And Expenses |   | Deductions |  | Balance At End of Period
|-------------------------------- |  | ------------------------------ | --- | ---------------------------- | - | ---------- |  | ------------------------
|ALLOWANCE FOR DOUBTFUL ACCOUNTS: |  |                                |     |                              |   |            |  |                         
|Year ended January 1, 2006       |  | $                              | 124 |                              | $ | 272        |  | $                       
|Year ended December 31, 2006     |  | $                              | 360 |                              | $ | 51         |  | $                       
|Year ended December 30, 2007     |  | $                              | 292 |                              | $ | 14         |  | $                       

79

---





ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES



Our management, with the participation of our President, Chief Executive Officer and Director, and our Executive Vice President, Chief Financial Officer and
Secretary, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. The evaluation included certain control areas in which we have made, and are continuing to
make, changes to improve and enhance controls. As described below underManagement's Report on Internal Control Over Financial Reporting, we have
identified material weaknesses and significant deficiencies in our internal control over financial reporting as of December 30, 2007 and as a result of these, our President and Chief Executive
Officer and our Executive Vice President, Chief Financial Officer and Secretary have concluded that, as of December 30, 2007, our disclosure controls and procedures were not effective.



Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in
Rule 13a-15(f) under the Exchange Act). Our management, with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer
and Secretary, evaluated the effectiveness of our internal control over financial reporting. Based on such evaluation, our management concluded that our internal control over financial reporting was
not effective as of the end of the period covered by this Annual Report on Form 10-K.

A
material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In conducting its assessment of the effectiveness of our internal control over financial
reporting, our management concluded the following material weaknesses existed as of December 30, 2007:



Our subsidiaries in India and China still maintain disparate financial accounting systems that do not completely interface with the Company's primary ERP system,
resulting in duplicate accounting entries on multiple systems. This causes a protracted reporting cycle which limits the oversight from corporate headquarters of transactional details at our
international sites. Site level financial statements are delivered on spreadsheets to the corporate office for consolidation.

Our
European operation has its own separate ERP system that is integrated into the local accounting system; however this system does not automatically interface financially with our
corporate headquarters. Therefore, financial results are also delivered to our corporate office by means of spreadsheets, and the corporate office also has insufficient visibility to transactional
details.

The
consolidation of all these local results delivered on spreadsheets is in turn prepared on spreadsheets at our corporate office. Consolidations performed on spreadsheets are prone to
human error and are difficult to review. As such, the existing consolidation process requires additional monitoring and oversight. Oversight and monitoring are discussed in more detail below.

80

---



The
Company is continuing to develop IT interface solutions for key activities in China. After these solutions are fully implemented, we will determine what IT solutions will be required
for our other locations. In the interim, the Company has supplemented these technical IT solutions with additional staffing and improved internal monitoring procedures.



As remediated in the second quarter of 2007, the Company now evaluates historical and projected labor and overhead costs to determine their reasonableness. This
process is subject to finance management oversight and review. The Company still does not track labor by product model at most locations.



The lack of an integrated financial reporting system creates the need for significant manual intervention and staffing to prepare spreadsheets, create eliminating
entries, make tax adjustments, and U.S. GAAP adjustments. Additionally, our remote locations, other than Europe, have one local controller with little more than clerical support to maintain the
local accounting system, transport information from the ERP system to their local books, report financial statements to our headquarters in the U.S. and perform routine functions such as account
reconciliations. As part of our Sarbanes Oxley Act of 2002 (SOX) 404 compliance efforts, the Company is performing a detailed review of procedures and personnel at each site location. The Company is
committed to resolving all deficiencies identified.

We
have identified and have performed or are working on the following remediation to resolve the weakness in oversight and monitoring controls over international financial reporting:



A
significant deficiency is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough
to merit the attention of those responsible for oversight over the Company's financial reporting. In addition to the material weaknesses described above, in conducting its assessment of the
effectiveness of our internal

81

---



control
over financial reporting, our management concluded the following significant deficiencies existed as of December 30, 2007:



As a non-accelerated filer, 2007 marked the first year of SOX compliance for the Company. The Company completed an internal assessment of controls.
While the vast majority of the Company's controls were operating properly, the Company did identify control deficiencies for remediation. The corporate office worked closely with the site accounting
personnel to remediate these deficiencies. The vast majority of the deficiencies were remediated during 2007, but some do remain at year end. While efforts to remediate these deficiencies will
continue in 2008, management assessed the remaining deficiencies to determine if any additional material weakness existed. The Company concluded that none of the open deficiencies at year end could
result in a material weakness, but did believe that two could be classified as significant deficiencies. These two significant deficiencies are as follows:

1)    Inadequate
fixed asset management systems and procedures; and

2)    Inadequate
system controls over shipping cutoffs

The
continued remediation of the weaknesses identified above and their associated risks is dependent on the Company's ability to address these issues effectively. The issues of IT
systems, people and process are interrelated and difficult to separate. Striking the optimum balance between improved process, better trained and supervised staff and mission critical IT improvements
is essential for success.

The
Company is committed to remediating all material weaknesses and significant deficiencies presently identified and any additional deficiencies that may be identified in the future.

This
annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was
not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's
report in this annual report. In connection with the Company's filing of its financial statements for its fiscal year ending December 28, 2008, the Company's internal control over financial
reporting will be subject to attestation by the Company's registered public accounting firm.



Except as described above, there have not been any changes in our internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

None.

82

---



PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information required under this Item 10 is incorporated by reference to the information found under the headings "Information Concerning the Nominees
and Members of the Board of Directors," "Executive Officers of the Company" and "Compliance with Section 16(a) of the Securities and Exchange Act" of the Definitive Proxy Statement relating to
our 2008 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended December 30, 2007.

The
information regarding Cherokee's Audit Committee and Audit Committee financial expert is incorporated by reference to the information found under the headings "Board Committees" and
"Report of the Audit Committee" of the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year
ended December 30, 2007.

The
information regarding Cherokee's Code of Business Conduct and Ethics is incorporated by reference to the information found under "Code of Ethics" of the Definitive Proxy Statement
relating to our 2008 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended December 30, 2007.

ITEM 11.    EXECUTIVE COMPENSATION

The information required under this Item 11 is incorporated by reference to the information found under the heading "Director Compensation," "Executive
Compensation," "Report of the Compensation
Committee" and "Compensation Committee Interlocks and Insider Participation," of the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders, which we expect to file within
120 days after the end of our fiscal year ended December 30, 2007.

ITEM 12.    SECURITY OWNERSHIPOFCERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required under this Item 12 is incorporated by reference to the information found under the heading "Security Ownership of Certain
Beneficial Owners and Management" and the heading "Equity Compensation Plan Information" of the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders, which we expect to file
within 120 days after the end of our fiscal year ended December 30, 2007.

ITEM 13.    CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS

The information required under this Item 13 is incorporated by reference to the information found under the heading "Certain Relationships and Related
Transactions" of the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended
December 30, 2007.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required under this Item 14 is incorporated by reference to the information found under the heading "Principal Accounting Fees and
Services" of the Definitive Proxy Statement relating to our 2008 Annual Meeting of Stockholders, which we expect to file within 120 days after the end of our fiscal year ended
December 30, 2007.

83

---





PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)    Consolidated
Financial Statements

The
following documents are contained in Part II, Item 8 of this Annual Report on Form 10-K:

PageReport of Independent Registered Public Accounting Firm

42Report of Independent Registered Public Accounting Firm

43Consolidated Balance Sheets as of December 30, 2007, and December 31, 2006

44Consolidated Statements of Operations for the years ended December 30, 2007, December 31, 2006, and January 1, 2006

45Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Operations for the years ended December 30, 2007, December 31, 2006 and January 1, 2006

46Consolidated Statements of Cash Flows for the years ended December 30, 2007, December 31, 2006 and January 1, 2006

47Notes to Consolidated Financial Statements

48


(a)(2)    Financial
Statement Schedules

The
following financial statement schedule is filed as a part of this Annual Report on Form 10-K and is incorporated herein by reference:

PageReport of Independent Registered Public Accounting Firm on Schedule

78Schedule II: Valuation and Qualifying Accounts

79


(a)(3)    Exhibits

Exhibits
have heretofore been filed with the SEC and are incorporated herein by reference. Management contracts or compensatory plans or arrangements are marked with an asterisk.

|Exhibit No. |  | Description                                                                                                                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Restated Certificate of Incorporation of Cherokee International Corporation.(1)                                                                                                                                                                               
|3.2         |  | Amended and Restated By-Laws of Cherokee International Corporation.(1)                                                                                                                                                                                        
|4.1         |  | Specimen certificate for shares of common stock, par value $0.001 per share.(34)                                                                                                                                                                              
|4.2         |  | Indenture, dated as of November 27, 2002, between Cherokee International Corporation, as issuer, and U.S. Bank, N.A., as trustee, relating to the 5.25% Senior Notes due 2008.(2)                                                                             
|4.3         |  | Form of 5.25% Senior Notes due 2008.(2)                                                                                                                                                                                                                       
|10.1        |  | Amended and Restated Credit Agreement, dated as of February 25, 2004, by and between Cherokee International Corporation and General Electric Capital Corporation, in its individual capacity and as agent (the Agent)
for all of the lenders named therein.(5)
|10.1.1      |  | First Amendment to the Amended and Restated Credit Agreement, dated November 1, 2007, by and between Cherokee International Corporation and General Electric Capital Corporation.                                                                             

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|10.1.2   |  | Second Amendment to the Amended and Restated Credit Agreement, dated December 30, 2007, by and between Cherokee International Corporation and General Electric Capital Corporation.                                                                                                                                                                                            
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1.3   |  | Amended and Restated Revolving Note, dated as of February 25, 2004, issued by Cherokee International Corporation.(5)                                                                                                                                                                                                                                                           
|10.1.4   |  | Amended and Restated Security Agreement, dated as of February 25, 2004, by and between Cherokee International Corporation and the Agent.(5)                                                                                                                                                                                                                                    
|10.1.5   |  | Registration Rights Agreement, dated as of February 25, 2004, by and among Cherokee International Corporation and the Security Holders party thereto.(6)                                                                                                                                                                                                                       
|10.2     |  | Security Agreement, dated as of November 27, 2002, between Cherokee International Corporation and U.S. Bank, N.A., as agent (relating to the 5.25% Senior Note Indenture).(2)                                                                                                                                                                                                  
|10.3     |  | Trademark Security Agreement, dated as of November 27, 2002, between Cherokee International Corporation and U.S. Bank, N.A., as agent (relating to the 5.25% Senior Note Indenture).(2)                                                                                                                                                                                        
|10.4     |  | Pledge Agreement, dated as of November 27, 2002, between Cherokee International Corporation and U.S. Bank, N.A., as agent (relating to the 5.25% Senior Note Indenture).(2)                                                                                                                                                                                                    
|10.5     |  | Pledge Agreement, dated as of November 27, 2002, between Cherokee Netherlands I B.V. and U.S. Bank, N.A., as agent (relating to the 5.25% Senior Note Indenture).(2)                                                                                                                                                                                                           
|10.6     |  | China Loan Contract, dated January 18, 2007, by and between Cherokee International (China) Power Supply Ltd. and Industrial and Commercial Bank of China Limited Shanghai branch Fengxian sub-branch.(11)                                                                                                                                                                      
|10.7     |  | China Maximum Pledge Contract, dated January 18, 2007, by and between Cherokee International (China) Power Supply Ltd. and Industrial and Commercial Bank of China Limited Shanghai branch Fengxian sub-branch.(11)                                                                                                                                                            
|10.8     |  | Lease Agreement, dated as of April 30, 1999, by and between Ganpat I. Patel and Manju G. Patel, Trustees of the Patel Family Trust dated July 17, 1987, as to an undivided two-thirds interest, and
Kenneth O. King and Arlene King, husband and wife as joint tenants, as to an undivided one-third interest, as tenants in common, and Cherokee International Corporation.(2)
|10.9     |  | Purchase and Sale Agreement, dated as of February 22, 2007, by and between Cherokee Electronics, S.A. de C.V. and Inmobiliaria Hondarribia, S.A. de C.V.(12)                                                                                                                                                                                                                   
|*10.10   |  | Cherokee International Corporation 2002 Stock Option Plan(2)                                                                                                                                                                                                                                                                                                                   
|*10.10.1 |  | Form of 2002 Stock Option Agreement.(2)                                                                                                                                                                                                                                                                                                                                        
|*10.11   |  | Cherokee International Corporation 2004 Omnibus Stock Incentive Plan, as amended as of July 17, 2007.(10)                                                                                                                                                                                                                                                                      
|*10.11.1 |  | Form of 2004 Stock Option Agreement.(3)                                                                                                                                                                                                                                                                                                                                        
|*10.12   |  | Form of Officer and Director Indemnification Agreement.(4)                                                                                                                                                                                                                                                                                                                     
|*10.13   |  | Executive Deferred Compensation Plan (and related schedule).(3)                                                                                                                                                                                                                                                                                                                
|*10.14   |  | Amended and Restated Severance Agreement, dated as of December 5, 2006, between Cherokee International Corporation and Jeffrey M. Frank.(7)                                                                                                                                                                                                                                    
|*10.15   |  | Amended and Restated Severance Agreement, dated as of June 16, 2005, between Cherokee International Corporation and Mukesh Patel.(9)                                                                                                                                                                                                                                           

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|*10.16 |  | Letter Agreement, dated as of December 5, 2006, between Cherokee International Corporation and Linster W. Fox.(7)                                     
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.17 |  | Amended and Restated Severance Agreement, dated as of October 14, 2005, between Cherokee International Corporation and Linster W. Fox.(7)             
|*10.18 |  | Letter Agreement, dated February 29, 2008, between Cherokee International Corporation and Jeffrey M. Frank.(13)                                       
|*10.19 |  | Letter Agreement, dated February 29, 2008, between Cherokee International Corporation and Linster W. Fox.(13)                                         
|*10.20 |  | Letter Agreement, dated February 29, 2008, between Cherokee International Corporation and Mukesh Patel.(13)                                           
|*10.21 |  | Severance Agreement, dated February 29, 2008, between Cherokee International Corporation and Alex Patel.(13)                                          
|21.1   |  | Subsidiaries of the Registrant.                                                                                                                       
|23.1   |  | Consent of Independent Registered Public Accounting Firm.                                                                                             
|23.2   |  | Consent of Independent Registered Public Accounting Firm.                                                                                             
|31.1   |  | Certification of President, Chief Executive Officer, and Director pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                          
|31.2   |  | Certification of Executive Vice President of Finance, Chief Financial Officer and Secretary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1   |  | Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 28th day of March 2008.

| |  | CHEROKEE INTERNATIONAL CORPORATION
| |  | ----------------------------------
| |  | By:                               

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities
indicated, on this 28th day of March 2008.

|                                                |  |                                                                                                             
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------
|/s/JEFFREY M. FRANKJeffrey M. Frank             |  | President, Chief Executive Officer and Director
(Principal Executive Officer)                               
|/s/LINSTER W. FOXLinster W. Fox                 |  | Executive Vice President, Chief Financial
Officer and Secretary (Principal Financial and Accounting Officer)
|/s/RAYMOND MEYERRaymond Meyer                   |  | Chairman of the Board                                                                                       
|/s/CLARK MICHAEL CRAWFORDClark Michael Crawford |  | Director                                                                                                    
|/s/DANIEL LUKASDaniel Lukas                     |  | Director                                                                                                    
|/s/EDWARD PHILIP SMOOTEdward Philip Smoot       |  | Director                                                                                                    
|/s/LARRY SCHWERINLarry Schwerin                 |  | Director                                                                                                    

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