**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

**x**                              Quarterly Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934

**Forthe quarterly period ended July 2, 2006**

**o**                                 Transition ReportPursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934

**Forthe transition period from                   to**

**CommissionFile No. 000-50593**

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**Cherokee International Corporation**

(Exact name of Registrantas specified in its charter)

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

Registrant’s telephone number, including area code**(714) 544-6665**

Securities registered pursuant toSection 12(b) of the Act:

**None**

Securities registered pursuant toSection 12(g) of the Act:

**CommonStock, $0.001 par value**

Indicate by check markwhether the registrant; (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x   No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o   AcceleratedFiler o   Non-Accelerated Filer x

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

As of July 31, 2006,19,292,419 shares of the registrant’s common stock, $0.001 par value, wereoutstanding.

 

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**TABLE OF CONTENTS**
| PART I FINANCIAL  INFORMATION                                                                   |   |
|------------------------------------------------------------------------------------------------------|--------|
|                                                                                                 |   |
| Item 1. Financial  Statements:                                                                       |   |
|                                                                                                 |   |
| Condensed  Consolidated Balance Sheets                                                               |   |
|                                                                                                 |   |
| Condensed  Consolidated Statements of Operations                                                     |   |
|                                                                                                 |   |
| Condensed  Consolidated Statements of Comprehensive Operations                                       |   |
|                                                                                                 |   |
| Condensed  Consolidated Statements of Cash Flows                                                     |   |
|                                                                                                 |   |
| Notes to  Condensed Consolidated Financial Statements                                                |   |
|                                                                                                 |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |   |
|                                                                                                 |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                  |   |
|                                                                                                 |   |
| Item 4. Controls and  Procedures                                                                     |   |
|                                                                                                 |   |
| PART II OTHER  INFORMATION                                                                      |   |
|                                                                                                 |   |
| Item 1. Legal Proceedings                                                                            |   |
|                                                                                                 |   |
| Item  1A. Risk Factors                                                                               |   |
|                                                                                                 |   |
| Item  6. Exhibits                                                                                    |   |
|                                                                                                 |   |
| Signatures                                                                                           |   |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item1. Financial Statements.**

**CHEROKEEINTERNATIONAL CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(In Thousands, Except Share Data)(Unaudited)**
| ** **                                                                                                                                                                     | ** ** | **July 2, 2006** | ** ** | ** January 1, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------------|------------|
| ASSETS                                                                                                                                                                         |       |                       |       |                                |       |
| CURRENT ASSETS:                                                                                                                                                                |       |                       |       |                                |       |
| Cash and cash  equivalents                                                                                                                                                     |       | $                          | 12,923     |                                | $          | 10,543 |   |
| Accounts receivable,  net                                                                                                                                                      |       | 25,036                     |       | 24,999                              |       |
| Inventories, net                                                                                                                                                               |       | 30,042                     |       | 26,851                              |       |
| Prepaid expenses and  other current assets                                                                                                                                     |       | 2,794                      |       | 1,698                               |       |
| Total current  assets                                                                                                                                                          |       | 70,795                     |       | 64,091                              |       |
| Property and equipment,  net                                                                                                                                                   |       | 19,432                     |       | 19,268                              |       |
| Deposits and other  assets                                                                                                                                                     |       | 1,288                      |       | 1,296                               |       |
| Deferred financing  costs, net                                                                                                                                                 |       | 281                        |       | 346                                 |       |
| Goodwill                                                                                                                                                                       |       | 6,317                      |       | 6,317                               |       |
|                                                                                                                                                                           |       | $                          | 98,113     |                                | $          | 91,318 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                     |       |                       |       |                                |       |
| CURRENT LIABILITIES:                                                                                                                                                           |       |                       |       |                                |       |
| Accounts payable                                                                                                                                                               |       | $                          | 14,104     |                                | $          | 11,658 |   |
| Accrued liabilities                                                                                                                                                            |       | 5,525                      |       | 6,028                               |       |
| Accrued compensation  and benefits                                                                                                                                             |       | 6,636                      |       | 5,326                               |       |
| Accrued restructuring  costs                                                                                                                                                   |       | 405                        |       | 424                                 |       |
| Total current  liabilities                                                                                                                                                     |       | 26,670                     |       | 23,436                              |       |
| Long-term debt                                                                                                                                                                 |       | 24,485                     |       | 24,485                              |       |
| Long-term debt payable  to affiliates                                                                                                                                          |       | 22,145                     |       | 22,145                              |       |
| Total long-term  debt                                                                                                                                                          |       | 46,630                     |       | 46,630                              |       |
| Other long-term  obligations                                                                                                                                                   |       | 5,612                      |       | 4,790                               |       |
|                                                                                                                                                                           |       |                       |       |                                |       |
| COMMITMENTS AND  CONTINGENCIES (Note 10)                                                                                                                                       |       |                       |       |                                |       |
|                                                                                                                                                                           |       |                       |       |                                |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                     |       |                       |       |                                |       |
| Common stock: $0.001  par value; 60,000,000 shares authorized; 19,292,419 and 19,259,612 shares  issued and outstanding at July 2, 2006 and January 1, 2006, respectively |       | 19                         |       | 19                                  |       |
| Paid-in capital                                                                                                                                                                |       | 184,277                    |       | 183,871                             |       |
| Accumulated deficit                                                                                                                                                            |       | (167,719                   | )          | (168,898                            | )          |
| Accumulated other  comprehensive income                                                                                                                                        |       | 2,624                      |       | 1,470                               |       |
| Net  stockholders’ equity                                                                                                                                                 |       | 19,201                     |       | 16,462                              |       |
|                                                                                                                                                                           |       | $                          | 98,113     |                                | $          | 91,318 |   |

See notes tocondensed consolidated financial statements.

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**CHEROKEEINTERNATIONAL CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In Thousands, Except Per Share Amounts)(Unaudited)**
| ** **                                   | ** ** | **Three Months Ended**                  | ** ** | **Six Months Ended**              | ** ** |
|----------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **July 2, 2006   (13 weeks)** | ** ** | **July 3, 2005  (13 weeks)** | ** ** | **July 2, 2006   (26 weeks)** | ** ** | **July 3, 2005  (26 weeks)** | ** ** |
| ** **                                   | ** ** | ** **                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                    |       | $                                                 | 38,314     |                                        | $          | 30,992 |   | $ | 74,411 |   | $ | 63,002 |   |
| Cost of sales                                |       | 30,179                                            |       | 24,680                                      |       | 57,760 |   | 49,048 |   |
| Gross profit                                 |       | 8,135                                             |       | 6,312                                       |       | 16,651 |   | 13,954 |   |
| Operating  expenses:                         |       |                                              |       |                                        |       |   |   |   |   |
| Engineering and  development                 |       | 2,323                                             |       | 2,350                                       |       | 4,643 |   | 4,706 |   |
| Selling and  marketing                       |       | 1,708                                             |       | 2,040                                       |       | 3,021 |   | 4,002 |   |
| General and  administrative                  |       | 3,060                                             |       | 2,956                                       |       | 6,064 |   | 6,176 |   |
| Gain from  insurance proceeds                |       | —                                            |       | —                                      |       | — |   | (2,490 | ) |
| Total operating expenses                     |       | 7,091                                             |       | 7,346                                       |       | 13,728 |   | 12,394 |   |
|                                         |       |                                              |       |                                        |       |   |   |   |   |
| Operating income  (loss)                     |       | 1,044                                             |       | (1,034                                      | )          | 2,923 |   | 1,560 |   |
| Interest expense                             |       | (657                                              | )          | (698                                        | )          | (1,354 | ) | (1,392 | ) |
| Other income,  net                           |       | 101                                               |       | 52                                          |       | 192 |   | 25 |   |
| Income (loss)  before income taxes           |       | 488                                               |       | (1,680                                      | )          | 1,761 |   | 193 |   |
| Provision for  income taxes                  |       | 136                                               |       | 93                                          |       | 582 |   | 1,341 |   |
|                                         |       |                                              |       |                                        |       |   |   |   |   |
| Net income  (loss)                           |       | $                                                 | 352        |                                        | $          | (1,773 | ) | $ | 1,179 |   | $ | (1,148 | ) |
|                                         |       |                                              |       |                                        |       |   |   |   |   |
| Net income  (loss) per share:                |       |                                              |       |                                        |       |   |   |   |   |
| Basic                                        |       | $                                                 | 0.02       |                                        | $          | (0.09 | ) | $ | 0.06 |   | $ | (0.06 | ) |
| Diluted                                      |       | $                                                 | 0.02       |                                        | $          | (0.09 | ) | $ | 0.06 |   | $ | (0.06 | ) |
|                                         |       |                                              |       |                                        |       |   |   |   |   |
| Weighted average  common shares outstanding: |       |                                              |       |                                        |       |   |   |   |   |
| Basic                                        |       | 19,292                                            |       | 19,221                                      |       | 19,276 |   | 19,214 |   |
| Diluted                                      |       | 19,372                                            |       | 19,221                                      |       | 19,324 |   | 19,214 |   |

See notes tocondensed consolidated financial statements.

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**CHEROKEEINTERNATIONAL CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS(In Thousands)(Unaudited)**
| ** **                               | ** ** | **Three Months Ended**            | ** ** | **Six Months Ended**              | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **July 2, 2006  (13 weeks)** | ** ** | **July 3, 2005  (13 weeks)** | ** ** | **July 2, 2006  (26 weeks)** | ** ** | **July 3, 2005  (26 weeks)** | ** ** |
| ** **                               | ** ** | ** **                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                       |       | $                                           | 352        |                                        | $          | (1,773 | ) | $ | 1,179 |   | $ | (1,148 | ) |
| Other  comprehensive income (loss):      |       |                                        |       |                                        |       |   |   |   |   |
| Foreign currency translation adjustments |       | 791                                         |       | (1,516                                      | )          | 1,154 |   | (2,462 | ) |
| Comprehensive income  (loss)             |       | $                                           | 1,143      |                                        | $          | (3,289 | ) | $ | 2,333 |   | $ | (3,610 | ) |

See notes tocondensed consolidated financial statements.

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**CHEROKEEINTERNATIONAL CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)(Unaudited)**
| ** **                                                                                | ** ** | **Six Months Ended**                    | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                | ** ** | **July 2, 2006   (26 weeks)** | ** ** | **July 3, 2005   (26 weeks)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |                                              |       |   |   |
| Net income (loss)                                                                         |       | $                                                 | 1,179      |   | $ | (1,148 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                             |       | 1,584                                             |       | 1,537 |   |
| Gain on sale of property and equipment                                                    |       | —                                            |       | (30 | ) |
| Amortization of deferred financing costs                                                  |       | 65                                                |       | 64 |   |
| Stock-based compensation                                                                  |       | 324                                               |       | — |   |
| Net change in operating assets and liabilities:                                           |       |                                              |       |   |   |
| Accounts receivable, net                                                                  |       | 683                                               |       | 1,900 |   |
| Inventories, net                                                                          |       | (2,621                                            | )          | (1,025 | ) |
| Prepaid expenses and other current assets                                                 |       | (1,011                                            | )          | 407 |   |
| Deposits and other assets                                                                 |       | 8                                                 |       | (292 | ) |
| Accounts payable                                                                          |       | 2,004                                             |       | (2,185 | ) |
| Accrued liabilities and restructuring costs                                               |       | (652                                              | )          | 1,449 |   |
| Accrued compensation and benefits                                                         |       | 1,016                                             |       | (794 | ) |
| Accrued interest payable                                                                  |       | (110                                              | )          | 9 |   |
| Other long-term obligations                                                               |       | 515                                               |       | 176 |   |
| Net cash provided by operating activities                                                 |       | 2,984                                             |       | 68 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |                                              |       |   |   |
| Additions to property and equipment                                                       |       | (1,102                                            | )          | (3,401 | ) |
| Net change in short-term investments                                                      |       | —                                            |       | 3,845 |   |
| Proceeds from sale of property and equipment                                              |       | —                                            |       | 34 |   |
| Net cash (used in) provided by investing activities                                       |       | (1,102                                            | )          | 478 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |                                              |       |   |   |
| Proceeds from employee stock purchases and the exercise  of stock options                 |       | 82                                                |       | 90 |   |
| Net cash provided by financing activities                                                 |       | 82                                                |       | 90 |   |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                             |       | 416                                               |       | (1,040 | ) |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |       | 2,380                                             |       | (404 | ) |
|                                                                                      |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                           |       | 10,543                                            |       | 14,585 |   |
|                                                                                      |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                 |       | $                                                 | 12,923     |   | $ | 14,181 |   |
|                                                                                      |       |                                              |       |   |   |
| SUPPLEMENTAL  INFORMATION                                                                 |       |                                              |       |   |   |
| Cash paid for  interest                                                                   |       | $                                                 | 1,248      |   | $ | 1,249 |   |
| Cash paid for income  taxes                                                               |       | $                                                 | 158        |   | $ | 466 |   |

See notes to condensedconsolidated financial statements.

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**CHEROKEEINTERNATIONAL CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.**                 Nature ofOperations

Cherokee International Corporation (the “Company”) isa designer and manufacturer of power supplies for original equipmentmanufacturers (OEMs). Its advanced power supply products are typically customdesigned into mid- to high-end commercial applications in the computing andstorage, wireless infrastructure, enterprise networking, telecom, medical andindustrial markets.

*Initial PublicOffering*

The Company completed its initial public offering of6,600,000 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 tothe Company from this offering after offering costs of $9.2 million were $86.5million. The Company used approximately $73.2 million of the net proceeds torepay certain outstanding indebtedness and accrued interest. Immediately priorto the consummation of the offering, the Company completed a 1 for 3.9 reversestock split of its outstanding Common Stock. All share and per share amountsfor all periods presented in this report reflect this reverse stock split. Alsoin connection with the offering, the Company issued 6,283,796 shares of CommonStock upon conversion of the $53.4 million original principal amount of itsoutstanding senior convertible notes, and issued 4,071,114 shares of CommonStock upon the exercise of outstanding warrants.

**2.**                 Basis ofPresentation and Summary of Significant Accounting Policies

*Basis ofPresentation*

The accompanying condensed consolidated financialstatements of Cherokee International Corporation have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include certainfootnotes and financial presentations normally required under accountingprinciples generally accepted in the United States of America for completefinancial reporting.  The interimfinancial information is unaudited, but reflects all normal adjustments andaccruals, which are, in the opinion of management, considered necessary to providea fair presentation for the interim periods presented.  The condensed consolidated financialstatements include the financial statements of the Company and its wholly ownedsubsidiaries.  All intercompany balancesand transactions have been eliminated in the accompanying condensedconsolidated financial statements.

Results of operations for the quarter endedJuly 2, 2006 and July 3, 2005 are not necessarily indicative of theresults to be expected for the entire fiscal year ended December 31, 2006 (“fiscal2006.”) The accompanying condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements for thefiscal year ended January 1, 2006, included in the Company’s Annual Reporton Form 10-K (FileNo. 000-50593) filed on April 18, 2006.

In our past filings with the Securities and ExchangeCommission, we referred to fiscal periods as ending on the last day of thenearest calendar month on our financial statements and in our Management’sDiscussion and Analysis of Financial Condition and Results of Operations inorder to provide the reader with a more convenient presentation of ourdisclosure.  The dates shown on the coverof our prior reports on Forms 10-K and 10-Q have always represented the actualperiod end dates, and will continue to do so. In order to comply with a recent request from the Securities andExchange Commission, we have reflected the actual period end dates throughoutthis filing.

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*Use of Estimates*

The preparation of financial statements in accordancewith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent liabilities at thedate of the financial statements and the amounts of revenues and expensesduring the reporting period. Actual results could differ from such estimates.

*Stock-BasedCompensation*

In December 2004, SFAS 123R, *Share-Based Payment*, was issued. SFAS 123Ris a revision of SFAS 123, *Accountingfor Stock Based Compensation*, and supersedes APB 25. Among otheritems, SFAS 123R eliminates the use of APB 25 and the intrinsic valuemethod of accounting, and requires companies to recognize the cost of employeeservices received in exchange for awards of equity instruments, based on thegrant date fair value of those awards, in the financial statements. The Companywas required to adopt SFAS 123R effective at the beginning of fiscal 2006. SFAS123R 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 theeffective date, based on the requirements of SFAS 123R for all share-basedpayments granted after that date, and based on the requirements of SFAS 123 forall unvested awards granted prior to the effective date of SFAS 123R. Under the“*modified retrospective*” method,the requirements are the same as under the “*modifiedprospective*’’method, but also permits entities to restate financial statements of previousperiods based on proforma disclosures made in accordance with SFAS 123.

The Company currently uses the Black-Scholes standardoption-pricing model to measure the fair value of stock options granted toemployees and nonemployees. While SFAS 123R permits the Company to continue touse such a model, the standard also permits the use of a “*lattice*” model. The Company is continuingto use the Black-Scholes model to measure the fair value of employee stockoptions upon the adoption of SFAS 123R.

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

The Company adopted SFAS 123R on January 2, 2006using the “modified prospective” method as permitted by SFAS 123R. Under thistransition method, stock compensation cost recognized beginning in the firstquarter of the fiscal 2006 includes: (a) compensation cost for all share-based payments grantedsubsequent to February 25, 2004 and prior to January 1, 2006 but not yetvested as of January 1, 2006, based on the grant-date fair value estimatedin accordance with the provisions of SFAS 123R, and (b) compensation costfor all share-based payments granted subsequent to January 1, 2006, basedon the grant-date fair value estimated in accordance with the provisions of SFAS123R. In accordance with the modified prospective method of adoption, theCompany’s results of operations and financial position for prior periods havenot been restated.  At the date of theadoption, the unamortized expense for options issued prior to January 2, 2006was $2.3 million, which will be amortized as stock compensation costs throughDecember 2010.   Stock based compensationcosts expensed during the six months ended July 2, 2006 were $0.3 million.

All grants are made at prices based on the fair marketvalue of the stock on the date of grant. Outstanding options generally vestover periods ranging from two to four years from the grant date and generallyexpire up to ten years after the grant date. During the three months and six monthsended July 2, 2006 the Company recorded $0.2 million and $0.3 million,respectively, of stock compensation expense. No stock compensation expense was recorded during the three months andsix months ended July 3, 2005.

The Companyrecords compensation expense for employee stock options based on the estimatedfair value of the options on the date of grant using the Black-Scholes optionpricing formula with the assumptions included in the table below. The Companyuses historical data, among other factors, to estimate the expected price

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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’sadoption 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 pointbetween the vesting date and the end of the contractual term).  The use of the simplified method is permittedthrough December 31, 2007.  We willconvert to company-specific experience on or before January 1, 2008. Theoptions have a maximum contractual term of 10 years and vest pro-rata over fouryears.   The risk-free rate is based onthe U.S. Treasury yield curve in effect at the time of grant for the estimatedlife of the option. The following weighted-average assumptions were used toestimate the fair value of options granted during the three and six-monthperiods ended July 2, 2006 and July 3, 2005 using the Black-Scholes optionpricing formula.
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **July 2, 2006**       | ** ** | **July 3, 2005**     | ** ** | **July 2, 2006** | ** ** | **July 3, 2005** | ** ** |
| Dividend yield           |       | 0.0%                             |       | 0.0%                           |       | 0.0% |   | 0.0% |   |
| Expected  volatility     |       | 58.8%                            |       | 56.1%                          |       | 58.8% |   | 42.4% |   |
| Risk free  interest rate |       | 4.83%                            |       | 3.65%                          |       | 4.83% |   | 3.65% |   |
| Expected lives           |       | 5.0 - 6.25 years                 |       | 5.0 years                      |       | 5.0 - 6.25 years |   | 5.0 years |   |
| Forfeiture rates         |       | 4.1% - 21.91%                    |       | —                         |       | 4.1% - 21.91% |   | — |   |

 

The followingtable summarizes the Company’s activities with respect to its stock optionplans for the first six months of 2006 as follows:
| **Options**                                                     | ** ** | **Number  of  Shares** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | ** **             | ** ** | ** **                                                  | ** ** | **(in years)**                                  | ** ** | ** **                      | ** ** |
| Outstanding at  January 1, 2006                            |       | 2,270,115              |       | $6.47                                                       |       | 8.73                                                 |       | —                          |       |
| Granted                                                         |       | 92,500                 |       | 3.86                                                        |       | —                                               |       | —                          |       |
| Exercised                                                       |       | —                 |       | —                                                      |       | —                                               |       | —                          |       |
| Forfeited                                                       |       | (59,077                | )          | $8.69                                                       |       | —                                               |       | —                          |       |
| Outstanding at  July 2, 2006                               |       | 2,303,538              |       | $6.30                                                       |       | 8.31                                                 |       | $509,413                        |       |
| Vested and  expected to vest in the future at July 2, 2006 |       | 2,009,523              |       | $6.48                                                       |       | 8.20                                                 |       | $385,175                        |       |
| Exercisable at  July 2, 2006                               |       | 844,012                |       | $7.88                                                       |       | 7.39                                                 |       | $1,650                          |       |

 

No options were exercised for the six months endedJuly 2, 2006 and July 3, 2005, respectively. Therefore there was no actual taxbenefit realized relating to stock option exercises in the six months endedJuly 2, 2006 and July 3, 2005.

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*Pro Forma EmployeeShare-Based Compensation Expense*

Prior to January2, 2006, the Company accounted for its employee stock-based compensation planusing the intrinsic value method under APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and provided theexpanded disclosures specified in SFAS 123, as amended by SFAS 148, *Accounting for Stock-Based Compensation—Transition and Disclosure*.

As required bySFAS 123R, the required pro forma disclosure, for periods prior to adoption ofSFAS 123R, is shown below (in thousands, except per share data):
| ** **                                                                                                                      | ** ** | **Three Months Ended  July 3, 2005** | ** ** | **Six Months Ended  July 3, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Net loss as  reported                                                                                                           |       | $                                                        | (1,773     | )                                                      | $          | (1,148 | ) |
| Add: Stock-based  employee compensation included in net loss, net of tax, as reported                                           |       | —                                                   |       | —                                                 |       |
| Less: Total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of tax |       | (324                                                     | )          | (616                                                   | )          |
| Net loss—pro  forma                                                                                                        |       | $                                                        | (2,097     | )                                                      | $          | (1,764 | ) |
|                                                                                                                            |       |                                                     |       |                                                   |       |
| Net loss per  share, as reported:                                                                                               |       |                                                     |       |                                                   |       |
| Basic                                                                                                                           |       | $                                                        | (0.09      | )                                                      | $          | (0.06 | ) |
| Diluted                                                                                                                         |       | $                                                        | (0.09      | )                                                      | $          | (0.06 | ) |
| Pro forma net  loss per share:                                                                                                  |       |                                                     |       |                                                   |       |
| Basic                                                                                                                           |       | $                                                        | (0.11      | )                                                      | $          | (0.09 | ) |
| Diluted                                                                                                                         |       | $                                                        | (0.11      | )                                                      | $          | (0.09 | ) |

 

*Translation ofForeign Currency*

Foreign subsidiary assets and liabilities denominatedin foreign currencies are translated at the exchange rate on the balance sheetdate. Revenues, costs and expenses are translated at the average exchange rateduring the period. Transaction gains and losses are included in results ofoperations and have not been significant for the periods presented. Thefunctional currency of the Company’s operating subsidiary in Europe, CherokeeEurope SCA (“Cherokee Europe”), is the Euro. The functional currency ofthe Company’s operating subsidiaries in Mexico (Cherokee Electronica, S.A. deC.V.), in India (Cherokee India Pvt. Ltd. and Powertel India Pvt. Ltd.), and inChina (Cherokee International (China) Power Supply Co. Ltd) is the U.S. dollar,as the majority of transactions are denominated in U.S. dollars. Translationadjustments related to Cherokee Europe are reflected as a component ofcomprehensive income (loss) and included in stockholders’ equity as accumulatedother comprehensive income (loss).

***Segment Information***

The Company is a designer and manufacturer of powersupplies for OEMs in the computing and storage, wireless infrastructure,enterprise networking, medical and industrial markets. Operating segments aredefined as components of the Company’s business for which separate financialinformation is available that is evaluated by the Company’s chief operatingdecision maker (its Chief Executive Officer) in deciding how to allocateresources and assessing performance. The Company’s operating segments consistof the United States, Mexico, and India operations of Cherokee North Americaand Cherokee Europe and China. These operating segments have been aggregatedinto a single reporting segment based on their similar economic characteristicsand common operating

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characteristics,including comparable gross profit margins and common products, productionprocesses, customers, distribution channels and regulatory requirements.

*Recent AccountingPronouncements*

In November 2004, the FASB issued SFAS 151,*Inventory Costs*, which amends theguidance in ARB 43, Chapter 4,*Inventory Pricing*. This amendment clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial (spoilage). SFAS 151 requires that those items be recognized ascurrent-period charges, regardless of whether they meet the criteria specifiedin ARB 43 of *so abnormal*. Inaddition, SFAS 151 requires that allocation of fixed production overheads tothe costs of conversion be based on normal capacity of the productionfacilities. SFAS 151 is effective for financial statements for fiscal yearsbeginning after June 15, 2005 with early application permitted. TheCompany adopted SFAS 151 during the three-month period endedJanuary 1, 2006; as the result of the adoption, $326,000 of freightrelated costs were reclassified from inventory to expense.

In December 2004, the FASB issued SFAS 153, *Exchanges of Non-monetary Assets*—*an amendment of APB Opinion 29*. The amendment eliminates theexception to fair value accounting for non-monetary exchanges of similarproductive assets and replaces it with a broader exception for exchanges ofnon-monetary assets that do not have commercial substance. Under APB 29,accounting for an exchange of a productive asset for a similar productive assetor an equivalent interest in the same or similar productive asset is to bebased upon the recorded amount of the asset relinquished (carry-over basis withno gain or loss recognition). Such transactions will now be accounted for basedupon the fair value of the assets exchanged. SFAS 153 is effective forexchanges occurring in fiscal years beginning after June 15, 2005 and isto be applied prospectively. This statement did not have a material impact onthe Company’s consolidated financial statements and financial position.

In May 2005, the FASB issued SFAS 154, *Accounting Changes and Error Corrections*,which replaced APB Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *ReportingChanges in Interim Financial Statements*. SFAS 154 requiresretrospective application to prior periods’ financial statements of voluntarychanges in accounting principles and changes required by a new accountingstandard when the standard does not include specific transition provisions.Previous guidance required most voluntary changes in accounting principle to berecognized by including in net income of the period in which the change wasmade the cumulative effect of changing to the new accounting principle. SFAS154 carries forward existing guidance regarding the reporting of the correctionof an error and a change in accounting estimate. SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The Company adopted SFAS 154 as ofJanuary 2, 2006; this statement did not have a material effect on the Company’sconsolidated financial position or results of operations.

In June 2006, the FASB issued FASB Interpretation No.48 (FIN 48), *Accounting for Uncertainty in**Income Taxes*, *an Interpretation of SFAS No. 109*. FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109, *Accounting for Income Taxe*s, byprescribing a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. Under FIN 48, the financial statement effects of a taxposition should initially be recognized when it is more likely than not, basedon the technical merits, that the position will be sustained upon examination.A tax position that meets the more-likely-than-not recognition threshold shouldinitially and subsequently be measured as the largest amount of tax benefitthat has a greater than fifty percent likelihood of being realized upon ultimatesettlement with a taxing authority. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The cumulative effect, if any, of applyingthe provisions of FIN 48 will be reported as an adjustment to the openingbalance of retained earnings in the period adopted. We are currently evaluatingthe impact that the adoption of FIN 48 will have on our results of operations,financial position and liquidity.

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*Inventories*

Inventories arevalued at the lower of weighted average cost or market. Inventory costs includethe cost of material, labor and manufacturing overhead and consist of thefollowing, net of reserve for obsolescence (in thousands):

|                  | ** ** | **July 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|------------------|------------|----------------------------|------------|-------------------------------|------------|
| Raw material     |       | $                          | 20,940     |                          | $          | 18,855 |   |
| Work-in-process  |       | 4,558                      |       | 3,599                         |       |
| Finished goods   |       | 4,544                      |       | 4,397                         |       |
| Inventories, net |       | $                          | 30,042     |                          | $          | 26,851 |   |

 

As of July 2, 2006 and January 1, 2006, thereserve for inventory obsolescence was $3.9 million and $3.8 million,respectively, and includes management’s assessment of reserves for surplus andobsolescence for non-compliant material related to the Restriction of HazardousSubstances in Electrical and Electronic Equipment directive (more commonlyknown as “RoHS”).

The following aretwo recent European Economic Community (“EEC”) directives that are having aneffect on the entire electronics industry, including the Company:

(1)    Restriction ofHazardous Substances in Electrical and Electronic Equipment. This Europeandirective bans the use of certain elements that are commonly found incomponents used to manufacture electrical and electronic assemblies. Thisdirective became effective on July 1, 2006. The Company is activelyworking with its customers to ensure compliance. The Company is focused onconsuming all non-compliant material on-hand within a reasonable period.However, the Company may have to dispose of non-compliant materials in thefuture, which could adversely affect the financial performance of the Company.There is also a risk of fines associated with non-compliance with the RoHSdirective; however, the Company is not aware of any specific potential fines,and the Company anticipates complying with all provisions of this legislation.

(2)    Waste Electricaland Electronic Equipment, also known as WEEE. This directive requiresmanufacturers and importers to properly recycle or dispose of such equipment atthe end of its useful life. This directive became effective August 13,2005. The Company believes it has limited exposure to the WEEE directivebecause its products are usually installed into another user’s system, but thisdirective may be interpreted and enforced differently in the future. If so, theCompany may face significant risk of fines and costs associated withnon-compliance with the existing laws and regulations in the European Union.

**3.**                 Income Taxes

The Company accounts for income taxes in accordancewith SFAS 109, *Accounting for IncomeTaxes*. In accordance with SFAS 109, deferred tax assets andliabilities are recorded for the estimated future tax effects of temporarydifferences between the carrying value of assets and liabilities for financialreporting and their tax basis, and carry-forwards to the extent they arerealizable. A deferred tax provision or benefit results from the net change indeferred tax assets and liabilities during the period. A valuation allowance isrecorded if it is more likely than not that all or a portion of the recordeddeferred tax assets will not be realized. As of January 1, 2006, deferred taxassets include $36.9 million relating to a tax basis step up from the 1999recapitalization transaction and $19.9 million of net operating loss (“NOL”)carry-forwards. The Company has recorded a valuation allowance against asignificant portion of its deferred tax assets.

Provision for income taxes for the three months endedJuly 2, 2006 was $0.1 million compared to $0.1 million for the three monthsended July 3, 2005.  Provision for incometaxes for the six months ended July 2, 2006 and the comparable period of 2005,were $0.6 million, and $1.3 million, respectively. The provision for the sixmonths ended July 2, 2006 is lower due to a higher percentage of taxable incomefor 2006 being generated in tax jurisdictions with operating losscarryforwards.

Provision for income taxes for the three and sixmonths ended July 2, 2006 was calculated by estimating taxable income forcertain tax jurisdictions using actual year to date operating results asmanagement has

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determined that it can nolonger reliably estimate the taxable income (loss) for the full year;therefore, the actual year to date effective tax rate was determined torepresent the best estimate of the effective tax rate for the full fiscal year2006.

The Company currently has an income tax contingencyrelated to its India operations.  In2003, the Company paid and expensed an income tax assessment of $0.4 millionfor three tax years for which an unfavorable ruling was rendered by the Indiantax authority.  In addition, the Companyaccrued a tax contingency reserve of $0.9 million in 2003 for potentialadditional exposure on the same issue related to subsequent years for which anassessment had not been received.  In2005, the Company received a favorable ruling upon appealing this decision tothe Indian Tribunal, and during the second quarter of 2006, $18,000 wasreceived against this ruling relating to one of the three tax years.  Since the timing and the certainty of theamounts remaining from the $0.4 million favorable ruling are not probable, theCompany has determined to recognize any gain contingency as and when monies arereceived.  In addition, the $0.9 milliontax contingency reserve is evaluated quarterly and may be adjusted based oncurrent facts and circumstances.

**4.**                 Earnings PerShare

In accordance with SFAS 128, *Earnings Per Share*, basic income per shareis based upon the weighted average number of common shares outstanding. Dilutedincome per share is based upon the weighted average number of common andpotential shares of common stock for each period presented. Potential commonshares include the dilutive effect of stock options and employee stock purchaseplan shares. For the three and six months ended July 2, 2006, approximately2,241,000 and 2,272,000, respectively, of our outstanding stock options wereexcluded from the calculation of diluted earnings per share as their effectwould have been anti-dilutive. For both the three and six months ended July 3,2005, approximately 1,963,000 of our outstanding stock options and warrantswere excluded from the calculation of diluted earnings per share as theireffect would have been anti-dilutive.

The followingtable sets forth the computation of basic and diluted net income per share (inthousands, except share and per share amounts):
|                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **July 2, 2006**       | ** ** | **July 3, 2005**     | ** ** | **July 2, 2006** | ** ** | **July 3, 2005** | ** ** |
| Net income  (loss)                                       |       | $                                | 352        |                           | $          | (1,773 | ) | $ | 1,179 |   | $ | (1,148 | ) |
| Shares:                                                  |       |                             |       |                           |       |   |   |   |   |
| Weighted-average common shares outstanding—basic    |       | 19,292                           |       | 19,221                         |       | 19,276 |   | 19,214 |   |
| Effect of  dilutive securities:                          |       |                             |       |                           |       |   |   |   |   |
| Stock options and employee stock purchase plan  shares   |       | 80                               |       | —                         |       | 48 |   | — |   |
| Weighted-average  common shares outstanding—diluted |       | 19,372                           |       | 19,221                         |       | 19,324 |   | 19,214 |   |
| Net income  (loss) per share:                            |       |                             |       |                           |       |   |   |   |   |
| Basic                                                    |       | $                                | 0.02       |                           | $          | (0.09 | ) | $ | 0.06 |   | $ | (0.06 | ) |
| Diluted                                                  |       | $                                | 0.02       |                           | $          | (0.09 | ) | $ | 0.06 |   | $ | (0.06 | ) |

 

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**5.**                 DeferredFinancing Costs

Net deferredfinancing costs are comprised of the following as of July 2, 2006 and January1, 2006 (in thousands):

|                                | ** ** | **July 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|--------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| Deferred  financing costs      |       | $                          | 580        |                          | $          | 580 |   |
| Accumulated  amortization      |       | (299                       | )          | (234                          | )          |
| Deferred financing  costs, net |       | $                          | 281        |                          | $          | 346 |   |

 

The Company amortizes deferred financing costs overthe life of the related debt; these costs will be fully amortized by August 2008.

**6.**                 Long-Term Debt

Long-term debtconsists of the following at July 2, 2006 and January 1, 2006 (in thousands):

|                                              | ** ** | **July 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| 5.25% senior  notes payable to third parties |       | $                          | 24,485     |                          | $          | 24,485 |   |
| 5.25% senior  notes payable to affiliates    |       | 22,145                     |       | 22,145                        |       |
| Total long-term debt                         |       | $                          | 46,630     |                          | $          | 46,630 |   |

 

As of July 2, 2006, all of the Company’s long-termdebt is scheduled to be repaid in 2008.

The agreements governing the Credit Facility andsenior notes contain covenants that restrict the Company’s business operations,including covenants limiting the Company’s ability to make investments, enterinto mergers or acquisitions, dispose of assets, incur additional debt, grantliens, enter into transactions with affiliates, redeem or repurchase  capital stock, repay other debt and paydividends, and contains a financial ratio test based on senior leverage. Theyalso contain customary events of default, including defaults in the payment ofprincipal or interest, defaults in the compliance with the covenants containedin the agreements governing the Company’s debt, cross defaults to othermaterial debt and bankruptcy or other insolvency events.

Long-term debt includes the Company’s senior notes,which mature on November 1, 2008. Interest on the senior notes is payablein cash on May 1 and November 1 of each year. The senior notes aresecured by a second-priority lien on substantially all of the Company’sdomestic assets and by a pledge of 65% of the equity of certain of the Company’sforeign subsidiaries. As of July 2, 2006, the Company was in compliance withall of the covenants set forth in the principal agreements governing the 5.25%senior secured notes due in 2008.

In connection with the Company’s initial publicoffering, the Company amended and restated its existing senior revolving creditfacility with General Electric Capital Corporation. The amended facility (the“Credit Facility”) provides for borrowings of up to $20.0 million that aresubject to a borrowing base comprised of eligible accounts receivable andinventory, which was $14.2 million at July 2, 2006. The Credit Facility maturesin August 2008 and borrowings bear interest, at the Company’s option, at arate per annum equal to LIBOR plus 2.5% or the agent bank’s base rate plus1.0%. In addition to paying interest on outstanding principal, the Company isrequired to pay a commitment fee to the lenders under the credit facility inrespect of the average daily balance of unused loan commitments at a rate of0.5% per annum. The Credit Facility is secured by a first-priority lien,subject to permitted encumbrances, on substantially all of the Company’sdomestic assets and by a pledge of 65% of the equity of certain of theCompany’s foreign subsidiaries. The Credit Facility contains restrictivecovenants requiring the Company to, among other things, maintain certain seniorleverage ratios. As of July 2, 2006, there were no borrowings outstanding underthe Credit Facility, and the Company was in compliance with all of thecovenants under the Credit Facility.

Cherokee Europe maintains a working capital line ofcredit of approximately $3.9 million with Bank Brussel Lambert, a subsidiary ofING Belgie NV, a bank in Brussels, which is denominated in Euros, iscollateralized by a

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pledge in first andsecond rank over a specific amount of business assets, requires Cherokee Europeto maintain a certain specific minimum solvency ratio and is cancelable at anytime. As of July 2, 2006, Cherokee Europe had no outstanding borrowings underthe line of credit and was in compliance with all covenants.

**7.**                 Other Long-TermObligations

Other long-termobligations consist of the following at July 2, 2006 and January 1, 2006 (inthousands):
|                                               | ** ** | **July 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| 1999 Europe  restructuring liabilities        |       | $                          | 548        |                          | $          | 585 |   |
| 2003 Europe  restructuring liabilities        |       | 1,193                      |       | 1,213                         |       |
| Long service  award liabilities               |       | 2,308                      |       | 2,075                         |       |
| Deferred  compensation                        |       | 985                        |       | 917                           |       |
| Advances for  research & development |       | 578                        |       | —                        |       |
| Total other long-term  obligations            |       | $                          | 5,612      |                          | $          | 4,790 |   |

 

The Company has agreements with a local governmentagency in Belgium whereby the agency advances funds to Cherokee Europe forresearch and development expenses. These advances are expected to be repaid tothe agency, either as a percentage of the revenues generated by the productsdeveloped or through a minimum fixed amount on an annual basis. These advancesare interest free.

**8.**                 Cherokee EuropeRestructuring

Prior to the Company’s acquisition of Cherokee Europe,the facility implemented a restructuring plan (the “1999 EuropeRestructuring”). The 1999 Europe Restructuring liability of $2.2 millionassumed by the Company was comprised entirely of termination benefits to bepaid through 2010. The Company paid $0.1 million during the six-monthperiod ended July 2, 2006.

In June 2003, the Company received approval for arestructuring plan (the “2003 Europe Restructuring*”*) of its operations in Europe from the Workers Union andthe appropriate governmental authorities in Belgium. The 2003 EuropeRestructuring involved the elimination of 61 operational and administrativepositions at the Cherokee Europe facility in Belgium due to unfavorableeconomic conditions in that market. All of the terminations were completed in2003. Pursuant to the 2003 Europe Restructuring, the Company recorded atermination benefits charge of $4.5 million for the year endedDecember 28, 2003, to be paid through 2016. The Company paid $0.1million during the six-month period ended July 2, 2006.

A reconciliationof the 1999 Europe Restructuring and 2003 Europe Restructuring liabilities asof July 2, 2006 (in thousands):
|                                  | ** ** | **1999 Europe  Restructuring** | ** ** | **2003 Europe  Restructuring** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| Balance as of  January 1, 2006   |       | $                                   | 770        |                                | $          | 1,452 |   |
| Provision                        |       | —                              |       | —                              |       |
| Payments                         |       | (108                                | )          | (137                                | )          |
| Foreign exchange rate effect     |       | 58                                  |       | 111                                 |       |
| Balance as of  July 2, 2006 |       | 720                                 |       | 1,426                               |       |
| Less current  portion            |       | (172                                | )          | (233                                | )          |
| Due after one year               |       | $                                   | 548        |                                | $          | 1,193 |   |

 

**9.**                 CustomerConcentration

For the quarter ended July 2, 2006, one customeraccounted for 16% of net sales, and no other customer accounted for more than10% of net sales. For the quarter ended July 3, 2005, one customeraccounted for 13% of net sales, and no other customer accounted for more than10% of net sales.  For the six monthsended July 2,

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2006, one customeraccounted for 16% of net sales, and no other customer accounted for more than10% of net sales.  For the six monthsended July 3, 2005, two customers accounted for 13% and 11% of net sales,respectively.   One customer accountedfor 10.4% of our net sales for the fiscal year ended January 1, 2006. Adecision by a major customer to decrease the amount purchased from the Companyor to cease purchasing the Company’s products could have a material adverseeffect on the Company’s financial position and results of operations.

As of July 2, 2006, one customer accounted for 11%,and no other customer accounted for more than 10% of net accounts receivable.As of January 1, 2006, one customer accounted for 10.3% and no other customeraccounted for more than 10% of net accounts receivable.

**10.**          Commitments andContingencies

*Guarantees andIndemnities*

The Company has agreed to indemnify the former ownersof Cherokee Europe for product liability, environmental hazard and employmentpractice claims relating solely to post-acquisition business. The Company alsoindemnifies its directors and officers to the maximum extent permitted underthe laws of the State of Delaware, and various lessors in connection withfacility leases for certain claims arising from such facility or lease. Noclaims are currently pending against the Company for such indemnifications. Themaximum amount of potential future payments under such indemnification is notdeterminable.

The Company has not incurred significant amountsrelated to these guarantees and indemnification obligations, and no liabilityhas been recorded in the financial statements for guarantees andindemnification as of January 1, 2006 and July 2, 2006.

*Employment and Severance Agreements*

The Company has entered into employment agreementswith certain executives, which provide for annual base salaries and cashincentive payments of up to 120% of base salary subject to attainment ofcorporate goals and objectives pursuant to incentive compensation programsapproved by the Company’s board of directors. In addition, the Company hasentered into severance agreements with certain executives, which providepayments to the executive if the executive is terminated other than for causeor is terminated for good reason.

*Other Matters*

In the first quarter of 2006, we executed a mutualrelease agreement with a former business partner. The agreement released bothparties from obligations arising from past transactions. As a result of thisagreement, we made a one-time adjustment to reduce our selling and marketingexpense by $0.4 million during the three months ended April 2, 2006.

*India Matter*

In late March 2006, the Company learned thatemployees of its Indian subsidiary manufacturing operations had made certainunauthorized payments that may have been in violation of the Foreign CorruptPractices Act and local laws. The facility in India is used for the solepurpose of manufacturing products for other Company locations and, as such,does not generate revenue or issue invoices to external customers. Itmanufactures approximately 6% (by volume) of the products offered by theCompany.

The subject payments, in the aggregate, amount toapproximately $40,000 in each year during 2004 and 2005, and less than $10,000in 2006. The Company retained outside counsel who conducted an internalinvestigation into these payments. The Company has notified the Department ofJustice and the Securities and Exchange Commission of this matter, and willcooperate fully with any investigations that may be conducted by suchregulatory agencies. The Company believes that this matter will not have amaterial impact on its consolidated financial statements.

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During the quarter ended July 2, 2006, we were not aparty to any material legal proceedings. We are occasionally a party tolawsuits relating to routine matters incidental to our business. As with alllitigation, we can provide no assurance as to the outcome of any particularlawsuit, and we note that litigation inherently involves significant costs.

**11.**          Stock and DeferredCompensation Plans

*2002 Stock OptionPlan*

In July 2003, the Company adopted the CherokeeInternational 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 issuedpursuant to the grant of non-qualified stock options to the directors,officers, employees, consultants and advisors of the Company and itssubsidiaries. In connection with the adoption of the 2002 Stock Option Plan,the Company granted 1,087,327 stock options. The options typically vest over afour-year period, have a ten-year contractual life, range in exercise pricefrom $5.85 to $10.34 per share and were granted with exercise prices at orabove fair value as determined by Cherokee’s Board of Directors based on incomeand market valuation methodologies. In February 2004, the Company grantedoptions to purchase 328,320 shares of Common Stock at an exercise price of$14.50 and terminated the 2002 Stock Option Plan. As of July 2, 2006, theCompany had granted a total of 1,415,647 options to purchase shares of CommonStock under the 2002 Stock Option Plan, which included options to purchaseshares that were cancelled and subsequently re-granted.

*2004 EmployeeStock Purchase Plan*

On February 16, 2004, the Company adopted the2004 Employee Stock Purchase Plan (the ‘‘ESPP’’). The ESPP provides for anannual increase to be added on the first day of the Company’s fiscal year equalto the lesser of (i) 250,000 shares or (ii) 1% of the number ofoutstanding shares on the last day of the immediately preceding fiscal year. Asof July 2, 2006, a total of 679,780 shares of Common Stock were reserved forissuance under the plan. The ESPP, which is intended to qualify as an‘‘employee stock purchase plan’’ under Section 423 of the Internal RevenueCode of 1986, is implemented utilizing six-month offerings with purchasesoccurring at six-month intervals, with a new offering period commencing on thefirst trading day on or after May 15 and November 15 and ending onthe last trading day on or before November 14 or May 14,respectively. The Compensation Committee of the Company’s Board of Directorsoversees administration of the ESPP. Employees are eligible to participate ifthey are employed for at least 20 hours per week and more than 5 months in acalendar year by the Company, subject to certain restrictions. The ESPP permitseligible employees to purchase Common Stock through payroll deductions, whichmay not exceed 15% of an employee’s compensation. The price of Common Stockpurchased under the ESPP is 85% of the lower of the fair market value of theCommon Stock at the beginning of each six-month offering period or on theapplicable purchase date. Employees may end their participation in an offeringat any time during the offering period, and participation ends automaticallyupon termination of employment. The Compensation Committee may at any timeamend or terminate the ESPP, except that no such amendment or termination mayadversely affect shares previously granted under the ESPP. As of July 2, 2006,104,878 shares of Common Stock had been issued under the ESPP.

*2004 Omnibus StockIncentive Plan*

On February 16, 2004, the Company adopted the2004 Omnibus Stock Incentive Plan (the ‘‘2004 Plan’’). The 2004 Plan providesfor an annual increase to be added on the first day of the Company’s fiscalyear equal to the lesser of (i) 450,000 shares or (ii) 2% of thenumber of outstanding shares on the last day of the immediately preceding fiscalyear. As of July 2, 2006, a total of 264,827 shares of the Company’s CommonStock were reserved for issuance under the 2004 Plan. Any officer, director,employee, consultant or advisor of the Company is eligible to participate inthe 2004 Plan. The 2004 Plan provides for the issuance of stock-based incentiveawards, including stock options, stock appreciation rights, restricted stock,deferred stock, and performance shares. As of July 2, 2006, the Company hadgranted options to purchase 1,518,989 shares of Common Stock under the 2004Plan, which included 208,153 options issued as partial compensation tonon-employee directors. During the quarter ended July 2, 2006, 92,500 shareswere issued under the 2004 Plan, the aggregate fair value for these shares was$0.2 million, which will be amortized as stock compensation costs over 6.25years.

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*DeferredCompensation Plans*

On February 16, 2004, the Company adopted twoexecutive deferred compensation plans for the benefit of certain designatedemployees and non-employee directors of the Company. The plans allowparticipating employees and non-employee directors to make pre-tax deferrals ofup to 100% of their annual base salary and bonuses and retainer fees andmeeting fees, respectively. The plans allow the Company to make matchingcontributions and employer profit sharing credits at the sole discretion of theCompany. A participant’s interest in each matching contribution and employerprofit sharing credits, if any, vests in full no later than after 3 years. Asof July 2, 2006, the Company has recorded a liability of $1.0 million foremployee and non-employee director contributions and investment activity todate, which is recorded in other long-term liabilities, and the Company hasprovided no matching contributions for the three months and six months endedJuly 3, 2005 and July 2, 2006.

**12.**          Retirement Plans

Cherokee Europemaintains a pension plan for certain levels of staff and management thatincludes a defined benefit feature. The following represents the amountsrelated to this defined benefit plan for the three and six months ended July 2,2006 and July 3, 2005, respectively (in thousands):
|                                                                      | ** ** | **Three-Months Ended** | ** ** | **Six-Months Ended**  | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **Components of Net Periodic Benefit Cost** | ** ** | **July 2, 2006**  | ** ** | **July 3, 2005** | ** ** | **July 2, 2006** | ** ** | **July 3, 2005** | ** ** |
| Service cost                                                         |       | $                           | 48         |                       | $          | 38 |   | $ | 92 |   | $ | 78 |   |
| Interest cost                                                        |       | 57                          |       | 62                         |       | 115 |   | 127 |   |
| Expected return  on plan assets                                      |       | (30                         | )          | (35                        | )          | (61 | ) | (71 | ) |
| Net periodic benefit  cost                                           |       | $                           | 75         |                       | $          | 65 |   | $ | 146 |   | $ | 134 |   |

 

**13.**          SubsequentEvent-Transfer of Manufacturing Operations to Shanghai, China Facility fromGuadalajara, Mexico Facility

In February 2006, the Company opened a new, 120,000square foot, state-of-the-art manufacturing facility in Shanghai, China (the “ChinaFacility”) and has begun consolidating high volume, low mix manufacturing fromplants that are more costly to operate to this new facility.  In connection with this strategy, the Companydetermined in August 2006 that it intends to close its manufacturing operationin Guadalajara, Mexico (the “Guadalajara Facility”) by the first quarter of2007.  The Guadalajara Facilityencompasses 35,000 square feet in one building and has been in operation since1988, recently employing approximately 250 full-time and temporary employees inthe production of power supplies. The Company owns the building and will seek abuyer for the property.

The design and location of the new China Facilityoptimizes the Company’s and its customers’ supply chains as an increasingnumber of Cherokee’s customers and suppliers have their own manufacturingoperations in China.  It also positionsthe Company to take advantage of the overall business growth in Asia.

**Item2.   Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

**FORWARD-LOOKINGSTATEMENTS**

Certain statements contained in this Quarterly Reporton Form 10-Q, other than purely historical information, are forward-lookingstatements. These forward-looking statements are based upon our currentexpectations about future events. When used in this Quarterly Report, the words“believe,” “anticipate,” “intend,” “estimate,” “expect” and similarexpressions, or the negative of such words and expressions, are intended toidentify forward-looking statements, although not all forward-lookingstatements contain such words or expressions. These forward-looking statementsgenerally relate to our plans, objectives and expectations for future operations.However, these statements are subject to a number of risks and uncertaintiesaffecting our business. You should read this Quarterly Report completely andwith the understanding that actual future results may be materially differentfrom what we expect as a result of these risks and uncertainties and otherfactors, which include, but are not limited to: (1) changes in general economicand business conditions, domestically and internationally, (2) reductions insales to, or the loss of, any of the Company’s significant customers or in

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customer capacitygenerally, (3) the Company’s inability to realize expected cost savings byshifting production to its Shanghai facility, (4) changes in the Company’ssales mix to lower margin products, (5) increased competition in the Company’sindustry, (6) disruptions of the Company’s established supply channels, (7) theCompany’s level of debt and restrictions imposed by its debt agreements, and(8) the additional risk factors identified in the Company’s filings with theSecurities and Exchange Commission, including its annual report on Form 10-K.Except as required by law, the Company undertakes no obligation to update anyforward-looking statements, even though the Company’s situation may change inthe future.

**OVERVIEW**

**Business**

We are a designer and manufacturer of power suppliesfor original equipment manufactures (OEMs). Our advanced power supplyproducts are typically custom designed into mid- to high-end commercialapplications in the computing and storage, wireless infrastructure, enterprisenetworking, telecom, medical and industrial markets.

We operate worldwide and have facilities in OrangeCounty, California; Bombay, India; Wavre, Belgium and Shanghai, China. Werecently announced our intention to close our facility in Guadalajara,Mexico.  We were founded in 1978 inOrange County, California. As we expanded our business and customer base, weopened facilities in Bombay, India, Guadalajara, Mexico, and Shanghai, China.In June 2000, we acquired Cherokee Europe, which added a manufacturingfacility in Wavre, Belgium to our manufacturing capacity and enabled us tobetter serve the European market.

**Basis of Reporting**

*Net Sales*

We recognize revenue whenpersuasive evidence of an arrangement exists, title transfer has occurred, theprice is fixed or readily determinable, and collectibility is probable. Werecognize 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. Changesin assumptions regarding the rate of sales discounts earned by our customerscould impact our results.

We generally recognizerevenue at the time of shipment because this is the point at which revenue isearned and realizable and the earnings process is complete. For most shipments,title to shipped goods transfers at the shipping point, so the risks andrewards of ownership transfer once the product leaves our facility orthird-party hub. Revenue is only recognized when collectibility is reasonablyassured. Shipping and handling fees are included in revenue, with related costsrecorded to cost of sales.

*Cost of Sales*

The principal elements comprising cost of sales areraw materials, labor and manufacturing overhead. Raw materials account for alarge majority of our costs of sales. Raw materials include magneticsub-assemblies, sheet metal, electronic and other components, mechanical partsand electrical wires. Direct labor costs include costs of hourly employees. Manufacturingoverhead includes salaries, and the direct expense and allocation of costsattributable to manufacturing for lease costs, depreciation on property, plantand equipment, utilities, property taxes and repairs and maintenance.

*Operating Expenses*

Operating expenses include engineering costs, sellingand marketing costs and general and administrative expenses. Engineering costsprimarily include salaries and benefits of engineering personnel, safetyapproval and quality certification fees, and depreciation on equipment andconsulting and professional services. Selling and marketing expenses primarilyinclude salaries and benefits to account managers and commissions toindependent sales representatives. Administrative expenses primarily includesalaries and benefits for certain management and administrative personnel,professional fees and information system costs. Operating expenses also includethe

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direct expense andallocation of costs attributable to these departments for lease costs,depreciation on property, plant and equipment, utilities, property taxes andrepairs and maintenance.

**CriticalAccounting Policies**

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

*RevenueRecognition*

We recognize revenue from product sales at the time ofshipment and passage of title. We also offer our customers the right to returnproducts that do not function properly within a limited time after delivery. Wemonitor and track product returns and record a provision for warranty based onhistorical experience, which historically has been insignificant to ourfinancial condition and results of operations. Any significant increase inproduct failure rates could have a material adverse effect on our operatingresults for the period or periods in which those returns materialize.

*AccountsReceivable*

We perform ongoing credit evaluations of our customersand adjust credit limits based upon payment history, the customer’s currentcredit worthiness and various other factors, as determined by our review oftheir current credit information. We continuously monitor collections andpayments from our customers and maintain a provision for estimated creditlosses based upon our historical experience and any specific customercollection issues that we have identified. While credit losses havehistorically been within our expectations and the provisions established, wemight not continue to experience the same credit loss rates that we have in thepast. A significant change in the liquidity or financial position of any one ofthese customers could have a material adverse effect on the collectibility ofour accounts receivable, our liquidity and our future operating results. As ofJuly 2, 2006, one customer accounted for 11% of net accounts receivable, and noother customer accounted for more than 10%. At January 1, 2006, onecustomer accounted for 10.3% and no other customer accounted for more than 10%of net accounts receivable.

*Inventories*

We value our inventory at the lower of the actual costto purchase and/or manufacture the inventory and the current estimated marketvalue of the inventory using the weighted average cost method. We regularlyreview inventory quantities on hand and record a provision for excess andobsolete inventory based primarily on our historical usage data and estimatesof future demand. Since substantially all of our products are manufacturedaccording to firm purchase orders and customer forecasts, we evaluate thepotential of recovery from our customers when customized products approachend-of-life.  Our customers are generallyliable for inventory costs we incur for order cancellations that occur after wehave committed resources to procure or manufacture product.  We also regularly evaluate inventory that isnon-compliant with the RoHS directive to determine if additional reserves areneeded to cover for potential obsolescence. We have not established a separate reserve for non-RoHS compliantinventory above what our normal calculations would require.

Our industry is characterized by rapid technologicalchange, frequent new product development, and rapid product obsolescence thatcould result in an increase in the amount of obsolete inventory quantities onhand. As demonstrated during the past five years, demand for our products canfluctuate significantly. A significant increase in the demand for our productscould result in a short-term increase in the cost of inventory purchases

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while a significantdecrease in demand could result in an increase in the amount of excessinventory quantities on hand. In addition, our estimates of future productdemand may prove to be inaccurate, in which case we may have understated oroverstated the provision required for excess and obsolete inventory. In thefuture, if our inventory were determined to be overvalued, we would be requiredto recognize additional expense in our cost of sales at the time of suchdetermination. Likewise, if our inventory is determined to be undervalued, wemay have over reported our costs of sales in previous periods and would berequired to recognize additional operating income at the time such inventory issold. Therefore, although we make every reasonable effort to ensure theaccuracy of our estimates of future product demand, any significantunanticipated changes in demand or technological developments could have amaterial effect on the value of our inventory and our reported operatingresults.

*Deferred Taxes*

We recognize deferred tax assets and liabilities basedon the differences between the financial statement carrying values and the taxbases of assets and liabilities. We regularly review our deferred tax assetsfor recoverability and establish a valuation allowance based on historicaltaxable income, projected future taxable income, and the expected timing of thereversals of existing temporary differences. If our future taxable income issignificantly higher than expected and/or we are able to utilize our taxcredits, we may be required to reverse all or a significant part of ourvaluation allowance against such deferred tax assets which could substantiallyreduce our effective tax rate for such period. Therefore, any significantchanges in statutory tax rates or the amount of our valuation allowance couldhave a material effect on the value of our deferred tax assets and liabilities,and our reported financial results.

The preparation of consolidated financial statementsin conformity with generally accepted accounting principles requires us to makeestimates and assumptions that affect the reported amount of tax-related assetsand liabilities and income tax provisions.  The Company’s effective tax rate may be subject to fluctuations duringthe fiscal year as new information is obtained which may affect the assumptionsmanagement uses to estimate the annual effective tax rate including mix of pre-taxearnings in the various tax jurisdictions in which it operates.  In 2006, the Company has determined that theactual effective tax rate for the year to date period is the best estimate ofthe annual effective tax rate to provide for income taxes in an interim becausemanagement does not believe that taxable income can be reliably estimated forthe quarterly and annual periods.

The Company currently has an income tax contingencyrelated to its India operations.  In2003, the Company paid and expensed an income tax assessment of $0.4 millionfor three tax years for which an unfavorable ruling was rendered by the Indiantax authority.  In addition, the Companyaccrued a tax contingency reserve of $0.9 million in 2003 for potentialadditional exposure on the same issue related to subsequent years for which anassessment had not been received.  In2005, the Company received a favorable ruling upon appealing this decision tothe Indian Tribunal, and during the second quarter of 2006, $18,000 wasreceived against this ruling relating to one of the three tax years.  Since the timing and the certainty of theamounts remaining from the $0.4 million favorable ruling are not probable, theCompany has determined to recognize any gain contingency as and when monies arereceived.  In addition, the $0.9 milliontax contingency reserve is evaluated quarterly and may be adjusted based oncurrent facts and circumstances.

*Goodwill and Long Lived Assets*

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

We also review the recoverability of the carryingvalue of long-lived assets whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofthese assets is determined based upon the forecasted undiscounted future netcash flows from the operations to which the assets relate, utilizing our bestestimates, appropriate assumptions and projections at the time. These projectedfuture cash flows may vary significantly over time as a result of increasedcompetition, changes in technology, fluctuations in demand, consolidation ofour customers and reductions in average selling prices. If the carrying

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value is determined notto be recoverable from future operating cash flows, the asset would be deemedimpaired and an impairment loss would be recognized to the extent the carryingvalue exceeded the estimated fair market value of the asset.

*Stock Compensation Expense*

Effective January 2, 2006, we adopted SFAS 123R usingthe “modified prospective” transition method. Under the transition method,compensation cost recognized in the six months ended July 2, 2006 includes (a)compensation cost for all share-based payments granted prior to, but not yetvested as of, January 2, 2006 based on the grant-fair value estimated inaccordance with the original provisions of SFAS 123 and (b) compensation costfor all share-based payments granted subsequent to January 2, 2006, based ongrant-date fair value estimated in accordance with the provisions of SFAS123R.  Results from prior periods havenot been restated.  As a result ofadopting SFAS 123R, our stock compensation costs for the six months ended July2, 2006 were $0.3 million.

The Company records compensation expense for employeestock options based on the estimated fair value of the options on the date ofgrant using the Black-Scholes option pricing formula. The Company useshistorical data, among other factors, to estimate the expected price volatilityand the expected forfeiture rate. For options granted prior to January 2, 2006,the Company used the expected option life of 5 years.  Options granted following the Company’sadoption of SFAS 123R, the expected life was increased to 6.25 years using the “simplifiedmethod” under SAB 107 (an expected term based on the mid point between thevesting date and the end of the contractual term).  The use of the simplified method is permittedthrough December 31, 2007.  We willconvert to Company-specific experience on or before January 1, 2008. Theoptions have a maximum contractual term of 10 years and vest pro-rata over fouryears.   The risk-free rate is based onthe U.S. Treasury yield curve in effect at the time of grant for the estimatedlife of the option.

**RESULTS OFOPERATIONS**

**THREE MONTHS ENDEDJULY 2, 2006 COMPARED TO THREE MONTHS ENDED JULY 3, 2005**

**NET SALES**

Net sales increased by approximately 23.6%, or $7.3million, to $38.3 million for the three months ended July 2, 2006 from $31.0million for the three months ended July 3, 2005.

The increase in net sales for the three months endedJuly 2, 2006 is due primarily to a general improvement in end market demand,reflected in the 20% increase in our backlog as of April 2, 2006, compared toApril 4, 2005, and new design wins during the three months ended July 2, 2006.

Our business remains largely dependent upon thelimited number of customers within the computing and storage, wirelessinfrastructure, enterprise networking, medical and industrial markets, and wecannot guarantee that we will continue to be successful in attracting newcustomers or retaining or increasing business with our existing customers. As aresult, our revenues could be significantly reduced if a large customer reducedits demand for our products.

A number of factors have previously caused delays andmay cause future delays in new computing and storage, wireless infrastructure,enterprise networking, medical and industrial infrastructures and upgradedeployment schedules throughout the world, including deployments in the UnitedStates, Mexico, Europe, and Asia. In addition, a number of factors may causeoriginal equipment manufacturers to alter their outsourcing strategy concerningcertain products, which could cause such original equipment manufacturers toreduce or eliminate their demand for external supplies of such products orshift their demand to alternative suppliers or internal suppliers. Such factorsinclude lower perceived internal manufacturing costs and competitive reasons toremain vertically integrated. Due to the possible uncertainties associated withinfrastructure deployments and original equipment manufacturer demand, we haveexperienced and expect to continue to experience significant fluctuations indemand from our original equipment manufacturer and customers. Suchfluctuations have previously caused and may in the future cause significantreductions in our revenues and/or operating results,

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which has adverselyimpacted and may continue to adversely impact our business, financial conditionand results of operations.

**GROSS PROFIT**

Gross profit increased by approximately 28.9%, or $1.8million, to $8.1 million for the three months ended July 2, 2006 from $6.3million for the three months ended July 3, 2005. Gross margin for thethree months ended July 2, 2006 increased to 21.2% from 20.4% in the prioryear period. The increase in gross profit was due primarily to the increase incompany-wide revenues, and better utilization of direct labor.

**OPERATING EXPENSES**

Operating expenses for the three months ended July 2,2006 decreased by approximately 3.5%, or $0.2 million, to $7.1 million from$7.3 million for the three months ended July 3, 2005. As a percentage ofnet sales, operating expenses decreased to 18.5% from 23.7% in the prior yearperiod.

During the three months ended July 2, 2006, theCompany incurred $0.4 million of legal and professional fees related to theinvestigation of certain unauthorized payments by employees of the Company’sIndian subsidiaries.  The Company alsoincurred $0.2 million of stock-based compensation expense during the threemonths ended July 2, 2006, and $0.3 million decrease in other various operatingexpenses.

During the second quarter of 2005, we incurredprofessional fees and costs related to the readiness efforts for compliancewith Section 404 of the Sarbanes-Oxley Act.  During the three months ended July 3, 2005,we incurred $0.5 million of related professional fees and costs, compared to noexpenses during the three months ended July 2, 2006.  On June 30, 2006, based on unaffiliatedmarket capitalization guidelines, the Company’s compliance deadline forcomplying with Section 404 of the Sarbanes-Oxley Act was deferred until fiscalyear-end 2007.

**OPERATING INCOME**

As a result of the factors discussed above, operatingincome increased by $2.0 million to $1.0 million for the three months endedJuly 2, 2006, from an operating loss of $1.0 million for the three months endedJuly 3, 2005. Operating margin increased to a positive 2.7% from a negative3.3% in the prior year period.

**INTEREST EXPENSE**

Interest expense for the three months ended July 2,2006 was $0.7 million compared to $0.7 million for the three months endedJuly 3, 2005. The interest expense is mainly related to our 5.25% seniornotes and commitment fees on our senior revolving credit line.

**INCOME TAXES**

Provision for income taxes for three months ended July2, 2006 was $0.1 million compared to $0.1 million for the three months endedJuly 3, 2005.

Provision for income taxes for the three and sixmonths ended July 2, 2006 was calculated by estimating taxable income forcertain tax jurisdictions using actual year to date operating results asmanagement has determined that it can no longer reliably estimate the taxableincome (loss) for the full year; therefore, the actual year to date effectivetax rate was determined to represent the best estimate of the effective taxrate for the full fiscal year 2006.

Provision for income taxes for the three and sixmonths ended June 30, 2005 was calculated by estimating full-year 2005 taxableincome separately for each tax jurisdiction and allocating the related incometax provision to the quarter during which the income was generated.  TheCompany recorded an income tax provision despite reporting a pre-tax loss,because a portion of our taxable income for 2005 was generated in taxjurisdictions without operating loss carryforwards, and a portion generatedlosses in certain other tax jurisdictions, with no available tax benefitrelated to these losses included in the provision for income taxes.

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**NET INCOME**

As a result of the factors discussed above, werecorded net income of $0.4 million for the three months ended July 2, 2006,compared to a net loss of $1.8 million for the three months ended July 3, 2005.

**SIX MONTHS ENDEDJULY 2, 2006 COMPARED TO SIX MONTHS ENDED JULY 3, 2005**

**NET SALES**

Net sales increased by approximately 18.1%, or $11.4million, to $74.4 million for the six months ended July 2, 2006 from $63.0million for the six months ended July 3, 2005.

The increase in net sales for the six months endedJuly 2, 2006 compared to the six months ended July 3, 2005 was due to an 37.0%increase in datacom and an 11.0% increase in telecom end markets, withindustrial and medical markets remaining flat.

**GROSS PROFIT**

Gross profit increased by approximately 19.3%, or $2.7million, to $16.7 million for the six months ended July 2, 2006 from $14.0million for the six months ended July 3, 2005. Gross margin for the six monthsended July 2, 2006 increased to 22.4% from 22.1% in the prior year period.

The increase in gross profit was due to the increasein company-wide revenues, and better utilization of direct labor.

**OPERATING EXPENSES**

Operating expenses for the six months ended July 2,2006, increased by approximately 10.8%, or $1.3 million, to $13.7 million from$12.4 million for the six months ended July 3, 2005.  As a percentage ofsales, operating expenses decreased to 18.4% from 19.7% in the prior yearperiod.

The increase in operating expenses is primarily due toa $2.5 million gain from insurance proceeds recorded in the prior year perioddue to the fire damage experienced in the Company’s Belgium facility inFebruary 2004. This gain in 2005 was partially offset by $0.7 million ofexpenses for professional fees and other costs in 2005 related to the readinessefforts for compliance with Section 404 of the Sarbanes-Oxley Act.  During the six months ended July 2, 2006, theCompany incurred $0.4 million of legal and professional fees related to theIndia investigation. The Company also incurred $0.3 million of stock-basedcompensation expense during the six months ended July 2, 2006, due to theadoption of SFAS 123R.

During the six months ended July 3, 2005, the Companyincurred $0.7 million in professional fees and costs related to the readinessefforts for compliance with Section 404 of the Sarbanes-Oxley Act,compared to no expenses during the six months ended July 2, 2006.  On June 30, 2006, based on unaffiliatedmarket capitalization guidelines, the Company’s compliance deadline forcomplying with Section 404 of the Sarbanes-Oxley Act was deferred until fiscalyear-end 2007.

**OPERATING INCOME**

As a result of the factors discussed above, operatingincome increased to $2.9 million for the six months ended July 2, 2006 comparedto $1.6 million for the six months ended July 2, 2005.  Operating marginincreased to 3.9% from 2.5% in the prior year period.

**INTEREST EXPENSE**

Interest expense for the six months ended July 2, 2006was $1.4 million compared to $1.4 million for the six months ended July 3,2005.  The interest expense is mainly related to our 5.25% senior notesand commitment fees on our senior revolving credit line.

**INCOME TAXES**

Provision for income taxes for the six months endedJuly 2, 2006 and the comparable period of 2005, were $0.6 million, and $1.3million, respectively. The provision for the six months ended July 2, 2006 islower due to a

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higher percentage oftaxable income for 2006 being generated in tax jurisdictions with operatingloss carryforwards.

Provision for income taxes for the three and sixmonths ended July 2, 2006 was calculated by estimating taxable income forcertain tax jurisdictions using actual year to date operating results asmanagement has determined that it can no longer reliably estimate the taxableincome (loss) for the full year; therefore, the actual year to date effectivetax rate was determined to represent the best estimate of the effective taxrate for the ful fiscal year 2006.

Provision for income taxes for the three and six monthsended June 30, 2005 was calculated by estimating full-year 2005 taxable incomeseparately for each tax jurisdiction and allocating the related income taxprovision to the quarter during which the income was generated.  TheCompany recorded an income tax provision despite reporting a pre-tax loss,because a portion of taxable income for 2005 was generated in tax jurisdictionswithout operating loss carryforwards, and a portion generated losses in certainother tax jurisdictions, with no available tax benefit related to these lossesincluded in the provision for income taxes.

**NET INCOME (LOSS)**

 As a result of the factors discussed above, werecorded net income of $1.2 million for the six months ended July 2, 2006,compared to a net loss of $1.1 million for the six months ended July 3, 2005.

**LIQUIDITY ANDCAPITAL RESOURCES**

**CASH FLOWS**

**SIX MONTHS ENDEDJULY 2, 2006 COMPARED TO SIX MONTHS ENDED JULY 3, 2005**

Net cash provided by operating activities for the sixmonths ended July 2, 2006, was $3.0 million, compared to $0.1 million for thesix months ended July 3, 2005.  Net cashprovided by operating activities for the six months ended July 2, 2006reflected the positive effect of $1.2 million in net income due to higher revenues,$1.6 million of depreciation and amortization, $0.3 million of stock-basedcompensation related to SFAS 123R, $0.7 million decrease in accounts receivabledue to higher collections, an $2.0 million increase in accounts payable due tohigher costs during the period as a result of higher revenues, $1.0 millionincrease in accrued compensation and benefits mainly due to the increase inbonus accrual, and an increase of $0.5 million in long-term obligations.  These amounts were partially offset by a$2.6 million increase in inventories due to a large past due and higherbacklog, $1.0 million increase in prepaid expenses and other current assets dueto the increase in value added tax (“VAT”) receivables in China and Europe,resulting from increased purchases to support higher revenues, a $0.7 milliondecrease in accrued liabilities and restructuring costs. Cash provided byoperating activities for the six months ended July 3, 2005 was $0.1 million,which reflected the positive effect of a decrease in accounts receivable of$1.9 million, due to lower revenue levels during the second quarter of 2005 anincrease in accrued liabilities and accrued restructuring costs of $1.4million, due primarily to a short-term advance of $0.9 million received to fundconstruction costs of the Company’s new facility in China.  These itemswere mostly offset by a reduction in accounts payable of $2.2 million, due tolower revenue levels during the second quarter of 2005, and an increase ininventories of $1.0 million, due primarily to an increase in consignment hubinventories partially offset by a decrease in raw materials.

Net cash used in investing activities for the sixmonths ended July 2, 2006 was $1.1 million related to capital expenditurepurchases. Net cash provided by investing activities for the six months endedJuly 3, 2005 was $0.5 million, which reflected net sales of short-terminvestments of $3.8 million, mostly offset by capital expenditures of $3.4million related to manufacturing equipment, construction-in-progress in China,and leasehold improvements.

Net cash provided by financing activities for the sixmonths ended July 2, 2006 and the six months ended July 3, 2005 was $0.1million, and $0.1 million, respectively. Both amounts were related to employeestock purchase plan proceeds.

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**LIQUIDITY**

As of July 2, 2006, we had cash and cash equivalentsof $12.9 million, working capital of $44.1 million and no borrowings underthe Credit Facility. Historically, we have financed our operations with cashfrom operations supplemented by borrowings from credit facilities and debt andequity issuances. Our current and future liquidity needs primarily arise fromworking capital requirements and capital expenditures. Our historical capitalexpenditures have primarily resulted from investments in equipment to increase manufacturingcapacity and to improve manufacturing efficiencies. For 2006, we expect capitalexpenditures to be approximately $3.0 million, which will relate primarily toour investments in manufacturing equipment at our facilities. In 2005, we spent$8.1 million in capital expenditures of which $5.5 million was invested in thedevelopment of our new China facility.

As of July 2, 2006, our borrowings consistedof approximately $46.6 million of senior notes bearing interest at 5.25%annually, and no borrowings under the Credit Facility. We are required to makesemi-annual interest payments to holders of the senior notes.

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

We have purchase commitments primarily with vendorsand suppliers for the purchase of inventory and for other goods, services, andequipment as part of the normal course of business. These commitments aregenerally evidenced by purchase orders that may or may not include cancellationprovisions. Based on current expectations, we do not believe that anycancellation penalties we incur under these obligations would have a materialadverse effect on our financial condition or results of operations.

The maturities ofour long-term debt and future payments relating to our operating leases andother obligations as of July 2, 2006 are as follows (in thousands):
| **Contractual Obligations**       | ** ** | **July 3, 2006 to  December 31, 2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Long-term debt                         |       | $                                                               | —     |     | $          | —   |       | $        | 46,630     |     | $          | —         |       | $         | —     |   | $ | — |   | $ | 46,630 |   |
| Operating leases                       |       | 786                                                             |       | 1,583    |       | 1,579    |       | 526      |       | 2        |       | 114            |       | 4,590     |       |
| Purchase order  commitments            |       | 16,810                                                          |       | —   |       | —   |       | —   |       | —   |       | —         |       | 16,810    |       |
| 1999 Europe  restructuring             |       | 89                                                              |       | 166      |       | 127      |       | 91       |       | 248      |       | —         |       | 721       |       |
| 2003 Europe  restructuring             |       | 117                                                             |       | 233      |       | 209      |       | 203      |       | 186      |       | 478            |       | 1,426     |       |
| Long service  award                    |       | —                                                          |       | 62       |       | 130      |       | 258      |       | 508      |       | 1,380          |       | 2,338     |       |
| Deferred  compensation                 |       | —                                                          |       | —   |       | —   |       | —   |       | —   |       | 985            |       | 985       |       |
| Advances for  research and development |       | 117                                                             |       | 91       |       | 56       |       | 53       |       | 53       |       | 319            |       | 689       |       |
| Total                                  |       | $                                                               | 17,919     |     | $          | 2,135    |       | $        | 48,731     |     | $          | 1,131          |       | $         | 997        |   | $ | 3,276 |   | $ | 74,189 |   |

 

Long-term debt includes our senior notes, which matureon November 1, 2008. Interest on the senior notes is payable in cash onMay 1 and November 1 of each year. The senior notes are secured by asecond-priority lien on substantially all of our domestic assets and by apledge of 65% of the equity of certain of our foreign subsidiaries.

In connection with our initial public offering inFebruary of 2004, we amended our existing senior revolving credit facilitywith General Electric Capital Corporation. The Credit Facility provides forborrowings of up to $20.0 million, subject to a borrowing base comprised ofeligible accounts receivable and inventory, which was $14.2 million at July 2,2006. We plan to use funds available under this credit facility to financeworking capital and other cash requirements as needed. The credit facilitymatures in August 2008 and bears interest, at our option, at a rate perannum equal to LIBOR plus 2.5% or the agent bank’s base rate plus 1.0%. Inaddition to paying interest on outstanding principal, we are required to pay acommitment fee to the lenders under the credit facility in respect of theaverage daily balance of unused loan commitments at a rate of 0.5% per annum.The Credit Facility is our senior obligation and ranks equal in right ofpayment with our existing and future permitted

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senior debt (includingour senior notes), and senior in right of payment to our future permittedsubordinated debt. The Credit Facility is secured by a first-priority lien,subject to permitted encumbrances, on substantially all of our domestic assetsand by a pledge of 65% of the equity of certain of our foreign subsidiaries.

The agreements governing the Credit Facility and oursenior notes contain covenants that restrict our business operations, includingcovenants limiting our ability to make investments, enter into mergers oracquisitions, dispose of assets, incur additional debt, grant liens, enter intotransactions with affiliates, redeem or repurchase our capital stock, repayother debt and pay dividends, and contains a financial ratio test based onsenior leverage. They also contain customary events of default, includingdefaults in the payment of principal or interest, defaults in the compliancewith the covenants contained in the agreements governing our debt, crossdefaults to other material debt and bankruptcy or other insolvency events.

As of July 2, 2006, we were in compliance withall covenants set forth in the principal agreements governing our debt. Basedon our present expectations, we believe that our existing cash and cashequivalents, working capital and available borrowing capacity at July 2, 2006will be sufficient to meet our anticipated cash requirements for at least thenext twelve months, including operating requirements, contractual obligations,planned capital expenditures and debt service.

**RECENT ACCOUNTINGPRONOUNCEMENTS**

For a discussion of the impact of recently issuedaccounting pronouncements, see “Item 1: Financial Statements” under “Note 2 of the Notes to CondensedConsolidated Financial Statements” entitled “Recent Accounting Pronouncements.”

**Item 3.    Quantitativeand Qualitative Disclosures About Market Risk**

Market risk relating to our operations resultsprimarily from changes in foreign currency exchange rates and short-terminterest rates. We did not have any derivative financial instruments atJuly 2, 2006.

We had no variable rate debt outstanding atJuly 2, 2006. However, any debt we incur under the Credit Facility andCherokee Europe line of credit with Bank Brussel Lambert, a subsidiary of INGBelgie NV , will bear interest at a variable rate. We cannot predict marketfluctuations in interest rates and their impact on any variable rate debt wemay incur in the future, nor can there be any assurance that fixed ratelong-term debt will be available to us at favorable rates, if at all.

The functional currency for our European operations isthe Euro. We are, therefore, subject to a certain degree of market riskassociated with changes in foreign currency exchange rates. This risk ismitigated by the fact that our revenues and expenses are generally bothtransacted in Euros, thereby reducing the risk of foreign currency fluctuationon our European operations. Historically, we have not actively engaged inexchange rate-hedging activities.

**Item 4.    Controlsand Procedures**

*DisclosureControls and Procedures*

Our management, with the participation of ourPresident and Chief Executive Officer, and our Executive Vice President, ChiefFinancial Officer and Secretary, has evaluated the effectiveness of ourdisclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-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. Based onsuch evaluation, our President and Chief Executive Officer, and our ExecutiveVice President, Chief Financial Officer and Secretary have concluded that, asof the end of such period, our disclosure controls and procedures were effective.

*Changes inInternal Control Over Financial Reporting*

In late March 2006, the Company learned thatemployees of its Indian subsidiary manufacturing operations had made certainunauthorized payments that may have been in violation of the Foreign Corrupt PracticesAct

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and local laws. Thefacility in India is used for the sole purpose of manufacturing products forother Company locations and, as such, does not generate revenue or issueinvoices to external customers. It manufactures approximately 6% (by volume) ofthe products offered by the Company.

The subject payments, in the aggregate, amount toapproximately $40,000 in 2004 and 2005, and less than $10,000 in 2006. TheCompany retained outside counsel who conducted an internal investigation intothese payments. The Company has notified the Department of Justice and theSecurities and Exchange Commission of this matter, and will cooperate fullywith any investigations that may be conducted by such regulatory agencies. TheCompany believes that this matter will not have a material impact on itsconsolidated financial statements.  TheCompany has directed that no such payments be made without prior approval ofU.S. management and has enhanced its existing policies and procedures to ensurecompliance with applicable laws.

*Material Weakness in InternalControl over Financial Reporting*

A material weakness is a control deficiency or acombination of control deficiencies that results in more than a remotelikelihood that a material misstatement of the annual or interim consolidatedfinancial statements will not be prevented or detected.  As of July 2, 2006, the Company identifiedthe following material weakness in its internal controls:

*Insufficient controls over thepreparation of the income tax provision*

The Company did not maintain effective controls overthe determination and reporting of the provision for income taxes during thequarter ended July 2, 2006. Specifically, the Company did not maintain effective controls to reviewand monitor the accuracy of significant estimates that impacted the componentsof the income tax provision calculations. This control deficiency resulted in amaterial adjustment during the preparation of the unaudited consolidatedfinancial statements as of and for the three months ended July 2, 2006.Additionally, this control deficiency could result in a misstatement of theincome tax provision or related deferred income tax balances that would resultin a material misstatement to the annual or interim consolidated financialstatements that would not be prevented or detected.  Accordingly, management has determined thatthis control deficiency constitutes a material weakness.

*Remediation of Material Weakness*

In order to remediate the material weakness reportedabove as of July 2, 2006, the Company has retained a third-party consultantwith significant tax and financial reporting experience to provide assistancein complying with United States Generally Accepted Accounting Principles (“GAAP”)and Securities and Exchange Commission reporting requirements. This taxprofessional has revised the quarterly closing procedures to ensure improvedflow of information obtained from foreign jurisdictions.  In addition, the Company has refined itsmethodology for calculating the quarterly provision to more accurately reflectand minimize its reliance on future estimated taxable income byjurisdiction.  The Company beganimprovement efforts subsequent to the quarter ended July 2, 2006 and prior tothe filing of this Form 10-Q.

Except as noted above,there have not been any changes in our internal control over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) during our July 2, 2006 quarter-end that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

**PART II   OTHER INFORMATION**

**Item1.**   LegalProceedings

In late March 2006, the Company learned thatemployees of its Indian subsidiary manufacturing operations had made certainunauthorized payments that may have been in violation of the Foreign CorruptPractices Act and local laws. The facility in India is used for the solepurpose of manufacturing products for other Company

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locations and, as such,does not generate revenue or issue invoices to external customers. Itmanufactures approximately 6% (by volume) of the products offered by theCompany.

The subject payments, in the aggregate, amount toapproximately $40,000 in 2004 and 2005, and less than $10,000 in 2006. TheCompany retained outside counsel who conducted an internal investigation intothese payments. The Company has notified the Department of Justice and theSecurities and Exchange Commission of this matter, and will cooperate fullywith any investigations that may be conducted by such regulatory agencies. TheCompany believes that this matter will not have a material impact on itsconsolidated financial statements.

During the quarter ended July 2, 2006, we were not aparty to any material legal proceedings. We are occasionally a party tolawsuits relating to routine matters incidental to our business. As with alllitigation, we can provide no assurance as to the outcome of any particularlawsuit, and we note that litigation inherently involves significant costs.

**Item 1A.****   Risk Factors**

There have been no material changes to the Company’srisk factors from those disclosed in the Company’s 2005 Annual Report onForm 10-K.

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**Item 6.   Exhibits**

**EXHIBIT INDEX**

Exhibits have heretofore been filed with the SEC andare incorporated herein by reference. Management contracts or compensatoryplans 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.(4)                                                                                                                                                                                                                                                                                                               |
| 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            |       | Cherokee  International Corporation 2004 Omnibus Stock Incentive Plan.(3)                                                                                                                                                                                                                                                                                                                      |
| *10.2            |       | Form of  2004 Stock Option Agreement.(3)                                                                                                                                                                                                                                                                                                                                                  |
| *10.3            |       | Form of  Officer and Director Indemnification Agreement.(4)                                                                                                                                                                                                                                                                                                                               |
| *10.4            |       | Executive  Deferred Compensation Plan (and related schedule).(3)                                                                                                                                                                                                                                                                                                                               |
| 10.5             |       | 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)                                                                                                                         |
| 10.6             |       | Amended and  Restated Revolving Note, dated as of February 25, 2004, issued by  Cherokee International Corporation.(5)                                                                                                                                                                                                                                                                    |
| 10.7             |       | Amended and  Restated Security Agreement, dated as of February 25, 2004, by and  between Cherokee International Corporation and the Agent.(5)                                                                                                                                                                                                                                             |
| 10.8             |       | Registration  Rights Agreement, dated as of February 25, 2004, by and among Cherokee  International Corporation and the Securityholders party thereto.(6)                                                                                                                                                                                                                                 |
| 10.9             |       | 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)                                                                                                                                                                                                          |
| 10.10            |       | 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)                                                                                                                                                                                                |
| 10.11            |       | 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)                                                                                                                                                                                                            |
| 10.12            |       | 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)                                                                                                                                                                                                                   |
| *10.13           |       | Cherokee  International Corporation 2002 Stock Option Plan.(2)                                                                                                                                                                                                                                                                                                                                 |
| *10.14           |       | Form of  2002 Stock Option Agreement.(2)                                                                                                                                                                                                                                                                                                                                                  |
| *10.15           |       | Severance  Agreement, dated as of March 31, 2005, between Cherokee International  Corporation and Jeffrey M. Frank.(7)                                                                                                                                                                                                                                                                    |
| 10.16            |       | 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) |
| *10.17           |       | 2005 Cash  Incentive Compensation program for executive officers and other employees  dated as of March 14, 2005.(8)                                                                                                                                                                                                                                                                      |
| *10.18           |       | Severance Agreement,  dated as of June 16, 2005, between Cherokee International Corporation  and Mukesh Patel.(9)                                                                                                                                                                                                                                                                         |
|                  |            |                                                                                                                                                                                                                                                                                                                                                                                                |  |

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| Exhibit No. | ** ** | **Description**                                                                                                                                               |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.19           |       | Letter  Agreement, dated as of October 14, 2005, between Cherokee International  Corporation and Linster W. Fox.(10)                                     |
| *10.20           |       | Severance  Agreement, dated as of October 14, 2005, between Cherokee International  Corporation and Linster W. Fox.(10)                                  |
| *10.21           |       | 2006 Cash  Incentive Compensation program for executive officers and other employees  dated as of January 06, 2006.(11)                                  |
| 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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(1)    Incorporated byreference from the Registration Statement on Form S-8, filed by theRegistrant on March 16, 2004.

(2)    Incorporated byreference from the Registration Statement on Form S-1 (FileNo. 333-110723), filed by the Registrant on November 25, 2003.

(3)    Incorporated byreference from Amendment No. 2 to the Registration Statement onForm S-1 (File No. 333-110723), filed by theRegistrant on February 4, 2004.

(4)    Incorporated byreference from Amendment No. 4 to the Registration Statement onForm S-1 (File No. 333-110723), filed by theRegistrant on February 17, 2004.

(5)    Incorporated byreference from the Quarterly Report on Form 10-Q, filed by theRegistrant on May 12, 2004.

(6)    Incorporated byreference from the Quarterly Report on Form 10-Q, filed by theRegistrant on August 9, 2004.

(7)    Previously filedas an exhibit to our Form 10-K on April 1, 2005.

(8)    Previously filedas an exhibit to our Form 8-K on March 21, 2005.

(9)    Previously filedas an exhibit to our Form 8-K on June 16, 2005.

(10)  Previously filed asan exhibit to our Form 8-K on October 31, 2005.

(11)  Previously filed asan exhibit to our Form 8-K on February 08, 2006.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|                             |   | CHEROKEE INTERNATIONAL CORPORATION |
|-----------------------------|--------|------------------------------------|
|                        |   |                               |
| Date:  August 16, 2006 |   | By:                                | /s/ JEFFREY M. FRANK |
|                        |   |                               | Jeffrey M. Frank |
|                        |   |                               | President, Chief Executive Officer, and Director |
|                        |   |                               |   |
| Date:  August 16, 2006 |   | By:                                | /s/ LINSTER W. FOX |
|                        |   |                               | Linster W. Fox |
|                        |   |                               | Executive Vice President, Chief Financial Officer,  and Secretary |

 

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