MANAGEMENT'SThe Company is currently considering alternatives to address these issues, which may include (i) an amendment or restructuring of its credit agreement to provide additional liquidity and room under certain financial covenants, (ii) a refinancing of its credit agreement, (iii) the infusion of additional equity by its unitholders, or (iv) some combination of the above.  Based upon the Company’s current business plans and prospects, management expects that its restructuring alternatives, the $10.5 million guaranty by certain unitholders and funding from its unitholders, if necessary, will enable the Company to meet its obligations and comply with its debt covenants through December 31, 2002.

Management cannot provide any assurances that the Company will be successful in obtaining any desired results on satisfactory terms or as to what effect any of the foregoing, if obtained, may have on its future business operations.  In the event of a covenant or payment default under the credit agreement or a payment default under the indenture governing the Company's senior subordinated notes, the lenders under the credit agreement would become entitled to certain rights, including the right to accelerate the debt and to require the Company's unitholders, or their equity members, to contribute $10.5 million to repay senior debt principal under the terms of the guaranty they provided.  The guarantors would be subrogated to rights of the lenders under the credit agreement, on the basis senior to the senior subordinated notes.  In the event of a payment default under the indenture or the credit agreement or in the event of an acceleration of amounts due under the credit agreement, the holders of the senior subordinated notes could also accelerate the maturity of the outstanding senior subordinated notes.

9.       Unit Option Plan

Effective March 15, 2002, the Company has made an offer to all option holders to cancel all outstanding options to purchase Class B Units with an exercise price equal to or greater than $4.00 per unit in reliance on the Company’s intent to grant new options of an equal number at the fair market value after six months and a day following cancellation.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

Cherokee is a leading designer and manufacturer of a broad range of switch mode power supplies for original equipment manufacturers (OEM's)(OEM’s) primarily in the telecommunications, networking and high-end workstation industries. The Company produces its products and related components in sophisticated manufacturing facilities located in Tustin and Irvine, California; Wavre, Belgium; Guadalajara, Mexico; and Bombay, India.

The principal elements comprising cost of sales are raw materials, labor and manufacturing overhead. Raw materials account for a majority of cost of sales. Raw materials include magnetic subassemblies, sheet metal, electronic and other components, mechanical parts and electrical wires. Labor costs include employee costs of salaried and hourly employees. Manufacturing overhead includes lease costs, depreciation on property, plant and equipment, utilities, property taxes and repairs and maintenance.

Operating expenses include engineering costs, selling and marketing costs and administrative expenses. Engineering costs primarily include salaries and benefits of engineering personnel, safety approval and quality certification fees, depreciation on equipment and subcontract costs for third party contracting services. Selling and marketing expenses primarily include salaries and benefits to account managers and commissions to independent sales representatives. Administrative expenses primarily include salaries and benefits for certain management and administrative personnel, professional fees and information system costs.

 On June 15, 2000, the Company acquired Industrial

During 2001 and Telecommunication Systems and related entities ("ITS") for approximately $55 million, including assumption of debt. The acquisition was accounted for using the purchase method of accounting.

             During the first halfquarter of 2001,2002, the  Company continued to generate the majority of its sales from the communications market segment, particularly the networking and telecommunications sectors.   As a result of recent unfavorable economic conditions and reduced capital spending by communication service providers that purchase our customers’ products, the Company’s sales decreased in the firsteach quarter of 2001, compared to the fourthimmediately preceding quarter.  Sales in the first quarter of 2000, and decreased again in2002 increased slightly from the second quarter of 2001 compared to the firstfourth quarter of 2001. The Company believes that unstable and unpredictable economic and industry conditions will continue, likely resulting in a further decline in revenues in the third quarter of 2001.may continue.  If these unfavorable economic conditions persist, the Company’s operating results and financial condition wouldcould be adversely affected.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2001MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000MARCH 31, 2001

NET SALES

Net sales increaseddecreased by approximately 14.6%37.7% or $4.2$14.9 million to $32.9$24.6 million for the three months ended June 30, 2001March 31, 2002 from last year's $28.7year’s $39.4 million for the three months ended June 30, 2000.

              The higher sales were primarily attributable to the acquisition of ITS, which contributed $14.6 million of sales for the three months ended June 30, 2001, compared to $3.3 million of sales contributed for the period June 15 to June 30, 2000.March 31, 2001.  Sales of our North American operations decreased by approximately 28.0%45.8% or $7.1$11.7 million compared to the prior year, while sales of Cherokee Europe decreased by approximately 22.7% or $3.1 million. These decreases were primarily due to lower customer demand as a result of unfavorable economic conditions and reduced capital spending by communication service providers.

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GROSS PROFIT

Gross profit decreased by approximately 11.4%39.2% or $1.2$4.7 million to $9.0$7.3 million for the three months ended June 30, 2001March 31, 2002 from $10.2$12.1 million for the three months ended June 30, 2000.March 31, 2001. Gross margin for the quarter decreased to 27.4%29.9% from 35.5%30.6% in the prior year.year’s quarter.

The decrease in gross profit was primarily due to significantly lower gross profit contributed by the North American operations which was attributable to the lower sales.   This was partially offset by gross profit contributed by ITS of  $3.1 million for the three months ended June 30, 2001 compared to $0.8 million for the period June 15 to June 30, 2000.  The decrease in gross margin compared to the prior year was primarily due to the inclusion in 2001a result of the ITS operations, which had a lower gross margin than the North American operations.  In addition, the gross margin for theour North American operations decreased primarilydue mainly to an increase in factory overhead expenses as percentage of net sales. This was partially offset by higher gross margins for Cherokee Europe due to a result of afavorable change in product mix.

OPERATING EXPENSES

Operating expenses for the three months ended June 30, 2001 increasedMarch 31, 2002 decreased by approximately 59.3%25.0% or $2.1$1.7 million to $5.8$5.0 million from $3.6$6.7 million for the three months ended June 30, 2000.March 31, 2001. As a percentage of sales, operating expenses increased to 17.6%20.4% from 12.6%16.9% in the secondfirst quarter of the prior year.

The increasedecrease in operating expenses as expressed in dollars as well as a percentage of net sales, was primarily attributable to reductions in our workforce and other cost control measures implemented mainly during 2001 in response to unfavorable economic conditions.  In addition, as a result of adopting SFAS No. 142 as of January 1, 2002, the inclusioncompany ceased amortizing goodwill in 2001the first quarter of the ITS operations and amortization2002. Amortization of goodwill and other related intangibles associated within the ITS acquisition.  Partially offsetting the increase in dollars relating to the ITS operationsprior year’s quarter was a decrease in operating expenses for the North American operations.approximately $0.8 million.

OPERATING INCOME

Operating income decreased by approximately 50.5%56.8% or $3.3$3.1 million to $3.2$2.3 million for the three months ended June 30, 2001March 31, 2002 from $6.5$5.4 million for the three months ended June 30, 2000.March 31, 2001. Operating margin decreased to 9.9%9.5% for the secondfirst quarter from 22.8%13.7% in the prior year.

The decrease in operating income was primarily attributable to a decreasedecline in the operating income of the North American operations  which decreased in the second quarter primarily  due to the lower sales and decreased gross margin.  Operating income contributed by ITSCherokee Europe in the secondfirst quarter was offset by amortization of goodwill and other related intangibles associated withincreased from the ITS acquisition.prior year due to a favorable change in product mix. The decrease in operating margin was primarily attributable to the decrease in gross margin combined with higher operating expenses as a percentage of sales discussed above.

INTEREST EXPENSE

Interest expense for the three months ended June 30, 2001March 31, 2002 was $4.2$3.7 million compared to $4.1$4.4 million for the three months ended June 30, 2000.March 31, 2001. The effect of increased debt during the three months ended June 30, 2001March 31, 2002 compared to the prior year'syear’s quarter was offset by lower interest rates on the Company'sCompany’s revolver borrowings and term loans in the current year compared to the prior year.

NET INCOME (LOSS)

As a result of the items discussed above, the Company recorded a net loss of $(0.9)$1.4 million for the three months ended June 30, 2001March 31, 2002 compared to net income of $2.5$1.0 million for the three months ended June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

NET SALESMarch 31, 2001.

 Net sales increased by approximately 33.6% or $18.2 million to $72.3 million for the six months ended June 30, 2001 from last year's $54.1 million for the six months ended June 30, 2000.

             The higher sales were primarily attributable to the acquisition of ITS, which contributed $28.5 million of sales for the six months ended June 30, 2001, compared to $3.3 million of sales contributed for the period June 15 to June 30, 2000.  Sales of our North American operations decreased by approximately 13.8% or $7.0 million compared to the prior year, due to lower customer demand as a result of unfavorable economic conditions and reduced capital spending by communication service providers.11

GROSS PROFIT

 Gross profit increased by approximately 11.2% or $2.1 million to $21.1 million for the six months ended June 30, 2001 from $19.0 million for the six months ended June 30, 2000.  Gross margin for the six months ended June 30, 2001 decreased to 29.2% from 35.1% in the prior year.

             The increase in gross profit was primarily due to the gross profit contributed by ITS, partially offset by a decrease in gross profit contributed by the North American operations resulting  primarily from lower sales. The decrease in gross margin compared to the prior year was primarily due to the inclusion in 2001 of the ITS operations, which had a lower gross margin than the North American operations. In addition, the gross margin for the North American operations decreased primarily as a result of a change in product mix.

OPERATING EXPENSES

             Operating expenses for the six months ended June 30, 2001 increased by approximately 94.4% or $6.0 million to $12.4 million from $6.4 million for the six months ended June 30, 2000. As a percentage of sales, operating expenses increased to 17.2% from 11.8% in the prior year.

             The increase in operating expenses, as expressed in dollars as well as a percentage of net sales, was primarily attributable to the inclusion in 2001 of the ITS operations and amortization of goodwill and other related intangibles associated with the ITS acquisition.  Partially offsetting the increase in dollars relating to the ITS operations was a decrease in operating expenses for the North American operations.

OPERATING INCOME

             Operating income decreased by approximately 31.2% or $3.9 million to $8.6 million for the six months ended June 30, 2001 from $12.6 million for the six months ended June 30, 2000. Operating margin decreased to 12.0% for the current year's period from 23.2% in the prior year.

             The decrease in operating income was primarily attributable to a decrease in the operating income of the North American operations resulting primarily from lower sales and decreased gross margin. Operating income contributed by ITS in the current year's period was offset by amortization of goodwill and other related intangibles associated with the ITS acquisition. The decrease in operating margin was primarily attributable to the decrease in gross margin combined with higher operating expenses as a percentage of sales discussed above.
INTEREST EXPENSE

             Interest expense for the six months ended June 30, 2001 was $8.5 million compared to $8.0 million for the six months ended June 30, 2000. This increase was primarily due to the additional debt incurred in June 2000 in connection with the ITS acquisition.

NET INCOME

             As a result of the items discussed above, net income decreased to approximately breakeven for the six months ended June 30, 2001 from $4.7 million for the six months ended June 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

SIX

THREE MONTHS ENDED JUNE 30, 2001MARCH 31, 2002 COMPARED TO SIXTHREE MONTHS ENDED JUNE 30, 2000MARCH 31, 2001

Net cash provided by operating activities was $8.5$5.3 million for the sixthree months ended June 30, 2001March 31, 2002 compared to $3.9$5.0 million for the sixthree months ended June 30, 2000.March 31, 2001. Cash provided by operating activities for 2002 reflects a net loss of approximately $1.4 million, depreciation and amortization of $0.9 million, a decrease in inventories of  $4.4 million, and an increase in accrued interest payable of $2.6 million, partially offset by a decrease of $0.9 million in accrued liabilities. Cash provided by operating activities for 2001 reflects net income of approximately zero,$1.0 million, depreciation and amortization of  $3.4$1.8 million, and decreases of $9.7$3.0 million in accounts receivablereceivables and $6.7$1.7 million in inventory, and an increase in accrued interest payable of $2.4 million, partially offset by decreases of $9.2$3.9 million in accounts payable and $1.7$1.1 million in accrued compensation and benefits. Cash provided by operating activities for 2000 reflects net income of $4.7 million, depreciation and amortization of  $1.5 million, and a $1.5 million increase in accrued liabilities, partially offset by an increase of $3.1 million in accounts receivable.

 Net cash used in investing activities for the six months ended June 30, 2000 primarily consists of $51.4  million for the purchase of ITS, net of acquired cash.

Net cash used in financing activities of $2.1$4.3 million for the sixthree months ended  June 30, 2001March 31, 2002 primarily reflects $2.9a net reduction of $2.2 million in revolving credit borrowings and $1.8 million of payments on long-term debt and an equity distributiondebt. Net cash used in financing activities of  $2.1$3.0 million partially offset byfor the three months ended March 31, 2001 primarily reflects a $3.3net reduction of  $1.6 million net increase in revolving credit borrowings. Net cash provided by financing activitiesborrowings and $1.4 million of $41.1 million for the six months ended June 30, 2000 primarily reflects proceeds from bank borrowings aggregating $13.0 million and $34.3 million from the sale of units, which were used to finance the purchase of ITS.payments on long-term debt.

LIQUIDITY

Historically, the Company has financed its operations with cash from operations supplemented by borrowings from credit facilities. The Company'sCompany’s current and future liquidity needs primarily arise from debt service on indebtedness, working capital requirements, capital expenditures and distributions to pay taxes.

The Company'sCompany’s historical capital expenditures have substantially resulted from investments in equipment to increase manufacturing capacity and improve manufacturing efficiencies. For fiscal 2001,2002, the Company expects capital expenditures to be approximately $2 million to $3$1-2 million.

As of  June 30, 2001,March 31, 2002, the Company'sCompany’s borrowings consisted of $100 million of senior subordinated notes and $66.0$50.9 million of borrowings under its various credit facilities, including $15.1$9.6 million drawn under its $25 million domestic revolving credit facility. The Company is not subject to any amortization requirements under the senior subordinated notes prior to maturity in 2009, but it is required to make scheduled repaymentsprincipal payments under certain term loans.

 The Company’s

In September 2001, the Company's credit agreement which covers its revolving credit facility and term loans, contains financial covenants that are required to be met each quarter.  As of June 30, 2001, the Company was not in compliance with some of these financial covenants.  On August 13, 2001, the Company and its lenders entered into an agreement whereby the lenders waived the financial covenant defaults as of June 30, 2001, and the parties agreedwas amended to modifications to the terms of the existing credit agreement, subject to various conditions and final documentation.  Modifications to the existing credit agreement will include provisions that specify among other things, (1) the guarantee bythat some of the Company's unit holders,unitholders, or their equity members, ofwill guarantee $10.5 million of the Company's senior debt principal until specific financial ratios are attained, (2) that the Company will be restricted from making cash distributions to its equity membersunitholders until specific financial ratios are attained, (3) that the Company will be permitted to make its interest payment due in November 2002 relating to its $100 million of senior subordinated notes so long as specificspecified financial ratios are attained, (4) that the maximum availability under the revolving line of credit will beis reduced until approximately April 30, 2002, and (5) that LIBOR and base rate margins will behave been increased for revolver borrowings and term loans.   Untilloans, and (6) that financial covenants ratios required in future periods have been modified, including provisions allowing the final documentation of an amendmentCompany's unitholders to make capital contributions to the Company which will be treated as earnings (as defined) for purposes of calculating debt covenants.  As of March 31, 2002 the Company was in compliance with its debt covenants.

Based upon present expectations, the Company anticipates that it may not be in compliance with certain financial covenants under its credit agreement is completed,at June 30, 2002 without additional financing from its unitholders.  In addition, the Company willbelieves that cash flow from operations and available borrowing capacity may not have access to additional borrowings under its revolving line of credit.  If final documentation of an amendment is not completed by September 14, 2001, the lenders' waiver of the Company's financial covenant defaults will expire and the Company will be subject to remedies provided for in the Company's credit agreement.  Management believes final documentation of an amendment to the Company's credit agreement will be completed with respect to the terms outlined above, prior to September 14, 2001, and that the Company has adequate liquidity to meet its anticipated cash needsrequirements, including

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operating requirements, planned capital expenditures and debt service, for the foreseeable future.last six months of the year, or earlier, without additional financing from its unitholders.

The Company is currently considering alternatives to address these issues, which may include (i) an amendment or restructuring of its credit agreement to provide additional liquidity and room under certain financial covenants, (ii) a refinancing of its credit agreement, (iii) the infusion of additional equity by its unitholders, or (iv) some combination of the above.  Based upon the Company’s current business plans and prospects, management expects that its restructuring alternatives, the $10.5 million guaranty by certain unitholders and funding from its unitholders, if necessary, will enable the Company to meet its obligations and comply with its debt covenants through December 31, 2002.

Management cannot provide any assurances that the Company will be successful in obtaining any desired results on satisfactory terms or as to what effect any of the foregoing, if obtained, may have on its future business operations.  In the event of a covenant or payment default under the credit agreement or a payment default under the indenture governing the Company's senior subordinated notes, the lenders under the credit agreement would become entitled to certain rights, including the right to accelerate the debt and to require the Company's unitholders, or their equity members, to contribute $10.5 million to repay senior debt principal under the terms of the guaranty they provided.  The guarantors would be subrogated to rights of the lenders under the credit agreement, on the basis senior to the senior subordinated notes.  In the event of a payment default under the indenture or the credit agreement or in the event of an acceleration of amounts due under the credit agreement, the holders of the senior subordinated notes could also accelerate the maturity of the outstanding senior subordinated notes.

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NEW ACCOUNTING PRONOUNCEMENTS

 Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, is effective for all fiscal years beginning after June 15, 2000.  SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative and all derivatives are to be reported on the balance sheet at fair market value. The Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.