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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended July 31, 2004.

For the Transition Period From              to             .

Commission file number 0-18640

CHEROKEE INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (818) 908-9868

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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CHEROKEE INC.

INDEX

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Part 1. Financial Information

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CHEROKEE INC.

CONSOLIDATED BALANCE SHEETS

See the accompanying notes which are an integral part of these consolidated financial statements.

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CHEROKEE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

See the accompanying notes which are an integral part of these consolidated financial statements.

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CHEROKEE INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

The accompanying notes are an integral part of these consolidated financial statements.

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CHEROKEE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

See the accompanying notes which are an integral part of these consolidated financial statements.

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CHEROKEE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The accompanying condensed consolidated financial statements as of July 31, 2004 and for the three and six month periods ended July 31, 2004 and August 2, 2003 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These consolidated financial statements have not been audited by independent accountants but include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee Inc. (“Cherokee” or the “Company”) are necessary for a fair statement of the financial position and the results of operations for the periods presented. Certain previously reported amounts have been reclassified to conform to current year presentation. The accompanying consolidated balance sheet as of January 31, 2004 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. The results of operations for the three and six month period ended July 31, 2004 are not necessarily indicative of the results to be expected for the fiscal year ended January 29, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2004.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

As used herein the term “First Quarter” refers to the three months ended May 1, 2004, the term “Second Quarter” refers to the three months ended July 31, 2004, and the term “Six Months” refers to the six months ended July 31, 2004.

(2) Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, SPELL C. LLC, a Delaware limited liability corporation (“Spell C”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

Revenues from royalty and finders agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from our licensees. Revenues are not recognized unless collectibility is reasonably assured.

Earnings Per Share Computation

The following table provides a reconciliation of the numerator and denominator of the basic and diluted per-share computations for the three and six month periods ended July 31, 2004 and August 2, 2003:

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The diluted weighted average number of shares excludes 104,690 and 30,464 shares of common stock issuable on the exercise of stock options for the six-month periods ended July 31, 2004 and August 2, 2003, respectively, because the effect of their inclusion would have been anti-dilutive. The diluted weighted average number of shares excludes zero and 30,464 shares of common stock issuable on the exercise of stock options for the three month periods ended July 31, 2004 and August 2, 2003, respectively, because the effect of their inclusion would have been anti-dilutive.

Significant Contracts

Our most significant retail relationship in the United States is with Target Stores. The terms of our relationship with Target Stores are set forth in an amended licensing agreement (the “Amended Target Agreement”) between Cherokee and Target Stores entered into on November 12, 1997. The Amended Target Agreement grants Target Stores the exclusive right in the United States to use the Cherokee trademarks in certain specified categories of merchandise.

The initial term of the Amended Target Agreement commenced on February 1, 1998 through January 31, 2004. The Amended Target Agreement provides that if Target Stores is current in its payments of the minimum guaranteed royalty under the agreement, then the term of the agreement will automatically renew for the fiscal year ending in January 2005, and will continue to automatically renew for successive fiscal year terms provided that Target Stores has paid a minimum guaranteed royalty equal to or greater than $9.0 million for the preceding fiscal year and Target Stores does not give notice of its intention to terminate the agreement. In February 2004, Target Stores elected to allow the term of the Amended Target Agreement to be renewed for one additional year. As a result, the term of the Amended Target Agreement currently continues through January 2006 and remains subject to the automatic renewal provisions described above. Target Stores may terminate the Amended Target Agreement effective February 2006 if it gives us written notice of its intent to do so by February 28, 2005, and may terminate at the end of any fiscal year thereafter, if it gives us written notice of its intent to do so during February of the calendar year prior to termination.

We also have other significant contracts, including with: (i) Mervyn’s for our Sideout brand in the U.S.; (ii) Tesco for our Cherokee brand in certain specified countries; (iii) Zeller’s for our Cherokee brand in Canada; (iv) TJX Companies for our Carole Little, CLII and Saint Tropez-West brands in the U.S., (v) Carrefour for our Cherokee brand in certain specified countries, and (vi) Mossimo, in which we receive a stated percentage of all revenues that Mossimo receives from Target. For a more complete description of our significant contracts, please see our most recently filed Form 10-K for our fiscal year ended January 31, 2004.

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Stock-Based Compensation

The Company currently maintains two compensation plans, the Cherokee 1995 Incentive Stock Option Plan (the “1995 Plan”), and the 2003 Incentive Award Plan (the “2003 Plan”). During the six months ended July 31, 2004, the Company granted stock options to purchase 125,000 shares of common stock at a weighted average per share exercise price of $22.71.

Cherokee accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions involving Stock Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price.

In accordance with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosures” the following table illustrates the effect on stock-based compensation, net income and earnings per share if Cherokee had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

Trademarks

During the three months ended July 31, 2004 (the “Second Quarter”) and for the six months ended July 31, 2004 (the “Six Months”) and for the three and six months ended August 2, 2003, the Company did not purchase any trademarks, other than the contingent purchase payments made to Sideout Inc., under the terms of the Sideout Agreement. Per the terms of the Sideout Agreement we capitalized $46,000 and $128,000 for the Second Quarter and Six Months in comparison to $90,000 and $175,000, respectively, for the three and six months ended August 2, 2003. Trademark registration and renewal fees capitalized for the Second Quarter and Six Months totaled $50,000 and $82,000, respectively in comparison to $109,000 and $213,000 for the three and six months ended August 2, 2003.

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(3) Long Term Debt

Long term debt was comprised of Zero-Coupon Secured Notes (“Secured Notes”) yielding 7% interest per annum and maturing on February 20, 2004. We made our last quarterly payment of $2.6 million on the Secured Notes on February 20, 2004 and subsequently retired the Secured Notes. We have no long-term debt outstanding as of July 31, 2004.

On March 23, 2004 we entered into a line of credit facility agreement with a bank. Under the terms of the agreement we can borrow up to $5,000,000 at any time at an interest rate of either (i) the Prime Rate, or (ii) at the 1-month LIBOR rate plus an applicable margin. The facility is collateralized by the Minimum Guaranteed Royalty from our licensing contract with Target Corp, and expires on July 15, 2005. The facility contains certain covenants, including restrictions on the creation of liens, restrictions on any fundamental changes such as a merger or consolidation, and certain financial covenants including a Senior Debt to EBITDA Ratio, a Leverage Ratio, and a covenant requiring us to maintain at least a $15.0 million Minimum EBITDA for each fiscal year during the term of this facility. We have no borrowings outstanding under this facility as of July 31, 2004.

(4) Commitments and Contingencies

Legal Proceedings

At January 31, 2004 we had accounts receivable outstanding from Mossimo totaling $6.2 million, which includes past revenues, interest owed on such amounts past due, and certain past legal fees incurred up to January 2003. During the three months ended May 1, 2004 Mossimo paid us all of the past amounts due, plus interest owed on such amounts. On May 21, 2004, we agreed to settle with Mossimo regarding the amount of past legal fees due, and subsequently received an additional $375,000 from Mossimo. We have recognized the additional $375,000 payment in other income in our quarter ending July 31, 2004.

(5) Dividends

On February 3, 2004 we declared a dividend of $3.2 million, or $0.375 per share, which was paid on March 17, 2004. On April 13, 2004 we declared a one-time special dividend of $4.3 million, or $0.50 per share from the proceeds received from the settlement of our litigation with Mossimo. This special dividend was paid on May 26, 2004. On April 28, 2004 we declared a dividend of $3.6 million, or $0.42 per share which was paid on June 15, 2004. On July 27, 2004 we declared a dividend of $3.6 million, or $0.42 per share, which will be payable in September 2004. Excluding the one-time special dividend, the dividend payment in September will represent the fourth consecutive quarter in which Cherokee has paid a dividend to its shareholders.

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

Cautionary note regarding forward looking statements

This quarterly report on Form 10-Q and other filings, which we make with the Securities and Exchange Commission, as well as press releases and other written or oral statements we may make may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used, the words “anticipates”, “believes,” “estimates,” “objectives”, “goals”, “aims”, “hopes”, “may”, “likely”, “should” and similar expressions are intended to identify such forward-looking statements. In particular, the forward-looking statements in this Form 10-Q include, among others, statements regarding our goals or expectations regarding our future revenues and earnings, the likelihood of increased retail sales by certain of our current and future licensees, such as Target Stores, Tesco and Carrefour, the likelihood of achieving certain royalty rate reductions, and our prospects for obtaining new licensees and our prospects for obtaining new brands to acquire or represent. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance, achievements or share price to be materially different from any future results, performance, achievements or share price expressed or implied by any forward-looking statements. Such risks and uncertainties, include, but are not limited to, the financial condition of the apparel industry and the retail industry, the overall level of consumer spending, the effect of intense competition in the industry in which we operate, adverse changes in licensee or consumer acceptance of products bearing the Cherokee or Sideout brands as a result of fashion trends or otherwise, the ability and/or commitment of our licensees to design, manufacture and market Cherokee, Sideout and Carole Little branded products, our dependence on a single licensee for most of our revenues, our dependence on our key management personnel, and adverse determination of claims, liabilities or litigation, and the effect of a breach or termination by us of the management agreement with our Chief Executive Officer. Several of these risks and uncertainties are discussed in more detail under “Item 1. Business-Risk Factors” in our Form 10-K for the fiscal year ended January 31, 2004 or in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments.

Overview

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-Q. See “Item 1. Consolidated Financial Statements.”

Cherokee Inc. (which may be referred to as we, us or our) is in the business of marketing and licensing the Cherokee and Sideout brands and related trademarks and other brands it owns or represents. We are one of the leading licensors of brand names and trademarks for apparel, footwear and accessories in the United States. Our operating strategy emphasizes domestic and international retail direct and wholesale licensing whereby we grant retailers and wholesalers the license to use the trademarks held by us on certain categories of merchandise in their respective territories.

We and our wholly owned subsidiary, SPELL C. LLC (“Spell C”) own several trademarks, including Cherokee^®, Sideout^®, Sideout Sport^®, Carole Little^®, CLII^®, Saint Tropez-West^®, Chorus Line^®, All that Jazz^®, Molly Malloy^® and others. The Cherokee brand, which began as a footwear brand in 1973, has been positioned to connote quality, comfort, fit, and a “Casual American” lifestyle with traditional wholesome values. The Sideout brand and related trademarks represent a young active lifestyle and were acquired by us in November 1997. The Carole Little and Chorus Line brands and trademarks were acquired by us in December 2002. These brands are recognized women’s brands that we have begun to market in apparel, accessories, and home products. As of January 31, 2004, we had twelve continuing license agreements covering both domestic and international markets, of which two are expected to expire in 2004.

Our retail direct licensing strategy is premised on the proposition that around the world nearly all aspects of the moderately priced apparel, footwear and accessories business can be sourced most effectively by large retailers, who not only command significant economies of scale, but also interact daily with the end consumer. In addition, we believe that these retailers in

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general may be able to obtain higher gross margins on sales and increase store traffic by directly sourcing, stocking and selling licensed products bearing widely recognized brand names, such as our brands, than through carrying strictly private label goods or branded products from third-party vendors. Our strategy globally is to capitalize on these ideas by licensing our portfolio of brands primarily to strong and growing retailers, such as Target Stores and TJX Companies in the U.S., Tesco and Carrefour in Europe, and Bolderway in China, who work in conjunction with us to develop merchandise for their stores.

In November 1997, we reaffirmed our relationship with Target Stores, a division of Target Corporation, by entering into an amended licensing agreement (the “Amended Target Agreement”) which grants Target Stores the exclusive right in the United States to use the Cherokee trademarks on certain specified categories of merchandise. The term of the Amended Target Agreement currently extends until January 31, 2006 and, unless Target Stores gives us one year’s advance notice of its intention to terminate the agreement, the agreement will continue to automatically renew for successive one-year terms provided that Target Stores has paid a minimum guaranteed royalty equal to or greater than $9.0 million for the preceding fiscal year. If Target Stores elects to terminate the agreement, effective January 31, 2006 or at any other time, it would have a material adverse effect on our business, financial condition, cash flow, liquidity and results of operations.

During the Second Quarter, retail sales of Cherokee branded products by Target Stores totaled $416 million compared to $468 million for the three months ended August 2, 2003. Our royalty revenues (before audit revenues) for the Second Quarter from Target Stores declined by 3.9%, which is less than the 6.5% decline experienced in the First Quarter. After including audit revenues, the decline in royalty revenues from Target Stores for the Second Quarter was only 1.8%. Target Stores pays us royalties based on a percentage of Target Stores’ net sales of Cherokee branded merchandise during each fiscal year ended January 31st, which percentage varies according to the volume of sales of merchandise. Target Stores has agreed to pay a minimum guaranteed royalty of $9.0 million per year for the fiscal years ended January 31, 2005 and January 31, 2006, and each fiscal year thereafter, if any, that the term of the Amended Target Agreement is extended.

During the Second Quarter, total sales of merchandise bearing the Cherokee brand were similar to last year, with sales at retail totaling $566.0 million versus $573.0 million in total retail sales for the second quarter of last year. Tesco and Carrefour sales of merchandise bearing the Cherokee brand were $116.8 million and $9.6 million, respectively in our Second Quarter, compared to $63.7 million and $8.4 million in the second quarter of last year. Zeller’s sales of merchandise bearing the Cherokee brand were approximately $23.2 million during the Second Quarter compared to $33.1 million for the second quarter of last year.

During the Second Quarter, sales of Mervyn’s young men’s, junior’s and children’s apparel and accessories bearing the Sideout brand were approximately $22.7 million in comparison to $23.8 million for the second quarter of last year.

As an incentive for our licensees to achieve higher retail sales of Cherokee or Sideout branded products, many of our existing license agreements, including the Amended Target Agreement, are structured to provide royalty rate reductions for the licensees after they achieve certain levels of retail sales of Cherokee or Sideout branded products during each fiscal year. As a result, our royalty revenues as a percentage of certain licensees’ retail sales of branded products are highest at the beginning of each fiscal year and decrease throughout each fiscal year as licensees reach certain retail sales thresholds contained in their respective license agreements. Therefore, the amount of royalty revenue received by us in any quarter is dependent not only on retail sales of branded products in such quarter, but also on the level of retail sales, and the resulting attainment of royalty rate reductions in any preceding quarters in the same fiscal year. The size of the royalty rate reductions and the level of retail sales at which they are achieved varies in each licensing agreement.

Parties seeking to sell their brands and related trademarks frequently approach us. Should an established and marketable brand or equity become available on favorable terms, we would be interested in pursuing such an acquisition. In addition to acquiring brands and licensing our own brands, we assist other companies in a broad range of services that may include: identifying licensees for their brands, marketing of brands, solicitation of licensees, contract discussions, and administration and maintenance of license or distribution agreements. In return for our services, we normally receive a percentage of the net royalties generated by the brands we represent and manage.

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For example, during fiscal 2001 we assisted Mossimo in locating Target Stores as a licensee of the Mossimo brand and entered into a finder’s agreement with Mossimo, which provides that we will receive 15% of all monies paid to Mossimo by Target Stores. Under Mossimo’s agreement with Target Stores, Target Stores is obligated to pay Mossimo a royalty based on a percentage of net sales of Mossimo branded products, with a minimum guaranteed royalty, beginning in 2001, of approximately $27.8 million over the initial three-year term of the agreement. Mossimo’s agreement with Target Stores is subject to early termination under certain circumstances. In February 2003, the agreement between Mossimo and Target was renewed until January 31, 2006, but continues to contain early termination provisions. In fiscal 2003 we assisted House Beautiful in locating May Company Department Stores as a licensee of the House Beautiful brand. In addition, we previously entered into an exclusive consulting agreement to represent the brand Latina domestically. We typically work on several select brand representation consulting agreements each quarter.

Our Board of Directors has recently authorized and approved the extension of the expiration date of our stock repurchase program from July 31, 2004 to January 31, 2006, and increased the number of shares which could be purchased to a total of 800,000. During the Six Months we did not repurchase any shares of our common stock. From July 1999 through February 1, 2003 we repurchased and retired 607,800 shares of our common stock. Continued repurchases of our stock, if any, will be made from time to time in the open market at prevailing market prices or in privately negotiated transactions.

At January 31, 2004 we had accounts receivable outstanding from Mossimo totaling $6.2 million, which included past revenues, interest owed on such amounts past due, and certain legal fees incurred up to January 2003. During the First Quarter Mossimo paid us all of the past amounts due, plus interest owed on such amounts, which totaled approximately $6.4 million. Shortly thereafter, on April 13, 2004 we declared a one-time special dividend of $4.3 million, or $0.50 per share from the majority of the proceeds received from the settlement of our litigation with Mossimo. This special dividend was paid on May 26, 2004. On May 21, 2004, we agreed to settle with Mossimo regarding the amount of legal fees due, and subsequently received an additional $375,000 from Mossimo. We recognized the additional $375,000 payment in other income in our Second Quarter.

On December 23, 1997, Spell C issued for gross proceeds of $47.9 million, privately placed Zero Coupon Secured Notes (the “Secured Notes”), yielding 7.0% interest per annum and maturing on February 20, 2004. The proceeds from the sale of the Secured Notes were used to pay a special dividend to Cherokee stockholders at that time. The Secured Notes subsequently have been paid in full out of royalties received under the Amended Target Agreement, with the final payment of principal and interest being made on February 20, 2004.

Results of Operations

Revenues were $10.2 million and $22.4 million, respectively, during the Second Quarter and Six Months compared to $9.9 million and $22.0 million during the second quarter and six month period ended August 2, 2003, an increase of 3.0% and 2.1%. Revenues from the Cherokee brand were $8.7 million and $19.0 million during the Second Quarter and Six Months compared to $7.9 million and $17.8 million for the comparable periods last year. During the Second Quarter and Six Months, revenues of $5.5 million and $13.1 million were recognized from Target Stores compared to $5.6 million and $13.7 million for the comparable periods last year, which accounted for 54.1% and 58.2% of total revenues versus 56.7% and 63.1% last year. The reduction in revenues from Target stores for the Six Months compared to the prior year was attributable to lower sales of Cherokee branded product principally in the women’s and men’s apparel categories. Revenues from Zellers were $687,000 and $1.3 million during the Second Quarter and Six Months compared to $939,000 and $1.6 million for the comparable periods last year, due primarily to lower sales of Cherokee branded product by Zellers across a variety of categories. Revenues from Tesco for sales of Cherokee branded products were $2.3 million and $4.3 million during the Second Quarter and Six Months compared to $1.3 million and $2.3 million for the comparable periods last year. The growth in revenues from Tesco is primarily attributable to an increase in the number of Cherokee-branded products sold in existing Tesco territories. Revenues from Carrefour for sales of Cherokee branded products were $191,000 and $382,000 during the Second Quarter and Six Months compared to $107,000 and $248,000 for the comparable periods last year.

Revenues from the Sideout brand were $667,000 and $1.5 million during the Second Quarter and Six Months compared to $823,000 and $1.8 million for the comparable periods last year. Revenues from Mervyn’s for sales of Sideout branded products during the Second Quarter and Six Months were $628,000 and $1.4 million compared to $762,000 and $1.6 million for the

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comparable periods last year. Second Quarter and Six Months revenues also included $55,000 and $126,000 from the Carole Little brands, which is below the $179,000 and $365,000 reported last year from these brands. This decline is primarily attributable to the cancellation of the Gilrichco contract in October of 2003, which contributed revenues of $255,000 during the first six months of last year.

Revenues from international licensees of both Cherokee and Sideout brands, such as Zellers, Tesco and Carrefour, were collectively $3.2 million and $6.0 million during the Second Quarter and Six Months compared to $2.3 million and $4.1 million for the comparable periods last year. This increase is due primarily to increased revenues from Tesco.

Second Quarter and Six Months revenues include $742,000 and $1.7 million attributable to Mossimo Inc. compared to $876,000 and $1.9 million for the comparable periods last year.

Our royalty revenue recognition policy provides for recognition of royalties in the quarter earned, although a large portion of such royalty payments are actually received during the month following the end of a quarter. Our trade receivables balance of $9.6 million as of the end of the Second Quarter included an accrual for revenues earned from Target Stores, Zellers, Mervyn’s, Tesco, and other licensees that are typically received in the month of August or, in the case of the Mossimo contract, shall be received on or before September 15, 2004.

We believe that our future revenues from Target and Zeller’s may remain relatively flat or slightly down due to changes in how Target and Zeller’s are placing our products in their stores and competition from other branded products. We are unsure how our future revenues from Mervyn’s will trend, as Target has announced that it is selling Mervyn’s to a private equity group, who we believe intends to continue to operate Mervyn’s as a retailer. If such buyer chooses to liquidate Mervyn’s for its real estate value, or chooses some other operating strategy with respect to Mervyn’s, we cannot at this time determine whether such transaction would result in the extension or renewal of our existing licensing contract beyond the current term ending January 31, 2005. Based on Tesco’s sales of Cherokee branded products in the last year and the Six Months, and Tesco’s expressed interest in continuing to promote the Cherokee brand, and also the new territories recently awarded to Tesco which have not yet begun to report sales of Cherokee-branded products, we believe that our future revenues from Tesco may continue to grow.

Selling, general and administrative expenses for the Second Quarter and Six Months were $3.3 million or 32% and $6.3 million or 28%, of revenues in comparison to selling, general and administrative expenses of $3.6 million and $6.5 million or 36% and 29% of revenues during the comparable periods last year. The decrease in our selling, general and administrative expenses during the Second Quarter and Six Months was primarily attributable to lower legal expenses, lower headcount in our marketing department which resulted in lower salaries and payroll expenses, and lower marketing costs incurred during the period. However, we experienced increases in amortization expenses of our trademarks, and also small increases in various other expenses.

During the Second Quarter and Six Months our interest expense was $6,000 and $10,000 compared to $187,000 and $429,000 for the comparable periods last year. The interest expense in the Second Quarter and Six Months was attributable to the amortization of costs incurred in establishing our new bank credit facility. The interest expense in the comparable periods of last year was attributable to interest on the Secured Notes and amortization of securitization fees. The decrease in interest expense is due to the retirement of the Secured Notes in February 2004.

During the Second Quarter and Six Months our interest and other income was $453,000 and $631,000 compared to $123,000 and $216,000 for the comparable periods last year. This increase is primarily due to receipt in the Second Quarter of an additional $375,000 from Mossimo pursuant to the reimbursement of our legal fees incurred, the higher legal interest rate charged on the monies previously owed to us by Mossimo, and also greater cash balances and hence higher interest income resulting from such cash balances.

During the Second Quarter and Six Months we booked for generally accepted accounting principles a tax provision of $3.0 million and $6.9 million which equates to an effective tax rate of 41.2% and 41.2% compared to $2.6 million and $6.3 million and an effective tax rate of 41.5% and 41.4% booked for the same periods last year. We are making quarterly estimated tax payments for our federal and state income tax liabilities. During the Second Quarter and Six Months our net income was $4.3 million and $9.9 million or $0.50 and $1.13 per diluted share, compared to $3.7 million and $9.0 million or $0.43 and $1.06 per diluted share for the comparable periods last year.

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Liquidity and Capital Resources

Cash Flows. On July 31, 2004 we had cash and cash equivalents of $8.3 million. On January 31, 2004 we had cash and cash equivalents of $8.5 million, which amount included restricted cash of $2.6 million. Although the Company generated a significant amount of cash during the Six Months, the slight decline in cash and cash equivalents during this period is primarily attributable to the payment of $11.2 million in dividends.

During the Six Months, cash provided by operations was $13.1 million, compared to $5.9 million for the six months ended August 2, 2003. The increase in cash from operations was primarily attributable to an increase in our net income, higher depreciation and amortization, lower accounts receivables due to the collection in full of our disputed receivables from Mossimo, and a higher stock option tax benefit of $257,000 during the Six Months as a result of the exercise of stock options during this period.

Cash provided by investing activities during the Six Months was $2.4 million, which was primarily comprised of a decrease in restricted cash of $2.6 million. This was offset by purchases of property and equipment of $42,000, contingent payments made to Sideout Sport, Inc. of $128,000, and $82,000 in trademark registration fees for the Cherokee, Sideout and Carole Little brands. As part of the Secured Notes indenture we were required to retain in the collection account certain amounts sufficient to meet the next quarterly note payment. In February 2004, we made our last payment under the Secured Notes and the amount held in the collection account as restricted cash was released. In comparison, during the six months ended August 2, 2003, cash used in investing activities was $395,000 comprised primarily of purchase of trademarks and registration fees of $388,000.

Cash used in financing activities was $13.0 million during the Six Months, which included three dividend payments which together totaled $11.2 million, final payment on the Secured Notes of $2.6 million in February 2004, and also the receipt of $804,000 in proceeds from the exercise of stock options. In comparison, last year cash used in financing activities was $4.9 million, comprised primarily of two quarterly payments on the then outstanding Secured Notes in aggregate totaling $5.25 million, which was offset by $388,000 in proceeds from the exercise of stock options.

Uses of Liquidity. Our cash requirements through the end of fiscal 2005 are primarily to fund operations, trademark registration expenses, capital expenditures, selectively expand our brand portfolio and, if adequate, to pay dividends and/or potentially repurchase shares of our common stock. The declaration and payment of any dividends will be at the discretion of our board and will be dependent upon our financial condition, results of operations, cash flow, capital expenditures and other factors deemed relevant by our board. Nonetheless, the payment of our previously announced $0.42 per share dividend in September 2004 will represent our fourth straight quarterly dividend.

At January 31, 2004 we had accounts receivable outstanding from Mossimo totaling $6.2 million, which included past revenues, interest owed on such amounts past due, and certain legal fees incurred up to January 2003. During the First Quarter Mossimo paid us all of the past amounts due, plus interest owed on such amounts, which totaled approximately $6.4 million. Shortly thereafter, on April 13, 2004 we declared a one-time special dividend of $4.3 million, or $0.50 per share from the majority of the proceeds received from the settlement of our litigation with Mossimo. This special dividend was paid on May 26, 2004. On May 21, 2004, we agreed to settle with Mossimo regarding the amount of legal fees due, and subsequently received an additional $375,000 from Mossimo. We have recognized the additional $375,000 payment in other income in our quarter ending July 31, 2004.

We are frequently approached by parties seeking to sell their brands and related trademarks. Should an established marketable brand or equity become available on favorable terms, we would be interested in pursuing such an acquisition and may elect to fund such acquisition, in whole or in part, using our then-available cash.

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The following table provides information related to our contractual cash obligations under various financial and commercial agreements:

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Sources of Liquidity. Our primary source of liquidity is expected to be cash flow generated from operations, and cash and cash equivalents currently on hand. We believe our cash flow from operations together with our cash and cash equivalents currently on hand will be sufficient to meet our working capital, capital expenditure and other commitments through July 2005; provided that, if the management agreement was terminated as discussed above, we would not have sufficient cash to make the lump sum payment to Mr. Margolis. See “Item 1. Business — Risk Factors” in our Form 10-K for the fiscal year ended January 31, 2004. We cannot predict our revenues and cash flow generated from operations. Some of the factors that could cause our revenues and cash flows to be materially lower are described under the caption titled “Risk Factors” in Item 1 of our Form 10-K for the year ended January 31, 2004 and under the caption titled “Special Note Regarding Forward-Looking Statements” below.

As of July 31, 2004 we did not have any amounts outstanding under any credit facilities or lines of credit and we are not the guarantor of any debt or any other material third-party obligations. As of July 31, 2004, we did not have any standby letters of credit nor any standby repurchase obligations. In March 2004 we entered into a new $5.0 million Secured Loan Agreement (the “New Bank Facility”) with U.S. Bank National Association (“U.S. Bank), which expires on July 15, 2005. This New Bank Facility was entered into to provide us with greater working capital flexibility and liquidity for general corporate purposes, including the potential acquisition of brands or related properties which may be for sale.

If our revenues and cash flows during fiscal 2005 are lower than fiscal 2004, we may not have cash available to continue to pay dividends, repurchase shares of our common stock or to explore or consummate the acquisition of other brands. If our revenues and cash flows during fiscal 2005 are materially lower than fiscal 2004, we may need to take steps to reduce expenditures by scaling back operations and reducing staff related to these activities. However, any reduction of revenues would be partially offset by reductions in the amounts we would be required to pay under the management agreement, employee bonuses and possibly the Sideout Agreement. We believe that we will have sufficient cash generated from our business activities to support our operations for the next twelve months.

Inflation and Changing Prices

Inflation, traditionally, has not had a significant effect on our operations. Since most of our future revenues are based upon a percentage of sales of the licensed products by our licensees, we do not anticipate that inflation will have a material impact on future operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk generally represents the risk that losses may occur in the values of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest: From time to time we invest our excess cash in interest-bearing temporary investments of high-quality issuers. Due to the short time the investments are outstanding and their general liquidity, these instruments are classified as cash equivalents in our consolidated balance sheet and do not represent a material interest rate risk to us. As of July 31, 2004 we had no long term debt obligations.

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Foreign Currency: We conduct business in various parts of the world. We are exposed to fluctuations in exchange rates to the extent that the foreign currency exchange rate fluctuates in countries where our licensees do business. For our most recent fiscal year ended January 31, 2004, revenues from international licensing comprised 26.1% of our consolidated revenues. For fiscal 2005, a hypothetical 10% strengthening of the US dollar relative to the foreign currencies of countries where we operate would not have a material effect on our results of operations or cash flow.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Cherokee maintains “disclosure controls and procedures”, as such term is defined under Exchange Act Rule 13a-14 (c). Disclosure controls and procedures are designed to ensure that information required to be disclosed in Cherokee’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to Cherokee’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Cherokee’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and Cherokee’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Cherokee has carried out an evaluation, as of the end of the period covered by this report, under the supervision and with the participation of Cherokee management, including Cherokee’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Cherokee’s disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that Cherokee’s disclosure controls and procedures were effective in ensuring that material information relating to Cherokee is made known to the Chief Executive Officer and Chief Financial Officer by others within Cherokee during the period in which this report was being prepared.

(b) Changes in internal controls. There have been no significant changes in Cherokee’s internal controls or in other factors that could significantly affect these controls subsequent to the date Cherokee completed its evaluation.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

The Company submitted to stockholder vote and its stockholders approved the following at the Company’s Annual Meeting of Stockholders held on June 14, 2004.

Election of five directors for additional one-year terms and until successor has been duly authorized and elected:

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS AND REPORTS ON 8-K

(a) Exhibits

(b) Reports on Form 8-K

Cherokee Inc. did not file any Current Reports on Form 8-K during the quarterly period ended July 31, 2004. Cherokee Inc. filed the following Current Reports on Form 8-K during the six month period ended July 31, 2004:

A Current Report on Form 8-K was filed on March 1, 2004 reporting that Target Stores had extended its licensing agreement with Cherokee through January 2006.

A Current Report on Form 8-K was filed on March 31, 2004 reporting the fourth quarter and fiscal year ended January 31, 2004 financial results for Cherokee, Inc.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: September 8, 2004

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