UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




x Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the fiscal year ended September 30, 2009.




o Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





Commission
File Number 0-16106




CLEARFIELD,
INC.


(Exact
Name of Registrant as Specified in its Charter)





Minnesota
            
            41-1347235(State
      of incorporation)
            
            (I.R.S.
      Employer Identification No.)





5480
      Nathan Lane North,
              Suite
      120
              Plymouth,
      Minnesota 55442
            
            (763)
      476-6866(Address
      of principal executive office)
            
            Registrant’s
      telephone number, including area
code





Securities
registered pursuant to Section 12(b) of the Act:





(Title
      of class)
            
            (Name
      of exchange on which registered)Common
      Stock, par value $.01 per share
            
            The
      NASDAQ Stock Market LLC(Including
      Series B Junior Participating Preferred Share Purchase
    Rights)




Securities
registered pursuant to Section 12(g) of the Act:




NONE




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




o  YESx  NO




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.




o  YESx  NO




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.





x  YESo 
NO









1







Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





o  YESo  NO





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.




o  YESx  NO




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act.





Large
accelerated filer o Accelerated
filer o   Non-accelerated
filer o   Smaller
Reporting Company x




Indicate
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).





o  YESx  NO




The
aggregate market value of the voting and non-voting equity held by
non-affiliates of the registrant, as of the last business day of the
registrant’s most recently completed second fiscal quarter computed by reference
to the price at which the common equity was last sold was approximately
$13,370,507.




The number
of shares of common stock outstanding as of December 17, 2009 was
11,978,831.




Documents
Incorporated by Reference:




Portions
of our proxy statement for the annual shareholders meeting to be held on
February 25, 2010 are incorporated by reference into Part III.









2
 CLEARFIELD,
INC.


ANNUAL
REPORT ON FORM 10-K


TABLE
OF CONTENTS






PART
      I
              
              4ITEM 1.
              BUSINESS
              4ITEM 1A.
              RISK FACTORS
              7ITEM 1B.
              UNRESOLVED STAFF COMMENTS
              14ITEM 2.
              PROPERTIES.
              14ITEM 3.
              LEGAL PROCEEDINGS.
              14ITEM 4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS.
              14PART
      II
              
              14ITEM 5.
              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS.
              15ITEM 6.
              SELECTED FINANCIAL DATA
              16ITEM 7.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
              17ITEM 8.
              FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA.
              24ITEM 9.
              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE.
              44ITEM 9A:
              CONTROLS AND PROCEDURES
              44ITEM 9B.
              OTHER INFORMATION
              44PART
      III
              
              44ITEM 10.
              DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE.
              44ITEM 11.
              EXECUTIVE COMPENSATION.
              45ITEM 12.
              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
              45ITEM 13.
              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE
              45ITEM 14.
              PRINCIPAL ACCOUNTANT FEES AND SERVICES
              45PART
      IV
              
              45ITEM 15.
              EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES
              45SIGNATURES
              
              48








3





PART
I





ITEM 1. BUSINESS




Background




Clearfield,
Inc. (“Clearfield” or the “Company”), formerly APA Enterprises, Inc., is a
Minnesota corporation which was founded in 1979.  Our corporate
headquarters is located at 5480 Nathan Lane North, Suite 120, Plymouth, MN 55442
and our corporate website is www.clearfieldconnection.com. The information
available on our website is not part of this Report. You can access, free of
charge, our filings with the Securities and Exchange Commission, including our
annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports
on Form 8-K and any other amendments to those reports, through a link at our
website, or at the Commission’s website at www.sec.gov.




On January
2, 2008, Clearfield consolidated its sole subsidiary, APA Cables & Networks,
Inc., (APACN) into the parent company, Clearfield, Inc. The Company also changed
its NASDAQ stock symbol to CLFD from APAT. The Company’s Optronics business was
discontinued during the quarter ended June 30, 2007, and the operations of the
Company have now consisted solely of the operations of Clearfield formerly known
as APACN.




On July
24, 2007, we changed our fiscal year end from March 31 to September
30.  The first full fiscal year following this change was the period
of October 1, 2007 to September 30, 2008.




Description
of Business




Clearfield,
Inc. manufactures, markets and sells telecommunications equipment. The Company
provides a suite of modular, highly-configurable passive connectivity solutions
to telecommunications service providers, as well as commercial and industrial
original equipment manufacturers (“OEMs”). The Company has successfully
established itself as a value-added supplier to its target market of independent
telephone companies and cable television operators as well as OEMs who value a
high level of engineering services as part of their procurement process.
Clearfield has expanded its product offerings and broadened its customer base
during the last five years.





Clearfield
offers a broad range of telecommunications equipment and products including the
design and manufacture of standard and custom connectivity products such as
fiber distribution systems, optical components, Outside Plant (“OSP”) cabinets,
and fiber and copper cable assemblies that serve the communication service
provider including Fiber-to-the-Premises (“FTTP”), large enterprise, and OEM
markets. Clearfield maintains a range of engineering and technical knowledge
in-house that works closely with customers to develop, customize and enhance
products from design through production. Most products are produced at
Clearfield’s plant in Plymouth, Minnesota with support from a network of
domestic and global manufacturing partners. Clearfield specializes in producing
these products on both a quick-turn and scheduled delivery basis. Key to our
business is strong acceptance of Clearfield’s proprietary FieldSmartTM Fiber
Management Platform product line within broadband service providers deploying
FTTP networks.





Products





Clearview
Cassette  The ClearviewTM Cassette, introduced in November 2007,
is the main building block of the FieldSmart product platform, positioning
Clearfield as the only company to provide the needs of every leg of the
telecommunications network with a single building block architecture. This
patent-pending technology is a system of five parts that nest together in the
cassette’s main housing to support a wide range of applications. Parts can be
added or removed as needed to support the environment in which it is deployed.
Within the cassette, all fibers from the sub-assembly are slack stored, bend
radius protected and secured against accidental physical damage from handling. A
transparent design allows the user to see components inside, while the
snap-together components provide access without tools for maintenance, cleaning
or troubleshooting. All products which integrate a Clearview product in it’s
design are marked as “Clearview Multiplied”.




4





FieldSmart Fiber Crossover
Distribution System (FxDS) The FieldSmart Fiber Crossover Distribution
System (FxDS) provides complete fiber management modularity and scalability
across the fiber network from inside plant to outside plant environments. Using
the Clearview building block approach, each fiber management element provides
modularity of physical fiber protection in the environment in which it is
placed. The FxDS is system of modular and scalable building blocks that provide
for cost containment configurations with the use of Clearview Multiplied
products. Easily configured for initial placement and scaling easily from
12-ports to a full rack of 1728-ports, the FieldSmart FxDS requires only four
unique blocks to configure initial deployment. The user then places what is
needed on the frame as subscriber take rates dictate.




FieldSmart Fiber Scalability
Center (FSC)  The FieldSmart FSC  is a modular and
scalable outside plant cabinet  that allow users to align their
capital equipment expense with subscriber revenue. This allows rollout of FTTP
services by communication service providers without a large initial expense.
Each outside plant cabinet stores feeder and distribution splices, splitters,
connectors and slack cable neatly and compactly, utilizing field-tested designs
to maximize bend radius protection, connector access, ease of cable routing and
physical protection, thereby minimizing the risk of fiber damage. The FSC
product, with the Clearview cassette at its heart has been designed to scale
with the application environment as demand requires and to reduce service
turn-up time for the end-user.




FieldSmart Fiber Delivery
Point (FDP) The Fieldsmart FDP product line is a series of enclosure
systems for the access network that incorporates the delivery of fiber
connectivity to the neighborhood or business district in the most cost-effective
footprint possible. The FieldSmart FDP family of pedestal inserts teams industry
standard pedestal products from a range of suppliers with a Clearfield designed
fiber connectivity module centered around the Clearview Cassette. The FieldSmart
FDP family of wall-mount enclosures provides 12 to 144 ports of connectivity for
multi-dwelling unit fiber deployments, fiber demarcation, security systems
(CCTV), telecommunications room needs and horizontal/intermediate
cross-connects.




Optical
Components  Clearfield packages optical components for signal
coupling, splitting, termination, multiplexing, demultiplexing and attenuation
to seamlessly integrate with the FieldSmart FxDS, FieldSmart FSC and FieldSmart
FDP. This value-added packaging allows the customer to source from a single
supplier and reduce space requirements. The products are built and tested to
meet the strictest industry standards ensuring customers trouble-free
performance in extreme outside plant environments.





Cable
Assemblies  Clearfield manufactures high quality fiber and
copper assemblies with an industry-standard or customer-specified
configuration.  Industry-standard assemblies built include but are not
limited to: single mode fiber, multimode fiber, multi-fiber, CATV node assembly,
DS1 Telco, DS 3 (734/735) coax, Category 5e and 6, SCSI, Token Ring, and
V.35.  In addition, Clearfield’s engineering services team works
alongside the engineering design departments of our OEM customers to design and
manufacturer custom solutions for both in-the-box as well as network
connectivity assemblies specific to that customer’s product line.




5




Marketing
and Distribution





Clearfield
markets its products in the United States through a direct field sales force
supported by an internal customer sales and support team.  This
internal team works proactively with the outside sales force to maintain a high
level of customer contact through regular communication of product availability,
order processing, and status and delivery information. Clearfield works closely
with its target customers to configure the Company’s product platform to the
client’s unique requirements.  Our high level of customer service
helps bring new products to markets with the design input from our customers and
network of consulting engineering firms. To ensure we cover all markets we
leverage our internal customer support team with a combination of manufacturer
representative organizations.





Competition





Competitors
to the FieldSmart FxDS, FSC and FDP product lines include, but are not limited
to, ADC Telecommunications, Inc., Corning Cabling Systems, Inc., OFS (Furukawa
Electric North America, Inc.), Telect Inc., Alcatel, Inc., and Tyco Electronics,
Inc.  Nearly all of these firms are substantially larger than
Clearfield and as a result may be able to procure pricing for necessary
components and labor at much lower prices. Competition for the custom fiber and
copper termination services for cable assemblies is intense. Competitors range
from small, family-run businesses to very large contract manufacturing
facilities. Clearfield believes that it has a competitive advantage with
customers who can leverage the cost savings the Clearview cassette can provide
and those who require quick-turn, high-performance customized products, and that
it is at competitive disadvantage with customers who principally seek large
volume commodity products.





Sources
of Materials and Outsourced Labor





Numerous
purchased materials, components, and labor are used in the manufacturing of the
Company’s products. Most of these are readily available from multiple suppliers.
However, some critical components and outsourced labor are purchased from a
single or a limited number of suppliers.  The loss of access to some
components and outsourced labor could have an adverse effect on our ability to
deliver products on a timely basis and on our financial
performance.





Major
Customers





Two
customers, Power & Telephone Supply Company and MTS Systems Corporation,
comprised approximately 40% and 22% of total sales for the periods ended
September 30, 2009 and September 30, 2008, respectively. Power & Telephone
Supply Company is a distributor and it accounted for 32% and 10% of revenue for
the corresponding respective periods. MTS Systems Corporation is an end use
customer and it accounted for 8% and 12% of revenues for the corresponding
respective periods. MTS Systems Corporation purchases our product through its
standard form of purchase order with pricing established by a schedule that is
in effect from July 1, 2008 through June 30, 2011.  Power &
Telephone Supply Company purchases our product through its standard form of
purchase order.




Patents
and Trademarks





As of
September 30, 2009, we had one patent pending in the United States and two
pending patent applications inside and outside the United States.  We
have also developed and are using trademarks and logos to market and promote our
products, including ClearfieldTM, ClearviewTM and FieldSmartTM.




6


Backlog





Backlog
reflects purchase order commitments for our products received from customers
that have yet to be fulfilled. Backlog orders are generally shipped within three
months. The Company had a backlog of $1,228,334 as of September 30, 2009 and
$1,865,629 as of September 30, 2008.





Seasonality




We are
affected by the seasonal trends in the industries we serve. We typically
experience sequentially lower sales in our first and second fiscal quarters,
primarily due to customer budget cycles, deployment schedules, some customer
geographical concentrations as well as standard vacation and holiday calendars.
Sales usually reach a seasonal peak in our third and fourth fiscal
quarters.





Product
Development




Product
development for Clearfield’s product line program has been conducted internally.
We believe that the communication industry environment is constantly evolving
and our success depends on our ability to anticipate and respond to these
changes. Our focus is to analyze the environment and technology and work to
develop products that simplify our customers’ business by developing innovative
high quality products utilizing modular design wherever possible.




Employees





As of
September 30, 2009, the Company had 113 full-time employees. We also have
several part-time employees and independent contractors. None of our employees
are covered by any collective bargaining agreement.  We believe our
employee relations to be good.





Segment
Reporting




The
Company operates in a single reportable segment.








ITEM 1A. RISK
FACTORS




The
impact and the timing of the impact of the American Recovery and Reinvestment
Act on our business is uncertain.




The
American Recovery and Reinvestment Act (ARRA), widely known as the “stimulus
bill,” was enacted in February 2009.  The ARRA allocates $7.2 billion
in grants, loans and loan guarantees for broadband/wireless initiatives for
rural unserved and underserved geographies across the country, with these
initiatives administered by several federal agencies. This funding is available
to a wide variety of organizations, including our customers and prospective
customers, to purchase and implement network infrastructure and services to
improve broadband coverage. As part of the criteria established by the federal
agencies administering these programs, the projects to be funded through the new
federal stimulus plan must be approved by the state or states in which the
projects will be located.




Currently,
only a very small portion of the funding allocated by the ARRA for these
broadband/wireless initiatives has been awarded to applicants.  Our
customers and prospective customers may postpone projects involving
telecommunications equipment such as ours until the availability and amount of
stimulus funds for a particular project is known or
awarded.  Accordingly, they may experience significant delays in the
funding of projects through the ARRA, which, in turn, will delay their purchase
of equipment for their projects.  We cannot be assured to what extent
the ARRA will impact demand for our products, our results of operations or the
timing of purchases by customers.




7




A large percentage of our sales have
been made to a small number of customers, and the loss of a major customer would
adversely affect us.




In fiscal
years 2009 and 2008, one distributor customer accounted for 32% and 10% of our
revenue, respectively.  In addition, another end-user customer
accounted for 8% and 12% of our revenue in fiscal years 2009 and 2008,
respectively. If there is a loss of one or more of these major customers or a
significant decline in sales to either of these major customers, it would have a
material adverse effect on our results from operations.




Intense competition in our industry
may result in price reductions, lower gross profits and loss of market
share.




Competition
in the telecommunications equipment and services industry is intense. Our
competitors may have or could develop or acquire marketing, financial,
development and personnel resources that exceed




ours.  Our
ability to compete successfully will depend on whether we can continue to
advance the technology of our products and develop new products, the acceptance
of our products among our customers and prospective customers and our ability to
anticipate customer needs in product development, as well as the price, quality
and reliability of our products, our delivery and service capabilities, and our
control of operating expenses.




We cannot
assure you that we will be able to compete successfully against our current or
future competitors.  Increased competition from manufacturers of
telecommunications equipment such as ours may result in price reductions, lower
gross profit margins, and increased discounts to customers and loss of market
share and could require increased spending by us on research and development,
sales and marketing and customer support.




Our results of
operations could be adversely affected by economic conditions and the effects of
these conditions on our customers’ businesses.




Recent
adverse changes in economic conditions, including the current recession in the
United States, have resulted and may continue to result in lower spending among
our customers and contribute to decreased sales to our distributors and
customers.  Further, our business may be adversely affected by factors
such as downturns in economic activity in specific geographic areas or in the
telecommunications industry; social, political or labor conditions; or adverse
changes in the availability and cost of capital, interest rates, tax rates, or
regulations. These factors are beyond our control, but may result in further
decreases in spending among customers and softening demand for our
products.  Declines in demand for our products will adversely affect
our revenue. Further, challenging economic conditions also may impair the
ability of our customers to pay for products and services they have purchased.
As a result, our cash flow may be negatively impacted and our allowance for
doubtful accounts and write-offs of accounts receivable may
increase.





Our
operating results may fluctuate significantly from quarter to quarter, which may
make budgeting for expenses difficult and may negatively affect the market price
of our common stock.




Because
many purchases by customers of our products relate to a specific customer
project, the short-term demand for our products can fluctuate significantly and
our ability to forecast sales accurately from quarter to quarter is limited.
This fluctuation can be further affected by the long sales cycles necessary to
obtain contracts to supply equipment for these projects, the availability of
capital to fund our customers’ projects, and the impact of the American Recovery
and Reinvestment Act on customer buying patterns. These long sales cycles may
result in significant effort expended with no resulting sales or sales that are
not made in the anticipated quarter.  Demand for our projects will
also depend upon the extent to which our customers and prospective customers
initiate these projects and the extent to which we are selected to provide our
equipment in these projects, neither of which can be assured. These factors
generally result in fluctuations, sometimes significant, in our operating
results.




8


Other
factors that may affect our quarterly operating results including:




·
            the
      volume and timing of orders from and shipments to our
      customers;




·
            work
      stoppages and other developments affecting the operations of our
      customers;




·
            the
      timing of and our ability to obtain new customer contracts and the timing
      of revenue recognition;




·
            the
      timing of new product and service
announcements;




·
            the
      availability of products and
services;




·
            market
      acceptance of new and enhanced versions of our products and
      services;




·
            variations
      in the mix of products and services we
sell;




·
            the
      utilization of our production capacity and
    employees; and




·
            the
      availability and cost of key components of our
  products.




Further,
we budget our expenses based in part on expectations of future revenues. If
revenue levels in a particular quarter are lower than expected, our operating
results will be affected adversely.




Because of
these factors, our quarterly operating results are difficult to predict and are
likely to vary in the future. If our operating results are below financial
analysts’ or investors’ expectations, the market price of our common stock may
fall abruptly and significantly.




To compete
effectively, we must continually improve existing products and introduce new
products that achieve market acceptance.




The
telecommunications equipment industry is characterized by rapid technological
changes, evolving industry standards, changing market conditions and frequent
new product and service introductions and enhancements. The introduction of
products using new technologies or the adoption of new industry standards can
make our existing products, or products under development, obsolete or
unmarketable. In order to remain competitive and increase sales, we will need to
anticipate and adapt to these rapidly changing technologies, enhance our
existing products and introduce new products to address the changing demands of
our customers.




Many of
our competitors have greater engineering and product development resources than
we have. Although we expect to continue to invest substantial resources in
product development activities, our efforts to achieve and maintain
profitability will require us to be selective and focused with our research and
development expenditures. Further, our existing and development-stage products
may become obsolete if our competitors introduce newer or more appealing
technologies. If these technologies are patented or proprietary to our
competitors, we may not be able to access these technologies.




9


If we fail
to anticipate or respond in a cost-effective and timely manner to technological
developments, changes in industry standards or customer requirements, or if we
experience any significant delays in product development or introduction, our
business, operating results and financial condition could be affected
adversely.




We may face
circumstances in the future that will result in impairment charges, including,
but not limited to, significant goodwill impairment charges.




If the
fair value of any of our long-lived assets decreases as a result of an economic
slowdown, a downturn in the markets where we sell products and services or a
downturn in our financial performance and/or future outlook, we may be required
to record an impairment charge on such assets, including goodwill.




We are
required to test intangible assets with indefinite life periods for potential
impairment annually and on an interim basis if there are indicators of a
potential impairment. We also are required to evaluate amortizable intangible
assets and fixed assets for impairment if there are indicators of a possible
impairment. One potential indicator of impairment is the value of our market
capitalization compared to our net book value. Significant declines in our
market capitalization could require us to record material goodwill and other
impairment charges. Impairment charges could have a negative impact on our
results of operations and financial position, as well as on the market price of
our common stock.




We
rely on single-source suppliers, which could cause delays, increases in costs or
prevent us from completing customer orders, all of which could materially harm
our business.




We
assemble our products using materials and components supplied by various
subcontractors and suppliers. We purchase critical components for our products,
including injected molded parts and connectors from third parties, some of whom
are single- or limited-source suppliers. If any of our suppliers are unable to
ship critical components, we may be unable to manufacture and ship products to
our distributors or customers. If the price of these components increases for
any reason, or if these suppliers are unable or unwilling to deliver, we may
have to find another source, which could result in interruptions, increased
costs, delays, loss of sales and quality control problems.





Further,
the costs to obtain certain raw materials and supplies are subject to price
fluctuations, which may be substantial, because of global market demands. Many
companies utilize the same raw materials and supplies in the production of their
products as we use in our products. Companies with more resources than us may
have a competitive advantage in obtaining raw materials and supplies due to
greater purchasing power. Some raw materials or supplies may be subject to
regulatory actions, which may affect available supplies. Furthermore, due to
general economic conditions in the United States and globally, our suppliers may
experience financial difficulties, which could result in increased delays,
additional costs, or loss of a supplier.





The
termination or interruption of any of these relationships, or the failure of
these manufacturers or suppliers to supply components or raw materials to us on
a timely basis or in sufficient quantities, likely would cause us to be unable
to meet orders for our products and harm our reputation and our business.
Identifying and qualifying alternative suppliers would take time, involve
significant additional costs and may delay the production of our products.
Further, if we obtain a new supplier or assemble our product using an
alternative source of supply, we may need to conduct additional testing of our
products to ensure the product meets our quality and performance standards. Any
delays in delivery of our product to distributors or customers could be
extended, and our costs associated with the change in product manufacturing
could increase.




10


The
failure of our third-party manufacturers to manufacture the products for us, and
the failure of our suppliers of components and raw materials to supply us
consistent with our requirements as to quality, quantity and timeliness could
materially harm our business by causing delays, loss of sales, increases in
costs and lower gross profit margins.





We
lack experience manufacturing our products at high volumes and we may be
required to rapidly increase our manufacturing capacity to deliver our products
to our customers in a timely manner.




We
manufacture and assemble our products at our facility in Plymouth, Minnesota.
Our success will depend upon our ability to cost-effectively manufacture a
reliable product and deliver that product in a timely manner. Because we lack
experience manufacturing our products in large quantities, we may encounter
difficulties in maintaining production efficiencies, quality control and
assurance, component supply and qualified personnel. We cannot assure you that
we will be able to manufacture a reliable product and deliver that product to
customers in a timely fashion. Our failure to maintain a reputation among our
customers as a timely, responsive manufacturer, or our failure to remedy
manufacturing issues in a timely manner and to our customers’ satisfaction, or
higher than expected manufacturing costs, would adversely affect our
business.





Our success
depends upon adequate protection of our patent and intellectual property
rights.




Our future
success depends in part upon our proprietary technology. We attempt to protect
our proprietary technology through patents, trademarks, copyrights and trade
secrets.  However, these legal means afford us only limited protection
and may not adequately protect our rights or remedies to gain or keep any
advantages we may have over our competitors.  Accordingly, we cannot
predict whether these protections will be adequate, or whether our competitors
will develop similar technology independently, without violating our proprietary
rights.





Our
competitors, who may have or could develop or acquire significant resources, may
make substantial investments in competing technologies, or may apply for and
obtain patents that will prevent, limit, or interfere with our ability to
manufacture or market our products. Further, although we do not believe that any
of our products infringe the rights of others, third parties may in the future
claim, our products infringe on their rights, and these third parties may assert
infringement claims against us in the future.





We may
litigate to enforce patents issued to us and to defend against claimed
infringement of the rights of others or to determine the ownership, scope, or
validity of our proprietary rights and the rights of others. Any claim of
infringement against us could involve significant liabilities to third parties,
could require us to seek licenses from third parties, and could prevent us from
manufacturing, selling or using our products. The occurrence of this litigation,
or the effect of an adverse determination in any of this type of litigation,
could have a material adverse effect on our business, financial condition and
results of operations.





Our
failure to protect or enforce our intellectual property rights could have a
material adverse effect on our business, results of operations and financial
condition.





Further
consolidation among our customers may result in the loss of some customers and
may reduce revenue during the pendency of business combinations and related
integration activities.




We believe
consolidation among our customers in the future will continue in order for them
to increase market share and achieve greater economies of scale. Consolidation
has impacted our business as our customers focus on completing business
combinations and integrating their operations. In connection with this merger
and acquisition activity, our customers may postpone or cancel orders for our
product based on revised plans for technology or network expansion pending
consolidation activity. Customers integrating large-scale acquisitions may also
reduce their purchases of equipment during the integration period, or postpone
or cancel orders.




11


The impact
of significant mergers among our customers on our business is likely to be
unclear until sometime after such transactions are completed. After a
consolidation occurs, a customer may choose to reduce the number of vendors from
which it purchases equipment and may choose one of our competitors as its
preferred vendor. There can be no assurance that we will continue to supply
equipment to the surviving communications service provider after a business
combination is completed.




We
are dependent on key personnel.




Our
failure to attract and retain skilled personnel could hinder the management of
our business, our research and development, our sales and marketing efforts, and
our manufacturing capabilities. Our future success depends to a significant
degree upon the continued services of key senior management personnel, including
Cheryl P. Beranek, our Chief Executive Officer and John P. Hill, our Chief
Operating Officer. We have employment agreements with Ms. Beranek and Mr. Hill
that provides that if we terminate the employment of either executive without
cause or if the executive terminates her or his employment for good reason, we
would be required to make specified payments to them as described in their
employment agreement. We do not have key person life insurance on Ms. Beranek or
Mr. Hill. Further, our future success also depends on our continuing ability to
attract, retain and motivate highly qualified managerial, technical and sales
personnel. Our inability to retain or attract qualified personnel could have a
significant negative effect and thereby materially harm our business and
financial condition.





Product defects
or the failure of our products to meet specifications could cause us to lose
customers and revenue or to incur unexpected expenses.




If our
products do not meet our customers’ performance requirements, our customer
relationships may suffer. Also, our products may contain defects or fail to meet
product specifications. Any failure or poor performance of our products could
result in:




·
            lack
      of or delayed market acceptance of our
products;




·
            delayed
      product shipments;




·
            unexpected
      expenses and diversion of resources to replace defective products or
      identify and correct the source of
errors;




·
            damage
      to our reputation and our customer
  relationships;




·
            delayed
      recognition of sales or reduced
sales; and




·
            product
      liability claims or other claims for damages that may be caused by any
      product defects or performance
failures.




Our
products are often critical to the performance of telecommunications systems.
Many of our supply agreements contain limited warranty provisions. If these
contractual limitations are unenforceable in a particular jurisdiction or if we
are exposed to product liability claims that are not covered by insurance, a
claim could harm our business.




12


Our stock price
has been volatile historically and may continue to be volatile. The price of our
common stock may fluctuate significantly.




The
trading price of our common stock has been and may continue to be subject to
wide fluctuations. Our stock price may fluctuate in response to a number of
events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products by us or our
competitors, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that
investors may deem comparable to us, and new reports relating to trends in our
markets or general economic conditions.




In
addition, the stock market is subject to price and volume fluctuations that
affect the market prices for companies in general, and small-capitalization,
high-technology companies like us in particular.  These broad market
and industry fluctuations may adversely affect the price of our common stock,
regardless of our operating performance. Further, any failure by us to meet or
exceed the expectations of financial analysts or investors is likely to cause a
decline in our common stock price. Further, recent economic conditions have
resulted in significant fluctuations and significant declines in stock prices
for many companies, including Clearfield. We cannot predict when the stock
markets and the market for our common stock may stabilize.




Future
sales of shares of our common stock in the public market may negatively affect
our stock price.




Future
sales of our common stock, or the perception that these sales could occur, could
have a significant negative effect on the market price of our common stock. In
addition, upon exercise of outstanding options, the number of shares outstanding
of our common stock could increase substantially. This increase, in turn, could
dilute future earnings per share, if any, and could depress the market value of
our common stock. Dilution and potential dilution, the availability of a large
amount of shares for sale, and the possibility of additional issuances and sales
of our common stock may negatively affect both the trading price of our common
stock and the liquidity of our common stock. These sales also might make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that we would deem appropriate.





Anti-takeover
provisions in our organizational documents, our shareholder rights agreement,
Minnesota law and other agreements could prevent or delay a change in control of
our company.




Certain
provisions of our articles of incorporation and bylaws, our shareholder rights
agreement (also known as a “poison pill”), Minnesota law and other agreements
may make it more difficult for a third- party to acquire, or discourage a
third-party from attempting to acquire, control of our company,
including:




·
            the
      provisions of our bylaws regarding the business properly brought before
      shareholders;




·
            the
      right of our board of directors to establish more than one class or series
      of shares and to fix the relative rights and preferences of any such
      different classes or series;




·
            our
      shareholder rights agreement, which would cause substantial dilution to
      any person or group attempting to acquire our company on terms not
      approved in advance by our Board of
Directors;




·
            the
      provisions of Minnesota law relating to business combinations and control
      share acquisitions; and




·
            the
      provisions of our stock option plans allowing for the acceleration of
      vesting or payments of awards granted under the plans in the event of
      specified events that result in a “change in control” and provisions of
      agreements with certain of our executive officers requiring payments if
      their employment is terminated and there is a “change in
      control.”






13


These
measures could discourage or prevent a takeover of us or changes in our
management, even if an acquisition or such changes would be beneficial to
our shareholders. This may have a negative effect on the price of our common
stock.




ITEM 1B. UNRESOLVED STAFF
COMMENTS





None.




ITEM
2.               PROPERTIES.





Clearfield
leases a 30,000 square foot facility at 5480 Nathan Lane North in Plymouth,
Minnesota consisting of our corporate offices, manufacturing and warehouse
space. The lease commenced on July 1, 2006 with rent commencing on November 1,
2006. The initial lease payment was $16,925.88 per month with annual increases
of approximately 3.5%. Currently, our monthly rent is $18,760.The lease expires
on November 30, 2013. The lease is backed by an unconditional, irrevocable
letter of credit equal to approximately five months rent.




We own a
24,000 square foot production facility in Aberdeen, South Dakota, which is
partially leased and occupied. (See Note C in the Financial Statements included
in Item 8 of this Form 10-K.)




ITEM
3.               LEGAL
PROCEEDINGS.




The
Company is exposed to a number of asserted and unasserted legal claims
encountered in the ordinary course of its business. Although the outcome of any
such legal actions cannot be predicted, management believes that there are no
pending legal proceedings against or involving the Company for which the outcome
is likely to have a material adverse effect upon its financial position or
results of operations.




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




None.




14








PART
II




ITEM
5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS.




Our common
stock is traded on The Nasdaq Global Market system of The Nasdaq Stock Market
LLC under the symbol “CLFD.” The following table sets forth the quarterly high
and low sales prices for our common stock for each quarter of the past two
fiscal years.




Fiscal Year Ended September 30,
      2009
            High
            LowQuarter
      ended December 31, 2008
            $1.30
            $0.75Quarter
      ended March 31, 2009
            $1.31
            1.00Quarter
      ended June 30, 2009
            $2.00
            1.09Quarter
      ended September 30, 2009
            $5.52
            1.52Fiscal Year Ended September 30,
      2008
            High
            LowQuarter
      ended December 31, 2007
            $1.19
            $0.96Quarter
      ended March 31, 2008
            1.18
            0.82Quarter
      ended June 30, 2008
            1.87
            1.03Quarter
      ended September 30, 2008
            1.37
            1.01




The
foregoing prices reflect inter-dealer prices, without dealer markup, markdown,
or commissions and may not represent actual transactions.




Approximate
Number of Holders of Common Stock




There were
approximately 318 holders of record of our common stock as of September 30,
2009.




Dividends




We have
never paid cash dividends on our common stock. We do not intend in the
foreseeable future to pay cash dividends on our common stock.




15




Equity
Compensation Plan Information




The
following table describes shares of our common stock that are available on
September 30, 2009 for purchase under outstanding stock-based awards, or
reserved for issuance under stock-based awards or other rights that may be
granted in the future, under our equity compensation plans:




Plan
      Category
            
            (a)
              Number
      of securities
              to
      be issued upon
              exercise
      of
              outstanding
      options,
              warrants
      and rights
            
            
            (b)
              Weighted-average
              exercise
      price of
              outstanding
              options,
      warrants
              and
      rights
            
            
            (c)
              Number
      of securities
              remaining
      available for
              future
      issuance under
              equity
      compensation plans
              (excluding
      those
              reflected
      in column (a))Equity
      compensation plans approved bysecurity
      holders2007
      Stock Compensation Option Plan
            
            
            887,200
            
            
            $
            1.06
            
            
            
            510,500Stock
      Option Plan for Non Employee Directors
            
            
            112,500
            
            
            $
            1.22
            
            
            
            67,500Equity
      compensation plans not approved by security holders
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            999,700
            
            
            $
            1.08
            
            
            
            578,000





Issuer
Repurchases





We did not
purchase any shares of our common stock during the fiscal year ended September
30, 2009.







ITEM 6. SELECTED FINANCIAL
DATA




Not
Required




16





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


Cautionary
Statement Regarding Forward-Looking Information




Statements
made in this Annual Report on Form 10-K, in the Company’s other SEC filings, in
press releases and in oral statements, that are not statements of historical
fact are “forward-looking statements.” Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results or performance of the Company to be materially different from the
results or performance expressed or implied by such forward-looking statements.
The words “believes,” “expects,” “anticipates,” “seeks” and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. The risks and uncertainties that could cause actual
results to differ materially and adversely from the forward-looking statements
include those risks described in Part I, Item 1A. “Risk Factors.”




Overview of Business:The
Company focuses on highly configurable products for telecommunications
customers, primarily related to cabling management requirements of the FTTP
marketplace and the design, manufacture, distribution, and marketing of a
variety of fiber optics and copper components to the data communication and
telecommunication industries.  The Companies primary manufactured
products include standard and custom fiber optic cable assemblies, copper cable
assemblies, OSP cabinets, value–added fiber optics frames, panels and
modules.




Critical Accounting
Policies:In
preparing our consolidated financial statements, we make estimates, assumptions
and judgments that can have a significant impact on our revenues, income or loss
from operations and net income or loss, as well as on the value of certain
assets and liabilities on our consolidated balance sheet. We believe that there
are several accounting policies that are critical to an understanding of our
historical and future performance, as these policies affect the reported amounts
of revenues, expenses and significant estimates and judgments applied by
management. While there are a number of accounting policies, methods and
estimates affecting our consolidated financial statements, areas that are
particularly significant include:





·           Stock
option accounting;


·           Accounting
for income taxes; and


·           Valuation
and evaluating impairment of long-lived assets and goodwill.





Stock-Based
CompensationWe measure and recognize
compensation expense for all stock-based payments at fair value over the
requisite service period. We use the Black-Scholes option pricing model to
determine the weighted average fair value of director and employee stock
options. The determination of fair value of share-based payment awards on the
date of grant using an option-pricing model is affected by our stock price as
well as by assumptions regarding a number of subjective variables. These
variables include, but are not limited to, the expected stock price volatility
over the term of the awards and actual and projected employee stock option
exercise behaviors.





The
expected terms of the options and employee stock purchase plan rights are based
on evaluations of historical and expected future employee exercise behavior. The
risk-free interest rate is based on the U.S. Treasury rates at the date of grant
with maturity dates approximately equal to the expected life at grant date.
Volatility is based on historical and expected future volatility of the
Company’s stock. The Company has not historically issued any dividends and does
not expect to in the future. Forfeitures are estimated at the time of the grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from estimates. If factors change we may employ different assumptions in the
calculation of compensation expense.




17


Income
TaxesWe
account for income taxes in accordance with Financial Accounting Standards Board
ASC 740, under which, deferred income taxes are determined based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of enacted tax laws.
Deferred income tax provisions and benefits are based on changes to the assets
or liabilities from year to year. In providing for deferred taxes, we consider
tax regulations of the jurisdictions in which we operate, estimates of future
taxable income, and available tax planning strategies. If tax regulations,
operating results or the ability to implement tax-planning strategies vary,
adjustments to the carrying value of deferred tax assets and liabilities may be
required. Valuation allowances are recorded related to deferred tax assets based
on the “more likely than not” criteria of ASC 740.





In
accounting for uncertainty in income taxes we recognize the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax
positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. The Company recognizes interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense.





The
Company had U.S. federal and state net operating loss (NOL) carry forwards of
approximately $31,684,000 and $23,573,000, respectively, which expire in fiscal
years 2019 to 2027. The Company has recently completed an Internal Revenue Code
Section 382 analysis of the loss carry-forwards and has determined that all of
the company’s loss carry-forwards are utilizable and not restricted under
Section 382.





At
September 30, 2008, all of the Company’s net deferred tax assets, which
consisted primarily of net operating losses, were offset with a valuation
allowance, which amounted to approximately $13.1 million. As part of the process
of preparing our consolidated financial statements, we are required to estimate
our income tax liability in each of the jurisdictions in which we do business.
This process involves estimating our actual current tax expense together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that these deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not more likely than not or unknown, we must establish a valuation
allowance.




During the
fourth quarter of fiscal year 2009, the Company reversed a portion of its
valuation allowance in consideration of all available positive and negative
evidence, including our historical operating results, current financial
condition, and potential future taxable income.  Our future potential
taxable income was evaluated based primarily on anticipated operating results
for fiscal years 2010 through 2012. We determined that projecting operating
results beyond 2012 involves substantial uncertainty and we discounted forecasts
beyond 2010 as a basis to support our deferred tax assets. The reduction in the
valuation allowance in the fourth quarter resulted in a non-cash income tax
benefit of approximately $2.5 million.  At September 30, 2009 the
Company continues to record a valuation allowance of approximately $9.3 million
against its remaining deferred tax assets. We will continue to assess the
assumptions used to determine the amount of our valuation allowance and may
adjust the valuation allowance in future periods based on changes in assumptions
of estimated future income and other factors. If the valuation allowance is
reduced, we would record an income tax benefit in the period the valuation
allowance is reduced. If the valuation allowance is increased, we would record
additional income tax expense.


18


During the
fiscal year ended September 30, 2009, the Company recorded a deferred income tax
expense of $65,120 for the book and income tax basis difference in goodwill on
acquisitions.  This deferred income tax expense was netted against the
deferred tax benefit resulting from the reduction in the valuation
allowance.





The
Company files income tax returns in the U.S. Federal jurisdiction, and various
state jurisdictions.  Based on its evaluation, the Company has
concluded that it has no significant unrecognized tax benefits.  With
limited exceptions, the Company is no longer subject to U.S. federal and state
income tax examinations for fiscal years ending prior 1993.  In 2007
the Company changed its fiscal year to September 30.





Impairment
of long-lived assets and goodwillThe Company records the
excess of purchase cost over the fair value of net tangible assets of acquired
companies as goodwill or other identifiable intangible assets. In the last
quarter of each year, or as an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount.  The Company completes the impairment testing of
goodwill primarily utilizing a discounted cash flow method.





Determining
market values using a discounted cash flow method requires the Company to make
significant estimates and assumptions, including long-term projections of cash
flows, market conditions and appropriate discount rates. The Company's judgments
are based on historical experience, current market trends, consultations with
external valuation specialists and other information. While the Company believes
that the estimates and assumptions underlying the valuation methodology are
reasonable, different estimates and assumptions could result in a different
outcome. The Company generally develops these forecasts based on recent sales
data for existing products, planned timing of new product launches, and
estimated expansion of the Fiber-To-The-Premise market.





If the
carrying amount of a reporting unit exceeds its fair value, the Company measures
the possible goodwill impairment loss based on an allocation of the estimate of
fair value of the reporting unit to all of the underlying assets and liabilities
of the reporting unit, including any previously unrecognized intangible assets.
The excess of the fair value of a reporting unit over the amounts assigned to
its assets and liabilities is the implied fair value of goodwill. An impairment
loss is recognized to the extent that a reporting unit's recorded goodwill
exceeds the implied fair value of goodwill. This test for the period ended
September 30, 2009 resulted in no change to goodwill from the prior
period.





The
Company evaluates the recoverability of its long-lived assets when events or
circumstances indicate an impairment may have occurred and when the net book
value of such assets exceeds the future undiscounted cash flow attributed to
such assets.  We assess the impairment of long-lived assets whenever
events or changes in circumstances indicate that that the carrying value may not
be recoverable.  No impairment of long-lived assets has occurred
during the years ended September 30, 2009 or September 30, 2008,
respectively.




19


Results
of Operations




Year ended September 30,
2009 compared to year ended September 30, 2008




Revenues
for the fiscal year ended 2009 increased 6% to $24,944,000 from revenue of
$23,494,000 in 2008. This increase is attributable to the acceptance of the
Company’s products, the introduction and acceptance of the FieldSmartTM fiber
management product line and engineering-led design services within the FTTH
market.





Revenue to
broadband service providers and commercial data networks amounted to $21,390,000
or 86% of revenue compared to $18,359,000 or 78% of revenue in
2008.  Sales to non-telecommunication companies, consisting primarily
of copper cable assemblies produced to customer design specifications, were 14%
of revenue or $3,555,000 compared to $5,134,000 or 22% of revenue in
2008.





Gross
margin increased from 33.4% in 2008 to 35.6% in 2009 resulting in a gross profit
of $8,871,000 in 2009 as compared to $7,852,000 in 2008, an increase of
$1,019,000 or 13%. The 2.2% increase in gross margin is attributable to product
mix, the introduction of the FieldSmart management product line, and the results
of on-going programs to reduce the cost of products through a combination of new
product introduction, process improvement, global sourcing of components and
supply chain partnerships with non U.S. manufacturing
organizations.





Selling,
general and administrative expense increased 12% or $805,000 from $6,855,000 for
2008 to $7,660,000 for 2009. This increase reflects a significant investment in
sales, marketing, product management, product engineering and performance-based
compensation that we believe contributed to increased sales and
profitability.





Income
from operations for 2009 was $1,211,000 compared to $997,000 for 2008, an
improvement of $214,000.  This change is attributable to increased
revenue and increased gross margin.





Interest
income in 2009 continued its decline from 2008 by $143,000 to $125,000 in fiscal
year 2009 from $268,000 in fiscal year 2008.  This decline is
attributable to continued declining interest rates from the prior year as the
Company invested in FDIC backed bank certificates of deposit in 2009 as opposed
to auction rate securities in 2008.





Interest
expense decreased from $11,000 in 2008 to $6,000 in 2009. The interest is
attributable to financing associated with the enterprise information system
installed during 2007 and 2008.





Other
income increased from $55,000 in 2008 to $82,000 in 2009. This consists of lease
income on the Company’s Aberdeen, South Dakota facility. In March 2009, the
tenant defaulted on the lease by failure to pay rent. We terminated the lease
with our tenant as of April 2009. As a consequence of the lease termination we
recorded as income the amount of $43,000 previously recorded as an accrual,
which would have resulted in a reduced sale price to the tenant, per the lease
agreement. We are currently leasing the facility on a month-to-month basis with
the same tenant.




Income tax
benefit for 2009 is $2,372,000 which reflects the recognition of a deferred tax
asset (DTA). The DTA is $2,464,000 and is offset by tax amortization of goodwill
of $65,000, which is deferred, tax expense for federal alternative minimum tax
of approximately $20,000 and various state taxes in the amount of $7,000. Income
taxes for 2008 include tax amortization of goodwill of $89,203, which is
deferred and tax expense for federal alternative minimum tax and various state
taxes in the amount of $3,800.




20




Net income
from continuing operations for 2009 was $3,785,000 or $0.32 per share for basic
and $0.31 for diluted compared to $1,217,000 or $0.10 per both basic and diluted
share in 2008. There were no discontinued operations for 2009. Net income from
discontinued operations for 2008 was $297,000 or $0.03 per basic and diluted
share.





The
Company’s net income was $3,785,000 or $0.32 per share for basic and $0.31 per
diluted share for the year 2009 compared to of $1,514,000 or $0.13 per share for
both basic and diluted share for the year 2008.  This is a net change
of $2,271,000 or an increase of 150% over the prior year, primarily due to the
non-cash income tax benefit realized from the reversal of the valuation
allowance on our net deferred tax assets.





Liquidity
and Capital Resources




As of
September 30, 2009, our principal source of liquidity was our cash and cash
equivalents and short-term investments. Those sources total $6,840,000, compared
to $4,334,000 at September 30, 2008. Our cash is invested in money market
accounts. We have no long-term debt obligations at September 30,
2009.





Operating
Activities




Net cash
generated from operations for the twelve months ended September 30, 2009 totaled
$2,091,000. This was primarily due to our net income of $3,785,000, depreciation
of $434,000, stock based compensation of $115,000 and a decrease in inventories
of $935,000. This was offset by non-cash charges for net deferred taxes of
$2,390,000, an increase in accounts receivable of $190,000 and reduction in
accounts payable of $637,000.





Net cash
generated from operations for the twelve months ended September 30, 2008 totaled
$2,024,000. This was primarily due to our net income of $1,514,000 and
depreciation of $498,000, deferred taxes of $89,000, stock based compensation of
$129,000 and an increase in accounts payable of $687,000. This was offset by
non-cash charges for the lease termination of $362,000 and an increase in
inventories and accounts receivable of $493,000 and $115,000,
respectively.





Investing
Activities




For the
twelve months ended September 30, 2009, we purchased $181,000 of manufacturing
and IT equipment and software. During the same period we purchased $6,503,000 of
FDIC backed certificates of deposit and sold approximately $4,962,000 securities
most of which were available-for-sale securities. The net result is a net
increase in cash from investing activities of $1,722,000. The Company intends to
continue to invest in the necessary and appropriate manufacturing equipment to
help maintain a competitive position in manufacturing capability.




For the
twelve months ended September 30, 2008, we purchased $1,904,000 of property
plant and equipment.  Of that amount, approximately $1,500,000 was for
the purchase of the Blaine Facility (see Note C) which was subsequently sold.
During this same period we made a significant investment in our IT structure and
manufacturing equipment totaling $404,000.  The proceeds from the sale
of assets amounted to $1,452,000 of which the Blaine building was the major
portion at $1,450,000. During the same period we purchased $3,675,000 and sold
$3,200,000 of available for sale securities. The net result is a net increase in
cash from investing activities of $927,000.




21





Financing
Activities




For the
twelve months ended September 30, 2009 we used $62,000 to make scheduled debt
principal payments principally associated with the financing of our IT systems.
We received $91,000 from the issuance of stock from the exercise of employee
stock options. The net cash received from financing activities totaled
$29,000.




For the
twelve months ended September 30, 2008 we used $68,000 to make scheduled debt
principal payments principally associated with the financing of our IT
systems.





The
Company believes that its current cash and cash equivalents and cash flow from
operations will be sufficient to meet its working capital and investment
requirements for the next 12 months.  The Company intends on utilizing
its available cash and assets primarily for its continued organic growth, as
well as potential future strategic transactions. However, future growth
organically or through acquisition, may require the Company to raise capital
through additional equity or debt financing. There can be no assurance that any
such financing would be available on commercially acceptable terms.





Recent Accounting
Pronouncements:





In
June 2009, the Financial Accounting Standards Board (FASB) issued new
standards on generally accepted accounting principles as codified in Accounting
Standards Codification (ASC) 105-10. The new standard stipulates the FASB ASC is
the source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. The new standard is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. We
have adopted this standard and the adoption did not have a material impact on
our consolidated financial statements.





In
September 2006, the FASB issued new standards on fair value measurements as
codified in ASC 820-10. This standard establishes a framework for measuring fair
value in generally accepted accounting principles clarifies the definition of
fair value within that framework and expands disclosures about the use of fair
value measurement. This standard emphasizes that fair value is a market-based
measurement, as opposed to a transaction-specific measurement. We adopted this
standard at the beginning of fiscal 2009 for financial assets and liabilities
and the adoption did not have a material impact on our consolidated financial
statements. We will adopt this standard at the beginning of fiscal 2010 for
non-financial assets and liabilities and do not expect it to have a material
effect on our financial statements.





In
April 2009, the FASB issued new standards on financial instruments as
codified in ASC 825-10, which requires disclosures about fair value of financial
instruments in financial statements for interim reporting periods and in annual
financial statements of publicly-traded companies. The new standard also
requires entities to disclose the methods and significant assumptions used to
estimate the fair value of financial instruments in financial statements on an
interim and annual basis and to highlight any changes from prior periods. The
new standard is effective for interim and annual periods ending after
June 15, 2009. We adopted this standard in 2009. The adoption of this
standard did not have a material impact on our consolidated financial
statements.





In
May 2009, the FASB issued new standards on subsequent events as codified in
ASC 855-10. The new standard establishes general standards for accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued. More specifically, the new
standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition in the financial statements, identifies the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that should be made about events or transactions that occur after
the balance sheet date. The new standard is effective for fiscal years and
interim periods ending after June 15, 2009. We adopted this standard during
2009. The adoption of this standard did not have a material impact on our
consolidated financial statements. We have evaluated subsequent events through
December 18, 2009, the date this report on Form 10-K was filed with the
U.S. Securities and Exchange Commission. We made no significant changes to our
consolidated financial statements as a result of our subsequent events
evaluation.




22





In
June 2009, the FASB issued new standards on variable interest entities
(VIE), as codified in 810-10, which requires an entity to perform a qualitative
analysis to determine whether the enterprise’s variable interest gives it a
controlling financial interest in a VIE. This analysis identifies a primary
beneficiary of a VIE as the entity that has both of the following
characteristics: i) the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance and ii) the obligation to
absorb losses or receive benefits from the entity that could potentially be
significant to the VIE. The Company is required to complete ongoing
reassessments of the primary beneficiary of a VIE and will be required by the
Company effective October 1, 2010. The Company does not expect it to have a
material effect on its financial statements.








ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Our
exposure to market risk for changes in interest rates relates primarily to our
investments in FDIC guaranteed bank certificates of deposit. The portfolio
includes only FDIC guaranteed bank certificates of deposit with an active
secondary or resale markets to ensure liquidity. We have no investments
denominated in foreign country currencies and, therefore, our investments are
not subject to foreign exchange risk.




23








ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.





Quarterly Financial Data
(Unaudited)




Quarterly
data for the years ended September 30, 2009 and 2008 was as
follows:




Quarter
      EndedDecember
      31, 2007
            
            
            March
      31, 2008
            
            
            June
      30, 2008
            
            
            September
      30, 2008Statement
      of Operations DataNet
      revenue
            
            $
            4,697,440
            
            
            $
            5,442,493
            
            
            $
            6,165,379
            
            
            $
            7,188,484Gross
      profit
            
            
            1,449,471
            
            
            
            1,765,564
            
            
            
            2,107,819
            
            
            
            2,528,981Net
      loss
            
            
            395,368
            
            
            
            115,338
            
            
            
            248,894
            
            
            
            754,660Net
      income per share, basic and diluted
            
            $
            0.03
            
            
            $
            0.01
            
            
            $
            0.02
            
            
            $
            0.06Quarter
      EndedDecember
      31, 2008
            
            
            March
      31, 2009
            
            
            June
      30, 2009
            
            
            September
      30, 2009Statement
      of Operations DataNet
      revenue
            
            $
            5,933,287
            
            
            $
            5,232,604
            
            
            $
            7,160,039
            
            
            $
            6,618,907Gross
      profit
            
            
            2,014,208
            
            
            
            1,818,152
            
            
            
            2,684,466
            
            
            
            2,354,194Net
      income
            
            
            217,487
            
            
            
            131,049
            
            
            
            587,020
            
            
            
            2,849,533Net
      income per share, Basic
            
            $
            0.02
            
            
            $
            0.01
            
            
            $
            0.05
            
            
            $
            0.24Diluted
            
            
            0.02
            
            
            
            0.01
            
            
            
            0.05
            
            
            
            0.23










24







Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Shareholders of Clearfield, Inc.





We have
audited the accompanying consolidated balance sheets of Clearfield, Inc. (a
Minnesota corporation) and subsidi­aries as of September 30, 2009 and
2008, and the related consolidated statements of operations, shareholders’
equity and cash flows for the years then ended.  These consolidated
financial state­ments are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Clearfield,
Inc. and subsidiaries as of September 30, 2009 and 2008, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.








/s/Grant
Thornton LLP


Minneapolis,
Minnesota


December
18, 2009




25


CLEARFIELD,
INC.


CONSOLIDATED
BALANCE SHEETS


September
      30, 2009
            
            
            September
      30, 2008AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            4,731,735
            
            
            $
            4,333,709Short-term
      investments
            
            
            2,108,566
            
            
            
            -Accounts
      receivable, net
            
            
            2,723,414
            
            
            
            2,533,447Inventories
            
            
            1,153,862
            
            
            
            2,088,769Other
      current assets
            
            
            180,635
            
            
            
            115,344Total  current
      assets
            
            
            10,898,212
            
            
            
            9,071,269Property,
      plant and equipment, net
            
            
            1,319,492
            
            
            
            1,604,202Other
      AssetsLong-term
      investments
            
            
            2,840,000
            
            
            
            3,036,000Goodwill
            
            
            2,570,511
            
            
            
            2,570,511Deferred
      taxes –long term
            
            
            2,231,990
            
            
            
            -Other
            
            
            176,368
            
            
            
            284,309Notes
      receivable
            
            
            392,186
            
            
            
            432,846Total
      other assets
            
            
            8,211,055
            
            
            
            6,323,666Total
      Assets
            
            $
            20,428,759
            
            
            $
            16,999,137Liabilities
      and Shareholders’ EquityCurrent
      LiabilitiesCurrent
      maturities of long term debt
            
            $
            33,081
            
            
            $
            62,126Accounts
      payable
            
            
            1,212,541
            
            
            
            1,849,633Accrued
      compensation
            
            
            1,159,245
            
            
            
            903,276Accrued
      expenses
            
            
            88,139
            
            
            
            301,859Total  current
      liabilities
            
            
            2,493,006
            
            
            
            3,116,894Long
      term debt, net of current maturities
            
            
            -
            
            
            
            33,081Deferred
      rent
            
            
            87,942
            
            
            
            89,641Deferred
      income taxes
            
            
            -
            
            
            
            166,904Total
      Liabilities
            
            
            2,580,948
            
            
            
            3,406,520Shareholders’
      EquityUndesignated
      shares, 4,999,500 authorized shares: no shares issued and
      outstanding
            
            
            -
            
            
            
            -Preferred
      stock, $.01 par value;  500 shares authorized, no shares issued
      or outstanding
            
            
            -
            
            
            
            -Common
      stock, 50,000,000 shares authorized, $.01 par value; 11,974,631 and
      11,938,131 shares issued and outstanding at September 30, 2009 and 2008,
      respectively
            
            
            119,746
            
            
            
            119,381Additional
      paid-in capital
            
            
            52,372,139
            
            
            
            52,166,219Accumulated
      deficit
            
            
            (34,644,074
            )
            
            
            (38,428,983
            )Accumulated
      other comprehensive loss
            
            
            -
            
            
            
            (264,000
            )Total
      shareholders’ equity
            
            
            17,847,811
            
            
            
            13,592,617Total
      Liabilities and Shareholders’ Equity
            
            $
            20,428,759
            
            
            $
            16,999,137





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




26





CLEARFIELD,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


Year
      Ended September 30,
            
            
            Year
      Ended September 30,2009
            
            
            2008Revenues
            
            $
            24,944,837
            
            
            $
            23,493,796Cost
      of sales
            
            
            16,073,817
            
            
            
            15,641,961Gross
      profit
            
            
            8,871,020
            
            
            
            7,851,835Operating
      expensesSelling,
      general and administrative
            
            
            7,628,495
            
            
            
            6,799,683Loss
      on disposal of assets
            
            
            31,144
            
            
            
            55,2517,659,639
            
            
            
            6,854,934Income
      from operations
            
            
            1,211,381
            
            
            
            996,901Interest
      income
            
            
            124,922
            
            
            
            268,063Interest
      expense
            
            
            (5,676
            )
            
            
            (10,721
            )Other
      income
            
            
            81,810
            
            
            
            55,881201,056
            
            
            
            313,223Income
      before income taxes
            
            
            1,412,437
            
            
            
            1,310,124Income
      tax expense (benefit)
            
            
            (2,372,472
            )
            
            
            93,303Net
      income from continuing operations
            
            
            3,784,909
            
            
            
            1,216,821Net
      income from discontinued operations
            
            
            -
            
            
            
            297,439Net
      income
            
            $
            3,784,909
            
            
            $
            1,514,260Net
      income per share:Continuing
      operations
            
            $
            0.32
            
            
            $
            0.10Discontinued
      operations
            
            $
            0.00
            
            
            $
            0.03Basic
            
            $
            0.32
            
            
            $
            0.13Diluted
            
            $
            0.31
            
            
            $
            0.13Shares
      used in calculation of net income per share:Basic
            
            
            11,941,116
            
            
            
            11,873,773Diluted
            
            
            12,046,059
            
            
            
            11,873,773








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




27


CLEARFILD,
INC.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY


Additional
              paid-in
            
            
            Accumulated
            
            
            Accumulated
      other comprehensive
            
            
            Total
      shareholdersShares
            
            
            Amount
            
            
            Capital
            
            
            deficit
            
            
            loss
            
            
            equityBalance
      at September 30, 2007
            
            
            11,872,331
            
            
            $
            118,723
            
            
            $
            52,037,207
            
            
            $
            (39,943,243
            )
            
            $
            -
            
            
            $
            12,212,687Stock
      based compensation expense
            
            
            -
            
            
            
            -
            
            
            
            50,052
            
            
            
            -
            
            
            
            -
            
            
            
            50,052Stock
      issued as compensation
            
            
            65,800
            
            
            
            658
            
            
            
            78,960
            
            
            
            -
            
            
            
            -
            
            
            
            79,618Other
      comprehensive loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (264,000
            )
            
            
            (264,000
            )Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,514,260
            
            
            
            -
            
            
            
            1,514,260Comprehensive
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,250,260Balance
      at September  30, 2008
            
            
            11,938,131
            
            
            
            119,381
            
            
            
            52,166,219
            
            
            
            (38,428,983
            )
            
            
            (264,000
            )
            
            
            13,592,617Stock
      based compensation expense
            
            
            -
            
            
            
            -
            
            
            
            115,218
            
            
            
            -
            
            
            
            -
            
            
            
            115,218Exercise
      of stock options
            
            
            36,500
            
            
            
            365
            
            
            
            90,702
            
            
            
            -
            
            
            
            -
            
            
            
            91,067Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            264,000
            
            
            
            264,000Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,784,909
            
            
            
            -
            
            
            
            3,784,909Comprehensive
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,048,909Balance
      at September  30, 2009
            
            
            11,974,631
            
            
            $
            119,746
            
            
            $
            52,372,139
            
            
            $
            (34,644,074
            )
            
            $
            -
            
            
            $
            17,847,811








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




28




CLEARFIELD,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Year
      ended September 30,
            
            
            Year
      ended September 30,2009
            
            
            2008Cash
      flows from operating activities:Net
      income
            
            $
            3,784,909
            
            
            $
            1,514,260Adjustments to reconcile net
      income to cash provided by operating activities:Depreciation
      and amortization
            
            
            434,499
            
            
            
            498,418Deferred
      income taxes
            
            
            (2,389,982
            )
            
            
            89,203Loss
      on sale of assets
            
            
            31,144
            
            
            
            55,251Stock-based
      compensation expense
            
            
            115,218
            
            
            
            129,012Lease
      termination accrual
            
            
            -
            
            
            
            (362,028
            )Changes
      in operating assets and liabilities:Accounts receivable,
      net
            
            
            (189,967
            )
            
            
            (114,796
            )Inventories
            
            
            934,907
            
            
            
            (493,487
            )Prepaid expenses and other
      assets
            
            
            (24,631
            )
            
            
            21,241Accounts payable and accrued
      expenses
            
            
            (605,454
            )
            
            
            686,595Net
      cash provided by operating activities
            
            
            2,090,643
            
            
            
            2,023,669Cash
      flows from investing activities:Purchases
      of property and equipment
            
            
            (180,933
            )
            
            
            (1,903,672
            )Purchase
      of available for sale securities
            
            
            (6,502,625
            )
            
            
            (3,675,000
            )Sale
      of available for sale securities
            
            
            4,962,000
            
            
            
            3,200,000Proceeds
      from sale of assets
            
            
            -
            
            
            
            1,451,624Net
      cash used in investing activities
            
            
            (1,721,558
            )
            
            
            (927,048
            )Cash
      flows from financing activities:Payment
      of long-term debt
            
            
            (62,126
            )
            
            
            (68,215
            )Proceeds
      from issuance of common stock
            
            
            91,067
            
            
            
            658Net
      cash provided by (used in) financing activities
            
            
            28,941
            
            
            
            (67,557
            )Increase
      in cash and cash equivalents
            
            
            398,026
            
            
            
            1,029,064Cash
      and cash equivalents at beginning of year
            
            
            4,333,709
            
            
            
            3,304,645Cash
      and cash equivalents at end of year
            
            $
            4,731,735
            
            
            $
            4,333,709Supplemental
      cash flow information:
              Cash
      paid during the year for:Interest
            
            $
            5,676
            
            
            $
            10,721Income
      Taxes
            
            
            17,510
            
            
            
            4,100





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




29


NOTES
TO FINANCIAL STATEMENTS





NOTE
A  –  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Description of
Business:Clearfield, Inc., (the Company) is a manufacturer of
a broad range of standard and custom passive connectivity products to customers
throughout the United States.  These products include fiber
distribution systems, optical components, Outside Plant (“OSP”) cabinets, and
fiber and copper cable assemblies that serve the communication service provider,
including Fiber-to-the-Premises (“FTTP”), large enterprise, and original
equipment manufacturers (“OEMs”) markets.





Principles of Consolidation:The consolidated financial statements include the accounts of Clearfield,
Inc. and its wholly-owned subsidiaries.   All significant
inter-company accounts and transac­tions have been eliminated in
consolidation. Effective January 2, 2008 the Company merged its sole subsidiary
APA Cables and Networks, Inc. into the Company (the “Parent – Subsidiary
Merger”) and changed the name of the Company from APA Enterprises, Inc. to
Clearfield, Inc. Since the Parent – Subsidiary Merger on January 2, 2008, the
Company has no subsidiaries. For periods prior to January 2, 2008 the
consolidated financial statements represent all companies of which Clearfield,
Inc. directly or indirectly had majority ownership or otherwise controlled. We
have evaluated subsequent events through December 18, 2009, the date this
report on Form 10-K was filed with the U.S. Securities and Exchange
Commission.





Revenue Recognition:Revenue
is recognized when persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed, acceptance by the customer is reasonably
certain and collection is probable.  This generally occurs upon
shipment of product to the customer, but in some cases occurs when the product
is picked up by a customer’s carriers. The Company records freight revenues
billed to customers as revenue and the related shipping and handling cost in
cost of sales. Taxes collected from customers and remitted to governmental
authorities are presented on a net basis.





Cash and Cash Equivalents: The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.  Cash equivalents at
September 30, 2009 and 2008 respectively consist entirely of short-term money
market accounts.  Cash equivalents are stated at cost, which
approximates fair value.





The
Company maintains cash balances at several financial institutions, and at times,
such balances exceed insured limits.  The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash. No cash was in foreign financial institutions as of
September 30, 2009.





Investments:The Company
currently invests its excess cash in money market accounts and bank certificates
of deposit (CD’s) that are fully insured by the FDIC with a term of not more
than three years. CD’s with original maturities of more than three months are
reported as held-to-maturity investments. These investments in CD’s are
classified as held to maturity and are valued at cost which approximates fair
value. These investments are considered Level 2 investments. The maturity dates
of our CD’s at September 30, 2009 are as follows:





Less
      than one year
            
            $
            2,108,5661-3
      years
            
            
            2,840,000Total
            
            $
            4,948,566








30


NOTE
A  –  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued








Fair value
is the price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. Three levels of inputs that may be used to measure fair
value:




•
            
            Level
      1 — quoted prices in active markets for identical assets and
      liabilities.•
            
            Level
      2 — observable inputs other than quoted prices in active markets for
      identical assets and liabilities.•
            
            Level
      3 — unobservable inputs in which there is little or no market data
      available, which require the reporting entity to develop its own
      assumptions.





At
September 30, 2008 our long term investment portfolio consisted of $3.3 million
of Auction Rate Securities (ARS), with contractual maturities between 22 and 33
years. The ARS held were primarily backed by student loans, are
over-collateralized and are insured by and guaranteed by the United States
Federal Department of Education.





As of
September 2008, Credit Suisse, our broker and financial advisor, settled a
lawsuit with the state of New York related to its ARS marketing practices. On
October 2, 2008, Credit Suisse offered to buy back at par value the ARS
securities from individuals, charities and businesses with accounts valued up to
$10 million. We accepted the offer in October 2008. During the month of October
of 2008 Credit Suisse bought back all of the securities held by Clearfield at
par value resulting in proceeds of $3.3 million which were invested money market
fund composed of 90 day U.S Treasuries.  The sale of these assets and
the related mark up to par value was reflected in our results for the quarter
ended December 31, 2008.





Accounts
Receivable:Credit is extended based on the evaluation of a
customer’s financial condition and, generally, collateral is not
required.  Accounts outstanding longer than the contractual payment
terms are considered past due.  The Company determines its allowance
by considering a number of factors, including the length of time trade
receivables are past due, the Company’s previous loss history, the customer’s
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as whole.  The Company writes off
accounts receivable when they become uncollectible; payments subsequently
received on such receivables are credited to the allowance for doubtful
accounts.  The following table illustrates balances and activity for
fiscal years 2009 and 2008:








Allowance
      for Doubtful Accounts
            
            Balance
      at Beginning of Period
            
            
            Charged
      to Cost and Expenses
            
            
            Charges
      to Other Accounts
            
            
            Deductions
            
            
            Balance
      at End of PeriodSeptember
      30, 2009
            
            $
            69,382
            
            
            $
            24,000
            
            
            $
            89
            
            
            $
            2,361
            
            
            $
            91,110September
      30, 2008
            
            
            78,973
            
            
            
            -
            
            
            
            -
            
            
            
            9,591
            
            
            
            69,382











Fair Value of Financial Instruments:The financial statements include the following financial instruments:
cash and cash equivalents, short term investments, accounts receivable, notes
receivable and accounts payable. Notes receivable is carried at fair value
because it is adequately secured by stock in the Company. All other financial
instruments approximate fair value because of the short-term nature of these
assets.




31


NOTE
A  –  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued




Inventories:Inventories
consist of finished goods, raw materials and work in process and are stated at
the lower of average cost (which approximates the first-in, first-out method) or
market.  Inventory is valued using material costs, labor charges, and
allocated factory overhead charges and consist of the following:





September
      30,
            
            
            September
      30,2009
            
            
            2008Raw
      materials
            
            $
            873,439
            
            
            $
            1,815,777Work-in-process
            
            
            23,031
            
            
            
            14,481Finished
      Goods
            
            
            257,392
            
            
            
            258,511$
            1,153,862
            
            
            $
            2,088,769





Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. Significant additions or
improvements extending asset lives are capitalized, while repairs and
maintenance are charged to expense when incurred. Depreciation is provided in
amounts sufficient to relate the cost of assets to operations over their
estimated useful lives. The straight-line method of depreciation is used for
financial reporting purposes and accelerated methods are used for tax purposes.
Estimated useful lives of the assets are as follows:





YearsBuilding
            
            
            20Equipment
            
            
            3 –
      7Leasehold
      improvements
            
            7-10
      or life of lease





Leasehold
improvements are amortized over the shorter of the remaining term of the lease
or estimated life of the asset.





Property,
plant and equipment consist of the following at:





September
      30,
            
            
            September
      30,2009
            
            
            2008Land
            
            $
            56,195
            
            
            $
            56,195Buildings
            
            
            1,679,424
            
            
            
            1,679,424Manufacturing
      Equipment
            
            
            719,167
            
            
            
            685,425Office
      Equipment
            
            
            1,357,811
            
            
            
            1,405,147Leasehold
      Improvements
            
            
            195,383
            
            
            
            187,9774,007,980
            
            
            
            4,014,168Less
      accumulated depreciation and amortization
            
            
            2,688,487
            
            
            
            2,409,966$
            1,319,493
            
            
            $
            1,604,202Depreciation
      expense
            
            $
            434,499
            
            
            $
            498,418





32





NOTE
A  –  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued





Goodwill: The Company analyzes
its goodwill testing for impairment annually or at an interim period when events
occur or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount.





The
Company assesses the valuation or potential impairment of its goodwill by
utilizing a present value technique to measure fair value by estimating future
cash flows. Determining market values using a discounted cash flow method
requires the Company to make significant estimates and assumptions, including
long-term projections of cash flows, market conditions and appropriate discount
rates. The Company's judgments are based on historical experience, current
market trends, consultations with external valuation specialists and other
information. While the Company believes that the estimates and assumptions
underlying the valuation methodology are reasonable, different estimates and
assumptions could result in a different outcome. The Company generally develops
these forecasts based on recent sales data for existing products, planned timing
of new product launches, and estimated expansion of the Fiber-To-The-Premise
market. Where available and as appropriate comparative market multiples are used
to corroborate the results of the present value method. We consider our net book
value and market capitalization when we test for goodwill impairment because we
have consolidated our reporting units in prior years into the parent company,
resulting in one reporting unit. If the carrying amount of a reporting unit
exceeds its fair value, the Company measures the possible goodwill impairment
loss based on an allocation of the estimate of fair value of the reporting unit
to all of the underlying assets and liabilities of the reporting unit, including
any previously unrecognized intangible assets. The excess of the fair value of a
reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill. An impairment loss is recognized to the extent
that a reporting unit's recorded goodwill exceeds the implied fair value of
goodwill. This test for the period ended September 30, 2009 resulted in no
change to goodwill from the prior period.





Impairment of Long-Lived Assets:The Company assesses potential impairments to its long-lived assets or
asset groups when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset or asset group may not be
recovered. An impairment loss is recognized when the carrying amount of the
long-lived asset or asset group is not recoverable and exceeds its fair value.
The carrying amount of a long-lived asset or asset group is not recoverable if
it exceeds the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset or asset group. Any required
impairment loss is measured as the amount by which the carrying amount of a
long-lived asset or asset group exceeds its fair value and is recorded as a
reduction in the carrying value of the related asset or asset group and a charge
to operating results. Intangible assets with indefinite lives are tested
annually for impairment and in interim periods if certain events occur
indicating that the carrying value of the intangible assets may be impaired. No
impairment of long-lived assets has occurred during any of the periods
presented.




33





NOTE
A  –  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued




Income Taxes: The Company
records income taxes in accordance with the liability method of
accounting.  Deferred taxes are recognized for the estimated taxes
ultimately payable or recoverable based on enacted tax law.  The
Company establishes a valuation allowance to reduce the deferred tax asset to an
amount that is more likely than not to be realizable.  Changes in tax
rates are reflected in the tax provision as they occur.





In
accounting for uncertainty in income taxes we recognize the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax
positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. The Company recognizes interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense.





Stock-Based Compensation:We
measure and recognize compensation expense for all stock-based payments at fair
value over the requisite service period. We use the Black-Scholes option pricing
model to determine the weighted average fair value of options. Equity-based
compensation expense is included in selling, general and administrative
expenses. The determination of fair value of stock-based payment awards on the
date of grant using an option-pricing model is affected by our stock price as
well as by assumptions regarding a number of subjective variables. These
variables include, but are not limited to, the expected stock price volatility
over the term of the awards, and actual and projected employee stock option
exercise behaviors.





The
expected terms of the options are based on evaluations of historical and
expected future employee exercise behavior. The risk-free interest rate is based
on the U.S. Treasury rates at the date of grant with maturity dates
approximately equal to the expected life at grant date. Volatility is based on
historical and expected future volatility of the Company’s stock. The Company
has not historically issued any dividends and does not expect to in the future.
Forfeitures are estimated at the time of the grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from estimates. The Company uses
a forfeiture rate of 10%.





The
weighted average fair value of options granted during for the year ended
September 30, 2009 and 2008 are $0.44 and $0.45. If factors change and we employ
different assumptions in the determination of the fair value of grants in future
periods, the related compensation expense that we record may differ
significantly from what we have recorded in the current periods.





In
September 2008, 65,800 shares of stock, with a market price of $1.21 per share,
were issued to employees of the Company under the Company’s 2007 Stock
Compensation Plan.  This award to employees was part of the annual
incentive program, totaled $79,618 and was recorded in selling, general and
administrative expense. The awards were issued without restriction. Recipients
of the award included, sales, professional staff and Company
management.




34





NOTE
A  –  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued


Net Income Per Share: Basic
and diluted net income per share is computed by dividing net income by the
weighted average number of common shares outstanding.





Common
stock options and warrants to purchase 999,700 and 386,700 shares of common
stock with a weighted average exercise price of $1.08 and $1.37 were outstanding
during the years ended September 30, 2009 and 2008.





At
September 30, 2009, there were no stock options with exercise prices
greater  than the average market price of the common shares of the
period.





Weighted
      average common share outstanding for the years ended September 30, 2009
      and 2008 were as follows:





Year
      ended September 30,
            
            2009
            
            
            2008Numerator
      for basic net income
            
            $
            3,784,909
            
            
            $
            1,514,260Denominator
      for basic net income per share –weighted average shares
            
            
            11,941,116
            
            
            
            11,873,773Effect
      of dilutive securities:Stock
      options
            
            
            104,943
            
            
            
            -Denominator
      for diluted net income per share – adjusted weighted average
      shares
            
            
            12,046,059
            
            
            
            11,873,773





Accumulated Other Comprehensive
Loss: Comprehensive income consists of net income and other gains and
losses affecting shareholders’ equity that, under generally accepted accounting
principles, are excluded from net income. For the Company, such items consist
primarily of unrealized gains and losses on marketable equity investments. The
changes in the components of other comprehensive income (loss) are composed of
the valuation allowance associated with the Auction Rate Securities (ARS) the
company held and was subsequently able to sell back to the broker, see the
investments policy under Note A to the consolidated financial
statements.





Use of Estimates:The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, related revenues and expenses and disclosure about contingent
assets and liabilities at the date of the financial
statements.  Actual results may differ from these
estimates.





Recently Issued Accounting
Pronouncements: In June 2009, the Financial Accounting Standards
Board (FASB) issued new standards on generally accepted accounting
principles as codified in Accounting Standards Codification (ASC) 105-10. The
new standard stipulates the FASB ASC is the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities. The new
standard is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. We have adopted this standard and
the adoption did not have a material impact on our consolidated financial
statements.




35





NOTE
A  –  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued




In
September 2006, the FASB issued new standards on fair value measurements as
codified in ASC 820-10. This standard establishes a framework for measuring fair
value in generally accepted accounting principles clarifies the definition of
fair value within that framework and expands disclosures about the use of fair
value measurement. This standard emphasizes that fair value is a market-based
measurement, as opposed to a transaction-specific measurement. We adopted this
standard at the beginning of fiscal 2009 for financial assets and liabilities
and the adoption did not have a material impact on our consolidated financial
statements. We will adopt this standard at the beginning of fiscal 2010 for
non-financial assets and liabilities and do not expect it to have a material
effect on our financial statements..





In
April 2009, the FASB issued new standards on financial instruments as
codified in ASC 825-10, which requires disclosures about fair value of financial
instruments in financial statements for interim reporting periods and in annual
financial statements of publicly-traded companies. The new standard also
requires entities to disclose the methods and significant assumptions used to
estimate the fair value of financial instruments in financial statements on an
interim and annual basis and to highlight any changes from prior periods. The
new standard is effective for interim and annual periods ending after
June 15, 2009. We adopted this standard in 2009. The adoption of this
standard did not have a material impact on our consolidated financial
statements.





In
May 2009, the FASB issued new standards on subsequent events as codified in
ASC 855-10. The new standard establishes general standards for accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued. More specifically, the new
standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition in the financial statements, identifies the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that should be made about events or transactions that occur after
the balance sheet date. The new standard is effective for fiscal years and
interim periods ending after June 15, 2009. We adopted this standard during
2009. The adoption of this standard did not have a material impact on our
consolidated financial statements. We have evaluated subsequent events through
December 18, 2009, the date this report on Form 10-K was filed with the
U.S. Securities and Exchange Commission. We made no significant changes to our
consolidated financial statements as a result of our subsequent events
evaluation.





In
June 2009, the FASB issued new standards on variable interest entities
(VIE), as codified in 810-10, which requires an entity to perform a qualitative
analysis to determine whether the enterprise’s variable interest gives it a
controlling financial interest in a VIE. This analysis identifies a primary
beneficiary of a VIE as the entity that has both of the following
characteristics: i) the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance and ii) the obligation to
absorb losses or receive benefits from the entity that could potentially be
significant to the VIE. The Company is required to complete ongoing
reassessments of the primary beneficiary of a VIE and will be required by the
Company effective October 1, 2010. The Company does not expect it to have a
material effect on its financial statements.





36





NOTE
B  –  LONG-TERM LIABILITIES




The
following is a summary of the outstanding debt, which consists of a capital
lease, at:







September
      30,
            
            
            September
      30,2009
            
            
            2008Long-term
      debt
            
            $
            33,081
            
            
            $
            95,207Less:
      current maturities
            
            
            33,081
            
            
            
            62,126$
            -
            
            
            $
            33,081





The
Company has no outstanding debt other than the capital lease.





NOTE
C  –  COMMITMENTS AND FACILITIES





Blaine Facility: On
      October 30, 2007 the Company purchased its previous corporate headquarters
      in Blaine for $1,500,000 under the provisions of its option to purchase as
      stated in its lease from Jain-Olsen Properties. The Company as owner of
      the building canceled the lease to itself. The lease was scheduled to run
      through November of 2009. The elimination of the lease resulted in the
      elimination of approximately $362,000 of accrued obligations related to
      this lease in conjunction with the discontinuation of the Optronics
      segment recorded during the fiscal quarter ended June 30, 2007.The Company, on the
      same day, then sold the land and building for $1,450,000 incurring a loss
      of $52,000.  Rent expense of $14,000, was paid to the
      partnership for the period ended September 30,
  2008.





Plymouth
Facility:  The Company leases office and manufacturing
facilities in Plymouth, MN for its ongoing operations. This operating lease
expires November 30, 2013. The Company also leases various office equipment. For
the period ended September 30, 2009, rent expense was $327,000. For the period
September 30, 2008, rent expense was a negative $37,000. This was the result of
netting the Blaine facility elimination of accrued obligation of $362,000
against the Plymouth facility rent of $325,000.





The
following is a schedule of approximate minimum rent payments under the operating
lease for its Plymouth Facility:





Year ending September 30
            
            Operating
      leases2010
            
            
            $
            226,9772011
            
            
            
            234,4082012
            
            
            
            241,7732013
            
            
            
            249,480Thereafter
            
            
            
            42,756Total
      minimum lease payments
            
            
            $
            995,394








Aberdeen Facility:On August
      20, 2009 the Company entered into a renegotiated lease agreement for its
      Aberdeen, South Dakota facility. The lease is month to month. The Company
      continues to actively seek additional tenants and is evaluating other uses
      for the facility.





Information Technology: In
February 2007, the Company began implementing a new enterprise system and
entered into a contract to pay approximately $266,000 over a 3 year period for
software related to part number configuration and production scheduling. The
contract calls for payments of $29,600 for 2010.




37








NOTE
D  –  SHAREHOLDERS’ EQUITY





The Board
of Directors may, by resolution, establish from the undesignated shares
different classes or series of shares and may fix the relative rights and
preferences of shares in any class or series. The Company is authorized to issue
500 shares of preferred stock and 50,000,000 shares of common stock at $.01 par
value. The Company has not issued any shares of preferred stock.





Stock-Based Compensation.The
Company’s stock-based compensation plans are administered by the Compensation
Committee of the Board of Directors, which selects persons to receive awards and
determines the number of shares subject to each award and the terms, conditions,
performance measures and other provisions of the award.





The
Company uses the Black-Scholes option-pricing model to estimate fair value of
stock-based awards with the following weighted average assumptions:





Year ended
      September  30
            
            2009
            
            
            2008Expected
      volatility
            
            
            43%
            
            
            
            52%Expected
      life (in years)
            
            5
      years
            
            
            5
      yearsExpected
      dividends
            
            
            0%
            
            
            
            0
            %Risk-free
      interest rate
            
            
            2.79%
            
            
            
            2.98
            %





The
Company has two stock option plans which are used as an incentive for directors,
officers, and other employees. Options are generally granted at fair market
values determined on the date of grant and vesting normally occurs over a three
to five-year period.  The maximum contractual term is normally six
years. However, options granted to directors have a one year vesting period and
a six year contractual term. Shares issued upon exercise of a stock option are
new shares as opposed to treasury shares.  The director plan has
67,500 and the employee plan has 510,500 shares available for issue as of
September 30, 2009. As of September 30, 2009, $248,474 of total unrecognized
compensation expense to non-vested awards is expected to recognized over a
weighted aver period of approximately 2.19 years. The Company recorded related
compensation expense for the years ended September 30, 2009 and 2008 of $115,208
and $50,052, respectively.





Option
transactions under these plans during the year ended September 30, 2009 and 2008
are summarized as follows:


Number ofshares
            
            Weighted
      average exercise price
            Weighted
      average fair
  valueOutstanding
      at September 30, 2007
            236,830
            
            $1.72Granted
            228,700
            
            1.13
            $0.45Cancelled
      or Forfeited
            (78,830)
            
            0.97Outstanding
      at September 30, 2008
            386,700
            
            1.37Granted
            678,500
            
            1.04
            $0.44Cancelled
      or Forfeited
            (29,000)
            
            2.12Exercised
            (36,500)
            
            2.49Outstanding
      at September 30, 2009
            999,700
            
            $1.08











38


NOTE
D – SHAREHOLDERS’ EQUITY - Continued





The number
of options exercisable under the Options Plans were:





Year ended
            Exercisable
            Weighted average exercise
    priceSeptember
      30, 2009
            148,540
            $1.23September
      30, 2008
            122,240
            $1.81





The
following table summarizes information concerning options currently outstanding
at September 30, 2009:


Range
      of exercise prices
            
            Number
      outstanding
            
            Weighted
      average remaining contractual life
            
            
            Weighted
      average exercise price
            
            
            Aggregate intrinsic
      value$0.00-$1.09
            
            860,200
            
            7.21
      years
            
            $
            1.04
            
            $
            896,5871.10-1.49
            
            47,500
            
            5.22
      years
            
            
            1.17
            
            
            55,3991.50-1.99
            
            92,000
            
            1.88
      years
            
            
            1.40
            
            
            128,404999,700
            
            6.63
      years
            
            $
            1.08
            
            $
            1,080,390





The
      following table summarizes information concerning options currently
      exercisable at September 30, 2009:Range
      of exercise prices
            
            Number
      outstanding
            
            Weighted
      average remaining contractual life
            
            
            Weighted
      average exercise price
            
            
            Aggregate
      intrinsic value$0.00-$1.09
            
            69,940
            
            4.17
      years
            
            $
            1.04
            
            $
            73,0311.10-1.49
            
            1,400
            
            3.57
      years
            
            
            1.22
            
            
            1,7051.50-1.99
            
            77,200
            
            1.85
      years
            
            
            1.40
            
            
            108,389148,540
            
            2.99
      years
            
            $
            1.23
            
            $
            183,125







NOTE  E  –  SHAREHOLDER
RIGHTS PLAN




Pursuant
to the Shareholder Rights Plan each share of common stock has attached to it a
right, and each share of common stock issued in the future will have a right
attached until the rights expire or are redeemed.  Upon the occurrence
of certain change in control events, each right entitles the holder to purchase
one one-hundredth of a share of Series B Junior Preferred Participating Share,
at an exercise price of $80 per share, subject to adjustment.  The
rights expire on November 10, 2010 and may be redeemed by the Company at a
price of $.001 per right prior to the time they become exercisable.





39





NOTE  F  –  INCOME
TAXES





Deferred
taxes recognize the impact of temporary differences between the amounts of the
assets and liabilities recorded for financial statement purposes and such amount
measured in accordance with tax laws.  Realization of net operating
loss carry forward and other deferred tax temporary differences are contingent
upon future taxable earnings.  The Company’s deferred tax asset was
reviewed for expected utilization using a “more likely than not” approach as
required by ASC 740 by assessing the available positive and negative factors
surrounding its recoverability.  Accordingly, the Company recorded a
full valuation allowance at September 30, 2008.  For the year ended
September 30, 2009, the Company has reduced the portion of the valuation
allowance related to our net operating loss carryforwards (NOL’s) and other
deferred tax assets that we believe are more likely than not to be realized
based upon estimates of future taxable income.





During the
fourth quarter of fiscal year 2009, the Company reversed a portion of its
valuation allowance in consideration of all available positive and negative
evidence, including our historical operating results, current financial
condition, and potential future taxable income.  Our future potential
taxable income was evaluated based primarily on anticipated operating results
for fiscal years 2010 through 2012. We determined that projecting operating
results beyond 2012 involves substantial uncertainty and we discounted forecasts
beyond 2010 as a basis to support our deferred tax assets. The reduction in the
valuation allowance in the fourth quarter resulted in a non-cash income tax
benefit of approximately $2.5 million.  At September 30, 2009 the
Company continues to record a valuation allowance of approximately $9.3 million
against its remaining deferred tax assets. We will continue to assess the
assumptions used to determine the amount of our valuation allowance and may
adjust the valuation allowance in future periods based on changes in assumptions
of estimated future income and other factors. If the valuation allowance is
reduced, we would record an income tax benefit in the period the valuation
allowance is reduced. If the valuation allowance is increased, we would record
additional income tax expense.


40





NOTE  F  –  INCOME
TAXES   – continued




Significant
components of deferred income tax assets and liabilities are as follows
at:


September
      30,
            
            
            September
      30,2009
            
            
            2008Current
      deferred income tax assets (liabilities):Inventories
            
            $
            118,247
            
            
            $
            178,710Accrued
      expenses and reserves
            
            
            109,392
            
            
            
            239,956Prepaid
      expenses
            
            
            (42,168
            )
            
            
            -185,471
            
            
            
            418,666Valuation
      allowance
            
            
            (185,471
            )
            
            
            (418,666
            )Net
      current deferred tax assets
            
            $
            -
            
            
            $
            -Long-term
      deferred income tax assets (liabilities):Intangibles
            
            $
            24,901
            
            
            $
            29,607Property
      and equipment depreciation
            
            
            258,325
            
            
            
            (65,925
            )Net
      operating loss carry forwards and credits
            
            
            11,257,970
            
            
            
            12,762,440Stock
      based compensation
            
            
            15,872
            
            
            
            -Accrued
      expenses and reserves
            
            
            31,624
            
            
            
            -Goodwill
            
            
            (232,010
            )
            
            
            (166,890
            )11,356,682
            
            
            
            12,559,232Valuation
      allowance
            
            
            (9,124,692
            )
            
            
            (12,726,136
            )Net
      long-term deferred income tax assets(liabilities)
            
            $
            2,231,990
            
            
            $
            (166,904
            )








As of
September 30, 2009, the Company had U.S. federal and state net operating
loss (NOL) carry forwards of approximately $31,684,000 and $23,573,000
respectively which expire in fiscal years 2019 to 2027. The Company has recently
completed an Internal Revenue Code Section 382 analysis of the loss
carry-forwards and has determined that all of the company’s loss carry-forwards
are utilizable and not restricted under Section 382.




41





NOTE  F  –  INCOME
TAXES   – continued




The
following is a reconciliation of the federal statutory income tax rate to the
consolidated effective tax rate as a percent of pre-tax income for the following
periods ended:


September
      30,
            
            
            September
      30,2009
            
            
            2008Federal
      statutory rate
            
            
            34
            %
            
            
            34
            %State
      income taxes
            
            
            2
            %
            
            
            5
            %Permanent
      differences
            
            
            3
            %
            
            
            2
            %Expiration
      of net operating loss carryforwards
            
            
            -
            %
            
            
            16
            %Change
      in state tax rate effect on deferreds
            
            
            55
            %
            
            
            -
            %Change
      in valuation allowance
            
            
            (262
            %)
            
            
            (51
            %)Tax
      rate
            
            
            (168
            %)
            
            
            6
            %





Components
of the income tax expense (benefit) are as follows for the periods
ended:


September
      30,
            
            
            September
      30,2009
            
            
            2008Current:Federal
            
            $
            19,598
            
            
            $
            -State
            
            
            6,824
            
            
            
            4,31826,422
            
            
            
            4,318Deferred:Federal
            
            
            (355,833
            )
            
            
            785,197State
            
            
            1,791,578
            
            
            
            115,4701,435,745
            
            
            
            900,667Valuation
      allowance
            
            
            (3,834,639
            )
            
            
            (811,682
            )Income
      tax expense (benefit)
            
            $
            (2,372,472
            )
            
            $
            93,303





The
Company is required to recognize the financial statement benefit of a tax
position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more likely than notthreshold, the amount
recognized in the financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement with the
relevant tax authority. The Company applies the interpretation to all tax
positions for which the statute of limitations remained open. The Company had no
liability for unrecognized tax benefits. The Company did not recognize any
interest or penalties during the year ended September 30, 2009.





The
Company is subject to income taxes in the U.S. federal jurisdiction, and various
state jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant
judgment to apply. With few exceptions, the Company is no longer subject to U.S.
federal, state and local, income tax examinations by tax authorities for fiscal
years ending prior 1993. The Company changed its fiscal year in 2007 to
September 30.





42





NOTE  G  –  CONCENTRATIONS




Suppliers.   The
Company purchases critical components for our products, including injected
molded parts and connectors from third parties, some of whom are single- or
limited-source suppliers. If any of our suppliers are unable to ship critical
components, we may be unable to manufacture and ship products to our
distributors or customers. If the price of these components increases for any
reason, or if these suppliers are unable or unwilling to deliver, we may have to
find another source, which could result in interruptions, increased costs,
delays, loss of sales and quality control problems.





Customers. Two customers,
Power & Telephone Supply Company and MTS Systems Corporation, comprised
approximately 40% and 22% of total sales for the periods ended September 30,
2009 and September 30, 2008, respectively. Power & Telephone Supply Company
is a distributor and it accounted for 32% and 10% of revenue for the
corresponding respective periods. MTS Systems Corporation is an end use customer
and it accounted for 8% and 12% of revenues for the corresponding respective
periods. MTS Systems Corporation purchases our product through its standard form
of purchase order with pricing established by a schedule that is in effect from
July 1, 2008 through June 30, 2011.  Power & Telephone Supply
Company purchases our product through its standard form of purchase
order.




NOTE  H  –  EMPLOYEE
BENEFIT PLAN




The
Company maintains a contributory 401(k) profit sharing benefit plan covering all
employ­ees.  The Company matches 50% of the first 6% of the
employee’s salary that was contributed by the employee to the
plan.  The Company’s contributions under this plan were $170,950 and
$114,379 for the periods ended September 30, 2009 and September 30, 2008.





NOTE  I
– CERTAIN RELATIONSHIPS AND TRANSACTIONS




India Facility.  On
June 28, 2007, the Company sold APA Optronics (India) Private Limited ("APA
India") to an entity owned by the former chief executive officer of the Company,
Dr. Anil K. Jain. The purchase price of $504,499 was paid by delivery of a
five year promissory note. The terms of the note include monthly installment
payments of principal and interest with an annual rate of 7% amortized over a
ten year period with a five year balloon payment due November 2012 when the
outstanding balance is due. The note is secured by a pledge of Company stock by
Dr. Jain, a pledge by Dr. Jain of payments under his Separation Agreement with
the Company, and a personal guaranty by Dr. Jain. The purchase price was
determined by the independent directors to be fair and reasonable to the
Company.  The current portion of the note receivable is presented
within “prepaid expenses and other” and the long term portion is reflected as
note receivable on the balance sheet.





Severance
Agreement.   Effective June 28, 2007, Dr. Jain ceased to
be Chief Executive Officer (principal executive officer), Chief Financial
Officer (principal financial and accounting officer), and Chairman of the Board
of Directors of the Company Pursuant to the terms of an Amended and Restated
Agreement Regarding Employment/Compensation Upon Change In Control dated
September 15, 2005, Dr. Jain will be paid his current salary ($190,000 per year)
for 24 months after the date of termination of his employment, payable
quarterly. As of June 30, 2009, the Company had paid all amounts required under
this agreement with Dr. Jain.





43


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




None.




ITEM 9A.CONTROLS AND
PROCEDURES




Disclosure
Controls and Procedures




The
Company’s management carried out an evaluation, under the supervision and with
the participation of the Company’s Chief Executive Officer and the Company’s
Chief Financial Officer of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September
30, 2009. Based upon that evaluation, the Company’s Chief Executive Officer and
the Company’s Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective.




Management’s
Annual Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting, as such term is defined in Rule
13a-15(f) of the Exchange Act. Under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, management concluded that, as of
September 30, 2009, our internal control over financial reporting was
effective.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




Changes
in Internal Control Over Financial Reporting




No changes
in the Company’s internal control over financial reporting occurred during the
fourth quarter of fiscal year 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.




ITEM 9B. OTHER
INFORMATION




None.




PART
III




ITEM
10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.






Information
required by Item 10 concerning the directors and executive officers of the
Company and corporate governance is incorporated herein by reference to
Company’s proxy statement for its 2010 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after the close of the fiscal year for which this report is
filed.




44




ITEM 11. EXECUTIVE
COMPENSATION.





The
information required by Item 11 is incorporated herein by reference to Company’s
proxy statement for its 2010 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the fiscal year for which this report is
filed.





ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.





The
information required by Item 12 is incorporated herein by reference to Company’s
proxy statement for its 2010 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the fiscal year for which this report is
filed.





ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE




The
information required by Item 13 is incorporated herein by reference to Company’s
proxy statement for its 2010 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the fiscal year for which this report is
filed.




ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES




The
information required by Item 14 is incorporated herein by reference to Company’s
proxy statement for its 2010 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the fiscal year for which this report is
filed.




PART
IV




ITEM
15.EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES






The
financial statements of Clearfield, Inc. are filed herewith under Item
8:





Exhibits.
See Exhibit Index.





45


EXHIBIT
INDEX




Number
              Description
              
              Incorporated
                by
      Reference to3.1
              Restated
      Articles of Incorporation, of APA Optics, Inc. (n/k/a Clearfield, Inc.)
      dated November 3, 1983 and Articles of Amendment dated December 9, 1983,
      July 30, 1987, March 22, 1989, September 14, 1994 and August 17,
      2000
              
              Exhibit
      3.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 20003.1
      (a)
              Articles
      of Amendment to Articles of Incorporation dated August 25,
      2004
              
              Exhibit
      3.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 20043.2
              Bylaws,
      as amended and restated effective February 17, 1999 of Clearfield, Inc.
      (f/k/a APA Optics, Inc.)
              
              Exhibit
      3.2 to Registrant’s Annual Report on Form 10-KSB for the fiscal year ended
      March 31, 19994.1
              Share
      Rights Agreement dated October 23, 2000 by and between the Registrant and
      Wells Fargo Bank Minnesota NA as Rights Agent
              
              Exhibit
      1 to the Registration Statement on Form 8-A filed November 8,
      200010.1
              Stock
      Option Plan for Non-Employee Directors
              
              Exhibit
      10.3a to Registrant’s Annual Report on Form 10-KSB for the fiscal year
      ended March 31, 1994*10.2
              1997
      Stock Compensation Plan
              
              Annex
      1 to the Definitive Proxy Statement for the Registrant’s Annual Meeting of
      Shareholders held on August 15, 2001 as filed on July 19,
    2001*10.3
              Insurance
      agreement by and between the Registrant and Anil K. Jain
              
              Exhibit
      10.5 to Registrant’s Annual Report on Form 10-K for the fiscal year ended
      March 31, 1990*10.4
              Form
      of Agreement regarding Indemnification of Directors and Officers with
      Messrs. Jain, Olsen, Ringstad, Roth, Von Wald and
Zuckerman
              
              Exhibit
      10.7 to Registrant’s Annual Report on Form 10-K for the fiscal year ended
      March 31, 200210.5
              Lease
      agreement dated May 31, 2006 between Bass Lake Realty, LLC and Clearfield,
      Inc.
              
              Exhibit
      10.14 to Registrant’s Annual Report on Form 10-K for the fiscal year ended
      March 31, 2006.*10.6
              2007
      Stock Compensation Plan, as amended
              
              Exhibit
      10.15 to Registrant’s Registration Statements on Form S-8 (SEC File Nos.
      333-136828 and 333-151504)
   46
   10.7
              Amended
      and Restated Agreement Regarding Employment/Compensation Upon Change In
      Control dated September 15, 2005 by and between APA Enterprises, Inc. and
      Anil K. Jain
              
              Exhibit
      10.16 to Registrant’s Current Report on for 8-K dated June 29,
      200710.8
              Supplemental
      Separation Agreement dated June 28, 2007 by and between APA Enterprises,
      Inc. and Anil K. Jain
              
              Exhibit
      10.17 to Registrant’s Current Report on for 8-K dated June 29,
      200710.9
              Promissory
      Note dated June 28, 2007 by Photonics International, Inc. as maker and APA
      Enterprises as holder in the principal sum of $500,000
              
              Exhibit
      10.19 to Registrant’s Current Report on for 8-K dated June 29,
      200710.10
              Unconditional
      and Continuing Guaranty dated June 28, 2007 by Anil K. Jain in favor of
      APA Enterprises, Inc.
              
              Exhibit
      10.20 to Registrant’s Current Report on for 8-K dated June 29,
      200710.11
              Stock
      Pledge Agreement dated June 28, 2007 by Anil K. Jain in favor of APA
      Enterprises, Inc.
              
              Exhibit
      10.21 to Registrant’s Current Report on for 8-K dated June 29,
      200710.12
              Separation
      Payments Pledge Agreement dated June 28, 2007 by and between Anil K. Jain
      and APA Enterprises, Inc.
              
              Exhibit
      10.22 to Registrant’s Current Report on for 8-K dated June 29,
      200710.13
              Agreement
      to Provide Additional Collateral dated June 28, 2007 by and between Anil
      K. Jain and APA Enterprises, Inc.
              
              Exhibit
      10.23 to Registrant’s Current Report on for 8-K dated June 29,
      200710.14
              Non-Compete
      Agreement dated June 28, 2007 by and among others, Anil K. Jain, and APA
      Enterprises, Inc.
              
              Exhibit
      10.24 to Registrant’s Current Report on for 8-K dated June 29,
      200710.15
              Employment
      Agreement dated December 16, 2008 by and between Clearfield, Inc. and
      Cheryl P. Beranek
              
              Exhibit
      10.26 to Registrant’s Current Report on for 8-K dated December 16,
      200810.16
              Employment
      Agreement dated December 16, 2008 by and between Clearfield, Inc. and John
      P. Hill
              
              Exhibit
      10.27 to Registrant’s Current Report on for 8-K dated December 16,
      200823.1
              Consent
      of Grant Thornton LLP
              
              **31.1
              Certification
      of Chief Executive Officer (principal executive officer) Pursuant to Rules
      13a-14(a) and 15d-14(a) of the Exchange Act
              
              **31.2
              Certification
      of Chief Financial Officer (principal financial officer) Pursuant to Rules
      13a-14(a) and 15d-14(a) of the Exchange Act
              
              **32.1
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. § 1350
              
              **32.2
              Certification
      of  Principal Financial Officer Pursuant to 18 U.S.C. §
      1350
              
              **







* Indicates a management
contract or compensatory plan or arrangement.





**
Indicates exhibit filed herewith.




47










SIGNATURES





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




Clearfield,
      Inc.Date:
      December 18, 2009
              By
              /s/
      Cheryl P. BeranekCheryl
      P. BeranekPresident
      and Chief Executive Officer








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




48







Each
person whose signature appears below hereby constitutes and appoints Cheryl P.
Beranek and Bruce G. Blackey, and each of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf, individually and in each capacity stated below, all amendments to this
Form 10-K and to file the same, with all exhibits thereto and any other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully and to all intents and purposes as each might
or could do in person, hereby ratifying and confirming each act that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue
thereof.





Signatures
            
            Title
            
            Date/s/ Cheryl P.
      Beranek
              Cheryl
      P. Beranek
            
            President,
      Chief Executive Officer and Director (principal executive
      officer)
            
            December
      18, 2009/s/ Bruce G.
      Blackey
              Bruce
      G. Blackey
            
            Chief
      Financial Officer (principal financial and accounting
officer)
            
            December
      18, 2009/s/ Ronald G.
      Roth
              Ronald
      G. Roth
            
            Director
            
            December
      18, 2009/s/ John G.
      Reddan
              John
      G. Reddan
            
            Director
            
            December
      18, 2009/s/ Stephen L. Zuckerman M.D.
              Stephen
      L. Zuckerman
            
            Director
            
            December
      18, 2009/s/ Donald R.
      Hayward
              Donald
      R. Hayward
            
            Director
            
            December
      18, 2009/s/ Charles N.
      Hayssen
              Charles
      N. Hayssen
            
            Director
            
            December
      18, 2009


49