Summary of CLEARFIELD, INC.

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

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events and typically address the Company's expected future business and financial performance. Words such as "plan," "expect," "aim," "believe," "project," "target," "anticipate," "intend," "estimate," "will," "should," "could" and other words and terms of similar meaning, typically identify these forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual results could differ from those projected in any forward-looking statements because of the factors identified in and incorporated by reference from Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the year ended September 30, 2011, as well as in other filings we make with the Securities and Exchange Commission, which should be considered an integral part of Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward-looking statements included herein are made as the date of this Quarterly Report on Form 10-Q and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion and analysis of our financial condition and results of operations as of and for the three and nine month periods ended June 30, 2012 and 2011 should be read in conjunction with the financial statements and related notes in Item 1 of this report and our Annual Report on Form 10-K for the year ended September 30, 2011.

OVERVIEW

General

Clearfield, Inc. manufactures, markets, and sells an end-to-end fiber management and enclosure platform that consolidates, distributes and protects fiber as it moves from the inside plant to the outside plant and all the way to the home, business and cell site. The Company has successfully established itself as a value-added supplier to its target market of broadband service providers, including independent local exchange carriers (telephone), multiple service operators (or MSO's) (cable), wireless service providers, municipal-owned utilities, as well as commercial and industrial original equipment manufacturers ("OEMs"). Clearfield has expanded its product offerings and broadened its customer base during the last five years.

The Company has historically focused on the un-served or under-served rural communities who receive their voice, video and data services from independent telephone companies. By aligning its in-house engineering and technical knowledge alongside its customers, the Company has been able to develop, customize and enhance products from design through production. Final build and assembly is completed at Clearfield's plant in Plymouth, Minnesota with manufacturing 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. The Company deploys a hybrid sales model with some sales made directly to the customer, some made through two-tier distribution (channel) partners, and some sales through original equipment suppliers who private label their products.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2012 VS. THREE MONTHS ENDED JUNE 30, 2011

Revenues for the third fiscal quarter of 2012 ended June 30, 2012 were $10,794,000, an increase of $669,000, or approximately 7%, from revenue of $10,125,000, for the third fiscal quarter of 2011. Revenue gains in the third quarter of fiscal 2012 versus the prior year period were achieved through increased sales to telco's, commercial data networks, and our build-to-print markets. Revenue increases were across product lines, offset by lower revenues to systems integrators in the third quarter of fiscal 2012 versus the 2011 third quarter. Revenues derived from distributor arrangements were consistent with the prior year quarter. Revenues were positively affected in both periods by deployments associated with the American Recovery and Reinvestment Act (stimulus funds). The market continues to experience challenges associated with long lead times for the supply of fiber cable. In addition, uncertainty regarding the effect of changes to the Universal Service Fund, a federal program to support the delivery of telecommunications services to rural and communities with high-cost delivery metrics, has influenced the buying patterns of Tier 3 Carriers. Operating results for the third quarter of fiscal year 2012 are not necessarily indicative of results to be expected for future quarters or the entire year, due to variability in customer purchasing patterns and seasonal, operating and other factors.

Cost of sales for the third quarter of fiscal 2012 was $6,237,000, an increase of $431,000, or 7% from $5,806,000 in the comparable period. Gross margin was 42.2% in the third quarter of fiscal 2012, relatively unchanged from 42.7% for the third quarter of fiscal 2011. Gross profit increased to $4,557,000 in the third quarter of fiscal 2012, compared to $4,319,000 for the third fiscal quarter of 2012, an increase of 6% or $238,000. The increase in cost of goods and gross profit was primarily the result of increased sales in the third quarter of fiscal 2012 versus the 2011 third quarter. The Company continues to be committed to developing our channel distribution programs in step with our ongoing improvements in our manufacturing processes in order to facilitate future improvements in gross profit.

Selling, general and administrative expenses decreased 9%, or $258,000, to $2,774,000 in the third quarter of fiscal 2012 versus $3,032,000 for the third fiscal quarter of 2011. Selling expenses increased $170,000, mainly associated with an increase in sales personnel. Marketing expenses increased $33,000, mainly as a result of higher advertising and tradeshow costs within the period. Stock based compensation expense increased $19,000 in the third quarter of fiscal 2012 as a result of a higher number of employee stock options outstanding in the 2012 third quarter versus the 2011 third quarter. In addition, the fiscal 2011 period expenses were reduced by a $44,000 benefit from a gain on the sale of assets in the period. Offsetting these increases was a decrease in incentive compensation expense in the amount of $545,000 in the fiscal 2012 period versus the comparable period in fiscal 2011.

Income from operations for the third fiscal quarter of 2012 was $1,783,000 compared to income of $1,287,000 for the third fiscal quarter of 2011, an increase of $496,000 or 39%. This increase is attributable to the increase in gross margin and decreased selling, general and administrative expenses within the period.

Interest income for the quarter ended June 30, 2012 was $24,000 compared to $27,000 for the comparable period for fiscal 2011. Interest rates have continued to decline resulting in lower returns. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit and money market accounts.

Income tax expense was $64,000 and $45,000 for the quarters ended June 30, 2012 and 2011, respectively. Tax expense primarily relates to book and tax differences of goodwill totaling $21,000 and $21,000 respectively for each of the corresponding quarters. The balance of the income tax expense was for various states income and franchise taxes as well as alternative minimum tax (AMT).

The Company's net income for the third quarter ended June 30, 2012 was $1,742,000, or $0.14 per basic and diluted share. For the third quarter of fiscal 2011 ended June 30, 2011 the Company reported net income of $1,278,000, or $0.11 per basic and $0.10 per diluted share.

NINE MONTHS ENDED JUNE 30, 2012 VS. NINE MONTHS ENDED JUNE 30, 2011

Revenues for the nine months ended June 30, 2012 were $27,071,000, an increase of approximately 11% or $2,580,000 from revenue of $24,491,000 for the first nine months of fiscal 2011. Revenue growth was experienced from existing clients as well as from the development of new accounts within the telco industry. The growth in revenue includes gains from within Tier 3 Carriers, as well as from an emerging presence associated with Tier 2 Carriers who have a national footprint. The increase in revenue includes the gains in product sales to engineering contractors providing Engineer, Furnish and Installation (EF&I) services to telco and cable broadband operators. Revenues derived from distributor arrangements increased as additional distributors are now representing the Company as compared to the prior year. In addition, revenue gains were also gained in our build-to-print market. These revenue increases in the nine month period ended June 30, 2012 were offset by lower revenues to system integrators in the comparable nine month period in fiscal 2011. Revenues were positively affected by deployments associated with the American Recovery and Reinvestment Act (stimulus funds) in both periods. Operating results for the first three quarters of fiscal year 2012 are not necessarily indicative of results to be expected for future quarters or the entire year, due to variability in customer purchasing patterns and seasonal, operating and other factors.

Cost of sales for the nine months ended June 30, 2012 was $16,001,000, an increase of $1,688,000, or 12%, from $14,312,000 in the comparable period. Gross margin was 40.9% in fiscal 2012, relatively unchanged from 41.6% for the comparable nine month period in fiscal 2011. Gross profit increased $892,000, or 9%, to $11,070,000 for the nine months ended June 30, 2012 from $10,178,000 in the comparable period in fiscal 2011. The year-over-year increase in gross profit is primarily a result of increased sales volume, mainly through additional sales distribution channels than prior year, along with improved manufacturing efficiencies and absorption of factory overhead associated with higher production volumes.

Selling, general and administrative expenses increased 3%, or $260,000, to $8,120,000 in the fiscal 2012 period from $7,860,000 for the first nine months of fiscal 2011 period. This increase is primarily composed of $658,000 in higher selling expenses, mainly associated with an increase in sales personnel. Marketing expenses increased $212,000 as a result of higher advertising and tradeshow costs within the period. Stock based compensation expense increased $118,000 in the fiscal 2012 period as a result of a higher amount of employee stock options outstanding in the nine month period ended June 30, 2012 quarter versus 2011. Offsetting these increases was a decrease of $709,000 in incentive compensation in the nine month period ending June 30, 2012 versus the comparable period in fiscal 2011.

Income from operations for the nine months ended June 30, 2012 was $2,951,000 compared to income of $2,319,000 for the first nine months of fiscal 2011, an improvement of $632,000, or 27%. This improvement is attributable to increased revenue and gross margin.

Interest income for the nine months ended June 30, 2012 was $77,000 compared to $83,000 for the comparable period for fiscal 2011. Interest rates have continued to decline resulting in lower returns. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit and money market accounts.

Income tax expense was $155,000 and $116,000 for the first nine months ended June 30, 2012 and 2011, respectively. Tax expense primarily relates to book and tax differences of goodwill totaling $62,000 and $62,000, respectively, for each of the corresponding nine month periods. The balance of the income tax expense was for various states income and franchise taxes as well as alternative minimum tax (AMT).

The Company's net income for the nine month period ended June 30, 2012 was $2,873,000, or $0.23 per basic and $0.23 per diluted share. The Company's net income for the nine month period ended June 30, 2011 was $2,311,000, or $0.19 per basic share and $0.18 per diluted share.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2012, our principal source of liquidity was our cash and cash equivalents and short-term investments. Those sources total $11,818,000 at June 30, 2012 compared to $13,130,000 at September 30, 2011. Our excess cash is invested mainly in certificates of deposit backed by the FDIC and money market accounts. The majority of our funds are insured by the FDIC. Investments considered long-term are $4,806,000 at June 30, 2012, compared to $2,707,000 at September 30, 2011. We believe the combined balances of short-term cash and investments along with long-term investments provide a more accurate indication of our available liquidity. At June 30, 2012, Clearfield had no debt along with $16,624,000 in cash and equivalents and investments, up $787,000 from $15,837,000 at September 30, 2011.

The Company expects to fund operations with its working capital, which is the combination of existing cash and cash equivalent cash flow from operations, accounts receivable and inventory. The Company intends to use its cash assets primarily for its continued organic growth. Additionally, the Company may use some available cash for potential future strategic initiatives or alliances. We believe our cash and cash equivalents at June 30, 2012, along with cash flow from future operations, will be sufficient to fund our working capital and capital resources needs for the next 12 months.

Operating Activities

Net cash generated from operating activities totaled $793,000 for the nine months ended June 30, 2012. This was primarily due to net income of $2,873,000, and non-cash expenses for depreciation and amortization of $300,000, deferred taxes of $62,000, loss on asset disposals of $21,000, and stock based compensation of $327,000. Changes in operating assets and liabilities using cash include increases in inventory of $242,000, other current assets of $351,000, and accounts receivable of $864,000. Changes using cash also include a decrease in accounts payable and accrued expenses in the amount of $1,332,000, primarily reflecting fiscal 2011 accrued bonus compensation accruals paid in the first quarter of fiscal 2012.

Net cash generated from operating activities totaled $3,070,000 for the nine months ended June 30, 2011. This was primarily due to net income of $2,311,000, and non-cash expenses for depreciation of $266,000, deferred taxes of $62,000, gain on disposal of assets of $44,000, and stock based compensation of $209,000. Changes in operating assets and liabilities using cash were increases in inventory of $685,000, other current assets of $125,000, and accounts receivable of $395,000. Changes in operating assets and liabilities providing cash were an increase in accounts payable and accrued expenses of $1,472,000.

Investing Activities

We invest our excess cash in money market accounts and bank CDs in denominations across numerous banks. We believe we obtain a competitive rate of return given the economic climate along with the security provided by the FDIC on these investments. During the nine month period ended June 30, 2012 we used cash to purchase $8,661,000 of FDIC-backed securities and received $2,574,000 on CDs that matured. Purchases of capital equipment and patents, mainly information technology equipment and vehicles, consumed $297,000 of cash.

During the nine month period ended June 30, 2011 we utilized cash to purchase $1,396,000 of securities and received $1,040,000 on CDs that have matured. Purchases of capital equipment and information technology equipment consumed $578,000 of cash during the nine month period ended June 30, 2011. We also received proceeds from the sale of assets in the amount of $660,000 for the sale of our Aberdeen, SD facility.

Financing Activities

For the nine month period ended June 30, 2012 we received $143,000 from employees' participation and purchase of stock through our ESPP and $148,000 from the issuance of stock as a result of employees exercising options.

For the nine month period ended June 30, 2011 we received $88,000 from employees' participation and purchase of stock through our ESPP and received $59,000 from the issuance of stock as a result of employees exercising options.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company's accounting policies. The accounting policies considered by management to be the most critical to the presentation of the financial statements because they require the most difficult, subjective and complex judgments include revenue recognition, stock-based compensation, deferred tax asset valuation allowances, accruals for uncertain tax positions, and impairment of goodwill and long-lived assets.

These accounting policies are described in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the year ended September 30, 2011. Management made no changes to the Company's critical accounting policies during the quarter ended June 30, 2012.

In applying its critical accounting policies, management reassesses its estimates each reporting period based on available information. Changes in these estimates did not have a significant impact on earnings for the quarter ended June 30, 2012.