UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE QUARTERLY PERIOD ENDED December
      31,2008o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE TRANSITION PERIOD FROM ______________ TO
      ______________








SECTOR
10, Inc.





(Exact
name of small business issuer as specified in its charter)





Delaware
            
            000-24370
            
            33-0565710(State
      or other jurisdiction of incorporation)
            
            (Commission
      File No.)
            
            (IRS
      Employer Identification No.)





14553
      South 790 West


Bluffdale, Utah 84065


(Address
of principal executive offices, including zip code)





Issuer’s
telephone number, including area code: (206) 853-4866





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





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


Yes o No x





As of
February 16, 2010 the issuer had 39,432,243 shares of common stock
outstanding.





Transitional
Small Business Disclosure Format (check one): Yes o No x




1





TABLE OF
CONTENTS





Sector
10, Inc.


Part I. Financial
      InformationItem
      1.
            Unaudited
      Consolidated Financial StatementsConsolidated
      Balance Sheets  as of December 31, 2009 (Unaudited)
      and  March 31, 2009 (Audited)
            
            3Unaudited
      Consolidated Statements of Operations for the nine months ended December
      31, 2009 and 2008 and for the period from inception, September 16, 2002 to
      December 31, 2009
            
            5Unaudited
      Consolidated Statements of Operations for the three months ended December
      31, 2009 and 2008.
            
            6Unaudited
      Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for
      the period March 31, 2009 to December 31, 2009
            
            7Unaudited
      Consolidated Statements of Cash Flows for the nine months ended December
      31, 2009 and 2008 and for the period from inception, September 16, 2002,
      to December 31, 2009.
            
            10Notes
      to the Unaudited Consolidated Financial Statements
            
            11Item
      2.
            Management’s
      Discussion and Analysis or Plan of Operation
            
            23Item
      3.
            Controls
      and Procedures
            
            31Part
      II. Other InformationItem
      1.
            Legal
      Proceedings
            
            31Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            33Item
      6.
            Exhibits
            
            33







2


Part
I    FINANCIAL INFORMATION





Item
1.  FINANCIAL STATEMENTS





Sector
10, Inc.


(A DEVELOPMENT STAGE
COMPANY)


CONSOLIDATED
BALANCE SHEETS


December
      31,
              2009
            
            
            March
      31,
              2009ASSETS
            
            (Unaudited)
            
            
            (Audited)Current
      assets:Cash
            
            $
            4,340
            
            
            $
            35,016Accounts
      receivable
            
            
            -
            
            
            
            2,000Inventory
            
            
            18,409
            
            
            
            18,409Prepaid
      assets
            
            
            -
            
            
            
            37,291Total
      current assets
            
            
            22,749
            
            
            
            92,716Fixed
      Assets:Furniture
            
            
            9,182
            
            
            
            9,182Computers
            
            
            13,068
            
            
            
            13,068Total
      fixed asset cost
            
            
            22,250
            
            
            
            22,250Less:
      accumulated depreciation
            
            
            (9,048
            )
            
            
            (5,710
            )Net
      fixed assets
            
            
            13,202
            
            
            
            16,540Other
      assets:Deposits
            
            
            -
            
            
            
            10,000Deferred
      expense
            
            
            1,467,000
            
            
            
            -Network
      acquisition/development costs
            
            
            1,147,995
            
            
            
            1,147,995Total
      other assets
            
            
            2,614,995
            
            
            
            1,157,995Total
      assets
            
            $
            2,650,946
            
            
            $
            1,267,251




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


3


Sector
10, Inc.


(A DEVELOPMENT STAGE
COMPANY)


CONSOLIDATED
BALANCE SHEETS




December
      31,
              2009
            
            
            March
      31,
              2009LIABILITIES
      AND SHAREHOLDERS' EQUITY
            
            (Unaudited)
            
            
            (Audited)Current
      liabilities:Accounts
      payable and accrued liabilities
            
            $
            682,518
            
            
            $
            400,152Deferred
      revenue
            
            
            -
            
            
            
            18,500Note
      payable  - short term
            
            
            387,833
            
            
            
            451,000Note
      payable –   officer / shareholder
            
            
            6,050
            
            
            
            38,754Total
      current liabilities
            
            
            1,076,401
            
            
            
            908,406Long  term
      liabilities:Note
      payable
            
            
            483,000
            
            
            
            -Total
      long term liabilities
            
            
            483,000
            
            
            
            -Total
      liabilities
            
            
            1,559,401
            
            
            
            908,406Shareholders'
      equity:Preferred
      shares - $0.001 par value; 1,000,000 authorized, no shares issued or
      outstandingC
      Common shares - $0.001 par value; 199,000,000 authorized; 39,432,243 and
      10,143,530 shares issued and outstanding, respectively
            
            
            39,432
            
            
            
            10,144Additional
      paid- in-capital
            
            
            2,887,810
            
            
            
            1,009,008Deficit
      accumulated during the development stage
            
            
            (1,835,697
            )
            
            
            (660,307
            )Total
      shareholders' equity
            
            
            1,091,545
            
            
            
            358,845Total
      liabilities and shareholders' equity
            
            $
            2,650,946
            
            
            $
            1,267,251




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


4


Sector 10, Inc.


(A
DEVELOPMENT STAGE COMPANY)


UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS


For the
Nine Months Ended December 31, 2009 and 2008 and for the Period From
Inception,


September
16, 2002 to December 31, 2009




Nine
      Months Ended
                  
                  
                  Inception
      toDecember
      31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008
                  
                  
                  2009Sales
                  
                  $
                  -
                  
                  
                  $
                  31,000
                  
                  
                  $
                  18,500Cost
      of Sales
                  
                  
                  -
                  
                  
                  
                  (23,800
                  )
                  
                  
                  (18,032
                  )Gross
      Profit
                  
                  
                  -
                  
                  
                  
                  7,200
                  
                  
                  
                  468Expenses:General
      and administrative
                  
                  
                  1,136,697
                  
                  
                  
                  491,657
                  
                  
                  
                  2,282,212Depreciation
                  
                  
                  3,338
                  
                  
                  
                  3,337
                  
                  
                  
                  9,048Total
      expenses
                  
                  
                  1,140,035
                  
                  
                  
                  494,994
                  
                  
                  
                  2,291,260Income
      (loss) from operations
                  
                  
                  (1,140,035
                  )
                  
                  
                  (487,794
                  )
                  
                  
                  (2,290,792
                  )Interest
      expense
                  
                  
                  (35,355
                  )
                  
                  
                  (13,707
                  )
                  
                  
                  (62,105
                  )Other
      income: debt restructuring
                  
                  
                  -
                  
                  
                  
                  517,200
                  
                  
                  
                  517,200Net
      Income (loss) before income taxes
                  
                  
                  (1,175,390
                  )
                  
                  
                  15,699
                  
                  
                  
                  (1,835,697
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      Income (loss) after income taxes
                  
                  $
                  (1,175,390
                  )
                  
                  $
                  15,699
                  
                  
                  $
                  (1,835,697
                  )Weighted
      Average Shares Outstanding – basic and diluted
                  
                  
                  16,541,740
                  
                  
                  
                  9,166,116Basic
      and diluted income (loss) per shareContinuing
      Operations
                  
                  $
                  (0.07
                  )
                  
                  $
                  0.00Net
      Income (Loss)
                  
                  $
                  (0.07
                  )
                  
                  $
                  0.00





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


5


Sector
10, Inc.


(A
DEVELOPMENT STAGE COMPANY)


UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS


For the
Three Months Ended December 31, 2009 and 2008





Three
      Months EndedDecember
      31,
            
            December
      31,2009
            
            2008Sales
            
            $
            -
            
            
            $
            25,000Cost
      of Sales
            
            
            -
            
            
            
            (20,000
            )Gross
      Profit
            
            
            -
            
            
            
            5,000Expenses:General
      and administrative
            
            
            414,283
            
            
            
            120,921Depreciation
            
            
            1,113
            
            
            
            1,112Total
      expenses
            
            
            415,396
            
            
            
            122,033Income
      (loss) from operations
            
            
            (415,396
            )
            
            
            (117,033
            )Interest
      expense
            
            
            (14,875
            )
            
            
            (5,865
            )Other
      income: debt restructuring
            
            
            -
            
            
            
            -Net
      Income (loss) before income taxes
            
            
            (430,271
            )
            
            
            (122,898
            )Provision
      for income taxes
            
            
            -
            
            
            
            -Net
      Income (loss) after income taxes
            
            $
            (430,271
            )
            
            $
            (122,898
            )Weighted
      Average Shares Outstanding – basic and diluted
            
            
            27,128,637
            
            
            
            9,417,442Basic
      and diluted income (loss) per shareContinuing
      Operations
            
            $
            (0.02
            )
            
            $
            (0.01
            )Net
      Loss
            
            $
            (0.02
            )
            
            $
            (0.01
            )





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





6





Sector
10, Inc.


(A
DEVELOPMENT STAGE COMPANY)


UNAUDITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)




Deficit
              AccumulatedAdditional
            
            During
      theCommon
      Stock
            
            
            Paid-In
            
            DevelopmentShares
            
            
            Amount
            
            
            Capital
            
            StageBalance
      at March 31, 2009
            
            
            10,143,530
            
            
            $
            10,144
            
            
            $
            1,009,008
            
            
            $
            (660,307
            )Issue
      shares on April 8, 2009 @$.30 per share to John Gargett for Director Fees
      (unaudited)
            
            
            50,000
            
            
            
            50
            
            
            
            14,950
            
            
            
            -Issue
      shares on April 22, 2009 to Layne Davis @$.20 per share for Product Design
      (unaudited)
            
            
            27,500
            
            
            
            28
            
            
            
            5,472
            
            
            
            -Issue
      shares on April 24, 2009 to QualityStocks, LLC @$.30 per share for
      Investor Relations (unaudited)
            
            
            37,500
            
            
            
            37
            
            
            
            11,213
            
            
            
            -Issue
      shares on April 24, 2009 to Illuminated Financial @$.20 per share for
      Investor Relations (unaudited)
            
            
            25,000
            
            
            
            25
            
            
            
            4,975
            
            
            
            -Issue
      shares to John Gargett on May 8, 2009 @$.10 per share per employment
      contract (unaudited)
            
            
            50,000
            
            
            
            50
            
            
            
            4,950
            
            
            
            -Issue
      shares to Patrick Love on May 15, 2009 @$.20 per share per employment
      contract (unaudited)
            
            
            10,000
            
            
            
            10
            
            
            
            1,990
            
            
            
            -Issue
      Shares on May 19, 2009 as a result of Reverse stock split
      (unaudited)
            
            
            43
            
            
            
            -
            
            
            
            -
            
            
            
            -Issue
      shares to John Gargett on July 13, 2009 @$.27 per share per employment
      contract due at July 1, 2009 (unaudited)
            
            
            50,000
            
            
            
            50
            
            
            
            13,450
            
            
            
            -Issue
      shares to Patrick Love on July 13, 2009 @$.27 per share per employment
      contract due at July 1, 2009 (unaudited)
            
            
            10,000
            
            
            
            10
            
            
            
            2,690
            
            
            
            -Issue
      shares to John McCloskey, Jr on September 24, 2009 @$.135 per share for
      Board of Advisor Fees due on July 14, 2009 (unaudited)
            
            
            25,000
            
            
            
            25
            
            
            
            3,350
            
            
            
            -Issue
      shares to Hugh Cholmondeley on September 24, 2009 @$.135 per share for
      Board of Advisor Fees due on July 14, 2009 (unaudited)
            
            
            25,000
            
            
            
            25
            
            
            
            3,350
            
            
            
            -Issue
      shares to Pericles DeAvila on September 28, 2009 based on May 1, 2009
      authorization @$.10 per share for prior year accrued services and current
      year board services. (unaudited)
            
            
            550,000
            
            
            
            550
            
            
            
            54,450
            
            
            
            -Issue
      shares to Laurence A. Madison on September 28, 2009 based on May 1, 2009
      authorization @$.10 per share for prior year accrued services and current
      year board services. (unaudited)
            
            
            400,000
            
            
            
            400
            
            
            
            39,600
            
            
            
            -




7


Sector
10, Inc.


(A
DEVELOPMENT STAGE COMPANY)


UNAUDITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)


DeficitAccumulatedAdditional
              
              
              During
      theCommon
      Stock
              
              
              Paid-In
              
              
              DevelopmentShares
              
              
              Amount
              
              
              Capital
              
              
              StageIssue
      shares to Alan Rouleau on September 28, 2009 based on May 1, 2009
      authorization @$.10 per share for prior year accrued services and current
      year board services. (unaudited)
              
              
              100,000
              
              
              
              100
              
              
              
              9,900
              
              
              
              -Issue
      shares to John Ketcham on September 28, 2009 @$.11 per share for R&D
      services (unaudited)
              
              
              5,000
              
              
              
              5
              
              
              
              545
              
              
              
              -Issue
      shares to Patrick Madison on September 28, 2009  @$.11 per share
      for short term investment (unaudited)
              
              
              15,000
              
              
              
              15
              
              
              
              1,635
              
              
              
              -Issue
      shares to Sector 10 Holdings, Inc. on September 30, 2009 @$.30 per share
      to reimburse stock transferred to Illuminated Financial on behalf of
      Company.  Accrued in prior
      quarter.  (unaudited)
              
              
              250,000
              
              
              
              250
              
              
              
              77,250
              
              
              
              -Issue
      shares to Sector 10 Holdings, Inc. on September 30, 2009 @$15 per share to
      stock transfer to Moody Capital, LLC (unaudited)
              
              
              20,834
              
              
              
              21
              
              
              
              3,104
              
              
              
              -Issue
      shares to Sector 10 Holdings, Inc. on November 6, 2009 @ $.11 per share
      regarding reimbursement of shares provided on behalf of Sector 10
      Inc.  (unaudited)
              
              
              1,544,000
              
              
              
              1,544
              
              
              
              (1,544
              )
              
              
              -Issue
      shares on November 10, 2009 based on conversion of $1,144,000 of
      distribution fee in accordance with provisions under Distribution
      Agreement between Sector 10 Holdings, Inc. and Sector 10, Inc. Based on
      agreement, the shares are convertible into shares based on a value
      computed on November 10, 2009 at $.10067 per share.  Shares
      issued to Mariennie & Associates and assignees on November 10, 2009 as
      assigned by Sector 10 Holdings, Inc. under an assignment and consulting
      agreement dated November 10, 2009. (unaudited)
              
              
              11,363,636
              
              
              
              11,364
              
              
              
              1,132,636
              
              
              
              -Issue
      shares on November 10, 2009 to Sector 10 Holdings regarding reimbursement
      of shares provided on behalf of Sector 10 Inc under the assignment
      contract with Mariennie & Associates.  Shares valued at
      $.10067 under the conversion computation in the distribution agreement.
      (unaudited)
              
              
              13,250,000
              
              
              
              13,250
              
              
              
              (13,250
              )
              
              
              -Issue
      shares to Sector 10 Holdings for agreement to provide financing under
      assignment transaction.  Shares are valued under the conversion
      provision at $.10067 as of November 10,
      2009.  (unaudited)
              
              
              1,325,000
              
              
              
              1,325
              
              
              
              131,675
              
              
              
              -





8





Sector
10, Inc.


(A
DEVELOPMENT STAGE COMPANY)


UNAUDITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)





Deficit
      AccumulatedAdditional
            
            
            During
      theCommon
      Stock
            
            
            Paid-In
            
            
            DevelopmentShares
            
            
            Amount
            
            
            Capital
            
            
            StageIssue
      shares authorized on December 3, 2009 @$.055 per share to John McCloskey
      for consulting services rendered. (unaudited)
            
            
            7,700
            
            
            
            7
            
            
            
            416
            
            
            
            -Issue
      shares authorized on December 3, 2009 @ $.055 per share to Lionel Brown in
      accordance with agreement for short term funding.
    (unaudited)
            
            
            7,500
            
            
            
            7
            
            
            
            405
            
            
            
            -Issue
      shares authorized on December 3, 2009 @ $.055 per share to Patricia
      Fielding in accordance with agreement for short term funding.
      (unaudited)
            
            
            20,000
            
            
            
            20
            
            
            
            1,080
            
            
            
            -Issue
      shares on December 9, 2009 @$.15 per share to John Gargett per employment
      contract due at September 1, 2009. (unaudited)
            
            
            50,000
            
            
            
            50
            
            
            
            7,450
            
            
            
            -Issue
      shares on December 9, 2009 @$.10 per share to John Gargett per employment
      contract due at November 1, 2009. (unaudited)
            
            
            50,000
            
            
            
            50
            
            
            
            4,950
            
            
            
            -Issue
      shares on December 9, 2009 @$.12 per share to Patrick Love per employment
      contract due at September 1, 2009. (unaudited)
            
            
            10,000
            
            
            
            10
            
            
            
            1,190
            
            
            
            -Issue
      shares authorized on December 17, 2009 @$.093 per share to Mark Madison in
      accordance with agreement for short term funding.
    (unaudited)
            
            
            10,000
            
            
            
            10
            
            
            
            920
            
            
            
            -Net
      loss for the period. (unaudited)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,175,390
            )Balance
      at December 31, 2009 (unaudited)
            
            
            39,432,243
            
            
            $
            39,432
            
            
            $
            2,887,810
            
            
            $
            (1,835,697
            )





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


9





Sector
10, Inc.


DEVELOPMENT
STAGE COMPANY)


UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS




Nine
      Months Ended
            
            
            Inception
      toDecember
      31,
            
            
            December
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009Cash
      Flows from Operating Activities:Net
      income (loss)
            
            $
            (1,175,390
            )
            
            $
            15,699
            
            
            $
            (1,835,697
            )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Stock
      for services
            
            
            478,381
            
            
            
            339,834
            
            
            
            1,025,089Depreciation
            
            
            3,338
            
            
            
            3,337
            
            
            
            9,048Gain
      on debt restructuring
            
            
            -
            
            
            
            (517,200
            )
            
            
            (517,200
            )Changes
      in assets and liabilities(Increase)
      decrease in accounts receivable
            
            
            2,000
            
            
            
            (3,000
            )
            
            
            -(Increase)
      in inventory
            
            
            -
            
            
            
            -
            
            
            
            (18,409
            )(Increase)
      decrease in deposits
            
            
            10,000
            
            
            
            (25,000
            )
            
            
            -Increase
      in accounts payable and accrued liabilities
            
            
            608,413
            
            
            
            129,466
            
            
            
            1,089,179Increase
      (decrease) in deferred revenue
            
            
            (18,500
            )
            
            
            -
            
            
            
            -Net
      cash used in operating activities
            
            
            (91,758
            )
            
            
            (56,864
            )
            
            
            (247,990
            )Cash
      Flows from Investing Activities:Fixed
      asset purchases
            
            
            -
            
            
            
            -
            
            
            
            (22,250
            )Network
      acquisition / development costs
            
            
            -
            
            
            
            (97,995
            )
            
            
            (147,995
            )Net
      cash used in investing activities
            
            
            -
            
            
            
            (97,995
            )
            
            
            (170,245
            )Cash
      Flows from Financing Activities:Bank
      overdraft
            
            
            -
            
            
            
            (692
            )
            
            
            -Proceeds
      from general financing
            
            
            93,786
            
            
            
            200,000
            
            
            
            544,786Proceeds
      from Shareholder /Officers
            
            
            31,516
            
            
            
            161,238
            
            
            
            914,337Payments
      to Shareholder/Officers
            
            
            (64,220
            )
            
            
            (205,612
            )
            
            
            (1,040,134
            )Proceeds
      from issuance of common stock
            
            
            -
            
            
            
            -
            
            
            
            3,586Net
      cash provided by financing activities
            
            
            61,082
            
            
            
            154,934
            
            
            
            422,575Net
      increase (decrease) in cash and cash equivalents
            
            
            (30,676
            )
            
            
            75
            
            
            
            4,340Beginning
      of the period – cash balance
            
            
            35,016
            
            
            
            -
            
            
            
            -Ending
      of the period – cash balance
            
            $
            4,340
            
            
            $
            75
            
            
            $
            4,340Cash
      Paid for interest
            
            $
            882
            
            
            $
            11,625
            
            
            $
            14,445Cash
      paid for income taxes
            
            $
            -
            
            
            $
            -
            
            
            $
            -





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


10


SECTOR
10, INC.


(A
DEVELOPMENT STAGE COMPANY)


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





Note
1 - BASIS OF PRESENTATION





The
accompanying unaudited consolidated condensed financial statements of Sector 10,
Inc. (“Sector 10” or the “Company”), have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and
required by Rule 10-01 of Regulation S-X. They do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation, have been included in
the accompanying unaudited consolidated financial statements. Operating results
for the periods presented are not necessarily indicative of the results that may
be expected for the full year.





Note
2 – INVENTORY





The
Company uses Dutro Company as an outsourced manufacturing
company.  The Dutro Company provides the Company with details
regarding inventory on hand and related costs.  The inventory on hand
at March 31, 2009 was $18,409. Sales activity and related purchase orders were
minimal for the fiscal year ended March 31, 2009 and no sales activity occurred
in the nine month period ended December 31, 2009.





All
inventory on hand is available for sale.  As sales and related
production activity increases the Company will with the assistance of the
outsourced manufacturer periodically makes judgments and estimates regarding the
future utility and carrying value of its inventory.  The carrying
value of inventory is periodically reviewed and impairments, if any, are
recognized when the expected future benefit from the inventory is less than its
carrying value.  If applicable, the Company will establish inventory
reserves for estimated obsolescence or unmarketable inventory which is equal to
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. For the period
ended December 31, 2009, the Company has no inventory reserve.





Dutro
Company was the outside manufacturer of Sector 10 Products under an agreement
dated October 1, 2007.  The agreement expired on September 30, 2009
and was not renewed.  Finished inventory was retrieved from the Dutro
Company manufacturing facility and is stored in facilities controlled by the
Company.  The Company is still seeking the return of various raw
materials, supplies, molds, detail plans and specifications and other items from
Dutro Company. The Company is soliciting quotes from potential new
manufacturers.  There are interim sources that are immediately
available for production until a new manufacturer is identified.





Note
3 – NETWORK ACQUISITION/DEVELOPMENT COSTS





On May
19, 2008 Sector 10, Inc. (“Sector 10” or “Company”) entered into an agreement
with its major shareholder Sector 10 Holdings, Inc.
(“Holdings”).  Holdings currently owns over 50% of the outstanding
shares of Sector 10, Inc.  Holdings had developed a Server Network to
maintain and administer products and services that had been developed within
specifications to manage the SRU and MRU safety products.





The
network has fully integrated capabilities for distribution services including
the worldwide transmission of video and audio broadcasts, with content
management services that archive data under a redundant system with various
server clusters across the nation to service Sector10’s National and world-wide
requirements.  In addition to providing for the normal Sector 10
products such as the SRU and SRU- Media, the Network also has the capability to
provide other services. The development costs include the licensed rights to
proprietary software including the PLX-3D software which is used for the
monitoring and tracking services provided with the SRU/MRU.


11





The
network was transferred from Holdings to the Company at a cost of $1,000,000
which reflects the prior development costs incurred by Holdings prior to the
transfer.  As part of the agreement, the Company agreed to pay for
development costs that were due in the month of transfer.  This
expense amounted to $97,995 in May 2008. An additional $50,000 was accrued for
development expenses incurred prior to the year ended March 31,
2009.  The transfer was reflected as Network acquisition /development
costs and the Company issued 1,250,000 common shares that were valued at $.80
per share for total value of $1,000,000.  The shares and related
conversion price were adjusted to reflect the subsequent reverse stock
split.





The
Network is treated as a Long Lived Asset which is reviewed regularly for
impairment.  In its review for impairment, the Company prepares
estimates of future cash flows to assist in the determination of the asset’s
recoverability.  If there is an issue regarding recoverability, an
independent valuation will be obtained to determine any required adjustment for
impairment  The estimates used in determining for recoverability are
updated by the Company on a regular basis to provide guidance
for  Management’s quarterly and annual reporting.  Based on
the estimates prepared for the fiscal year end March 31, 2009, Management has
determined that the Network Asset is recoverable and not subject to an
adjustment for impairment.




The
Network is not in service as of the period ended December 31,
2009.  It is expected to be placed in service in the fiscal year ended
March 31, 2010.  Once, placed in service, the asset will be
depreciated over its estimated useful life which is currently estimated to be 7
to 10 years.  The Company has not completed its review of the final
depreciable life for the Network asset.





The
Company has determined that the performance of the administrator has been
inadequate and the administration agreement was cancelled.  The
performance issues have resulted in various disagreements with the
administrator.  As part of the termination, the Company has requested
the return of all servers and related software and other equipment for
deployment in other secure facilities with a new administrator. The
administrator has not provided the return of the equipment at this
stage.  In addition, the administrator is seeking payment of fees and
has filed a claim for $58,732 of fees due. Although the fees at issue are
attributable to services for the Company, the claim was not filed against the
Company.





The
Company disagrees with the total fees but has recorded the full amount in the
financial statements.  The Company has disputed this claim and
considering legal options to provide the transfer of the equipment to another
administrator. The disputed fees include charges for consulting fees that are
being challenged since the network is not in service.  Removing the
consulting fees included in the $58,732 and the consulting fees paid with the
acquisition of the equipment, the Company has a credit balance of $4,000. The
dispute is expected to be resolved before any significant sales activity
begins.  If needed, the Company will purchase additional servers as
required to perform any required administration for new business in the next
fiscal year.  Any additional expenses needed to cover the IT
administration during this dispute will be included as potential damages in any
future legal considerations.





Note
4 – Deferred Expense





Distribution
Fee





On
September 1, 2007, Sector 10 USA, Inc. entered into a Distribution Agreement
with Sector 10 Holdings, Inc.  This agreement was assumed by Sector
10, Inc. as a result of the merger with SKRM Interactive.  Under the
terms of the agreement, Sector 10, Inc. has exclusive rights to manufacture,
sell and distribute Sector 10 products within the assigned Territories under the
agreement.





The fee
for the acquisition of the distribution rights was established under the
agreement.  No liability for this fee is incurred in any respective
market until a minimum of $100,000 in sales are generated in the respective
authorized distribution market.   Each of the initial markets
identified in the agreement require a distribution rights fee of $250,000 to
$500,000 per market (depending on market size) with a maximum cumulative fee of
$5 Million.  The fee may not exceed 20% of the cumulative sales in the
market.  Therefore, the fee may be paid over a period of time as sales
are initiated in a new market.


12





Due to
the lack of significant sales activity, there have been two changes adopted in
the Distribution Agreement as it relates to the payment of the $5 million
fee.  First, the fee payment has been adjusted to be computed at 20%
of sales regardless of the specific Metropolitan Territory.  The
payment computation is not initiated until there have been at least $100,000 of
aggregate sales.   The amended agreement also provides a
conversion option for all or a portion of the unpaid fees. The conversion is
subject to various limitations in order to prevent the conversion of more than
50% of the future distribution fee in any calendar quarter.





Under a
conversion election, it is likely that shares will be issued in return for the
entire future distribution fee (up to $5 million) regardless of whether the fee
was earned based on sales generated by the Company.  Prior to
sufficient revenue generation, any distribution fee paid by way of a common
stock conversion will be recorded as a deferred expense.  The deferred
expense associated with the distribution fee shall be recognized as an expense
when sufficient revenues are generated by the Company to warrant such
recognition in accordance with the provisions set forth in the Distribution
Agreement.





Sector 10
Holdings, Inc. has elected to convert $1,144,000 of the fee under the conversion
option.  The conversion was effected on November 10,
2009.  Total stock of 11,363,636 was issued as a result of this
conversion.  The conversion price was computed at $.10067 per share
which was based on the 10 day average immediately before the conversion was
effected.





Based on
the conversion, the Company offset $1,144,000 of the $5 million total
distribution fee due under the Distribution Agreement.  Since the
Company has not generated a minimum of $100,000 in sales, the Company has
treated the $1,144,000 amount paid by way of the conversion as a deferred
expense.  This deferred expense attributed to the distribution fee
will be recognized as revenues are generated by the
Company.  Sufficient revenues are expected to be generated in the
fiscal year ended March 31, 2011.  Distribution fees included as
deferred expense totaled $1,144,000 as of the period ended December 31,
2009.





Financing
Fee





Financing
fees are paid in transactions for assistance in obtaining financing or other
capital needed to fund the Company operations.





Based on
the current economic situation and the fact that the Company has not generated
any significant revenues to date, the raising of needed capital has proven very
difficult.  The Company has reached an agreement with its majority
shareholder Sector 10 Holdings, Inc (“Holdings”) to provide assistance in
raising capital.  The efforts will involve the Holdings management,
shareholders and other contacts.





Holdings
has been willing to leverage its assets in an effort to raise capital and to
negotiate arrangements with various equity investors.  On November 6,
2009, the Company authorized an anti-dilution provision to provide assurances
that Holdings shall retain its equity ownership for any stock issued to other
parties during the period of the agreement.  In addition, the Company
provided anti-dilution provision retroactively for any transaction that Holdings
provided shares on behalf of the Company on or before November 1,
2009.   For any shares issued under this provision, the Company
shall break out the amount of reimbursed shares and dilution
shares.  The reimbursed shares shall equal to the amount of shares
provided to an outside party for the benefit of the Company. This shall be
intended to assist in financing for the Company.  The dilution portion
shall include the shares in excess of any reimbursed amount.  The
value of the dilution portion of the shares will be treated as financing
fees.  In addition, the agreement provides a fee to be paid to
Holdings for shares issued as reimbursement for a transaction that may result in
funding for the Company.  Any shares issued under this provision shall
be treated as financing fees.  Financing fees (if any)
shall  be recorded as deferred expense until the applicable financing
transaction has closed.





The
Company issued 1,554,000 shares to Holdings for benefits attributed to prior
transactions where shares have previously been reimbursed but dilution
occurred.  The 1,554,000 was required to eliminate the dilution impact
of the prior transactions.  The shares were issued on November 6, 2009
and valued at .11 per share.  The $170,000 full value of the shares
was treated as a financing fee.  No portion of this fee is deferred
since the transactions have closed.


13





Holdings
has elected to convert $1,144,000 of the Distribution Fee to additional common
shares of the Company to be used for the benefit of funding the
Company.   Holdings was entitled to be reimbursed 11,363,636
shares as a result of this issuance.  Holdings assigned previous held
free trading shares to Mariennie & Associates on November 10,
2009.  The assigned shares have been issued and distributed to the
assignees as agreed in the agreement.  Under Holdings' assignment
contract, Mariennie & Associates shall provide Holdings with
funding.  Holdings Board has agreed to allocate a portion of the
funding received in this transaction to the Company which is estimated to be at
least approximately $300,000 to $400,000.





As a
result of the assignment of the shares, the Company issued shares to Holdings
for reimbursement of the assigned shares and to adjust for the dilution
impact.  Total shares issued were 13,250,000 and valued at $.10067 per
share.  The value of the dilutive portion was $190,000 was treated as
a financing fee.  The full amount of this fee was deferred since the
financing transaction has not closed.





Since
Holdings has agreed to provide funding to the Company, the Company issued shares
equal to 10% of the shares issued above for financing fees.  Total
shares of $1,325,000 valued at $.10067 were issued in Holdings
name.  The $133,000 full value was treated as a financing
fee.  The full amount of this fee was deferred since the financing
transaction has not closed.




Summary
of Deferred Expense





Deferred
      Expense
            
            December
      31,
              2009
            
            
            March
      31,
              2009Deferred
      Distribution Fee
            
            $
            1,144,000
            
            
            $
            -Deferred
      Financing Fee
            
            
            323,000
            
            
            
            -Total
      Deferred Expense
            
            $
            1,467,000
            
            
            $
            -






Note
5 – DEPOSIT





The
Company was approached by DPO Medical, Inc. with respect to the possible
acquisition of a medical product that (if acquired) could produce immediate
revenues to assist in providing the Company with cash flow during their growth
period.  In order to hold the rights during its due diligence review,
the Company on September 15, 2008, placed a $25,000 refundable deposit with DPO
Medical, Inc.  The Company completed its due diligence review
subsequent to the quarter ended September 30, 2008 and decided that it was not
in the Company’s best interest to pursue the acquisition of the medical product
offered by DPO Medical.  Accordingly, the Company has requested the
full refund of the $25,000 deposit. The deposit has been recorded as an asset on
the balance sheet for the period ended December 31, 2008. A total of $15,000 of
the deposit was received in January 2009.  The balance of $10,000 was
still outstanding as of the year ended March 31, 2009.  The final
$10,000 deposit was received in May 2009.





Note
6 – DEBT CONVERSION





On May 8,
2008, Sector 10, Inc. (“Sector 10”) and Jeffrey Martin (“Martin”) agreed to
convert all outstanding debt owed Martin to common shares of Sector 10,
Inc.  A brief description of the transaction and the related
background is as follows.





Martin
transferred 120,000 (adjusted for reverse stock split) SKRM Interactive, Inc.
common shares (“Martin Transfer”) that were owned by Martin and/or related
parties to various individuals in satisfaction of pre-acquisition
debt.  As a result of the Martin transfer, Sector 10 recorded $649,200
in liabilities due Martin on its books for the fiscal year end March 31,
2008.


14





Martin
agreed to convert the debt into Sector 10 shares in an amount equal to the
number of shares used by Martin in the Martin Transfer.  Sector 10
agrees to issue 120,000 new shares (adjusted for reverse stock split) of Sector
10, Inc. in complete and total satisfaction of the $649,200 debt to Martin and
in satisfaction of any other unrecorded debt that may exist between Martin and
Sector 10.





The
120,000 shares were issued during the quarter ended June 30,
2008.  The accounting for the debt conversion consisted of
reclassification of the note payable of $649,200 to additional paid-in-capital
($131,880) and capital stock ($120).  The value of the shares issued
on May 8, 2008 was $132,000.  The $517,200 difference between the
value and the debt converted was treated as other income.






Note
7 – NOTES PAYABLE





Related
Parties - Shareholder / Officer





Subsequent
to the merger transaction on November 20, 2007, the Company received funding
from both Sector 10 Holdings, Inc. (Majority Shareholder) and Pericles DeAvila
(an Officer/Shareholder). This continued in the fiscal year ended March 31,
2009.  Funding and/or disbursements transactions with the respective
sources is accounted for in a separate account for Sector 10 Holdings, Inc. and
Pericles DeAvila.  Interest is charged on the account at a rate of 8%
per annum.  Total interest accrued during the nine months ended
December 31, 2009 on the accounts is $882 which is comprised of Pericles DeAvila
- $399 and Sector 10 Holdings - $483.  The Company has entered into a
new arrangement for financing with its majority shareholder Sector 10 Holdings,
Inc.  All new funding received from Sector 10 Holdings, Inc will be
accounted for under a new account which will be established when financing is
expected to begin in the 4th
quarter in the fiscal year ended March 31, 2010. No further advances are
expected under the existing shareholder/officer accounts for the foreseeable
future.





Sector
10 Holdings





Based on
the current economic situation and the fact that the Company has not generated
any significant revenues to date, the raising of needed capital has proven very
difficult.  The Company has reached an agreement with its majority
shareholder Sector 10 Holdings, Inc (“Holdings”) to provide assistance in
raising capital.  The efforts will involve the Holdings management,
shareholders and other contacts.  No funding has been received as of
February 10, 2010.  This is expected in the 4th
quarter of the fiscal year ended March 31, 2010.





Johnson
Financing





On May
11, 2008, Sector 10, Inc. (“Sector 10”) entered into an agreement with Edward
Johnson (“Johnson”) to provide short term financing to provide assistance with
the development and expansion of the business of Sector 10.


The loan
will be for term of 9 months with 1 automatic extension of 6 months allowed if
so requested by Sector 10.  The 6 month loan extension was requested
by Sector 10 on February 5, 2009.  Interest on the loan is fixed at
rate equal to prime plus 1 (As published in the Wall Street Journal as of the
effective date of this agreement).   The effective prime rate as
of May 11, 2008 was 5%.  The rate under the agreement is
6%.  The investor has proposed that the interest on the loan is
6.5%.  We have accrued the total loan at 6.5% for book
purposes.  Total interest accrued at December 31, 2009 is $21,247 of
which $9,750 was accrued during the nine months ending December 31,
2009.





A loan
extension until August 11, 2009 was requested on February 5,
2009.  The Company is currently negotiating financing with another
investor group.  The new financing will be used in part to repay the
extended loan plus interest.  The investor notified the Company on May
23, 2009 that the loan was due on June 11, 2009.  We did not close on
financing prior to June 11th and
the loan will continue until financing is received and the loan is
paid.    Financing has not yet been secured as of the
reporting date and the principal payment was not be made on the due date of
August 11th.  The
Company will work with the Investor to work out an agreed payment
arrangement.  Upon the receipt of financing, the Company intends on
making payments under this arrangement until all principal and accrued interest
is paid in full.  The Company has maintained contact with the Investor
and is expecting sufficient funding in the 4th
Quarter of the fiscal year ended March 31, 2010  to pay off the
principal and all accrued interest.


15





Dutro
Financing:





Dutro
Company is the Company’s outsourced manufacturing resource. The owners of Dutro
Company include Vicki Davis and William Dutro.  Lee Allen is the
nephew of William Dutro.  Vicki Davis, William Dutro and Lee Allen as
individuals (referred to as “Dutro Group”) have made funds available to the
Company to assist in financing.  All funding has been provided by the
individuals from the Dutro Group and Dutro Company has not provided any funding.
The funds from Vicki Davis were received from the Vicki K. Davis, Living Trust
TDT 5/19/95.





In 2008,
Dutro Group had provided funding through Sector 10 Holdings at various times in
the year.  In most situations, the funding was either repaid or stock
was provided in lieu of cash payments in settlement of any proceeds
received.  In November, 2008, the Company was approached by the Dutro
Group to consider them as their sole source of working capital
funding.  Based on the previous relationship, a funding arrangement
was initiated as the terms were to be negotiated.





Effective
January 2, 2009, all Dutro Funding was transferred from Holdings to the Company
and all obligations and future proceeds were assumed by the
Company.  An adjustment was made to the N/P Sector 10 Holdings to
reflect all outstanding Dutro debt as January 2, 2009.  Total
transferred amount was $98,000 broken down as follows:  Vicki Davis –
$15,000; William Dutro $65,000 and Lee Allen $18,000.





Discussions
regarding financing began in November 2008.  The funding was
anticipated to provide full funding needs so that no other outside source may be
required.  Discussions of the terms was not completed and it was
decided that the terms requested for long term funding were not acceptable by
the Company.  Accordingly all funding was terminated as of the end of
the fiscal year ended March 31, 2009.  The final funding proceeds were
received on March 24, 2009 and were reflected in the financial
statements.





At March
31, 2009, the Company and the Dutro Group individuals did not have a signed
document for the loan proceeds.  The books were recorded to reflect
the principal amounts as transferred to the Company on January 2,
2009.  From January 2, 2009 through March 31, 2009, total proceeds of
$153,000 were received.  All of these proceeds were received from the
Vicki K. Davis, Living Trust TDT 5/19/95.  Interest has been accrued
on all proceeds from January 2, 2009 or the actual date received (if later)
through December 31, 2009 at an annual rate of 7.5%.





On June
10, 2009, the Company signed a loan document with the Vicki K. Davis, Living
Trust TDT 5/19/9 to cover the $168,000 principal loaned to the
company.  The loan term expires on May 31, 2014.  The
interest rate under the agreement is computed at an annual rate of
7.5%.  An agreement with the same terms was signed on June 24, 2009 by
William Dutro for his respective $65,000 loan amount. At the filing of the
financial report for the fiscal year ended March 31, 2009, the Company believed
that Lee Allen would sign a similar loan agreement. Accordingly, a draft
agreement was forwarded to Mr. Allen for signature.   Mr. Allen
has rejected the loan agreement and the loan has been transferred to general
accounts payable where it will be paid as funds become available.  No
further interest is being accrued on the amount due Mr. Allen.





In
addition to the loan agreements for the above individuals, the Dutro Company and
Reality Engineering (Managed by Lee Allen and a related party to Dutro Company)
have discussed the issue of getting reimbursed for research and development fees
associated with their work on Sector 10 products.  Dutro Company has
presented old invoices totaling $264,872 plus additional future amounts of
$162,415 for a total of $427,287.   If a liability were to be
generated, it is agreed that a loan agreement would be established for any
agreed amount under the same terms as set forth under the individual Dutro Group
loan agreements.





The
Company reached final agreement with Dutro Company on August 6, 2009 to settle
any past differences regarding research and development costs and all past
production costs.  The Company agreed to pay Dutro Company
$250,000.  Included in this is $41,213 of current accounts payable,
$48,787 of additional R&D expenses recorded in the period ended September
30, 2009 and $160,000 allocated to research and development allocated in prior
periods as follows: a total of $50,000 R&D expense was recorded in the
previous fiscal year and an additional $110,000 of R&D expenditures was
recorded in the period ended June 30, 2009.  Dutro Company agreed to
record the $250,000 in a promissory note agreement under the same terms as
agreed to by William Dutro and Vicki Davis.  All Dutro Group promissory
notes are treated as long term notes payable. Total interest accrued for the
Dutro Group at December 31, 2009 is $24,360 of which $20,954 was accrued during
the nine months ending December 31, 2009.


16





Interest
payments were due under the Dutro Group promissory note arrangements in January
2010.  Total interest due for payment in January was $23,685 which is
allocated as follows: Vicki Davis - $11,300, William Dutro - $4,875 and Dutro
Company - $7,510.  Payments were made to Vicki Davis and William Dutro
for the full accrued amount.  No payment was sent to Dutro Company in
January.  The promissory note required Dutro Company to return all
materials to the Company upon request by the Company.  The Company has
made multiple requests for property still held at the Dutro Company
facility.  This includes various raw materials, supplies, molds,
detail plans and specifications and other items. A letter was issued to Dutro
Company in January 2010 requesting the return of all of the Company’s property
in accordance with the underlying promissory note agreement and manufacturing
agreement.  The letter stated that all interest payments under the
promissory note would be withheld pending receipt of all requested
information.  No response has been received from Dutro Company as of
February 10, 2010.





Reality
Engineering is a company managed by Lee Allen and related to Dutro
Company.  The Company Board authorized Management to engage Reality
Engineering to provide $50,000 of software consultation services to assist in
preparing the PLX-3D software for customer demonstrations. Any additional fees
required further Board approval. The Company booked the $50,000 fee as an
addition to the development cost at March 31, 2009.  At the end of the
project, Lee Allen informed the Company that the services cost approximately
$168,000.  Any useable end product was withheld from the Company by
Reality Engineering pending payment of the increased amounts. The Company agreed
to $50,000.  No additional fees were authorized by Management nor were
they approved by the Board.  The Company has made proposals regarding
the review of any documentation to support an additional price to the
project.





Reality
Engineering has not provided the Company with any useable end product from their
services until the higher fee is paid. Based on the refusal to present a useable
product and information needed to allow us to perform future modifications, the
Company has presented two final options to Mr. Allen for settlement of the fee
dispute. The options were presented on September 29, 2009.  Reality
Engineering has rejected all offers proposed by the Company to settle the
difference in fee arrangement and has still never provided the Company with any
useable end product from their services.  On October 24, 2009, the
Company informed Reality Engineering that they will no longer seek the end
product derived from their services since no agreement could be reached on the
fees.  Accordingly, no fees will be paid to Reality as a result of
their final rejection.  No further communication has been made or
received with Reality Engineering regarding this matter as of February 10,
2010.





Employee
Group





John
Gargett signed an employment agreement on April 24, 2009.  Patrick
Love signed an employment agreement dated May 8, 2009.  They have
agreed to a loan arrangement for any unpaid amounts due under the employment
agreements.  Loan agreements were established in July 2009 to begin
accounting for unpaid amounts.  Interest on any outstanding balance is
accrued at an annual rate of 8%.  The maturity term is May 14,
2014.  However, the funds will be paid earlier if funds are available
in the Company.  It is not intended to be a long term program. Total
interest accrued at December 31, 2009 is $3,294 of which $3,294 was accrued
during the nine months ending December 31, 2010.  Both Gargett and
Love elected to convert all accrued interest due in January 2010 to common stock
of the Company.  Shares for such conversion will be issued in the
4th
Quarter for the fiscal year ended March 31, 2010.





Other
Notes





In order
to generate short term funding, the Company provided individual investors with
an opportunity to receive common shares equal to their investment plus a
promissory note to return principal within 180 days.  Interest is
accrued at a annual rate of 8%.  A conversion option is provided at
the end of the term to provide the investor with a right to convert all or a
portion of the principal into common shares of the Company. The agreement
further provides the issuance of warrants to provide the investor with
subsequent opportunities to acquire Company common shares.  The short
term funding program was initially offered in September 2009.  A total
of $52,500 was received under this program on or before December 31,
2009.  Total interest accrued for the nine months ending December 31,
2009 was $475.


17





Summary of Interest and
Notes Payable


Interest
      expense  (Nine Months)
            
            December
      31,
              2009
            
            
            December
      31,
              2008Sector
      10 Holdings, Inc.  – Shareholder
            
            $
            483
            
            
            $
            5,674Pericles
      DeAvila – Officer
            
            
            399
            
            
            
            420Total
      related party interest expense
            
            
            882
            
            
            
            6,094Interest
      – Johnson
            
            
            9,750
            
            
            
            7,613Interest
      – Dutro Group
            
            
            20,954
            
            
            
            -Interest  -
      Employee Group
            
            
            3,294
            
            
            
            -Interest
      – Other Notes
            
            
            475
            
            
            
            -Total
      interest expense
            
            $
            35,355
            
            
            $
            13,707




Note Payable
      Balance
            
            December
      31,
              2009
            
            
            March
      31,
              2009Sector
      10 Holdings, Inc.  – Shareholder
            
            $
            392
            
            
            $
            27,595Pericles
      DeAvila – Officer
            
            
            5,658
            
            
            
            11,159Total
      Note Payable – Officer / Shareholder
            
            $
            6,050
            
            
            $
            38,754Edward
      Johnson – Johnson Financing
            
            $
            200,000
            
            
            $
            200,000Vicki
      Davis  - Dutro Group
            
            
            -
            
            
            
            168,000William
      Dutro – Dutro Group
            
            
            -
            
            
            
            65,000Lee
      Allen – Dutro Group
            
            
            -
            
            
            
            18,000John
      Gargett – Employee Group
            
            
            83,333
            
            
            
            -Patrick
      Love – Employee Group
            
            
            52,000
            
            
            
            -Patrick
      Madison – Other Notes
            
            
            15,000
            
            
            
            -Lionel
      Brown – Other Notes
            
            
            7,500
            
            
            
            -Patricia
      Fielding – Other Notes
            
            
            20,000
            
            
            
            -Mark
      Madison – Other Notes
            
            
            10,000
            
            
            
            -Total
      Note Payable – short term
            
            $
            387,833
            
            
            $
            451,000Vicki
      Davis -  Dutro Group
            
            $
            168,000
            
            
            $
            -William
      Dutro – Dutro Group
            
            
            65,000
            
            
            
            -Dutro
      Company – Dutro Group
            
            
            250,000
            
            
            
            -Total
      Note Payable – long term
            
            $
            483,000
            
            
            $
            -Total
      Notes Payable
            
            $
            876,883
            
            
            $
            489,754




18





Note
8 – REVERSE STOCK SPLIT





The
Company filed a definitive Form 14C on April 24, 2009 to inform shareholders of
the authorization to file a 1 to 10 reverse split of common shares.





The Board
has unanimously adopted a resolution approving the Reverse Split whereby common
shareholders would receive 1 share of post reverse split common shares for each
10 shares of pre-reverse split common shares. The majority shareholders also
approved the reverse split.  Management anticipates that the principal
effects of the Reverse Split will be that:





1.
            The
      number of outstanding shares of Common Stock will be reduced from
      approximately 102,210,292 to approximately
  10,221,029;





2.
            The
      number of shares of Post-Split Common Stock held by each Stockholder will
      be equal to 1/10th
      of the number of shares of pre-split Common Stock held by that
      stockholder;





3.
            The
      trading price of the Post-Split Common Stock will be greater than the
      current trading price of a share of Common Stock (the exact trading price
      of the Post-Split Common Stock will depend on the reaction, if any, of the
      public market for the Post-Split Common Stock, as well as other factors,
      all as discussed in greater detail
below);





4.
            Stockholders
      who would otherwise be entitled to receive a fractional share of
      Post-Split Common Stock, after all Shares of Common Stock held by such
      Stockholder are consolidated, as a result of the Reverse Split will be
      entitled, upon surrender of the certificate(s) representing such
      Stockholder’s Common Stock, if any, to have the fractional share rounded
      up to one share of Post-Split Common Stock;
and





5.
            The
      Company will be authorized to issue 199,000,000 shares of Common Stock, of
      which approximately 10,221,029 shares will be issued and
      outstanding.




The
amendment to the articles of incorporation reflecting the reverse split was
approved by the Delaware Secretary of State on April 30, 2009.




The Company was notified on May 18,
2009 that NASDAQ has received all necessary information to process the reverse
split.  The Company was informed that the 1 for 10 reverse split
transaction was approved and would be effective at the opening of business on
May 19, 2009.  Due to this transaction, the trading symbol for the
Company has been changed.  The new symbol is SECI.  The
former symbol was SECT.  The new symbol takes effect on May 19,
2009.







Note
9 – EQUITY





During the Quarter ended:
June 30, 2009:





In April
2009, John Gargett was added to the Board of Directors and was later hired to be
the Company COO.  In accordance with an employment agreement dated
April 24, 2009, Mr. Garget received 50,000 shares of Common stock for joining
the Board of Directors and received 50,000 shares of stock under the terms of
the employment agreement.  The employment agreement provides for Mr.
Gargett to receive an additional 150,000 shares of common shares in 50,000 share
installments due on July 1, 2009, September 1, 2009 and November 1,
2009.  The shares for July 1, 2009 were requested to be issued by the
transfer agent in accordance with this agreement.


19





In April
2009, the Company issued at total of 27,500 common shares as
follows:  25,000 shares to Layne Davis and 2,500 shares to his son
Layne Davis.  These shares were issued in consideration for product
design work performed in the development of Sector 10 MRU and SRU design through
the Dutro Company.  No other obligations or consideration is
expected.





In April
2009, 37,500 shares were issued to QualityStocks, LLC in accordance with the
terms of an Investor Relations Agreement.  No additional equity is
required under the terms of the agreement.





In April
2009, Illuminated Financial received 25,000 of newly issued restricted stock
from the Company.  In addition, Sector 10 Holdings, Inc. transferred
250,000 free trading shares to Illuminated for services rendered to the
Company.  New shares were issued to Sector 10 Holdings, Inc. to
replace the shares transferred on behalf of the Company.  The 250,000
shares were issued during the period ended September 30, 2009.  The
value of the shares was determined to be $77,500.  This amount was
accrued as a future stock award.  When the shares are issued, the
accrual will be adjusted to additional paid in capital.





In May
2009, Patrick Love was hired as Director of Business Development for the
Company.  In accordance with the terms of his employment agreement, he
received $10,000 common shares. The employment agreement provides for Mr. Love
to receive an additional 40,000 shares of common shares in 10,000 share
installments due on 7/1/2009, 10/1/2009, 1/1/2010 and 4/1/2010.  The
shares for 7/1/2009 were requested to be issued by the transfer agent in
accordance with this agreement.





In May
2009, the Board of Directors authorized the issuance of 900,000 shares to
officers and directors for prior services.  The shares were issued
based on services performed on or before March 31, 2009.  The shares
were authorized on May 1, 2009.





In May
2009, the Board of Directors authorized the issuance of 150,000 shares to
directors (on the Board as of April 1, 2009) for Board services for the fiscal
year ended March 31, 2010.  This adjustment was completed to be
consistent with the stock issued for the new director added in April 2009. The
shares were authorized on May 1, 2009.





In May
2009, the Company affected a 1 to 10 reverse stock split.  Total
outstanding shares at the time of the split was 103,435,292
shares.  Total shares outstanding after the reverse split was
10,343,573.  Approximately 43 shares were issued in the split to
account for fractional shares.  All shares noted in this report are
reflected as post split amounts.





During the Quarter ended:
September 30, 2009:





In July
2009, the Company issued 50,000 shares to John Gargett in accordance with the
requirements set forth in his employment agreement.  The shares were
required to be issued based on his employment as of 7/1/2009.





In July
2009, the Company issued 10,000 shares to Patrick Love in accordance with the
requirements set forth in his employment agreement.  The shares were
required to be issued based on his employment as of 7/1/2009.





In
September 2009, issued a total of 50,000 shares - 25,000 shares to John
McCloskey and 25,000 shares to  Hugh Cholmondeley for their acceptance
as members of the Company Board of Advisors.  The membership was
accepted in July 2009.





In
September 2009, issued 1,050,000 shares to officers and directors for past
services rendered and for current director services.  The shares were
authorized on May 1, 2009 by the Board.  Shares were allocated as
follows:  Pericles DeAvila – 550,000 shares, Laurence A Madison –
400,000 shares and Alan Rouleau – 100,000 shares.





In
September 2009, issued 5,000 shares to John Ketcham for services in connection
with R&D and development of manufacturing specs of all Sector 10
products.





In
September 2009, issued 15,000 shares to Patrick Madison in connection with short
term promissory note agreement dated September 14, 2009





In
September 2009, issued a total of 270, 834 shares to Sector 10 Holdings for
reimbursement for shares provided to Illuminated Financial Services and Moody
Capital on behalf of the Company.


20





During the Quarter ended:
December 31, 2009:





In
November 2009, the Company issued 1,554,00 shares to Sector 10 Holdings , Inc.
in accordance with anti dilution provision for transaction closed on or before
November 1, 2009.





In
November 2009, the Company issued 11,363,636 shares to Mariennie &
Associates and assignees.  The issue was based on conversion of
$1,144,000 of distribution fee in accordance with provisions under Distribution
Agreement between Sector 10 Holdings, Inc. and Sector 10, Inc.





In
November 2009, the Company issued shares 13,250,000 shares to Sector 10
Holdings, Inc. in accordance with reimbursement and dilution
provisions.  Shares are held by the Company pending receipt of
funding.





In
November 2009, the Company issued 1,325,000 shares to Sector 10 Holdings, Inc.
in accordance with fee arrangement for seeking funding.  Shares are
held by the Company pending funding.





In
December 2009, the Company issued 7,700 shares to John McCloskey for consulting
services rendered in connection with the San Francisco Pilot
project.




In
December 2009, the Company issued 7,500 shares to Lionel Brown for short term
funding based on promissory note dated December 3, 2009.





In
December 2009, the Company issued 20,000 shares to Patricia Fielding for short
term funding based on promissory note dated December 3, 2009.





In
December 2009, the Company issued 50,000 shares to John Gargett in accordance
with the requirements set forth in his employment agreement.  The
shares were required to be issued based on his employment as of
9/1/2009.





In
December 2009, the Company issued 50,000 shares to John Gargett in accordance
with the requirements set forth in his employment agreement.  The
shares were required to be issued based on his employment as of
11/1/2009





In
December 2009, the Company issued 10,000 shares to Patrick Love in accordance
with the requirements set forth in his employment agreement.  The
shares were required to be issued based on his employment as of
10/1/2009.





In
December 2009, the Company issued 10,000 shares to Mark Madison for short term
funding based on promissory note dated December 17, 2009.








Note
10 – GOING CONCERN





The
Company generated initial revenues of $18,500 through the year ended March 31,
2009.  No revenues were generated for the nine month period ended
December 31, 2009. This level of revenues is not sufficient for the Company to
meet its future obligations. This factor raises substantial doubt about the
Company’s ability to continue as a going concern.




Management
has several contracts under review and three large transactions under
negotiation as of December 31, 2009.  Management expects revenues to
begin in the 4th
quarter of the fiscal year ended March 31, 2010 and to increase significantly in
the fiscal year ended March 31, 2012.  Management also intends to seek
additional capital through equity and/or debt financing to assist the Company
until profitable operations can be achieved. This is being handled through the
efforts of Sector 10 Holdings, Inc. There can be no assurance that such increase
in revenues will be generated or that financed funds will be available to the
Company or available on terms acceptable to the Company. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.


21





Note
11 - INCOME TAX





Income
taxes are accounted for using the asset and liability method. Deferred taxes are
provided on a liability method whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases.  Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.





Income
taxes are accounted for using the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and net operating
loss carryforwards. Valuation allowances are established when necessary to
reduce net deferred tax assets to the amount expected to be
realized.





The
Company’s financial statements for the nine month period ended December 31, 2009
and 2008 do not include any provision for income taxes.   No
income tax accrual has been recorded based on the expectation that the Company
will be in a net loss position for the overall applicable fiscal year.
Accordingly, deferred tax assets have been entirely offset by valuation
allowances. The difference between the amounts of income tax benefit that would
result from applying domestic federal statutory income tax rates to the net loss
and the net deferred tax assets is related to certain nondeductible expenses,
state income taxes, and the change in the valuation allowance.





The
Financial Accounting Standards Board ("FASB") has issued ASC 740 for Accounting
for Income Taxes that clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements. ASC 740 requires a company
to determine whether it is more likely than not that a tax position will be
sustained upon examination based upon the technical merits of the position. If
the more-like1y-than-not threshold is met, a company must measure the tax
position to determine the amount to recognize in the financial statements. As a
result of the implementation of ASC 740, the Company performed a review of its
material tax positions in accordance with recognition and measurement standards
established by ASC 740.





The
Company had no unrecognized tax benefit which would affect the effective tax
rate if recognized.





The
Company includes interest and penalties arising from the underpayment of income
taxes in the consolidated statements of operations in the provision for income
taxes. As of December 31, 2009 the Company had no accrued interest or penalties
related to uncertain tax positions.





The
Company files income tax returns in the U.S. federal jurisdiction and in the
states of Delaware, Utah and any other jurisdiction where required. With few
exceptions, the Company is no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations by tax authorities for years before
2005.







Note
12 – SUBSEQUENT EVENTS





We have
evaluated our financial statements for subsequent events through February 22,
2010.





No
financing has been received or closed as of February 22, 2010.  No
other significant events have occurred through February 22,
2010.


22





Item
2.  Management’s Discussion And Analysis Or Plan Of
Operation




This
report contains forward-looking statements within the meaning of Section 29a of
the Securities Act of 1933, as amended, and Section 21e of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are subject
to numerous risks and uncertainties that could cause actual results to differ
materially from historical or anticipated results. You should not place undue
reliance on such forward-looking statements, and, when considering such
forward-looking statements, you should keep in mind the risk factors noted in
this report, including the section of this report entitled “Risks Related to Our
Business and Operations.” You should also keep in mind that all forward-looking
statements are based on management’s existing beliefs about present and future
events outside of management’s control and on assumptions that may prove to be
incorrect. The following discussion and analysis should be read in conjunction
with the Company’s financial statements and notes thereto, which are included
elsewhere in this report.





Overview





Sector
10, Inc.  (“The Company”) is in the business of providing emergency
disaster response equipment and related support services.  The Company
was structured to provide manufacturing, sales and distribution of Sector 10
emergency response equipment and supplies needed by first responders to an
emergency situation.  The  Mobile Response Unit
(“MRU”)  and the Stationary Response Unit (“SRU”) were developed to
promote the concept of pre-deploying life saving tools and supplies in office
buildings, factories, schools, construction sites, airports and cruise
ships.





Sector
10, Inc. is more than a sales and distribution company.  It also is
responsible for the manufacturing and development of products.  The
Company has full rights to all Sector 10 products.  The technology
incorporated locates employees and communicates with first responders in an
emergency situation.  The system provides customers with the ability
to comply with the ever changing Domestic and International Fire
Codes.  The SRU-M also provides a unique opportunity to media
companies by providing advertising through a new distribution channel that will
be located in high traffic areas.





Sector
10, Inc. is a systems integration company exclusively representing a unique line
of proprietary products and technologies focused on the pre-deployment of
emergency and leveraging other incorporated Asset system such as communication
channels and interactive advertising. Sector 10’s life saving services center
around the placement of stationary kiosks called SRU’s in high traffic venues
and high-rise buildings.  The SRU’s or stationary response units
contain personal protective equipment (PPE) that can help people, prevent
fatalities and injuries during natural disasters, terrorist attacks, and other
life threatening situations such as fires. In addition the SRU provides four
channels of communication and tracking capabilities that are linked to a command
center and can interact with first responders to ensure the greatest number of
lives can be saved.





The SRU-M
product contains two large video screens and is placed in high traffic areas
such as convention centers, arenas and malls.  The screens combined
with the network used for the emergency response services provides both the
Company and the customers with additional revenue sources by placing media on
its screens.  SRU products will be placed in high rise, office
buildings and other non-high traffic areas without the media
screens.  The Company will coordinate sales activity both domestically
and internationally.





On
September 1, 2007, Sector 10 USA, Inc. entered into a Distribution Agreement
with Sector 10 Holdings, Inc.  This agreement was assumed by Sector
10, Inc. as a result of the merger with SKRM Interactive.  Under the
terms of the agreement, Sector 10, Inc. has exclusive rights to manufacture,
sell and distribute Sector 10 products within the assigned Territories under the
agreement.  The assigned territories include the following
metropolitan areas:


23




New
      York
            Miami
            AtlantaLos
      Angeles
            Washington
      DC
            San
      FranciscoChicago
            Houston
            Salt
      Lake CityPhiladelphia
            Detroit
            PhoenixDallas
            Boston
            Seattle





The fee
for the acquisition of the distribution rights was established under the
agreement.  No liability for this fee is incurred in any respective
market until a minimum of $100,000 in sales are generated in the respective
authorized distribution market.   Each of the initial markets
identified in the agreement require a distribution rights fee of $250,000 to
$500,000 per market (depending on market size) with a maximum cumulative fee of
$5 Million.  The fee may not exceed 20% of the cumulative sales in the
market.  Therefore, the fee may be paid over a period of time as sales
are initiated in a new market.





Sector 10
Inc will have rights to acquire other distribution territories.  This
includes other areas within the United States, Canada and other international
markets.  The agreement sets pricing requirements and establishes
minimum performance standards.  Pricing requirements set the price at
which the specific Sector 10 Product will be acquired prior to sale by Sector
10, Inc. The pricing will be set by agreement when the products are available
for sale.  The pricing requirements will be adjusted to reflect the
price available for the fiscal year ended March 31, 2010.  The
performance standards are effective when product is available and the sales
process has begun.  Minimum performance standards are the minimum
sales results that are required to continue the exclusive distribution rights in
the specific territory. Sales activity has been minimal to date.  The
Company has engaged various sales representatives that project more significant
activity Sales Activity for the fiscal year ended March 31,
2010.  Minimum performance standards provide a transition for each
territory. The term for the agreement is 5 years and is renewable with an
automatic renewable feature.





Due to
the lack of significant sales activity, there have been two changes adopted to
the Distribution Agreement as it relates to the payment of the $5 Million
Fee.  First, the fee payment has been adjusted to be computed at 20%
of sales regardless of the specific Metropolitan Territory.  The
payment computation is not initiated until there have been at least $100,000 of
aggregate sales.   The amended agreement also provides a
conversion option for all or a portion of the unpaid fees. The conversion is
subject to various limitations in order to prevent the conversion of more than
50% of the unpaid balance in any calendar quarter.





Under a
conversion election, it is likely that shares will be issued in return for a
future distribution fee regardless of whether the fee was earned based on sales
generated by the Company.  In such a situation, the Company will
recognize the distribution fee under a conversion when the revenues are
generated in a sufficient manner to recognize all or a portion of any fee paid
by way of a conversion to common stock. Prior to sufficient revenue generation,
any distribution fee paid by way of a common stock conversion will be recorded
as a deferred expense.  The deferred expense associated with the
distribution fee shall be recognized as an expense when sufficient revenues are
generated by the Company to warrant such recognition in accordance with the
provisions set forth in the Distribution Agreement.





The
changes were authorized by the Board in August 2008. The agreement was formally
amended on October 29, 2009 to reflect these changes and to reflect the fact
that the Company is responsible for manufacturing.  The original
agreement provided that the Company acted solely as a distributor.





Going
Concern Qualification





The notes
to the Company’s consolidated financial statements disclose that the limited
cash flow of the Company has been absorbed in operating activities and the
Company has incurred net losses since inception, and the Company has a working
capital deficiency. In the event that funding from internal sources or from
public or private financing is insufficient to fund the Company’s business, the
Company will have to substantially cut back its level of spending, which could
substantially curtail the Company’s operations. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The Company’s
going concern uncertainty may affect its ability to raise additional capital,
and may also affect its ability to raise additional capital, and may also affect
its relationships with suppliers and customers. Investors should carefully
examine the Company’s financial statements.


24





Results
of Operations








Nine Months Ended December
31, 2009 as Compared to the Nine Months Ended December 31,
2008





Revenues
-





The
Company had no revenues for the nine months ended December 31,
2009.





The
Company had initial revenues of $31,000 for the nine months ended December 31,
2008.





The
Company is currently negotiating various contracts which the Company’s
management currently believes will generate significant revenues in the next
fiscal year ended March 31, 2011.








Other
Income-





The
Company had no other income for the nine months ended December 31,
2009.





The
company had other income of $517,200 for the period ended June 30,
2008.  The income was a result of the difference in the value of the
shares provided in the conversion of debt to equity.  No other income
was reported during the nine months ended December 31, 2008.








Operating
Expenses -





The
Company had no operating expenses for the nine months ended December 31,
2009.





The
Company had sales of $31,000 during the nine months ended December 31,
2008.  The Cost of Sales associated with the sales for this period was
$23,800 which was $1,900 per MRU unit and $10,000 per SRU-M unit.








General
and Administrative Expenses -





General
and administrative expenses were $1,136,697 for the nine months ended December
31, 2009 which was made up primarily of Wages - $422,233, Financing Fee -
$174,093, R&D expenses - $161,336, Professional fees - investor relations
$141,917, Professional fees – Legal & Accounting - $136,270, Director and
Business Advisory Board fees - $36,750, Insurance expense – $24,990, Expense
allocation from Sector 10 Holdings of $10,000, Filing fees - $8,641, Other
professional fees of $5,500 and other expenses of $14,967.





General
and administrative expenses were $491,657 for the nine months ended December 31,
2008. These expenses are made up of professional fees – investor relations –
347,333, expense allocation from Sector 10 Holdings of $90,000, other
professional fees of $35,811 and other expenses of $18,513.








Depreciation
Expense –





Depreciation
expense for the nine months ended December 31, 2009 was $3,338.





Depreciation
expense for the nine months ended December 31, 2008 was $3,337.


25





Interest
Expense –





Interest
expense for the nine months ended December 31, 2009 was $35,355.





Interest
expense for the nine month period ended December 31, 2008 was
$13,707.







Three Months Ended December
31, 2009 as Compared to the Three Months Ended December 31,
2008








Revenues
-





The
Company had no revenues for the three months ended December 31,
2009.





The
Company had revenues of $25,000 for the three months ended December 31,
2008.





The
Company is currently negotiating various contracts which the Company’s
management currently believes will generate significant revenues in the next
fiscal year ended March 31, 2011.








Other
Income-





The
Company had no other income for the three months ended December 31,
2009.





The
company had no other income for the three months ended December 31,
2008.








Operating
Expenses -





The
Company had no operating expenses for the three months ended December 31,
2009.





The
Company had sales of $25,000 during the three months ended December 31,
2008.  The Cost of Sales associated with the sales for this period was
$20,000 which was $10,000 per SRU-M unit.








General
and Administrative Expenses -





General
and administrative expenses were $414,283 for the three months ended December
31, 2009 which was made up primarily of  Financing Fees - $172,443,
Wages - $158,700, Professional fees – Legal & Accounting -
$52,369,  Insurance expenses - $24,990, Filing fees - $1,476 ,
Professional fees - investor relations $1,022  and other expenses of
$3,283.





General
and administrative expenses were $120,921 for the three months ended December
31, 2008. These expenses are made up of professional fees – investor relations –
69,003, expense allocation from Sector 10 Holdings of $30,000, other
professional fees of $16,250 and other expenses of $5,668.


26





Depreciation
Expense –





Depreciation
expense for the three months ended December 31, 2009 was $1,113.





Depreciation
expense for the three months ended December 31, 2008 was $1,112.







Interest
Expense –





Interest
expense for the three month period ended December 31, 2009 was
$14,875.





Interest
expense for the three month period ended December 31, 2008 was
$5,865.








Liquidity
and Capital Resources





As of
December 31, 2009, Sector 10 had cash of $4,340. This amount is not sufficient
to meet the Company’s working capital requirements for the balance of the fiscal
year ending March 31, 2010 or for any future period.





Sector 10
has had minimal sales activity in the past.  There are significant
opportunities that are under review with the City of San Francisco Fire
Department and other sources that may have a significant impact on the future
operations of the Company. Management is hopeful that the negotiations may be
completed by the end of the 4th
quarter with placement of product beginning in the 1st
quarter for the year ended March 31, 2011.  The Company may consider
also generating funding from the sale of shares of Common Stock in private
transactions. There is no guarantee that the Company will be successful in
arranging financing on acceptable terms. If the Company is not able to raise
additional debt or equity, the Company’s ability to continue its business
operations is highly unlikely.





The
Company engaged its majority shareholder to assist on raising capital. The
shareholder has engaged an  investment bankers regarding various
financing arrangements. No significant financing has been closed as of February
10, 2010 and there is no guarantee that any significant financing will be
completed. Obtaining additional financing would be subject to a number of
factors, including investor sentiment. Market factors may make the timing,
amount, terms or conditions of additional financing unavailable to the
Company.





The
Company’s continuation as a going concern is dependent upon continued financial
support from the Company’s shareholders or other parties.








Total
Assets -





The
Company had $2,650,946 in total assets as of December 31, 2009, comprised of
cash - $4,340, Inventory - $18,409, Net Fixed Assets - $13,202 Deferred Expenses
- $1,467,000 and Network Acquisition/Development Costs -
$1,147,995.








Total
Liabilities -





The
Company had $1,559,401 in total liabilities as of December 31, 2009. The
Company’s total liabilities as of December 31, 2009 were comprised of $682,518
of accounts payable and accrued liabilities; $6,050  in notes payable
to a shareholder/officer , $387,833 in short term notes payable and $483,000 in
long term notes payable.


27





Operating
Activities -





Cash used
in operations for the nine months ended December 31, 2009 was ($91,758).
Operating activities were affected by stock for services - $478,381;
depreciation expense - $3,338; change in accounts receivable – $2,000; change in
deposits $10,000 and change in accounts payable and accrued liabilities
-$608,413 and change in deferred revenue - ($ 18,500).





Cash used
in operations for the nine months ended December 31, 2008 was ($56,864).
Operating activities were affected by stock for services - $339,834;
depreciation expense - $3,337; gain in debt restructuring - ($517,200); change
in accounts receivable – ($3,000); change in deposits - ($25,000) and change in
accounts payable and accrued liabilities -$129,466.








Investing
Activities -





Cash used
from investing activities for the nine months ended for December 31, 2009 was
$0.





Cash used
from investing activities for the nine months ended for December 31, 2008 was
$97,995.








Financing
Activities -





Cash
provided from financing activities for the nine months ended for December 31,
2009 was $61,082 comprised of net proceeds from general financing - $93,786 net
payments on shareholder / officer notes – ($32,704).





Cash
provided from financing activities for the nine months ended December 31, 2008
was $154,934 comprised of general financing proceeds - $200,000, net proceeds on
shareholder / officer notes – ($44,374) and bank overdraft of
($692).








Risks
Related to the Company’s Business and Operations




Investing
in the Common Stock involves a high degree of risk. You should carefully
consider the risks described below, and all of the other information set forth
in this report before deciding to invest in shares of the Company’s common
stock. In addition to historical information, the information in this report
contains forward-looking statements about the Company’s future business and
performance. The Company’s actual operating results and financial performance
may be different from what the Company’s management expects as of the date of
this report. The risks described in this report represent the risks that the
Company’s management has identified and determined to be material to the
Company. Additional risks and uncertainties not currently known to the Company’s
management, or that the Company’s management currently deems to be immaterial,
may also materially harm the Company’s business operations and financial
condition.








Going
Concern Qualification





The
Company has generated limited cash flow, has incurred net losses since inception
and has a working capital deficiency. In the event that contracts are not
executed, the Company will not be able to generate revenues sufficient to cover
anticipated expenses. Existing funding from internal sources or from public or
private financing is insufficient to fund the Company’s business. If the Company
is unable to quickly generate capital from operating activities or from external
sources, the Company will have to substantially curtail its operations and will
likely need to suspend its operations entirely. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The Company’s
going concern uncertainty will likely affect its ability to raise additional
capital, and may also affect its relationships with suppliers and prospective
customers. Investors should carefully examine the Company’s financial
statements.





The
Company has not generated revenues and has not executed any contracts for the
sale of the Company’s products.





The
Company has not generated any revenues. Currently the Company is negotiating
contracts that may generate revenues; however, none of those contracts has been
executed, and the Company can provide no assurance that any such contracts will
ever be executed. There can be no assurance that the Company will generate any
revenues. If the Company does not generate revenues in the near term, the
Company will have to substantially curtail its operations and will likely need
to suspend its operations entirely.


28





The
Company uses outside sources to fulfill contract obligations and has limited
control over the provider’s ability to meet the Company
obligations.





The
Company will be required to supply various equipment and services under the
contracts currently under negotiation. If the contracts are executed, of which
the Company can provide no assurance, the Company intends to engage third-party
suppliers to manufacture the products the Company proposes to sell under the
contracts. The Company has no control over such third-party suppliers. If any or
all of those third-party suppliers fails to supply sufficient products on a
timely basis to meet the terms of any contract, the Company would be unable to
perform its obligations to its customers, if any. If the Company is successful
in negotiating and executing contracts for the sale of its products and if a
third-party supplier fails to perform its obligations under its arrangement with
the Company, the Company’s financial condition and results of operation would be
materially and adversely affected.





The
directors, executive officers and principal shareholders of the Company have
effective control of the Company, preventing non-affiliate shareholders from
significantly influencing the Company’s direction and future.





The
Company’s directors, officers, and principal shareholders and their affiliates
control in excess of 50% of the Company’s outstanding shares of common stock and
are expected to continue to control a majority of our outstanding common stock
following any financing transactions projected for the foreseeable future. These
directors, officers and affiliates effectively control all matters requiring
approval by the Company’s shareholders, including any determination with respect
to the acquisition or disposition of assets, future issuances of securities,
declarations of dividends and the election of directors. This concentration of
ownership may also delay, defer, or prevent a change in control and otherwise
prevent stockholders other than management’s affiliates from influencing the
Company’s direction and future.





The
market for the Company’s stock is thin and subject to manipulation.





The
volume of trading in the Common Stock is limited and can be dominated by a few
individuals. The limited volume, if any, can make the price of the Common Stock
subject to manipulation by one or more shareholders and will significantly limit
the number of shares of Common Stock that one can purchase or sell in a short
period of time. An investor may find it difficult to dispose of shares of Common
Stock or obtain a fair price for the Common Stock in the market.





The
market price for the Common Stock is volatile and may change dramatically at any
time.





The
market price of the Common Stock is highly volatile. The price for the Common
Stock may change dramatically as the result of announcements of the Company’s
operating or financial results, the rate of the Company’s expansion, significant
litigation or other factors or events that would be expected to affect the
Company’s business or financial condition, results of operations and other
factors specific to the Company’s business and future prospects. In addition,
the market price for the Common Stock may be affected by various factors not
directly related to the Company’s business, including the
following:





·
            intentional
      manipulation of the price of the Common Stock by existing or future
      stockholders;


·
            short
      selling of the Common Stock or related derivative
    securities;


·
            a
      single acquisition or disposition, or several related acquisitions or
      dispositions, of a large number of the Company’s shares of Common
      Stock;


·
            the
      interest, or lack of interest, of the market in the Company’s business
      sector, without regard to the Company’s financial condition or results of
      operations;


·
            the
      adoption of governmental regulations and similar developments in the
      United States or abroad that may affect the Company’s ability to offer the
      Company’s products and services or affect the Company’s cost
      structure;


·
            developments
      in the businesses of companies that purchase the Company’s products;
      and


·
            economic
      and other external market factors, such as a general decline in market
      prices due to poor economic indicators or investor
    distrust.


29





Our
business may be affected by increased compensation and benefits
costs.




The
Company is currently negotiating various contracts that may generate revenues
beginning in the  4th
quarter for the fiscal year ended March 31, 2010. If the Company is able to
execute any such contracts, of which there can be no assurance, the Company
intends to new personnel to assist in the development and conduct of the
Company’s business operations. The increased compensation and benefits
associated with any new hires will impact the net results of the
Company.





The
Company has not paid dividends and does not anticipate paying dividends in the
future.





The
Company has not paid any cash dividends on its common stock to date and does not
anticipate any cash dividends being paid to holders of its common stock in the
foreseeable future. While the Company’s dividend policy will be based on the
operating results and capital needs of the business, it is anticipated that any
earnings will be retained to finance the Company’s future expansion. As the
Company has no plans to issue cash dividends in the future, its common stock
could be less desirable to other investors and as a result, the value of our
common stock may decline, or fail to reach the valuations of other similarly
situated companies who have issued cash dividends.





The
Common Stock is a “low-priced stock” and subject to regulation that limits or
restricts the potential market for the stock.





Shares of
the Common Stock should be considered to be “low-priced” or “penny stock,”
resulting in increased risks to investors and certain requirements being imposed
on some brokers who execute transactions in the common stock. In general, a
low-priced stock is an equity security that:


·
            Is
      priced under five dollars;


·
            Is
      not traded on a national stock exchange, the Nasdaq Global Market or the
      Nasdaq Capital Market;


·
            Is
      issued by a company that has less than $5 million in net tangible assets
      (if it has been in business less than three years) or has less than $2
      million in net tangible assets (if it has been in business for at least
      three years); and


·
            Is
      issued by a company that has average revenues of less than $6 million for
      the past three years.




The
Company believes the Common Stock is presently a “penny stock.” At any time that
the Common Stock qualifies as a penny stock, the following requirements, among
others, will generally apply:





·
            Certain
      broker-dealers who recommend penny stock to persons other than established
      customers and accredited investors must make a special written suitability
      determination for the purchaser and receive the purchaser’s written
      agreement to a transaction prior to
sale.


·
            Prior
      to executing any transaction involving a penny stock, certain
      broker-dealers must deliver to certain purchasers a disclosure schedule
      explaining the risks involved in owning penny stock, the broker-dealer’s
      duties to the customer, a toll-free telephone number for inquiries about
      the broker-dealer’s disciplinary history and the customer’s rights and
      remedies in case of fraud or abuse in the
sale.


·
            In
      connection with the execution of any transaction involving a penny stock,
      certain broker-dealers must deliver to certain purchasers the
      following:




o
            bid
      and offer price quotes and volume
information;


o
            the
      broker-dealer’s compensation for the
trade;


o
            the
      compensation received by certain salespersons for the
    trade;


o
            monthly
      accounts statements; and


o
            a
      written statement of the customer’s financial situation and investment
      goals.


30





Compliance
with existing and new regulations of corporate governance and public disclosure
may result in additional expenses.





Compliance
with changing laws, regulations, and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002 and other SEC
regulations, requires large amounts of management attention and external
resources. This may result in increased general and administrative expenses and
a diversion of management time and attention from revenue-generating activities
to compliance activities.








Item
3.  Controls and Procedures





(a)
            Based
      on the evaluation of our “disclosure controls and procedures” (as defined
      in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e))
      required by paragraph (b) of Rules 13a-15 or 15d-15, the Company’s
      principal executive officer and principal financial officer concluded that
      as of December 31, 2009, the Company’s disclosure controls and procedures
      were effective.





(b)
            There
      have been no changes in the Company’s internal control over financial
      reporting identified in connection with the evaluation required by
      paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during
      the Company’s last fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, the Company’s internal control
      over financial reporting.








PART
II - OTHER INFORMATION





Item
1. Legal Proceedings




The
Company is aware of the following situation regarding litigation, pending or
threatened, to which it is a party.





Syptec,
Inc.





Syptec,
Inc. was engaged by Sector 10 Holdings, Inc. and Sector 10 Connex,
Inc.  (a company owned by Sector 10 Holdings) to provide
administration services for the system network.  The network was
transferred from Holdings to the Company in May 2009 along with the
administration.





The
Network is not in service as of December 31, 2009. The Company has determined
that the performance of the administrator has been inadequate and the
administration agreement was cancelled.  The performance issues have
resulted in various disagreements with the administrator.  As part of
the termination, the Company has requested the return of all servers and related
software and other equipment for deployment in other secure facilities with a
new administrator. The administrator has not provided the return of the
equipment at this stage.  In addition, the administrator is seeking
payment of fees and has filed a claim for $58,732 of fees due. Although the fees
at issue are attributable to services for the Company, the claim was not filed
against the Company.





The
Company disagrees with the total fees but has recorded the full amount in the
financial statements.  The Company has disputed this claim and
considering legal options to provide the transfer the equipment to another
administrator. The disputed fees include charges for consulting fees that are
being challenged since the network is not in service.  Removing the
consulting fees included in the $58,732 and the consulting fees paid with the
acquisition of the equipment, the Company has a credit balance of approximately
$4,000.


31


Dutro Company & Reality
Engineering





The
Company resolved all outstanding issues regarding research and development
expenses and other expenses incurred by Dutro Company on behalf of the
Company.  An agreement was signed on August 6, 2009 with all parties
agreeing to payment.  Subsequent to the agreement, the Company
requested the return of detail information concerning the R&D expenditures
including drawings, engineering information and other property and supplies held
by Dutro Company.  Dutro Company has refused to provide any requested
information and/or property.





The
Company also learned that Dutro Company and members of the Dutro Group may be
involved in the manufacturing, sale and /or distribution of a product that is
similar to the Sector 10 MRU.  Such activity is in violation of the
Master Product Manufacturing and Purchase Agreement dated October 1, 2007,
between Dutro Company and the Company and possibly a violation of patents held
on the MRU.  The Company sent Dutro Company and members of the Dutro
Group a Cease and Desist letter on August 25, 2009 to stop such
activity.  The Company is monitoring the status of this
request.




Reality
Engineering is managed by Lee Allen, a member of the Dutro
Group.  Reality Engineering agreed to assist the Company in enhancing
the PLX-3D software.  The agreed fee was $50,000.  Reality
completed the project and has attempted to collect over $168,000 for the
services.  Reality Engineering has not provided the Company with any
useable product until the higher fee is paid.  Reality Engineering has
rejected all offers proposed by the Company to settle the difference in fee
arrangement and has still never provided the Company with any useable end
product from their services.  On October 24, 2009, the Company
informed Reality Engineering that they will no longer seek the end product
derived from their services since no agreement could be reached on the
fees.  Accordingly, no fees will be paid to Reality as a result of
their final rejection.  The Company will review all actions taken by
Reality Engineering and their impact on the Company.





Interest
payments were due under the Dutro Group promissory note arrangements in January
2010.  Total interest due for payment in January was $23,685 which is
allocated as follows: Vicki Davis - $11,300, William Dutro - $4,875 and Dutro
Company - $7,510.  Payments were made to Vicki Davis and William Dutro
for the full accrued amount.  No payment was sent to Dutro Company in
January.  The promissory note required Dutro Company to return all
materials to the Company upon request by the Company.  The Company has
made multiple requests for property still held at the Dutro Company
facility.  This includes various raw materials, supplies, molds,
detail plans and specifications and other items. A letter was issued to Dutro
Company in January 2010 requesting the return of all of the Company’s property
in accordance with the underlying promissory note agreement and manufacturing
agreement.  The letter stated that all interest payments under the
promissory note would be withheld pending receipt of all requested
information.  No response has been received from Dutro Company as of
February 10, 2010





No
complaint or other litigation is currently filed for any of the above Dutro or
Reality Engineering issues.




Edward  Johnson





The
Company is past due on the $200,000 note payable plus accrued interest to Edward
Johnson.  The Company is currently negotiating financing with another
investor group.  The new financing will be used in part to repay the
extended loan plus interest.   The Company continues to work with
the Investor to work out an agreed payment arrangement.  Upon the
receipt of financing, the Company intends on making payments under this
arrangement until all principal and accrued interest is paid in
full.  No claim has been filed by the investor as of February 10,
2010





Doty
Scott





Doty
Scott is a consultant that delivered services to the Company prior to November
20, 2007 which was the date of the merger between SKRM Interactive, Inc. and
Sector 10 USA, Inc. (now Sector 10, Inc.)  The amount due the
consultant at that time was approximately $16,000.  This amount was
treated as pre-acquisition debt and included in accounts payable.  The
Company has been informed of an agreement that was signed on November 13, 2007
(pre-acquisition) that the consultant argues that carried a promissory note
arrangement should the fees not be paid within a specific time
period.  Under the promissory note, additional compensation may be
due.  The consultant claims that they are entitled to over 3 million
shares of common shares of the Company to fulfill their
obligation.  The Company reviewed the details of the claims presented
by the consultant and has rejected their claims. The Consultant’s attorney
provided an e-mail of a complaint that he filed in a court in San Diego, CA. on
October 16, 2009.   The Company Registered Agent was served
regarding the Complaint on October 20, 2009. The Company disagrees with the
consultant claims and argues that the benefits requested are far in excess of
any reasonable benefits that should be due if the original $16,000 fees can be
validated.  There is no signed promissory note contained in any
agreement. Nor is there any signed promissory note contained in the claim
documentation that was filed. The Company will vigorously argue against any
claims presented by the consultant in this matter.  An attorney has
been engaged to respond to the claim filed on October 16, 2009.  The
attorney filed a response on November 19, 2009 and requested that the case be
removed to Federal Court in an effort to better protect the Company from
frivolous claims that may be asserted by the consultant.





The Case
is pending review in Court in April, 2010.  The Company believes that
sufficient reserves are included in the financial statements for exposures for
this case.


32





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





On
September 12, 2007, the Company, Jeffrey Martin, Sector 10 Services, Sector 10
Holdings, and the DeAvila Institute the Section 10 Transaction Exchange
Agreement. The offer and sale of shares of common stock in the Sector 10
Transaction were effected in reliance upon the exemptions for sales of
securities not involving a public offering, as set forth in Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder, based upon the
following: (a) there was no public offering or general solicitation with respect
to the Sector 10 Transaction offering; (b) each of Sector 10 Holdings and the
DeAvila Institute investor was provided with certain disclosure materials and
all other information requested with respect to the Company; (c) each of Sector
10 Holdings and the DeAvila Institute acknowledged that all securities being
purchased were “restricted securities” for purposes of the Securities Act, and
agreed to transfer such securities only in a transaction registered under the
Securities Act or exempt from registration under the Securities Act; and (d) a
legend was placed on the certificates representing each such security stating
that it was restricted and could only be transferred if subsequently registered
under the Securities Act or transferred in a transaction exempt from
registration under the Securities Act.





Item
6. Exhibits





See the
Exhibit Index attached hereto following the signature page.








33


SIGNATURES





Pursuant
to the requirements 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.





Sector
      10, Inc.February
      22, 2010
            
            By:
      /s/ Pericles DeAvilaDate
            
            Pericles
      DeAvila, PresidentFebruary
      22, 2010
            
            By:
      /s/ Laurence A. MadisonDate
            
            Laurence
      A. Madison
              Chief
      Financial Officer





34





EXHIBIT
      INDEXExhibit
      No.
            
            Exhibit
            
            Incorporated
      by Reference/
              Filed
      Herewith[Discuss
      other exhibits]31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer
            
            Filed
      herewith31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
            
            Filed
      herewith32.1
            
            Section
      1350 Certification of Chief Executive Officer
            
            Filed
      herewith32.2
            
            Section
      1350 Certification of Chief Financial Officer
            
            Filed
      herewith











35