UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
quarterly period ended December 31, 2009





o TRANSITIONAL
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
transitional period from ______ to ______





Commission
File No.333-151807





PSM
HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)





Nevada
            
            90-0332127(State
      or other jurisdiction of incorporation of organization)
            
            (I.R.S.
      Employer Identification Number)





1112 N. Main Street,
Roswell, New Mexico 88201


(Address
of principal executive office) (zip code)





(575)
624-4170


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding twelve months (or for such shorter period that the
registrant was required to submit and post such files). Yes o   No o





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





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
            Smaller
      reporting company x(Do
      not check if a smaller reporting company)





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


Yes o No x





As of
February 12, 2010, there were 13,028,318 shares of registrant’s common stock
outstanding.











PSM
HOLDINGS, INC.





TABLE
OF CONTENTS





Report on
Form 10-Q


For the
quarter ended December 31, 2009








PagePART
      I - FINANCIAL INFORMATIONItem
      1.     Financial Statements
            3Consolidated
      Balance Sheets at December 31, 2009 (Unaudited) and June 30,
      2009
            3Unaudited
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the
              Three
      Month and Six Month Periods ended December 31, 2009 and
    2008
            4Unaudited
      Consolidated Statements of Cash Flows for the Six Month Periods
      ended
              December
      31, 2009 and 2008
            5Notes
      to the unaudited Consolidated Financial Statements
            6 –
      15Item
      2.     Management's Discussion and Analysis of
      Financial Condition and Results of Operations
            16Item
      3.     Quantitative and Qualitative Disclosures About
      Market Risk
            21Item
      4T.   Controls and Procedures
            22PART
      II - OTHER INFORMATIONItem
      1.     Legal Proceedings
            22Item
      1A.  Risk Factors
            22Item
      2.     Changes in Securities
            22Item
      3.     Defaults Upon Senior Securities
            22Item
      4.     Submission of Matters to a Vote of Securities
      Holders
            22Item
      5.     Other Information
            23Item
      6.     Exhibits
            23


2
  PART
1 – FINANCIAL INFORMATION





Item 1.
Financial statements




PSM HOLDINGS, INC. AND
SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS






ASSETS
            
            December
      31,
              2009
            
            
            June
      30,
              2009(UNAUDITED)Current
      Assets:Cash
      & cash equivalents
            
            $
            45,873
            
            
            $
            83,158Accounts
      receivable, net
            
            
            108,809
            
            
            
            90,415Marketable
      securities
            
            
            51,113
            
            
            
            42,039Total
      current assets
            
            
            205,795
            
            
            
            215,612Property
      and equipment, net
            
            
            22,230
            
            
            
            27,516Loan
      receivable
            
            
            93,754
            
            
            
            94,206NWBO
      License, net of accumulated amortization, December 31, 2009 -
      $218,683and
      June 30, 2009 - $189,218
            
            
            606,316
            
            
            
            635,781Total
      Assets
            
            $
            928,095
            
            
            $
            973,115LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            151,548
            
            
            $
            97,203Accrued
      liabilities
            
            
            67,133
            
            
            
            9,268Total
      current liabilities
            
            
            218,681
            
            
            
            106,471Long-term
      Liabilities:Due
      to related party
            
            
            120,000
            
            
            
            110,000Total
      long-term liabilities
            
            
            120,000
            
            
            
            110,000Total
      Liabilities
            
            
            338,681
            
            
            
            216,471Commitment
      & contingencies
            
            
            -
            
            
            
            -Stockholders'
      Equity:Common
      stock, $0.001 par value, 100,000,000 shares authorized, 12,970,956 and
      12,942,294shares
      issued and outstanding at December 31, 2009 and June 30,
    2009
            
            
            12,970
            
            
            
            12,942Preferred
      stock, $0.001 par value, 10,000,000 shares authorized, no shares
      issuedand
      outstanding at December 31, 2009 and June 30, 2009
            
            
            -
            
            
            
            -Treasuary
      stock, at cost: shares held - 179,495 at December 31, 2009 and June 30,
      2009
            
            
            (72,747
            )
            
            
            (72,747
            )Additional
      paid in capital
            
            
            4,303,998
            
            
            
            4,244,502Accumulated
      other comprehensive (loss) income, net of deferred tax
            
            
            3,850
            
            
            
            (9,770
            )Accumulated
      deficit
            
            
            (3,658,657
            )
            
            
            (3,418,283
            )Total
      stockholders' equity
            
            
            589,414
            
            
            
            756,644Total
      Liabilities and Stockholders' Equity
            
            $
            928,095
            
            
            $
            973,115




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




3


PSM HOLDINGS, INC. AND
SUBSIDIARY
 UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)


For
      the three months period ended
              
              
              For
      the six months period endedDecember
      31,
              
              
              December
      31,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenues
              
              $
              926,612
              
              
              $
              766,328
              
              
              $
              1,863,009
              
              
              $
              1,624,185Operating
      expensesBrokerage
      commission
              
              
              813,473
              
              
              
              698,514
              
              
              
              1,639,234
              
              
              
              1,471,248Selling,
      general & administrative
              
              
              193,191
              
              
              
              209,988
              
              
              
              428,633
              
              
              
              426,339Depreciation
      and amortization
              
              
              17,376
              
              
              
              17,441
              
              
              
              34,751
              
              
              
              34,747Total
      operating expenses
              
              
              1,024,040
              
              
              
              925,943
              
              
              
              2,102,618
              
              
              
              1,932,334Loss
      from operations
              
              
              (97,428
              )
              
              
              (159,615
              )
              
              
              (239,609
              )
              
              
              (308,149
              )Non-operating
      income (expense):Interest
      expense
              
              
              (621
              )
              
              
              (1,060
              )
              
              
              (1,310
              )
              
              
              (3,876
              )Interest
      and dividend income
              
              
              2,584
              
              
              
              2,634
              
              
              
              5,063
              
              
              
              5,153Realized
      gain (loss) on sale of securities
              
              
              (1,014
              )
              
              
              (38
              )
              
              
              (4,518
              )
              
              
              473Total
      non-operating income (expense)
              
              
              949
              
              
              
              1,536
              
              
              
              (765
              )
              
              
              1,750Loss
      from continuing operations before income tax
              
              
              (96,479
              )
              
              
              (158,079
              )
              
              
              (240,374
              )
              
              
              (306,399
              )Provision
      for income tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              
              (96,479
              )
              
              
              (158,079
              )
              
              
              (240,374
              )
              
              
              (306,399
              )Other
      comprehensive income (loss):Unrealized
      gain (loss) on marketable securities
              
              
              3,287
              
              
              
              (13,101
              )
              
              
              13,620
              
              
              
              (20,187
              )Comprehensive
      income (loss)
              
              $
              (93,192
              )
              
              $
              (171,180
              )
              
              $
              (226,754
              )
              
              $
              (326,586
              )Net
      loss per common share and equivalents -basic
      and diluted loss from operations
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              (0.02
              )
              
              $
              (0.02
              )Weighted
      average shares of share capital outstanding-
      basic & diluted
              
              
              12,960,052
              
              
              
              12,964,460
              
              
              
              12,951,173
              
              
              
              12,936,080Weighted
      average number of shares used to compute basic and diluted loss per share
      for the three months and six months ended December 31, 2009 and 2008 are
      the same since the effect of dilutive securities is
      anti-dilutive.


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


4


PSM HOLDINGS, INC. AND
SUBSIDIARY


UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS




For
      the six months period ended December 31,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (240,374
              )
              
              $
              (306,399
              )Adjustments
      to reconcile net loss to net cash used
      in operating activities:Depreciation
      and amortization
              
              
              34,751
              
              
              
              34,747Non-cash
      commissions contributed by an officer
              
              
              1,342
              
              
              
              120,239Share
      based payment awards
              
              
              58,183
              
              
              
              12,300Gain
      (loss) on sale of marketable securities
              
              
              4,518
              
              
              
              (473
              )(Increase)
      decrease in current assets:Accounts
      receivable
              
              
              (18,394
              )
              
              
              10,476Accrued
      interest receivable
              
              
              452
              
              
              
              (90
              )Increase
      (decrease) in current liabilities:Accounts
      payable
              
              
              54,345
              
              
              
              2,903Accrued
      liabilities
              
              
              57,865
              
              
              
              (3,074
              )Bank
      overdraft
              
              
              -
              
              
              
              (4,792
              )Net
      cash used in operating activities
              
              
              (47,312
              )
              
              
              (134,163
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property & equipment
              
              
              -
              
              
              
              (2,680
              )Proceeds
      from loan and notes receivable
              
              
              -
              
              
              
              8,963Proceeds
      from sale of marketable securities
              
              
              17,667
              
              
              
              23,088Purchase
      of marketable securities
              
              
              (17,640
              )
              
              
              (23,881
              )Net
      cash provided by investing activities
              
              
              27
              
              
              
              5,490CASH
      FLOWS FROM FINANCING ACTIVITIES:Cash
      receipts from capital contributions
              
              
              -
              
              
              
              145,000Cash
      payments on loan from related party
              
              
              (10,000
              )
              
              
              -Cash
      receipts on loan from related party
              
              
              20,000
              
              
              
              20,000Net
      cash provided by financing activities
              
              
              10,000
              
              
              
              165,000NET
      INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
              
              
              (37,285
              )
              
              
              36,327CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
              
              
              83,158
              
              
              
              11,869CASH
      & CASH EQUIVALENTS, ENDING BALANCE
              
              $
              45,873
              
              
              $
              48,196See
      Note 3 - Statement of Cash Flows Additional Disclosures


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




5





PSM HOLDINGS, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


(UNAUDITED)





NOTE 1 – NATURE OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Company
Background


As used
herein and except as otherwise noted the term “Company” shall mean PSM Holdings,
Inc.





The
Company was incorporated under the laws of the State of Utah on March 12, 1987,
as Durban Enterprises, Inc. On July 19, 2001, Durban Enterprises, Inc., created
a wholly owned subsidiary called Durban Holdings, Inc., a Nevada corporation, to
facilitate changing the domicile of the Company to Nevada. On August 17, 2001,
Durban Enterprises, Inc. merged with and into Durban Holdings, Inc., leaving the
Nevada Corporation as the survivor. The Company retained the originally
authorized 100,000,000 shares at $0.001 par value.





On May
18, 2005, Durban Holdings, Inc. completed the acquisition of all of the
outstanding stock of PrimeSource Mortgage, Inc., a Texas corporation, by a stock
for stock exchange in which the stockholders of PrimeSource Mortgage, Inc.
received 10,250,000 shares, or approximately 92% of the outstanding stock of the
Company.  Following the acquisition,  the name of the parent
“Durban Holdings, Inc.”, was changed to “PSM Holdings, Inc.” effective May 18,
2005. For reporting purposes, the acquisition was treated as an acquisition of
the Company by PrimeSource Mortgage, Inc. (reverse acquisition) and a
recapitalization of PSM Holdings, Inc. The historical financial statements prior
to May 18, 2005, are those of PrimeSource Mortgage, Inc. No goodwill was
recognized from the transaction.





Business
Activity


PrimeSource
Mortgage, Inc., a wholly-owned subsidiary of PSM Holdings, Inc. was incorporated
February 15, 1991 under the laws of the State of Texas.  PrimeSource
Mortgage, Inc became a wholly owned subsidiary of PSM Holdings, Inc., a Nevada
corporation, on May 18, 2005. PrimeSource Mortgage, Inc. acts as an agent or
broker for mortgage lenders in real estate mortgage loan transactions, and
solicits and receives applications for secured or unsecured loans. PrimeSource
Mortgage, Inc. establishes Independent Network Office Agreements with
originators who act as an independent contractor to originate mortgage
applications for submission to lenders under the terms and conditions provided
in the Network Office Agreement. PrimeSource Mortgage, Inc. pays the originators
commissions and fees based on a split schedule accepted and agreed to by
PrimeSource Mortgage, Inc., the respective lenders and the
originators.  PrimeSource Mortgage, Inc. will then return to the
originator a percentage of the commission and fee split in stock
awards.  The Network Office Agreements are effective for a period of
30 days, and are automatically extended for 30 day periods until they are
cancelled.  The Company primarily operates and is licensed in the
following 17 states:  Arkansas, California, Connecticut, Florida,
Georgia, Idaho, Iowa, Kansas, Louisiana, Missouri, Montana, Nebraska, New
Mexico, Oklahoma, Tennessee, Texas, and Washington.





Basis of
Presentation


The
accompanying unaudited consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission for the presentation of interim financial information, but do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The audited financial
statements for the year ended June 30, 2009 were filed on September 28, 2009
with the Securities and Exchange Commission and is hereby incorporated by
reference. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the six month
period ended December 31, 2009 are not necessarily indicative of the results
that may be expected for the year ended June 30, 2010.





Summary of Significant
Accounting Policies


The
following summary of significant accounting policies of the Company is presented
to assist in the understanding of the Company’s financial
statements.  The financial statements and notes are the representation
of the Company’s management who is responsible for their integrity and
objectivity.  The financial statements of the Company conform to
accounting principles generally accepted in the United States of America (GAAP).
The Financial Accounting Standards Board (FASB) is the accepted standard-setting
body for establishing accounting and financial reporting
principles.





6





Principles of
Consolidation


The
consolidated financial statements include the accounts of PSM Holdings, Inc. and
its wholly-owned subsidiary PrimeSource Mortgage, Inc.  All material
intercompany transactions have been eliminated in consolidation.





Use of
Estimates


Management
uses estimates and assumptions in preparing financial statements. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses.  Accordingly, actual results could differ from those
estimates. Significant estimates include the value of other non-current assets,
estimated depreciable lives of property, plant and equipment, estimated
valuation of deferred tax assets due to net operating loss carry-forwards and
estimates of uncollectible amounts of loans and notes receivable.





Cash and Cash
Equivalents


For the
purposes of the statement of cash flows, cash and cash equivalents includes cash
on hand and cash in checking and savings accounts, and all investment
instruments with an original maturity of three months or less.





Accounts
Receivable


Accounts
receivable represent commissions earned on closed loans and fees charged to new
branch offices that the Company has not yet received payment. Accounts receivable
are stated at the amount management expects to collect from balances outstanding
at period-end.  The Company estimates the allowance for doubtful
accounts based on an analysis of specific accounts and an assessment of the
customer of branch owner’s ability to pay. The Company recorded an allowance for
doubtful accounts of $0 and $12,500 as of December 31, 2009 and June 30,
2009.





Loan
Receivable


The loan
receivable is stated at the unpaid principal balance.  Interest income
is recognized in the period in which it is earned.





Investments in Marketable
Securities


Investments
consist of equity securities categorized as available-for-sale which includes
securities that are not classified in either the held-to-maturity category or
the trading category.  The securities are recognized at fair value,
with unrealized holding gains and losses included as other comprehensive income,
net of any deferred income taxes and reported as a net amount in a separate
component of stockholders’ equity until realized. Interest and dividends earned
on investment securities are recognized in the period in which they are
received. Interest and dividends are reported in the non-operating income
section of the Consolidated Statements of Operations and Comprehensive Income
(loss).





Property and
Equipment


Property
and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets as follows.
Expenditures for maintenance and repairs are charged to expense as
incurred.


Furniture,
      fixtures and office equipment
              5-7
      yearsComputer
      equipment
              5
      years





Income
Taxes


Income
taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the bases of certain assets and liabilities for
financial and tax reporting. The deferred taxes represent the future tax return
consequences of those differences, which will either be deductible or taxable
when the assets and liabilities are recovered or settled.  In
addition, there is the deferred tax asset which represents the economic value of
various tax carryovers.





Taxes Collected and Remitted
to Governmental Authorities


When
applicable, the Company collects New Mexico gross receipts taxes from its
customers and remits them to the required governmental
authorities.  Related revenues are reported net of applicable taxes
collected and remitted to governmental authorities.





7





Advertising


Advertising
costs are expensed as incurred. Advertising expense for the three month period
and six month period ended December 31, 2009 and 2008 was $1,167 and $2,524, and
$3,705 and $3,920, respectively.





Share Based Payment
Plan


Under the
2002 Stock Option/Stock Issuance Plan, the Company can grant stock or options to
employees, related parties, and unrelated contractors in connection with the
performance of services provided to the Company by the awardees. The Branch
Owner Stock Program provides for issuance of stock to branch owners for the
commissions earned.  The Company uses the fair value method to account for
employee stock compensation costs and to account for share based payments to
non-employees.





Revenue
Recognition


The
Company’s revenue is derived primarily from revenue earned from the origination
of mortgage loans that are funded by third parties. The Company has a network of
independently owned branch offices that originate mortgage loans from which the
Company receives a percentage of the fees earned by the branch. Revenue is
recognized as earned on the later of the settlement date or the funding date of
the loan.





The
Company generated no revenue, and less than 1% of total revenues from fees
charged to new branch offices for joining the network during the six month
period ended December 31, 2009 and 2008. The fee is recognized as revenue when
the new branch signs agreements to join the network, in accordance with
generally accepted accounting principles.





Beginning
in May of 2009, the Company receives a fee on a warehouse line of credit of one
eighth (1/8) of one percent of the loan amount on loans closed on the
credit line. In October of 2009 the fee was raised to one fourth (1/4) of one
percent of the loan amount.  The revenue is recognized as earned on
the later of the settlement date or the funding date of the loan.





Reclassification


Certain
accounts in the prior-period financial statements have been reclassified for
comparative purposes to conform with the presentation in the current quarter
financial statements.





Recent Accounting
Pronouncements


The
Company has evaluated the possible effects on its financial statements of the
following accounting pronouncements:




FSP FAS 107-1 and APB 28-1 – Interim Disclosures about
Fair Value of Financial Instruments – This FASB
staff position amends ASC 825, Disclosures about Fair Value of
Financial Instrumentsto require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements.  This staff position also
amends APB Opinion No. 28, Interim Financial Reporting,to require those disclosures in summarized financial information at
interim reporting periods. This staff position will be effective for interim
periods ending after June 15, 2009 and will be applied prospectively. The
Company has adopted the requirements of this pronouncement for the six month
period ended December 31, 2009.




In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements”, now codified under FASB ASC Topic 605, “Revenue Recognition”,
(“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted.
Management is currently evaluating the potential impact of ASU2009-13 on our
financial statements.




8





In
October 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”,
now codified under FASB ASC Topic 470 “Debt”, (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of issuance, a
share-lending arrangement entered into on an entity’s own shares should be
measured at fair value in accordance with Topic 820 and recognized as an
issuance cost, with an offset to additional paid-in capital. Loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs. The amendments also require several
disclosures including a description and the terms of the arrangement and the
reason for entering into the arrangement. The effective dates of the amendments
are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the
beginning of fiscal years beginning on or after December 15, 2009. Management is
currently evaluating the potential impact of ASU 2009-15 on our financial
statements.





In
December 2009, under FASB ASC Topic 860, “Transfers and Servicing.” New
authoritative accounting guidance under ASC Topic 860, “Transfers and
Servicing,” amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred financial assets.
The new authoritative accounting guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 will be effective January 1, 2010 and is not
expected to have a significant impact on the Company’s financial
statements.





NOTE 2 – PROPERTY AND
EQUIPMENT




Property
and equipment is summarized as follows:


December
      31, 2009(unaudited)
            
            
            June
      30, 2009Fixtures
      and equipment
            
            $
            114,563
            
            
            $
            114,563Accumulated
      depreciation
            
            
            (92,333
            )
            
            
            (87,047
            )Property
      and equipment, net
            
            $
            22,230
            
            
            $
            27,516





Depreciation
expense was $2,643 and $2,708 for the three month period ended December 31, 2009
and 2008, and $5,286 and $5,282 for the six month period ended December 31, 2009
and 2008, respectively.





NOTE 3 – STATEMENTS OF CASH
FLOWS ADDITIONAL DISCLOSURES





Six
      months ended
              December
      31, 2009
              (Unaudited)
            
            
            Six
      months ended
              December
      31, 2008
              (Unaudited)Cash
      paid for interest
            
            $
            1,310
            
            
            $
            3,876Cash
      paid for income taxes
            
            
            -
            
            
            
            -





Non-cash
investing and financing activities were as follows:


Six
      months ended
              December
      31, 2009
              (Unaudited)
            
            
            Six
      months ended
              December
      31, 2008
              (Unaudited)Stock
      issuance and transfers (Note 5):Stock
      transferred from Company President for services
            
            $
            1,342
            
            
            $
            120,239Stock
      issued to as a result of transfers from the Company
    President
            
            
            1,342
            
            
            
            120,239





9


NOTE 4 – INVESTMENTS IN
MARKETABLE SECURITIES




Cost and
fair value of marketable securities at December 31, 2009 and June 30, 2009, are
as follows:





Cost
            
            
            Gross Unrealized
      Gains
            
            
            Gross Unrealized
      Losses
            
            
            Fair
      ValueDecember 31, 2009
    (Unaudited)Available
      for SaleEquity
      Securities
            
            $
            46,140
            
            
            $
            6,375
            
            
            $
            (1,402
            )
            
            $
            51,113June 30, 2009Available
      for SaleEquity
      Securities
            
            $
            50,685
            
            
            $
            1,029
            
            
            $
            (9,675
            )
            
            $
            42,039





Available
for sale securities are carried in the financial statements at fair value. Net
unrealized holding gains on available for sale securities in the amount of
$4,973 and net unrealized holding losses of $8,646 as of December
31,  2009 and June 30, 2009, respectively, have been included in
accumulated other comprehensive income.  Estimated income tax related
to unrealized holding gains for the six month and three month periods ending
December 31, 2009 and 2008 was $0.





Proceeds
from the sale of securities available for sale during the six month period ended
December 31, 2009 was $17,667,   Net realized loss from the sale
of securities available for sale and included in the statement of operations for
the six month and three month periods ended December 31, 2009 was $4,518 and
$1,014 respectively.  The cost of securities sold is determined by
specific identification.





Proceeds
from the sale of securities available for sale during the six month period ended
December 31, 2008 was $23,088.  Net realized gain of $473 and net
realized loss of $38 from the sale of securities available for sale is included
in the statement of operations for the six month and three month periods ended
December 31, 2008, respectively.  The cost of securities sold is
determined by specific identification.





Temporary
impairments


The
following table shows the gross unrealized losses and fair value of the
Company’s investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and the
length of time that individual securities have been in a continuous unrealized
loss position at December 31, 2009.





Less
      than 12 Months
            
            
            More
      than 12 Months
            
            
            TotalDescription
      of Securities
            
            Fair
      Value
            
            
            Unrealized Losses
            
            
            Fair Value
            
            
            Unrealized Losses
            
            
            Fair Value
            
            
            Unrealized LossesMarketableEquity
      Securities
            
            $
            -
            
            
            $
            -
            
            
            $
            11,686
            
            
            $
            (1,402
            )
            
            $
            11,686
            
            
            $
            (1,402
            )Total
            
            $
            -
            
            
            $
            -
            
            
            $
            11,686
            
            
            $
            (1,402
            )
            
            $
            11,686
            
            
            $
            (1,402
            )





Marketable Equity
Securities


The
Company’s investments in marketable equity securities consist primarily of
investments in common stock of companies engaged in a variety of industries. The
industries and the Company’s investees are susceptible to changes in the U.S.
economy and the economies of their customers. The severity of the impairments in
relation to the carrying amounts of the individual investments is consistent
with market developments within the various industries.  The Company
evaluated the near-term prospects of the issuers in relation to the severity and
duration of the impairments. Based on that evaluation and the Company’s ability
and intent to hold these investments for a reasonable period of time sufficient
for a forecasted recovery of fair value, the Company does not consider these
investments to be other than temporarily impaired at December 31,
2009.





10





NOTE 5 – RELATED PARTY
TRANSACTIONS




The
Company leases office space in a building that is 100% owned by an LLC whose
members are the Company’s President and his immediate family. The Company rents
a vehicle that is owned by the Company’s President. The rental is on a
month-to-month basis and is cancellable at any time.  Monthly rental
payments are $500. During the three month period ended December 31, 2009 and
2008, the Company paid $1,500 and $2,000, respectively, under the rental
agreement.  During the six month periods ended December 31, 2009 and
2008, the Company paid $3,000 and $3,000, respectively under the rental
agreement.





The
Company had the following loan outstanding to a related party:


Original
      Loan
            
            
            Balance
      due
              December
      31, 2009 (Unaudited)
            
            
            Balance
      due
              June
      30, 2009Unsecured
      loans to NWBO Corporation(NWBO)
      bearing interest at 9.25%annually
      with no definedpayment
      terms
            
            $
            167,000
            
            
            $
            90,890
            
            
            $
            90,890Accrued
      interest due from NWBO
            
            
            -
            
            
            
            2,864
            
            
            
            3,316167,000
            
            
            
            93,754
            
            
            
            94,206Less
      allowance for uncollectible amounts
            
            
            -
            
            
            
            -
            
            
            
            -$
            167,000
            
            
            $
            93,754
            
            
            $
            94,206





The
Company conducted business with the Roswell, New Mexico Branch office, owned by
a director of the Company during the six month period ended December 31,
2008. The branch owner served on the Company’s Board of Directors until
July 1, 2009.  For the three month period ended December 31, 2008,
commissions paid to the branch owner under the branch agreement were $53,886,
which included share based payments of $5,987.  For the six month period
ended December 31, 2008, commissions paid under the branch agreement were
$97,515, which included share based payments of $10,834.  At June 30,
2009, the Company owed the branch owner $9,670 in
commissions.





The
Company conducted business with the Ruidoso, New Mexico Branch office which is
owned by a director of the Company.  For the three month periods ended
December 31, 2009 and 2008, commissions paid under the branch agreement were
$7,522 and $0 respectively.  For the six month periods ended December 31,
2009 and 2008, commissions paid under the branch agreement were $7,637and
$3,889, respectively.  At December 31, 2009 and June 30, 2009, the
Company did not owe the Ruidoso Branch any commissions.  There were no
share based payments during the three month and six month periods ended December
31, 2009 and 2008.





The
Company purchased certain consulting services from one of the Company’s
directors. Cash payments for services purchased during the three month periods
ended December 31, 2009 and 2008, included in selling, general, and
administrative expenses, were $9,000 and $15,000, respectively.  Cash
payments for services purchased during the six month periods ended December 31,
2009 and 2008 included in selling, general, and administrative expenses were
$17,679 and $30,000, respectively.





The
following table represents the Company President’s contributions to the
Company:





Six
      months ended
              December
      31, 2009
              (Unaudited)
            
            
            Six
      months ended
              December
      31, 2008
              (Unaudited)Transfer
      of personal stock in exchange for servicesRendered
            
            $
            1,342
            
            
            $
            120,239Cash
    contributions
            
            
            -
            
            
            
            145,000Total
      Contributions from President to Company
            
            $
            1,342
            
            
            $
            265,239




11




During
the six month period ended December 31, 2008, the Company’s President committed
to make loans to the Company in the form of transfers of his personal stock of
the Company to branch owners in exchange for services rendered during the
periods. As part of his commitment, he agreed to forgive 100% of the resulting
loans to the Company. Transactions under this agreement were as
follows:
 Six
      months ended December 31, 2009
                  (Unaudited)
                
                
                Six
      months ended December 31, 2008
                  (Unaudited)Fair
      value of stock transferred, recognized as expenses
                  in
      the financial statements
                
                $
                1,342
                
                
                $
                120,239Loan
      amounts forgiven and recognized as additionalpaid
      in capital in the financial statements
                
                
                1,342
                
                
                
                120,239


On
January 24, 2008, the Company executed a promissory note for a revolving line of
credit arrangement with its President to borrow funds up to $120,000 for its
working capital requirements.  The term of the promissory note is five
years at an adjustable interest rate of the Prime Rate minus
0.76%.  The balance outstanding of the promissory note at December 31,
2009 and June 30, 2009 was $120,000 and $110,000, respectively.





NOTE 6 –STOCK
ISSUANCE


Following
is the status of the share based payment plans during the quarter ended December
31, 2009.





The
Company uses the fair value method to account for employee stock compensation
costs and to account for share based payments to non-employees.  The
fair value of each share granted/issued for services is estimated on the
grant/issue date using the Black-Scholes pricing model.





During
the six month period ended December 31, 2009, the Company issued 28,662 shares
under the 2002 Stock Option/Stock Issuance Plan. The Company
has  recorded commission expense of $61,820 payable to the branch
owners for brokerage commissions equating to the fair value of 56,200 shares of
common stock.  The fair value of common shares was calculated by
dividing the quarterly commission earned by the average share price for the
quarter using the closing share price on the last trading day of the quarter
during which the brokerage commission is earned. The Company has not issued the
56,200 common shares to the branch owners for brokerage commission as of
December 31, 2009.





During
the six month period ended December 31, 2008, the Company issued a total of
15,000 shares under the 2002 Stock Option/Stock Issuance Plan. The market value
of the shares was $12,300 which was recorded as brokerage commission in the
accompanying financial statements as of December 31, 2008.





During
the six month period ended December 31, 2009 and 2008, there were no stock
options granted under the 2002 Stock Option/Stock Issuance
Plan.  There were no options issued and outstanding under the plan as
of December 31, 2009.





NOTE 7 –
COMMITMENTS




Nationwide By Owners
License


On April
14, 2006, the Company entered into a five-year renewable license agreement with
Nationwide By Owner, Inc. (“NWBO”), a Texas based company engaged in the
business of marketing real property for sale by owners.  In the course
of its business, NWBO generates a proprietary system which produces a database
of sales leads containing home buyer and home seller information for persons
seeking financing on the purchase or refinancing of real property. The license
agreement permits exclusive use of the database to be used to generate leads for
the origination of mortgage applications for submission to PrimeSource Mortgage,
Inc.





12





The
initial cost of the license was $150,000 cash, plus the issuance of 150,000
shares of PSM Holdings, Inc. stock in favor of NWBO and its principals, at a
fair value for consideration received of $674,999 on the date of
issue.  The Company is amortizing the cost of the license over
fourteen years, which is the initial five-year period of the agreement, plus
three automatic three year renewal terms. Amortization expense recorded during
the three month periods ended December 31, 2009 and 2008 was $14,732.
Amortization expense recorded during the six month periods ended December 31,
2009 and 2008 was $29,465.  Amortization expense to be recognized for
each of the years ending June 30, 2010 through 2019 is $58,929 and for the year
ending June 30, 2020 is $46,497.





The
agreement between NWBO and the Company calls for the establishment of a National
Processing Center for the collection, origination and tracking of the sales lead
database. As agreed to by NWBO and the Company, the National Processing Center
has been delayed until a written approval has been obtained between NWBO and a
national marketing company. There are several on-going conversations taking
place at this time, but no agreement has been executed. NWBO continues to
provide the platform that produces a database of sales leads containing home
buyer and home seller information for persons seeking financing on the purchase
or refinancing of real property for exclusive use by the Company. Upon
completion of a National Processing Center, the Company has also committed to
provide year-end bonuses under the license agreement which the parties can elect
to take in cash, stock, or any combination of the two.  Bonus cash
will be calculated by multiplying the annual net profit of the National
Processing Center by the following percentage rates: 15% for the initial five
year term of the license agreement, 20% for the first automatic renewal term,
25% for the second automatic renewal term, and 30% for the third automatic
renewal term and all subsequent annual renewal terms.  Should the
parties elect to take all or part of the bonus in common stock, the number of
shares awarded will be calculated according to the base value of the shares as
defined in the agreement. No accrual has been recorded for the year-end bonuses
because the National Processing Center has not been established.





Pursuant
to the agreement with NWBO, the Company has also committed to pursue obtaining,
in good faith and diligently, the appropriate licenses to originate mortgages in
all 50 states of the United States of America.





Historically
the Company has not gathered data on the number of leads and loans closed, and
commissions earned and paid, relating to the NWBO license since the branch
offices are independently owned and operated and may choose not to use these
lead generating opportunities.  Because some of the branches have
taken advantage of the NWBO opportunity, management has recently begun tracking
some of the results from those offices.  From the seven offices that
have used the NWBO technology, management believes there are approximately 20%
of the loans being derived from the NWBO signs.  However, management
also believes there are other benefits from the association for the branches in
the form of marketing exposure and the control of a transaction.  If a
prospective buyer calls the telephone number on the NWBO sign while looking for
a property, and if they are not already working with a realtor, the branch
office has the opportunity not only to generate the loan business, but may also
refer a lead prospect to a producing realtor in the market area.





The
Company has developed a method to measure the value of the NWBO license. 
The method is a computation based on income from new and existing branches and
an estimate of the value NWBO brings to each of the branches. The computation is
updated each quarter. The computed value of the license is compared to the
book value of the license at the end of each quarter to determine if there is
any impairment in the carrying value of the license is warranted. The book
value is determined by the original cost of the license less accumulated
amortization as of the end of the quarter. The value of the license
recorded on the balance sheet is book value. Pursuant to the computations, the
book value of the license was less than the computed value at December 31,
2009.





Lease
commitments


The
Company leases office space in a building that is 100% owned by an LLC whose
members are the Company’s President and his immediate family. The terms under
these lease agreements are that of month-to-month operating leases, and there
are no future non-cancelable lease commitments due by the Company. Total rents
paid during the three month periods ended December 31, 2009 and 2008 were $9,360
and $9,000, respectively. Total rents paid during the six month periods ended
December 31, 2009 and 2008 were $18,720 and $18,000, respectively. The Company
rents various property and equipment under leases and rental agreements with
cancellable terms. Total rents paid under these agreements during the three
month periods ended December 31, 2009 and 2008 were $1,671 and $2,974,
respectively. This included $1,500 and $2,000 paid to a related party during the
three month periods ended December 31, 2009 and 2008,
respectively.  Total rents paid under these agreements during the six
month periods ended December 31, 2009 and 2008 were $4,802 and $4,947,
respectively. This included $3,000 paid to a related party during the six month
periods ended December 31, 2009 and 2008, respectively.





13





NOTE 8 – LOSS PER COMMON
SHARE




Basic and
diluted loss per common share is computed by dividing the loss available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted loss per share does not reflect per share amounts
that would have resulted if diluted potential common stock has been converted to
common stock because the effect would be anti-dilutive.  The weighted
average number of common shares outstanding during the three month periods ended
December 31, 2009 and 2008 was 12,960,062 and 12,964,060 respectively. Loss per
common share for the three month periods ended December 31, 2009 and 2008 was
$0.01.  The weighted average number of common shares outstanding
during the six month periods ended December 31, 2009 and 2008 was 12,951,173 and
12,936,080 respectively. Loss per common share for the six month periods ended
December 31, 2009 and 2008 was $0.02.





NOTE 9 – LINE OF
CREDIT





The
Company has two warehouse lines of credit.  On August 3, 2008, the
Company entered into a warehouse line of credit agreement for up to $1,000,000
bearing an annual interest rate of 5%. On June 11, 2009, the Company entered
into an additional warehouse line of credit for up to $1,000,000 which was
modified on June 19, 2009 to increase the credit line to up to $4,000,000. The
annual interest rate on the new line is Wall Street Journal Prime Interest Rate
plus 1⁄2 %. The lines of credit provide short term funding for mortgage loans
originated by the branches.  The lines of credit are repaid within 5
to 7 days, when the loan is sold. The Company does not intend to hold and
service the loans.  The lines are used strictly to fund mortgage loans
and not to provide operating funds for the Company.  As of December
31, 2009, the Company did not have any amounts outstanding for payment against
the lines of credit.





NOTE 10 – FAIR VALUE
MEASUREMENTS





The
Company uses a hierarchy that prioritizes the inputs used in measuring fair
value such that the highest priority is given to unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurements) and
the lowest priority to unobservable inputs (level 3
measurements).  The three levels of the fair value hierarchy under are
described below:





Level
       1
            Inputs
      to the valuation methodology are unadjusted quoted prices for identical
      assets or liabilities in active markets that the Company has the ability
      to access.Level
       2
            Inputs
      to the valuation methodology include:
              •    
      Quoted prices for similar assets or liabilities in active
      markets;
              •    
      Quoted prices for identical or similar assets or liabilities in inactive
      markets;
              •    
      Inputs other than quoted prices that are observable for the asset or
      liability;
              •    
      Inputs that are derived principally from or corroborated by observable
      market data by correlation or other means.
              
              If
      the asset or liability has a specified (contractual) term, the Level 2
      input must be observable for substantially the full term of the asset or
      liability.Level
       3
            Inputs
      to the valuation methodology are unobservable and significant to the fair
      value measurement.




14




The
asset’s or liability’s fair value measurement level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement.  Valuation techniques used maximize the use of
observable inputs and minimize the use of unobservable inputs.  See Note 1
for discussion of valuation methodologies used to measure fair value of
investments.





The
valuation methodologies described above may produce a fair value calculation
that may not be indicative of net realizable value or reflective of future fair
values.  Furthermore, while the Company believes its valuation methods are
appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at the reporting
date.





The fair
value of the marketable securities were determined using Level 1
inputs.  The fair value of the remaining assets and liabilities were
determined using Level 2 inputs.  The carrying amounts and fair values
of the Company’s financial instruments at December 31, 2009 June 30, 2009 are as
follows:





December
      31, 2009
            
            
            June
      30, 2009Carrying
      Amount
            
            
            Fair
      Value
            
            
            Carrying
      Amount
            
            Fair
      ValueFinancial
      assets:Cash
      and cash equivalents
            
            $
            45,873
            
            
            
            45,873
            
            
            $
            83,158
            
            $
            83,158Accounts
      receivable
            
            
            108,809
            
            
            
            108,809
            
            
            
            90,415
            
            
            90,415Marketable
      securities
            
            
            51,113
            
            
            
            51,113
            
            
            
            42,039
            
            
            42,039Loan
      receivable
            
            
            93,754
            
            
            
            93,754
            
            
            
            94,206
            
            
            94,206Financial
      liabilities:Accounts
      payable
            
            $
            151,548
            
            
            
            151,548
            
            
            $
            97,203
            
            $
            97,203Accrued
      liabilities
            
            
            67,133
            
            
            
            67,133
            
            
            
            9,268
            
            
            9,268Due
      to a related party
            
            
            120,000
            
            
            
            120,000
            
            
            
            110,000
            
            
            110,000





NOTE 11 – SUBSEQUENT
EVENTS





Subsequent
events have been evaluated through February 12, 2010, the date these financial
statements were issued.




The Board
of Directors authorized the issuance of 6,500 shares of common stock valued at
$4,875 to third parties for consulting services. On January 19, 2010 and January
28, 2010, the Company issued such shares to the third party
consultants.




In
addition, the Board of Directors authorized and approved the issuance of 56,200
shares of common stock with a fair value of $61,820 to the branch owners for
brokerage commissions earned for the three month period ended December 31, 2009.
As of February 12, 2010, 5,338 shares of such common stock authorized for
brokerage commission have not been issued by the Company.


15


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





This
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to future events and financial
performance. You can identify these statements by forward-looking words such as
“may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or
similar words.  Those statements include statements regarding the
intent, belief or current expectations of us and members of its management team
as well as the assumptions on which such statements are based. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risk and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements.





Readers
are urged to carefully review and consider the various disclosures made by us in
this report and in our other reports filed with the Securities and Exchange
Commission.  Important  factors  currently  known  to
Management  could  cause  actual  results  to
differ  materially  from  those in
forward-looking  statements.  We undertake no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes in the future operating results
over time. We believe that our assumptions are based upon reasonable data
derived from and known about our business and operations.  No
assurances are made that actual results of operations or the results of our
future activities will not differ materially from its
assumptions.  Factors that could cause differences include, but are
not limited to, expected market demand for our services, fluctuations in pricing
for materials, and competition.





Overview





Throughout
this Quarterly Report on Form 10-Q, unless otherwise designated, the terms
“we,” “us,” “our,” “the Company,” “our Company,” and “PSM” refer to PSM
Holdings, Inc., a Nevada corporation.





We
conduct all of our business operations through our wholly-owned subsidiary,
PrimeSource Mortgage, Inc., a Texas corporation, (herein referred to as
“PrimeSource Mortgage”) which we acquired in May 2005.  Since 1991,
PrimeSource Mortgage has been engaged in the mortgage brokerage business and
since 2008 has also conducted business as a mortgage banker using a $1,000,000
warehouse line of credit. On June 11, 2009, we entered into an additional
warehouse line of credit for up to $1,000,000. The new warehouse line of credit
was modified on June 19, 2009 to increase the credit line to up to $4,000,000.
The annual interest rate on the new line is Wall Street Journal Prime Interest
Rate plus 1⁄2 %.





We
generate revenues through mortgage brokerage services by originating mortgage
loans that are funded directly by third parties selected by us from over fifty
institutional and private lenders.  We also generate revenues through
mortgage banking services with mortgage loans originated and funded by us
through a warehouse line of credit.  These loans are sold to third
parties within 5 to 7 days.  We have a number of independently owned
branch offices from which we derive revenue based on a percentage of commissions
generated on loans originated by these branch offices. We make available to
these branch offices our institutional and private lenders for the mortgage
brokerage business and our third party lenders and warehouse line of credit for
the mortgage banking business in order to assist them in originating and closing
new loans thereby generating commission revenue for us. We are licensed as a
mortgage brokerage and banking firm in 17 states and we currently operate in the
southwest, primarily in the states of New Mexico, Oklahoma, and
Texas.




On April 14, 2006, we entered into a
five-year renewable license agreement with Nationwide By Owner, Inc.
(“Nationwide”), a Texas based company engaged in the business of marketing real
property for sale by owners and others. In the course of its business,
Nationwide operates a proprietary system which produces a database of sales
leads containing home buyer and home seller information for persons seeking
financing on the purchase or refinancing of real property. The license agreement
permits us exclusive use of the database which we use to generate leads for the
origination of mortgage applications for submission to us. We have also agreed
to establish a national processing center to expand nationally the collection,
organization and tracking of sales leads obtained from the database. We have
agreed with Nationwide to delay the establishment of the processing center until
Nationwide secures a national marketing agreement.




16


The
Company continues to explore the possibilities of mergers or acquisitions.
Management is currently engaged in preliminary discussions with potential merger
or acquisition targets in our industry.  However, no letter of intent
or other document has been prepared in connection with respect to any merger or
acquisition or similar transaction.





On October 22, 2009, we received a
letter from U.S. Department of Housing and Urban Development (HUD) requesting us
to provide certain information with respect to HUD’s annual audit for the period
ended June 30, 2009. We responded to HUD’s request and submitted the required
information for their review on November 10, 2009. HUD requested additional
information and we submitted the requested information on December 11, 2009 and
January 22, 2010.  However, if HUD is not satisfied with our responses
to their comments, HUD could take away our ability to originate FHA loans and
that could have an adverse effect in expanding our business.





At the
present time we have no record of how many mortgage loan applications are
received. Each branch office maintains its own record-keeping system for
applications and whether or not to retain this information.  During
the six month period ended December 31, 2009 and 2008, we closed 473 loans and
430 loans, respectively.  We experienced an increase of 10% in the
number of loans closed during the six month period ended December 31, 2009
compared to the same period in 2008. This increase was as a result of a net
increase in the number of new branches opened and improved production from the
existing branches during the six month period ended December 31, 2009 compared
to the same period in 2008.





The
branches are compensated by receiving 80% percent of the commission earned on
each loan they originate in cash and 10% of the commission earned in stock of
our Company.  The percentage paid to the branch remains the same on
all loans originated by the branch. Branches do not receive a greater percentage
as their production increases. An increase in branch production increases our
revenue. Increases in production through adding branches or increasing the
production of existing branches increases the revenue of our Company. We
continue to recruit new branches and work with existing branches to increase
their production. Management believes the cost to service new branches will not
increase greatly over current costs to service existing branches. We retain
approximately 10% of the commissions earned on loans generated by our branch
offices. We have been in discussions with our branch owners to streamline our
commission plan to get paid a flat commission each time the branch closes a
loan. We have established a revised commission program with our branches whereby
we will receive a flat commission of $500 on each loan closed.





We have
failed to generate a profit during the three month and six month periods ended
December 31, 2009 and 2008 and for the fiscal years ended June 30, 2009 and
2008.  We believe the primary reason for the losses over the past
periods was that after the decision was made to take the Company public through
a reverse acquisition in 2005, five of the top producing branch offices banded
together and demanded more ownership and a more beneficial split in revenue
going forward. We made the decision not to negotiate the demands of five top
producing branches and agreed to let these branches leave the network. This
reduction in revenue was the primary reason for the extensive losses. It has
taken over three years to replace the revenue previously generated by these five
branch offices through increased originations and additional offices added to
the network.  In addition, we have incurred in excess of $406,838 over
the last three years in legal and professional costs to take the Company public
through reverse acquisition.





Operating
expenses consist primarily of commissions paid to the independent brokers on
mortgage loans generated by us or our branch offices, development costs
associated with adding new branch offices and servicing existing branch offices,
legal and professional fees related to us becoming a public company, and the
costs of putting on our annual convention. The annual convention provides
training for branch owners and markets our Company to potential branch owners
who attend.  Overhead expenses include wages, rent of office space,
and other administrative expenses.  Licensing costs to conduct
business in each state are included in taxes and licenses.





Results
of Operations





Our
consolidated results of operations for the three month and six month periods
ended December 31, 2009 and 2008 include the operating results of our
wholly-owned subsidiary PrimeSource Mortgage, Inc.





17


We
reported a net loss of $96,479 and $240,374 for the three month and six month
periods ended December 31, 2009 compared to a loss of $158,079 and $306,399 for
the same periods ended December 31, 2008. The decrease in loss was principally
attributable to the increase in revenue as more fully explained
below.





Revenues





Our total
revenues increased by $160,284 or 20.9% for the three month period and $238,824
or 14.7% for the six month period ended December 31, 2009, as compared to the
same periods in 2008 (the “comparable prior year periods”).  Our
revenues for the three month period and six month period ended December 31, 2009
increased primarily due to a net increase of four branches in operation as
compared to the comparable prior year period. Some of the existing branches also
increased their production during this time period as their businesses matured.
Management believes adding strong producing branches is a viable way to continue
to increase revenues.  The business model created has the operational
resources in place to handle additional branches.  Presently, the
network can expect to add approximately 10 to 15 producing offices without an
appreciable increase in expenses.





Operating
Expenses





Our total
operating expenses increased by $98,097 or 10.6% for the three month period and
$170,284 or 8.8% for the six month period ended December 31, 2009, as compared
to the comparable prior year periods. This overall increase was primarily due to
an increase of $114,960 for the three month period and $167,987 for the six
month period in brokerage commissions earned by branches due to the increase in
branch revenues during the three month period and six month period ended
December 31, 2009, as compared to the comparable prior year periods. Our general
and administrative expenses decreased by $16,797 or 8% for the three month
period and increased by $2,294 or 0.5% for the six month period ended December
31, 2009 as compared to the comparable prior year periods.  The
decrease in the three month period was due primarily to a decrease in
professional and legal expense.  Professional and legal expense was
greater in the first three months of the six month period ended December 31,
2009 than the comparable prior year, so the general and administrative expenses
for the two six month periods show only a slight increase.





Non-operating income
(expense)





Our total non-operating income
decreased by $587 or 38.2% for the three month period and $2,515 or 143.7% for
the six month period ended December 31, 2009, as compared to the comparable
prior year periods. This overall decrease was primarily due to the increase in
realized loss of $976 and $4,991on the sale of marketable securities and
decrease in interest expense of $439 and $2,566 for the three month period and
six month period ended December 31, 2009 as compared to the comparable prior
year periods.





Other comprehensive income
or loss





Unrealized gain on marketable
securities was $3,287 and $13,620 for the three month period and six month
period ended December 31, 2009 as compared to unrealized losses of $13,101 and
$20,187 for the comparable prior year periods. Unrealized gains and losses
resulted due to the increase and decrease in the market value of the marketable
securities held at December 31, 2009 and 2008, respectively.





Liquidity
and Capital Resources





Our cash and cash equivalents were
$45,873 at December 31, 2009. As shown in the accompanying consolidated
financial statements, we recorded a loss of $240,374 for the six month period
ended December 31, 2009, compared to a loss of $306,399 for the comparable prior
year period. Our current liabilities exceeded our current assets by $12,885 at
December 31, 2009, and our net cash used in operating activities for the six
month period ended December 31, 2009, was $47,312. We believe we have sufficient
funds to conduct our operations for the next operating cycle of twelve months.
We expect to open fifteen additional branches during the current fiscal year
(seven new branches have opened and three non-performing branches have closed
since July 1, 2009), while our existing branches continue to strengthen and
mature due to the upcoming recovery in mortgage business.  In order to
expand our business we may need to sell additional shares of our common stock or
borrow funds from private lenders.  Although we were successful in
executing two warehouse lines of credit for $4 million and $1 million for the
interim funding to close customer loans, there can be no assurance that we will
be successful in securing additional funding for customer loans and/or funding
for expansion or operations.





18


Due to
historical operating losses, our operations have not been a source of liquidity.
We will need to obtain additional capital in order to expand operations and
become profitable. In order to obtain capital, we may need to sell additional
shares of our common stock or borrow funds from private lenders. There can be no
assurance that we will be successful in obtaining additional
funding.





To the
extent that we raise additional capital through the sale of equity or
convertible debt securities, the issuance of such securities may result in
dilution to existing stockholders. If additional funds are raised through the
issuance of debt securities, these securities may have rights, preferences and
privileges senior to holders of common stock and the terms of such debt could
impose restrictions on our operations. Regardless of whether our cash assets
prove to be inadequate to meet our operational needs, we may seek to compensate
providers of services by issuance of stock in lieu of cash, which may also
result in dilution to existing shareholders. Even if we are able to raise the
funds required, it is possible we could incur unexpected costs and expenses,
fail to collect significant amounts owed to us, or experience unexpected cash
requirements that would force us to seek alternative financing.




Whereas
we have been successful in the past in raising capital, no assurance can be
given that these sources of financing will continue to be available to us and/or
that demand for our equity/debt instruments will be sufficient to meet our
capital needs, or that financing will be available on terms favorable to us. If
funding is insufficient at any time in the future, we may not be able to take
advantage of business opportunities or respond to competitive pressures, or may
be required to reduce the scope of our planned service development and marketing
efforts, any of which could have a negative impact on our business and operating
results. In addition, insufficient funding may have a material adverse effect on
our financial condition, which could require us to:





-
            curtail
      operations significantly;-
            sell
      significant assets;-
            seek
      arrangements with strategic partners or other parties that may require the
      Company to relinquish significant rights to products, technologies or
      markets; or-
            explore
      other strategic alternatives including a merger or sale of our
      Company.





Operating
Activities




Net cash
used in operating activities for the six month period ended December 31, 2009
was $47,312 resulted due to an increase in accounts receivable of $18,394, a
decrease in interest receivable of $452, an increase in accounts payable of
$54,345 and an increase in accrued liabilities of $57,865. We experienced a net
loss from operations of $239,609 for the six month period ended December 31,
2009 as compared to a net loss from operations of $308,149 for the comparable
prior period. The losses were primarily attributable due to the loss of five top
producing branches. The decrease in the loss between the two periods is the
result of an increase in branches as the Company continues to open new branches
and recover from the loss of the five top producing branches. We believe the
Company can become profitable from the increased revenue that will be achieved
by adding more branches.





Investing
Activities




Net cash
provided by investing activities for the six month period ended December 31,
2009 was $27.  This was due to cash used to purchase marketable
securities of $17,640 offset by receiving $17,667 in cash proceeds from the sale
of marketable securities. We do not currently have material commitments for
capital expenditures and do not anticipate entering into any such commitments
during the next twelve months.





19





Financing
Activities





Net cash
provided by financing activities for the six month period ended December 31,
2009 was $10,000. The cash was received from a related party as a loan to the
Company to fund the operations.





As a
result of the above activities, we experienced a net decrease in cash of $37,285
for the six month period ended December 31, 2009.





The
President and the Chairman have provided support to fund our operations with
cash in the past but are not obligated to do so in the future.  Our
ability to continue as a going concern is still dependent on our success in
opening new branches, maturing the business of existing branches, capitalizing
on the leads from NWBO and closing them into mortgage loans, and obtaining
additional financing from financial institutions and from investors through the
sale of our securities.





Critical
Accounting Policies and Estimates





Management’s
discussion and analysis of the Company’s financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting
principles. Our financial statements reflect the selection and application of
accounting policies which require management to make estimates and
judgments.  (See Note 1 to our consolidated financial statements,
“Summary of Significant Accounting Policies.”) We believe the following
paragraphs reflect accounting policies that currently affect our financial
condition and results of operations:





Investments in Marketable
Securities





Investments
consist of equity securities categorized as available-for-sale which includes
securities that are not classified in either the held-to-maturity category or
the trading category.  As required by the Investments – Debt and
Equity Securities Topic of the FASB ASC, the securities are recognized at fair
value, with unrealized holding gains and losses included as other comprehensive
income, net of any deferred income taxes and reported as a net amount in a
separate component of stockholders’ equity until realized.





Share Based Payment
Plan





Under the
2002 Stock Option/Stock Issuance Plan, the Company can grant stock or options to
employees, related parties, and unrelated contractors in connection with the
performance of services provided to the Company by the awardees.  The
Branch Owner Stock Program provides for issuance of stock to branch owners for
outstanding performance.  The Company uses the fair value method
pursuant to the Compensation-Stock Compensation Topic of the FASB ASC to account
for employee stock compensation costs and to account for share based payments to
non-employees.





Revenue
Recognition





The
Company’s revenue is derived primarily from revenue earned from the origination
of mortgage loans that are funded by third parties.  The Company has a
network of independently owned branch offices that originate mortgage loans from
which the Company receives a percentage of the fees earned by the branch. The
revenue is recognized as earned on the later of the settlement date or the
funding date of the loan.





20





Recent Accounting
Pronouncements





The
Company has evaluated the possible effects on its financial statements of the
following accounting pronouncements:




FSP FAS 107-1 and APB 28-1 – Interim Disclosures about
Fair Value of Financial Instruments – Disclosures about Fair Value of
Financial Instruments Interim Financial Reporting,




In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements”, now codified under FASB ASC Topic 605, “Revenue Recognition”,
(“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted.
Management is currently evaluating the potential impact of ASU2009-13 on our
financial statements.





In
October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”,
now codified under FASB ASC Topic 470 “Debt”, (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of issuance, a
share-lending arrangement entered into on an entity’s own shares should be
measured at fair value in accordance with Topic 820 and recognized as an
issuance cost, with an offset to additional paid-in capital. Loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs. The amendments also require several
disclosures including a description and the terms of the arrangement and the
reason for entering into the arrangement. The effective dates of the amendments
are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the
beginning of fiscal years beginning on or after December 15, 2009. Management is
currently evaluating the potential impact of ASU 2009-15 on our financial
statements.





In
December, 2009, under FASB ASC Topic 860, “Transfers and Servicing.” New
authoritative accounting guidance under ASC Topic 860, “Transfers and
Servicing,” amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred financial assets.
The new authoritative accounting guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 will be effective January 1, 2010 and is not
expected to have a significant impact on the Company’s financial
statements.





Off-Balance
Sheet Arrangements





During
the fiscal year ended June 30, 2009 and since that date we have not had any
off-balance sheet arrangements that are reasonably likely to have a current or
future effect on our financial condition, revenues, results of operations,
liquidity, capital expenditures or capital resources.





Item
3.Quantitative and Qualitative Disclosures about Market Risk





Not
required under Regulation S-K for “smaller reporting companies.”





21





Item
4T. Controls and Procedures





(a)
Evaluation of disclosure controls and procedures.





Our
management, with the participation of our chief executive officer and principal
financial officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 15d-15 under the Securities Exchange Act of 1934 as
of December 31, 2009. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their
costs.





Based on
our evaluation, our chief executive officer and principal financial officer
concluded that as of December 31, 2009, our disclosure controls and procedures
are effective to provide assurance that information we are required to disclose
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
principal financial officer to allow timely decisions regarding required
disclosure.





(b)
Changes in internal control over financial reporting.





We
regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more
efficient systems, consolidating activities, and migrating processes. There were
no changes in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.






PART
II - OTHER INFORMATION





Item 1.  Legal
Proceedings





None.





Item
1A.  Risk Factors





Not
required under Regulation S-K for “smaller reporting companies.”





Item 2. Changes in
Securities





During
the three months ended December 31, 2009, we issued 28,662 shares to our branch
owners under our Commission Plan B program which represented commissions earned
for the quarter ended September 30, 2009. These shares were issued without
registration under the Securities Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, and Rule 506
promulgated thereunder, as a transaction by an issuer not involving any public
offering.





Item 3. Defaults Upon Senior
Securities





None.





Item 4. Submission of
Matters to a Vote of Securities Holders





None.





22





Item
5. Other Information





None.





Item 6. Exhibits





31.1
            
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended31.2
            
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended32.1
            
            Certification
      of Chief Executive Officer and Principal Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002


23





SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





PSM
      HOLDINGS, INC.Date:
      February 12, 2010
            By:
            /s/ JEFFREY R.
      SMITHJeffrey
      R. Smith, President
              Chief
      Executive Officer