UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C.  20549





**FORM
      10-QSB**





T
            QUARTERLY
                REPORT UNDER SECTION 13
                OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934





For
      the
      quarterly period ended September 30,
      2007





OR





£
            TRANSITION
                REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                OF
                1934





For
      the
      transition period from__________ to __________





Commission
      file number: 0 –
50235








**Performance
                Capital Management, LLC**(Exact
                name of small business issuer as specified in its charter)





California
            
            03-0375751State
                or other jurisdiction of incorporation or organization
            
            (IRS
                Employer Identification No.)








7001
                Village Drive. Suite 255, Buena Park,
                California  90621(Address
                of principal executive offices)








(714)
                736-3780(Issuer's
                telephone number)








(Former
                name, former address and former fiscal year, if changed since last
                report.)





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 issuer was required to file such reports), and (2) has been subject
      to
      such filing requirements for the past 90 days.  Yes T  No
      £





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


Yes
£  No
      T





Check
      whether the issuer has filed documents and reports required to be filed by
      Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court.     Yes T   No
      £





As
      of
      November 1, 2007, the issuer had 549,911 LLC Units issued and
      outstanding.








Transitional
      Small Business Disclosure Format (Check one):  Yes £  No
      T













**PERFORMANCE
      CAPITAL MANAGEMENT, LLC**





**Index
      to**


**Quarterly
      Report on Form 10-QSB**


**For
      the Quarter Ended September 30, 2007**








**PART
                I – FINANCIAL INFORMATION**
            **Page**Item
                1
            Consolidated
                Financial StatementsReview
                Report of Independent Registered Public Accounting
                Firm
            1Consolidated
                Balance Sheets as of September 30, 2007
                (unaudited) and December 31, 2006
            2Consolidated
                Statements of Operations for the quarters and nine
                months ended September 30, 2007 and 2006 (unaudited)
            3Consolidated
                Statements of Members’ Equity for the nine months
                ended September 30, 2007 (unaudited) and the year ended December
                31,
                2006
            4Consolidated
                Statements of Cash Flows for the nine months ended
                September 30, 2007 and 2006 (unaudited)
            5Condensed
                Notes to the Consolidated Financial Statements
                (unaudited)
            6Item
                2
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            17Item
                3
            Controls
                and Procedures
            27**PART
                II – OTHER INFORMATION**Item
                5
            Other
                Information
            28Item
                6
            Exhibits
            29**SIGNATURES**
            30




***Index***





**PART
      I – FINANCIAL INFORMATION**





**ITEM
      1.  CONSOLIDATEDFINANCIAL
      STATEMENTS**











[MOORE
      STEPHENS WURTH FRAZER AND TORBET, LLP
      LETTERHEAD]








REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To
      the
      Board of Directors


Performance
      Capital Management, LLC


Buena
      Park, California





We
      have
      reviewed the accompanying consolidated balance sheet of Performance Capital
      Management, LLC as of September 30, 2007, and the related consolidated
      statements of operations for the three-month and nine-month periods ended
      September 30, 2007 and 2006, and the consolidated statements of members’ equity
      and the consolidated statements of cash flows for the nine month periods ended
      September 30, 2007 and 2006. All information included in these consolidated
      financial statements is the representation of the management of Performance
      Capital Management, LLC.





We
      conducted our review in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). A review of interim financial
      information consists principally of applying analytical procedures and making
      inquiries of persons responsible for financial and accounting
      matters.  It is substantially less in scope than an audit conducted in
      accordance with the standards of the Public Company Accounting Oversight Board,
      the objective of which is the expression of an opinion regarding the
      consolidated financial statements taken as a whole.  Accordingly, we
      do not express such an opinion.





Based
      on
      our reviews, we are not aware of any material modifications that should be
      made
      to the accompanying consolidated financial statements referred to above for
      them
      to be in conformity with accounting principles generally accepted in the United
      States of America.





We
      have
      previously audited, in accordance with the standards of the Public Company
      Accounting Oversight Board (United States), the consolidated balance sheet
      of
      Performance Capital Management, LLC as of December 31, 2006, and the related
      consolidated statements of operations, members’ equity and cash flows for the
      year ended December 31, 2006 (not presented herein); and in our report dated
      March 22, 2007, we expressed an unqualified opinion on those consolidated
      financial statements.  In our opinion, the information set forth in
      the accompanying consolidated balance sheet as of December 31, 2006, is fairly
      stated, in all material respects, in relation to the consolidated balance sheet
      from which it has been derived.








/s/
      Moore
      Stephens Wurth Frazer And Torbet, LLP








November
      13, 2007


Orange,
      California





1
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC ANDSUBSIDIARY





CONSOLIDATED
      BALANCE SHEETS


AS
      OF
      SEPTEMBER 30, 2007 AND DECEMBER 31, 2006








September 30,
                2007
            
            
            December 31,
                2006(unaudited)ASSETSCash
                and cash equivalents
            
            $
            331,386
            
            
            $
            689,888Restricted
                cash
            
            
            518,433
            
            
            
            491,400Other
                receivables
            
            
            30,141
            
            
            
            28,984Advance
                on loan portfolio purchase
            
            
            410,811
            
            
            
            -Purchased
                loan portfolios, net
            
            
            3,687,935
            
            
            
            5,000,942Property
                and equipment, net
            
            
            389,043
            
            
            
            430,119Deposits
            
            
            38,090
            
            
            
            80,463Prepaid
                expenses and other assets
            
            
            95,950
            
            
            
            100,274Total
                assets
            
            $
            5,501,789
            
            
            $
            6,822,070LIABILITIES
                AND MEMBERS' EQUITYLIABILITIES:Accounts
                payable
            
            $
            120,648
            
            
            $
            165,996Accrued
                liabilities
            
            
            623,316
            
            
            
            423,367Accrued
                interest
            
            
            39,380
            
            
            
            46,040Notes
                payable
            
            
            3,937,988
            
            
            
            4,455,460Income
                taxes payable
            
            
            12,000
            
            
            
            27,580Total
                liabilities
            
            
            4,733,332
            
            
            
            5,118,443COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            
            -MEMBERS'
                EQUITY
            
            
            768,457
            
            
            
            1,703,627Total
                liabilities and members' equity
            
            $
            5,501,789
            
            
            $
            6,822,070





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


See
      Review Report of Independent Registered Public Accounting Firm.





2
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
      STATEMENTS OF OPERATIONS








For
                the quarter ended September 30, 2007
            
            
            For
                the quarter ended September 30, 2006
            
            
            For
                the nine months ended September 30, 2007
            
            
            For
                the nine months ended September 30, 2006(unaudited)
            
            
            (unaudited)
            
            
            (unaudited)
            
            
            (unaudited)REVENUES:Portfolio
                collection, net
            
            $
            1,889,294
            
            
            $
            1,530,548
            
            
            $
            5,498,801
            
            
            $
            5,243,651Portfolio
                sales, net
            
            
            -
            
            
            
            20,000
            
            
            
            14,789
            
            
            
            551,728TOTAL
                NET REVENUES
            
            
            1,889,294
            
            
            
            1,550,548
            
            
            
            5,513,590
            
            
            
            5,795,379OPERATING
                COSTS AND EXPENSES:Salaries
                and benefits
            
            
            994,094
            
            
            
            1,021,897
            
            
            
            3,155,046
            
            
            
            3,214,974General
                and administrative
            
            
            807,217
            
            
            
            695,382
            
            
            
            2,312,240
            
            
            
            2,205,027Depreciation
            
            
            24,954
            
            
            
            27,456
            
            
            
            74,649
            
            
            
            79,934Total
                operating costs and expenses
            
            
            1,826,265
            
            
            
            1,744,735
            
            
            
            5,541,935
            
            
            
            5,499,935INCOME
                (LOSS) FROM OPERATIONS
            
            
            63,029
            
            
            
            (194,187
            )
            
            
            (28,345
            )
            
            
            295,444OTHER
                INCOME (EXPENSE):Interest
                expense and other financing costs
            
            
            (160,794
            )
            
            
            (219,178
            )
            
            
            (448,275
            )
            
            
            (629,439
            )Interest
                income
            
            
            1,066
            
            
            
            5,508
            
            
            
            9,922
            
            
            
            12,101Other
                income
            
            
            17,571
            
            
            
            -
            
            
            
            28,064
            
            
            
            -Total
                other expense, net
            
            
            (142,157
            )
            
            
            (213,670
            )
            
            
            (410,289
            )
            
            
            (617,338
            )LOSS
                BEFORE INCOME TAX PROVISION
            
            
            (79,128
            )
            
            
            (407,857
            )
            
            
            (438,634
            )
            
            
            (321,894
            )INCOME
                TAX PROVISION
            
            
            -
            
            
            
            2,790
            
            
            
            13,600
            
            
            
            29,180NET
                LOSS
            
            $
            (79,128
            )
            
            $
            (410,647
            )
            
            $
            (452,234
            )
            
            $
            (351,074
            )NET
                LOSS PER MEMBER UNIT – BASIC AND DILUTED
            
            $
            (.14
            )
            
            $
            (.73
            )
            
            $
            (.82
            )
            
            $
            (.62
            )





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


See
      Review Report of Independent Registered Public Accounting Firm.





3
 ***Index***





PERFORMANCE
      CAPITALMANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
      STATEMENTS OF MEMBERS' EQUITY








Member
                Units
            
            
            Unreturned
                Capital
            
            
            Abandoned
                Capital
            
            
            Accumulated
                Deficit
            
            
            Total
                Members' EquityBalance,
                December 31, 2005
            
            
            563,926
            
            
            $
            23,979,042
            
            
            $
            485,741
            
            
            $
            (21,331,102
            )
            
            $
            3,133,681Reinstatement
                of units to investor
            
            
            199
            
            
            
            11,938
            
            
            
            (11,938
            )
            
            
            
            
            
            
            -Distributions
                to investors
            
            
            
            
            
            
            (498,532
            )
            
            
            
            
            
            
            
            
            
            
            (498,532
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (351,074
            )
            
            
            (351,074
            )Balance,
                September 30, 2006 (unaudited)
            
            
            564,125
            
            
            
            23,492,448
            
            
            
            473,803
            
            
            
            (21,682,176
            )
            
            
            2,284,075Repurchase
                of units from investors
            
            
            (13,881
            )
            
            
            (574,909
            )
            
            
            574,909
            
            
            
            (65,935
            )
            
            
            (65,935
            )Distributions
                to investors
            
            
            
            
            
            
            (164,989
            )
            
            
            
            
            
            
            
            
            
            
            (164,989
            )Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (349,524
            )
            
            
            (349,524
            )Balance,
                December 31, 2006
            
            
            550,244
            
            
            
            22,752,550
            
            
            
            1,048,712
            
            
            
            (22,097,635
            )
            
            
            1,703,627Reinstatement
                of units to investorDistributions
                to investors
            
            
            
            
            
            
            (482,936
            )
            
            
            
            
            
            
            
            
            
            
            (482,936
            )Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (452,234
            )
            
            
            (452,234
            )Balance,
                September 30, 2007 (unaudited)
            
            
            550,244
            
            
            $
            22,269,614
            
            
            $
            1,048,712
            
            
            $
            (22,549,869
            )
            
            $
            768,457





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


See
      Review Report of Independent Registered Public Accounting Firm.





4
 ***Index***





PERFORMANCE
      CAPITALMANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
      STATEMENTS OF CASH FLOWS








For
                the nine months ended September 30, 2007
            
            
            For
                the nine months ended September 30, 2006(unaudited)
            
            
            (unaudited)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (452,234
            )
            
            $
            (351,074
            )Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
            
            
            74,649
            
            
            
            79,934(Increase)
                decrease in assets:Other
                receivables
            
            
            (1,157
            )
            
            
            (233,764
            )Prepaid
                expenses and other assets
            
            
            4,324
            
            
            
            7,608Deposits
            
            
            42,373
            
            
            
            (61,765
            )Advance
                on loan portfolio purchase
            
            
            (410,811
            )
            
            
            -Loan
                portfolios
            
            
            1,313,007
            
            
            
            2,159,225Increase
                (decrease) in liabilities:Accounts
                payable
            
            
            (45,346
            )
            
            
            (11,547
            )Accrued
                liabilities
            
            
            199,949
            
            
            
            75,222Accrued
                interest
            
            
            (6,660
            )
            
            
            28,563Income
                taxes payable
            
            
            (15,580
            )
            
            
            -Net
                cash provided by operating activities
            
            
            702,514
            
            
            
            1,692,402CASH
                FLOWS FROM INVESTING ACTIVITIES:Additions
                to property and equipment
            
            
            (33,574
            )
            
            
            (191,789
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                change in restricted cash
            
            
            (27,033
            )
            
            
            (175,478
            )Loan
                proceeds from borrowing
            
            
            1,396,825
            
            
            
            2,379,418Repayment
                of loans
            
            
            (1,914,298
            )
            
            
            (3,837,170
            )Distributions
                to investors
            
            
            (482,936
            )
            
            
            (498,532
            )Net
                cash used in financing activities
            
            
            (1,027,442
            )
            
            
            (2,131,762
            )NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            (358,502
            )
            
            
            (631,149
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            689,888
            
            
            
            1,810,677CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            331,386
            
            
            $
            1,179,528SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Income
                taxes paid
            
            $
            29,180
            
            
            $
            29,180Interest
                paid
            
            $
            386,114
            
            
            $
            510,314




The
        accompanying notes are an integral part of these consolidated financial
        statements.
 See
        Review Report of Independent Registered Public Accounting Firm.


5
 ***Index***





PERFORMANCE
      CAPITALMANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      1 – Organization and Description of Business**





Performance
      Capital Management, LLC (“PCM LLC”) and its wholly-owned subsidiary, Matterhorn
      Financial Services, LLC (“Matterhorn”) (collectively the “Company”, unless
      stated otherwise) are engaged in the business of acquiring assets originated
      by
      federal and state banks and other sources, for the purpose of generating income
      and cash flow from managing, collecting, or selling those assets. These assets
      consist primarily of non-performing credit card loan portfolios and are
      purchased and sold as portfolios (“portfolios”). Additionally, some of the loan
      portfolios are assigned to third-party agencies for collection. These condensed
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and footnotes included in the Company's Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2006.





Reorganization
      under Bankruptcy





PCM
      LLC
      was formed under a Chapter 11 Bankruptcy Reorganization Plan and operating
      agreement. The plan called for the consolidation of five California limited
      partnerships and a California corporation into the new California limited
      liability company. The five California limited partnerships were formed for
      the
      purpose of acquiring investments in or direct ownership of non-performing credit
      card loan portfolios from financial institutions and other sources. The assets
      of the five limited partnerships consisted primarily of non-performing credit
      card loans, as well as cash. In late December 1998, these six entities
      voluntarily filed bankruptcy petitions, which were later consolidated into
      one
      case. PCM LLC was formed on January 14, 2002 and commenced operations upon
      the
      confirmation of its Bankruptcy Reorganization Plan (“Reorganization Plan”) on
      February 4, 2002.





Wholly-owned
      Subsidiary





In
      July
      2004, the Company completed a credit facility (effective June 10, 2004) with
      Varde Investment Partners, L.P. (“Varde”), a participant in the debt collection
      industry, to augment portfolio purchasing capacity using capital provided by
      Varde. To implement the agreement, PCM LLC created a wholly-owned subsidiary,
      Matterhorn. The facility provides for up to $25 million of capital (counting
      each dollar loaned on a cumulative basis) over a five-year term. Varde is not
      under any obligation to make a loan to Matterhorn and Varde must agree on the
      terms for each specific advance under the loan facility. Under the terms of
      the
      facility, Varde will receive both interest and a portion of any residual
      collections on the portfolios acquired with a loan, after repayment of the
      purchase price (plus interest) to Varde and the Company and payment of servicing
      fees. Portfolios purchased using the facility will be owned by PCM LLC's
      subsidiary, Matterhorn. Varde has a first priority security interest in
      Matterhorn's assets securing repayment of its loans. In June 2007, the Company
      entered into an amendment to the Master Loan Agreement with Varde. The amendment
      extends the maturity date for principal and any other accrued but unpaid amounts
      on each loan from up to two years to up to three years for portfolio purchases
      using the Varde facility made on or after the effective date of the
      amendment.





**Note
      2 - Basis of Presentation**





Financial
      Statement Preparation





The
      accompanying interim consolidated financial statements have been prepared by
      the
      Company, without audit, in accordance with the rules and regulations promulgated
      by the Securities and Exchange Commission. The information furnished herein
      reflects all adjustments (consisting of normal recurring accruals and
      adjustments) which are, in the opinion of management, necessary to fairly
      present the operating results for the respective periods. Certain information
      and footnote disclosures normally present in annual consolidated financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America have been omitted pursuant to such rules and
      regulations. These condensed consolidated financial statements should be read
      in
      conjunction with the audited consolidated financial statements and footnotes
      included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2006. The results for the nine months ending September 30, 2007
      are
      not necessarily indicative of the results to be expected for the full year
      ending December 31, 2007.








See
      Review Report of Independent Registered Public Accounting Firm.





6
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      2 - Basis of Presentation (continued)**





Reporting
      Entity





PCM
      LLC
      is a successor entity of six companies emerging from bankruptcy (see Note 1).
      The accompanying balance sheets, statements of operations, members’ equity, and
      cash flows include balances and transactions since the emergence from
      bankruptcy. Matterhorn was consolidated in the financial statements as a
      wholly-owned subsidiary starting in the third quarter of 2004.





Fresh
      Start Accounting





Statement
      of Position 90-7 issued by the American Institute of Certified Public
      Accountants (“SOP 90-7”) addresses accounting for companies in reorganization
      under the bankruptcy code. For certain entities, SOP 90-7 requires “fresh start
      accounting” which records a revaluation of assets to fair values and an
      adjustment of liabilities to present values.





SOP
      90-7
      also requires the following procedures for entities that adopt fresh start
      accounting:





1.
            The
                reorganization value of the entity should be allocated to the entity’s
                assets following FAS 141;





2.
            Liabilities
                other than deferred taxes should be stated at present values of amounts
                to
                be paid using current interest
                rates;





3.
            Deferred
                taxes should be presented in conformity with generally accepted accounting
                principles. Benefits realized from preconfirmation net operating
                loss
                carryforwards should reduce reorganization value in excess of amounts
                allocable to identifiable assets and other intangibles until exhausted
                and
                be reported as a direct addition to paid-in capital
                thereafter;





4.
            Changes
                in accounting principles that will be required for the emerging entity
                within the twelve months following the adoption of fresh start accounting
                should be adopted at the same time fresh start accounting is
                adopted.





SOP
      90-7
      also requires the following disclosure in the initial financial statements
      after
      fresh start accounting has been adopted:





1.
            Adjustments
                to the historical amounts of individual assets and
                liabilities;


2.
            The
                amount of debt forgiveness;


3.
            The
                amount of prior retained earnings or deficit eliminated;
                and


4.
            Other
                important matters in determining reorganization
                value.





Management
      reviewed these requirements and determined that fresh start accounting was
      not
      applicable because assets exceeded liabilities prior to confirmation of the
      Reorganization Plan and existing limited partners retained a majority interest
      in the successor entity.





For
      entities that do not meet the requirements for fresh start accounting, SOP
      90-7
      requires that liabilities compromised by a confirmed bankruptcy plan be stated
      at present value of amounts to be paid, using current interest rates. Debt
      forgiveness, if any, should be reported as an extraordinary item.





As
      part
      of the Reorganization Plan, no debt forgiveness existed and all liabilities
      subject to compromise were presented on the face of the balance sheet as
      pre-petition claims with disclosures required by SOP 90-7. These claims have
      been paid or settled by December 31, 2003.





Transfer
      of Assets to Successor Company





Assets
      were transferred at historical carrying values and liabilities were assumed
      as
      required by the bankruptcy confirmation plan.








See
      Review Report of Independent Registered Public Accounting Firm.





7
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      3 - Summary of Significant Accounting Policies**





Use
      of
      Estimates





In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities, the disclosure of contingent assets and liabilities at the date
      of
      the financial statements, and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





Significant
      estimates have been made by management with respect to the timing and amount
      of
      collection of future cash flows from non-performing credit card loan portfolios.
      Among other things, the estimated future cash flows of the portfolios are used
      to recognize impairment in the purchased loan portfolios. Management reviews
      the
      estimate of future collections and it is reasonably possible that these
      estimates may change based on actual results and other factors. A change could
      be material to the financial statements.





New
      Accounting Pronouncements





In
      February 2007, the Financial Accounting Standards Board issued Statement No.
      159, “Fair Value Option for Financial Assets and Liabilities – including an
      amendment of FASB Statement No. 115” (“SFAS No. 159”), which is effective for
      financial statements issued for fiscal years beginning after November 15, 2007.
      SFAS No. 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. The objective is to improve financial
      reporting by providing entities with the opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions. The Company is
      currently analyzing the effects of the new standard and its potential impact
      on
      its financial statements, if any.





In
      September 2006, the Financial Accounting Standards Board issued Statement No.
      157, “Fair Value Measurements” (“SFAS No. 157”), which is effective for
      financial statements issued for fiscal years beginning after November 15, 2007.
      SFAS No. 157 defines fair value, establishes a framework for measuring fair
      value, and expands disclosures about fair value measurements. The Company is
      currently analyzing the effects of the new standard and its potential impact
      on
      its financial statements, if any.





Cash
      and Cash Equivalents





The
      Company defines cash equivalents as cash, money market investments, and
      overnight deposits with original maturities of less than three months. Cash
      equivalents are valued at cost, which approximates market. The Company maintains
      cash balances, which exceeded federally insured limits by
      approximately $600,000 as of September 30, 2007. The Company has not
      experienced any losses in such accounts. Management believes it is not exposed
      to any significant risks on cash in bank accounts.





Restricted
      cash consists principally of cash held in a segregated account pursuant to
      the
      Company’s credit facility with Varde.  The Company and Varde settle
      the status of these funds on a monthly basis pursuant to the credit
      facility.  The proportion of the restricted cash ultimately disbursed
      by Matterhorn to Varde and PCM LLC depends upon a variety of factors, including
      the portfolios from which the cash is collected, the size of servicing fees
      on
      the portfolios that generated the cash, and the priority of payments due on
      the
      portfolios that generated the cash. Restricted cash is not considered to be
      a
      cash equivalent.





Property
      and Equipment





Property
      and equipment are carried at cost and depreciation is computed over the
      estimated useful lives of the assets ranging from 3 to 7 years. The Company
      uses
      the straight-line method of depreciation. Property and equipment transferred
      under the Reorganization Plan were transferred at net book value. Depreciation
      is computed on the remaining useful life at the time of transfer.








See
      Review Report of Independent Registered Public Accounting Firm.





8
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      3 - Summary of Significant Accounting Policies (continued)**





The
      related cost and accumulated depreciation of assets retired or otherwise
      disposed of are removed from the accounts and the resultant gain or loss is
      reflected in earnings. Maintenance and repairs are expensed currently while
      major betterments are capitalized.





Long-term
      assets of the Company are reviewed annually as to whether their carrying value
      has become impaired.  Management considers assets to be impaired if
      the carrying value exceeds the future projected cash flows from related
      operations. Management also re-evaluates the periods of amortization to
      determine whether subsequent events and circumstances warrant revised estimates
      of useful lives. As of September 30, 2007, management expects these assets
      to be
      fully recoverable.





Leases
      and Leasehold Improvements





PCM
      LLC
      accounts for its leases under the provisions of SFAS No. 13, “Accounting
      for Leases,” and subsequent amendments, which require that leases be evaluated
      and classified as operating leases or capital leases for financial reporting
      purposes. The Company’s office lease is accounted for as an operating
      lease. The office lease contains certain provisions for incentive payments,
      future rent increases, and periods in which rent payments are reduced. The
      total
      amount of rental payments due over the lease term is being charged to rent
      expense on a straight-line method over the term of the lease. The difference
      between the rent expense recorded and the amount paid is credited or charged
      to
“Deferred rent obligation,” which is included in “Accrued liabilities” in the
      accompanying Consolidated Balance Sheets. In addition, leasehold improvements
      associated with this operating lease are amortized over the lease
      term.





Revenue
      Recognition





The
      Company accounts for its investment in purchased loan portfolios utilizing
      either the interest method or the cost recovery method with the provisions
      of
      the American Institute of Certified Public Accountant’s (AICPA) Statement of
      Position 03-03, “Accounting for Loans or Certain Securities Acquired in a
      Transfer” (“SOP 03-03”). Purchased loan portfolios consisted primarily of
      non-performing credit card accounts. Based on a study conducted by an
      independent consultant in the first half of 2007, the revenue recognition method
      used by the Company has changed to include the interest method for the majority
      of portfolios purchased after December 31, 2006. The study determined that
      the
      Company could reasonably estimate cash flows on most loan portfolios it
      purchases.  However, if the estimated future cash flows cannot be
      reasonably estimated for a particular portfolio, the Company will use the cost
      recovery method. Application of the cost recovery method requires that any
      amounts received be applied first against the recorded amount of the portfolios;
      when that amount has been reduced to zero, any additional amounts received
      are
      recognized as net revenue. Acquired portfolios are initially recorded at their
      respective costs, and no accretable yield is recorded on the accompanying
      consolidated balance sheets.





Accretable
      yield represents the amount of income the Company expects to generate over
      the
      remaining life of its existing investment in loan portfolios based on estimated
      future cash flows. Total accretable yield is the difference between future
      estimated collections and the current carrying value of a portfolio. All
      estimated cash flows on portfolios where the cost basis has been fully recovered
      are classified as zero basis cash flows.





Commencing
      with portfolios acquired on or after January 1, 2007, in accordance with the
      provisions of AICPA Statement of Position 03-03, “Accounting for Certain Debt
      Securities in a Transfer” (“SOP 03-03”), discrete loan portfolio purchases
      during a quarter, with the exception of those portfolios where the Company
      will
      continue to use the cost recovery method, are aggregated into pools based on
      common risk characteristics. The Company accounts for each static pool as a
      unit
      for the economic life of the pool (similar to one loan) for purposes of
      recognizing revenue from loan portfolios, applying collections to the cost
      basis
      of loan portfolios, and providing for loss or impairment.





Once
      a
      static pool is established, the portfolios are permanently assigned to the
      pool.
      The discount (i.e., the difference between the cost of each static pool and
      the
      related aggregate contractual loan balance) is not recorded because the
      Company expects to collect a relatively small percentage of each static pool’s
      contractual loan balance. As a result, loan portfolios are recorded at cost
      at the time of acquisition. This change in accounting method to the interest
      method is being reflected for the first time in the report on Form 10-QSB for
      the period ended September 30, 2007.








See
      Review Report of Independent Registered Public Accounting Firm.





9
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      3 - Summary of Significant Accounting Policies (continued)**





The
      interest method applies an effective interest rate, or internal rate of return
      (“IRR”), to the cost basis of the pool, which is to remain unchanged throughout
      the life of the pool unless there is an increase in subsequent expected cash
      flows and is used for almost all loan portfolios purchased after December 31,
      2006. The Company purchases loan portfolios usually in the late stages of the
      post charged off collection cycle. The Company can therefore, based on common
      characteristics, aggregate most purchases in a quarter into a common pool.
      Each
      static pool retains its own identity. Revenue from purchased loan
      portfolios is accrued based on each pool’s effective interest rate applied to
      each pool’s adjusted cost basis. The cost basis of each pool is increased by
      revenue earned and decreased by gross collections and impairments.





Collections
      on each static pool are allocated to revenue and principal reduction based
      on
      the estimated IRR, which is the rate of return that each static pool requires
      to
      amortize the cost or carrying value of the pool to zero over its estimated
      life.
      Each pool’s IRR is determined by estimating future cash flows, which are based
      on historical collection data for pools with similar characteristics. Based
      on
      historical cash collections, each pool is given an expected life of 60 months.
      The actual life of each pool may vary, but will generally amortize in
      approximately 60 months, with some pools amortizing sooner and some amortizing
      later.  Monthly cash flows greater than the recognized revenue will
      reduce the carrying value of each static pool and monthly cash flows lower
      than
      the recognized revenue will increase the carrying value of the static pool.
      Each
      pool is reviewed at least quarterly and compared to historical trends to
      determine whether each static pool is performing as expected. This comparison
      is
      used to determine future estimated cash flows. Subsequent increases in cash
      flows expected to be collected are generally recognized prospectively through
      an
      upward adjustment of the pool’s effective IRR over its remaining life.
      Subsequent decreases in expected cash flows do not change the effective IRR,
      but
      are recognized as an impairment of the cost basis of the pool, and are reflected
      in the consolidated statements of operations as a reduction in revenue with
      a
      corresponding valuation allowance offsetting the investment in purchased loan
      portfolios in the consolidated financial statements. If the cash flow estimates
      increase subsequent to recording an impairment, reversal of the previously
      recognized impairment is made prior to any increases to the IRR.





The
      cost
      recovery method prescribed by SOP 03-3 is used when collections on a particular
      portfolio cannot be reasonably predicted. Under the cost recovery method, no
      revenue is recognized until the Company has fully collected the cost of the
      portfolio.





Prior
      to
      January 1, 2007, revenue from all portfolios was accounted for using the cost
      recovery method of accounting in accordance with SOP 03-3, “Accounting for Loans
      or Certain Securities Acquired in a Transfer” and prior to January 1, 2005, the
      Company accounted for its investment in purchased loan portfolios using the
      cost
      recovery method under the guidance of Practice Bulletin 6, “Amortization of
      Discounts on Certain Acquired Loans”. For the Company’s acquired portfolios
      prior to January 1, 2007, the cost recovery method of accounting was and
      continues to be used.  Under the cost recovery method, cash receipts
      relating to individual loan portfolios are applied first to recover the cost
      of
      the portfolios, prior to recognizing any revenue. Cash receipts in excess of
      the
      cost of the purchased loan portfolios are then recognized as net
      revenue.





The
      Company provides a valuation allowance for an acquired loan portfolio when
      the
      present value of expected future cash flows does not exceed the carrying value
      of the portfolio. Over the life of the portfolio, the Company’s management will
      continue to review the carrying values of each loan for impairment. If net
      present value of expected future cash flows falls below the carrying value
      of
      the related portfolio, the valuation allowance is adjusted
      accordingly.








See
      Review Report of Independent Registered Public Accounting Firm.





10
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      3 - Summary of Significant Accounting Policies (continued)**





Loan
      portfolio sales occur after the initial portfolio analysis is performed and
      the
      loan portfolio is acquired.  Portions of portfolios sold typically do
      not meet the Company’s targeted collection characteristics. Loan portfolios sold
      are valued at the lower of cost or market. Proceeds from strategic sales of
      purchased loan portfolios are recorded as revenue when received.





Income
      Taxes





PCM
      LLC
      is treated as a partnership for Federal income tax purposes and does not incur
      Federal income taxes. Instead, its earnings and losses are included in the
      personal returns of its members.





PCM
      LLC
      is also treated as a partnership for state income tax purposes. The State of
      California imposes an annual corporation filing fee and an annual limited
      liability company fee.





Members’
      Equity





Members’
      equity includes voting LLC units held by members and non-voting LLC units held
      by one economic interest owner. As of September 30, 2007, PCM LLC had 526,522
      voting LLC units and 23,722 non-voting LLC units.





Retired
      or abandoned capital represents LLC units that are either voluntarily returned
      to the Company by a member or LLC units that are redeemed and cancelled
      following a procedure authorized by PCM LLC’s plan of reorganization to
      eliminate the interests of PCM LLC members that PCM LLC has not been able to
      locate. In the first quarter of 2006, 199 LLC units of previously cancelled
      LLC
      units were reinstated due to a beneficiary heir establishing ownership. In
      December 2006, 13,881 LLC units, which were purchased for approximately $66,000,
      were retired in connection with the Company’s odd lot buy back program conducted
      in December 2006 (discussed in further detail in the Company’s annual report on
      Form 10-KSB for the year ended December 31, 2006).





Reclassifications





Certain
      amounts in the prior periods have been reclassified to conform to the current
      period financial statement presentation. Certain adjustments have been made
      to
      numbers for the quarter ended September 30, 2007, to reflect the adoption of
      the
      interest method of accounting for portfolio revenue (see Revenue Recognition
      above in this Note 3). These adjustments were necessary to prepare the
      consolidated statement of operations for the period ended September
      30, 2007.





**Note
      4 – Fair Value of Financial Instruments**





The
      Company refers to the discounted present value of the actual amount of money
      that it believes a portfolio will ultimately produce as the "fair value"of
      the
      portfolio. The estimated fair value and the methods and assumptions used to
      estimate the fair values of the financial instruments of the Company as of
      September 30, 2007 and December 31, 2006 are as follows. The carrying amount
      of
      cash and cash equivalents, restricted cash and liabilities approximate their
      fair values. The total and retained fair values of purchased loan portfolios
      were determined based on both market pricing and discounted expected cash flows.
      The total fair value of the Company’s portfolios includes fair value
      attributable to the residual interests of third parties in collections once
      all
      funds (including funds invested by the Company) invested in a portfolio have
      been repaid (with interest) and all servicing fees have been
      paid.  The retained fair value of the Company’s portfolios excludes
      fair value attributable to these residual interests. The discount rate is based
      on an acceptable rate of return adjusted for the risk inherent in the loan
      portfolios. The discount rate utilized at September 30, 2007 and December 31,
      2006 was 20%. The estimated total fair value of loan portfolios was $19.0
      million and $22.0 million at September 30, 2007, and December 31, 2006,
      respectively, and the estimated retained fair value of loan portfolios was
      $18.5
      million and $21.3 million at September 30, 2007, and December 31, 2006,
      respectively.








See
      Review Report of Independent Registered Public Accounting Firm.





11
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      5 - Purchased Loan Portfolios**





The
      Company acquires portfolios of non-performing credit card loans from federal
      and
      state banks and other sources.  These loans are acquired at a
      substantial discount from the actual outstanding balance. The aggregate
      outstanding contractual loan balances at September 30, 2007 and December 31,
      2006 totaled approximately $825 million and $800 million,
      respectively.





The
      Company initially records acquired loans at cost.  To the extent that
      the cost of a particular loan portfolio exceeds the net present value of
      estimated future cash flows expected to be collected, a valuation allowance
      is
      recognized in the amount of such impairment.





The
      carrying amount of loans included in the accompanying consolidated balance
      sheets is as follows:





As
                of Sept. 30, 2007
            
            
            As
                of Dec. 31, 2006Unrecovered
                cost balance, beginning
                of period
            
            $
            5,059,283
            
            
            $
            8,505,065Valuation
                allowance, beginning of period
            
            
            (58,341
            )
            
            
            (58,341
            )Net
                balance, beginning of period
            
            
            5,000,942
            
            
            
            8,446,724Net
                portfolio activity
            
            
            (1,313,007
            )
            
            
            (3,445,782
            )Net
                balance, end of period
            
            $
            3,687,935
            
            
            $
            5,000,942








Purchases
      by Quarter





The
      following table summarizes portfolio purchases the Company made by quarter
      during the nine months ended September 30, 2007, that were accounted for using
      the interest method, and the respective purchase prices**(in
      thousands):





**For
                the quarter ended September 30,
                2007**
            
            
            **For
                the nine months ended September 30,
                2007**Fair
                Value Date of Purchase
            
            $
            165
            
            
            $
            2,567Forward
                Flow Allocation
            
            $
            216
            
            
            $
            3,158





Changes
      in Investment in Purchased Loan Portfolios





The
      Company utilizes the interest method for loan portfolios purchased after
      December 31, 2006.  Revenue related to the Company’s investment in
      purchased loan portfolios consists of two components: (i) revenue from those
      loan portfolios purchased in 2007 that have a remaining book value and are
      accounted for on an accrual basis under the interest method (“Accrual Basis
      Portfolios”); and (ii) revenue from those portfolios that have no remaining cost
      basis that are accounted for under the cost recovery method of accounting for
      which every dollar of gross collections is recorded as zero basis
      revenue.





The
      effect of changing to the interest method was to decrease net loss by a net
      amount of $355,637 and $455,257 for the three and nine months ended September
      30, 2007, respectively. The effect of the change on earnings per LLC Unit was
      to
      reduce the loss per LLC Unit by $0.65 and $0.83 for the three and nine months
      ended September 30, 2007, respectively.





Prior
      to
      January 1, 2007, the Company was not reasonably able to estimate the amount
      and
      timing of future cash collections on a pool of loan portfolios. All portfolios
      were accounted for using the cost recovery method (“Cost Recovery Portfolios”).
      Under the cost recovery method of accounting, no income is recognized until
      the
      purchase price of a Cost Recovery Portfolio has been fully recovered. As of
      September 30, 2007, the Company had $3.7 million in investment in purchased
      loan
      portfolios, of which $2.4 million is accounted for using the interest
      method.   As of September 30, 2007, the portfolios accounted for
      using the cost recovery method consisted of $1.3 million in net book value
      of
      investment in loan portfolios and represented all of the portfolios acquired
      prior to January 1, 2007.








See
      Review Report of Independent Registered Public Accounting Firm.





12
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      5 - Purchased Loan Portfolios (continued)**





The
      following table summarizes the changes in the balance of the investment in loan
      portfolios:





Quarter
                Ended Sept. 30, 2007
            
            
            Quarter
                Ended Sept. 30, 2006
            
            
            Nine
                Months Ended Sept. 30, 2007
            
            
            Nine
                Months Ended Sept. 30, 2006Balance,
                beginning of period
            
            $
            4,526,210
            
            
            $
            7,611,599
            
            
            $
            5,000,942
            
            
            $
            8,446,724Purchased
                loan portfolios, net
            
            
            164,461
            
            
            
            367,388
            
            
            
            2,567,400
            
            
            
            4,057,131Collections
                on loan portfolios
            
            
            (2,751,537
            )
            
            
            (3,222,036
            )
            
            
            (9,063,594
            )
            
            
            (10,459,125
            )Sales
                of loan portfolios
            
            
            (1,211
            )
            
            
            (20,000
            )
            
            
            (155,824
            )
            
            
            (1,552,610
            )Revenue
                recognized on collections
            
            
            1,889,294
            
            
            
            1,530,548
            
            
            
            5,498,801
            
            
            
            5,243,651Revenue
                recognized on sales
            
            
            -
            
            
            
            20,000
            
            
            
            14,789
            
            
            
            551,728Cash
                collection applied to principal
            
            
            (139,282
            )
            
            
            -
            
            
            
            (174,579
            )
            
            
            -Balance,
                end of period
            
            $
            3,687,935
            
            
            $
            6,287,499
            
            
            $
            3,687,935
            
            
            $
            6,287,499





Projected  Amortization
      of Portfolios





As
      of
      September 30, 2007, the Company had approximately $3.7 million in investment
      in
      purchased loan portfolios, of which  approximately $2.4 million is
      accounted for using the interest method.   This balance will
      be amortized based upon current projections of cash collections in excess of
      revenue applied to the principal balance. The estimated amortization of the
      investment in purchased loan portfolios under the interest method is as
      follows:





**For
                the Years Ended December 31,**
            
            
            **Amortization**2007
            (a)
            
            $
            184,4712008
            
            
            $
            770,0422009
            
            
            $
            381,6172010
            
            
            $
            361,1472011
            
            
            $
            421,9702012
            
            
            $
            263,066$
            2,382,313





(a)
            2007
                amount consists of three months of data from October 1, 2007 to December
                31, 2007.







See
      Review Report of Independent Registered Public Accounting Firm.





13
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      5 - Purchased Loan Portfolios (continued)**





Accretable
      Yield





Accretable
      yield represents the amount of income recognized on purchased loan portfolios
      under the interest method that the Company can expect to generate over the
      remaining life of its existing pools of portfolios based on estimated future
      cash flows as of  September 30, 2007.  Changes in accretable
      yield for the three and nine months ended September 30, 2007 were as
      follows:





Three
                Months Ended September 30, 2007
            
            
            Nine
                Months Ended September 30, 2007Balance
                at the be beginning of the period
            
            $
            2,720,033
            
            
            $
            -Income
                recognized on portfolios, net
            
            
            (355,637
            )
            
            
            (455,257
            )Additions
            
            
            539,926
            
            
            
            3,359,579Balance
              at the end of the period
            
            $
            2,904,322
            
            
            $
            2,904,322





**Note
      6 - Other Receivables**





Other
      receivables consist of collections on portfolios received by third party
      collection agencies, a tax refund receivable and a portfolio purchase
      settlement.





**Note
      7 - Property and Equipment**





Property
      and equipment is as follows:





As
                of Sept. 30, 2007
            
            
            As
                of Dec. 31, 2006Office
                furniture and equipment
            
            $
            432,139
            
            
            $
            427,897Computer
                equipment
            
            
            659,491
            
            
            
            630,159Leasehold
                improvements
            
            
            113,502
            
            
            
            113,502Totals
            
            
            1,205,132
            
            
            
            1,171,558Less
                accumulated depreciation
            
            
            816,089
            
            
            
            741,439Property
                and equipment, net
            
            $
            389,043
            
            
            $
            430,119





Depreciation
      expense for the three months ended September 30, 2007 and 2006 amounted to
      approximately $25,000 and $27,000, respectively. Depreciation expense for the
      nine months ended September 30, 2007 and 2006 amounted to approximately $75,000
      and $80,000, respectively.





**Note
      8 – Notes Payable**





During
      2004, the Company entered into an agreement for a credit facility with Varde
      that provides for up to $25 million of capital (counting each dollar loaned
      on a
      cumulative basis) over a five-year term ending in July 2009. In June 2007,
      the
      Company entered into an amendment to its agreement with Varde, which extended
      the maturity date for principal and any other accrued but unpaid amounts on
      each
      loan from up to two years to up to three years for portfolio purchases using
      the
      Varde facility made on or after the effective date of the amendment. PCM LLC’s
      wholly-owned subsidiary Matterhorn owed approximately $3.9 million and $4.5
      million at September 30, 2007, and December 31, 2006, respectively, under the
      facility in connection with its purchase of certain charged-off loan portfolios.
      The total amount borrowed was approximately $14.0 million at September 30,
      2007
      and $12.6 million at December 31, 2006. Each advance has minimum payment
      threshold points. Each advance has a term of up to three years and bears
      interest at the rate of 12% per annum. These obligations are scheduled to be
      paid in full on dates ranging from December 2007 to June 2010, with the
      approximate following principal payments due:








See
      Review Report of Independent Registered Public Accounting Firm.





14
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      8 – Notes Payable (continued)**








Year
                ending September 30,2008
            
            $
            3,089,0002009
            
            $
            432,0002010
            
            $
            417,000





Once
      all
      funds (including funds invested by the Company) invested in a portfolio financed
      by Varde have been repaid with interest and all servicing fees have been paid,
      Varde will begin to receive a residual interest in collections of that
      portfolio. Depending on the performance of the portfolio, these residual
      interests may never be paid, they may begin being paid a significant time later
      than Varde’s loan is repaid (i.e., after the funds invested by the Company are
      repaid with interest), or, in circumstances where the portfolio performs
      extremely well, the loan could be repaid early and Varde could conceivably
      begin
      to receive its residual interest on or before the date that the loan obligation
      was originally scheduled to be paid in full. Varde has a first priority security
      interest in all the assets of Matterhorn, securing repayment of its loans and
      payment of its residual interest. PCM LLC, Matterhorn’s parent operating
      company, has guarantied certain of Matterhorn's operational obligations under
      the loan documents. The amount of remaining available credit under the facility
      was approximately $11.0 million at September 30, 2007 and $12.4 at December
      31,
      2006. The assets of Matterhorn that provide security for Varde's loan were
      carried at a cost of approximately $2.5 million at September 30,
      2007.





Under
      the
      loan agreement with Varde, the Company was required to pay the balance of one
      of
      its loans in full by the due date of April 28, 2007. The balance outstanding
      of
      the loan on that date was approximately $702,000. The balance outstanding of
      the
      loan at September 30, 2007 was $466,000. The portfolio continues to generate
      revenue through collections but at a slower rate than forecasted. In May 2007,
      Varde gave the Company an extension and a limited forbearance from any action
      until July 31, 2007. After further discussions with Varde regarding the timing
      of the payment, in July 2007, the Company obtained another extension and limited
      forbearance from any action until December 31, 2007.





**Note
      9 - Commitments and Contingencies**





Lease
      Commitments





On
      July
      17, 2006, PCM LLC entered into an Office Lease Agreement to lease office space
      in Buena Park, California.  PCM LLC is using the leased premises as
      its principal executive offices and operating facility.





The
      term
      of the lease is 87 months and commenced on December 1, 2006, and will expire
      on
      February 28, 2014. PCM LLC has an option to renew the lease for one additional
      five-year term at the then prevailing "fair market rental rate" at the end
      of
      the term.





The
      base
      rent will increase on a yearly basis throughout the term. Future minimum lease
      commitments under the Buena Park lease for the twelve months ended September
      30,
      will be:





Year
                ending Sept 30
            Approximate
                Annual Lease Commitments2008
            $
                345,0002009
            $
                346,0002010
            $
                355,0002011
            $
                355,0002012
            $
                360,000Thereafter
            $
                515,000








See
      Review Report of Independent Registered Public Accounting Firm.





15
 ***Index***





PERFORMANCE
      CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





**Note
      9 - Commitments and Contingencies (continued)**





In  addition  to  the  base
      rent, PCM LLC must pay its pro rata share of the increase in operating expenses,
      property taxes and property insurance for the building above the total dollar
      amount of operating expenses, property taxes and
      property  insurance  for  the 2006 base
      calendar  year.





The
      building lease contains provisions for incentive payments, future rent
      increases, or periods in which rent payments are reduced. As the Company
      recognizes rent expense on a straight-line basis, the difference between the
      amount paid and the amount charged to rent expense is recorded as a liability.
      The amount of deferred rent liability at September 30, 2007 was
      $229,000.





Rental
      expense for the three months ended September 30, 2007 and September 30, 2006,
      amounted to approximately $80,000 and $84,000, respectively.  Rental
      expense for the nine months ended September 30, 2007 and September 30, 2006,
      amounted to approximately $240,000 and $252,000,
      respectively.   PCM LLC is obligated under two five-year
      equipment leases, one expiring in 2009 with minimum payments of $4,800 per
      year
      and the other lease expiring in 2011 with minimum payments of $3,900 per
      year.





**Note
      10 - Earnings Per Member Unit**





Basic
      and
      diluted earnings per member unit are calculated based on the weighted average
      number of member units issued and outstanding, 550,244 for the quarter ended
      September 30, 2007 and 564,125 for the quarter ended September 30,
      2006.





**Note
      11 - Employee Benefit Plans**





The
      Company has a defined contribution plan covering all eligible full-time
      employees of Performance Capital Management (the Plan Sponsor) who are currently
      employed by the Company and have completed six months of service from the time
      of enrollment. The Plan was established by the Plan Sponsor to provide
      retirement income for its employees and is subject to the provisions of the
      Employee Retirement Income Security Act of 1974, as amended
      (ERISA).





The
      Plan
      is a contributory plan whereby participants may contribute a percentage of
      pre-tax annual compensation as outlined in the Plan agreement and as limited
      by
      Federal statute.  Participants may also contribute amounts
      representing distributions from other qualified defined benefit or contribution
      plans.  The Plan Sponsor does not make matching
      contributions.





**Note
      12 – Subsequent Event**





PCM
      LLC
      did not experience the level of cash reserves that it expected during the nine
      months ended September 30, 2007, largely due to a decrease in collection
      revenues and continued expenditures to purchase new portfolios. In order to
      conserve working capital necessary to run the business, PCM LLC’s Board of
      Directors decided at its October 2007 meeting to forego third quarter PCM LLC
      unit holder distributions, which would normally have occurred in
      October.





At
      the
      October 2007 meeting of the Board of Directors of PCM LLC, the Board approved
      three changes to LLC unit ownership effective October 1, 2007. The changes
      were
      as follows. First, a total of 548 LLC units were voluntarily forfeited and
      returned to the Company by eight unit holders and were subsequently canceled.
      Second, 199 LLC units of previously canceled LLC units were reinstated due
      to a
      beneficiary heir establishing ownership. These 199 LLC units had previously
      been
      canceled in accordance with PCM LLC's Chapter 11 Bankruptcy Reorganization
      Plan,
      which provides a method to eliminate the interests of PCM LLC members that
      PCM
      LLC has not been able to locate for a period of time.  Finally, 16 LLC
      units that were previously reported in the Company’s buyback program that took
      place in December 2006 were reinstated to correct an ownership discrepancy.
      The
      aggregate effect of the changes is a decrease in the number of LLC units
      outstanding from 550,244 to 549,911.








See
      Review Report of Independent Registered Public Accounting Firm.





16
 ***Index***





**ITEM
      2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS**





Except
      for the historical information presented in this document, the matters discussed
      in this Form 10-QSB, and specifically in “Management's Discussion and Analysis
      of Financial Condition and Results of Operations,” or otherwise incorporated by
      reference into this document contain “forward-looking statements” (as such term
      is defined in the Private Securities Litigation Reform Act of 1995). These
      statements can be identified by the use of forward-looking terminology such
      as
“believes,” “plans,” “expects,” “may,” “will,” “intends,” “should,” “plan,” or
“anticipates” or the negative thereof or other variations thereon or comparable
      terminology, or by discussions of strategy that involve risks and uncertainties.
      The safe harbor provisions of Section 21E of the Securities Exchange Act of
      1934, as amended, and Section 27A of the Securities Act of 1933, as amended,
      apply to forward-looking statements made by Performance Capital Management,
      LLC.
      You should not place undue reliance on forward-looking statements due to their
      inherent uncertainty. Forward-looking statements involve risks and
      uncertainties. The actual results that we achieve may differ materially from
      any
      forward-looking statements due to such risks and uncertainties. These
      forward-looking statements are based on current expectations, and we assume
      no
      obligation to update this information. Readers are urged to carefully review
      and
      consider the various disclosures made by us in this report on Form 10-QSB and
      in
      our other reports filed with the Securities and Exchange Commission that attempt
      to advise interested parties of the risks and factors that may affect our
      business.





The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with the unaudited consolidated
      financial statements and accompanying notes and the other financial information
      appearing elsewhere in this report and with the financial information contained
      in our report on Form 10-KSB for the year ended December 31, 2006. The Form
      10-KSB contains a general description of our industry and a discussion of recent
      trends affecting the industry.








**OVERVIEW**





We
      acquire assets originated by federal and state banking and savings institutions,
      loan agencies, and other sources, for the purpose of generating income and
      cash
      flow from collecting or selling those assets. Typically, these assets consist
      of
      charged-off credit card contracts. These assets are typically purchased and
      sold
      as portfolios. We purchase portfolios using our own cash resources and funds
      borrowed from a third party. In January 2007, we started a third-party
      collection program to engage in the collection of debt on behalf of other
      parties, whereby we earn fees contingent upon the amount we collect. We will
      enter into third-party collection arrangements that we believe will increase
      our
      collection efficiency.  Third party collection revenues have been
      minimal during the nine months ended September 30, 2007.





Before
      purchasing a portfolio, we conduct due diligence to assess the value of the
      portfolio. We try to purchase portfolios at a substantial discount to the actual
      amount of money that they will ultimately produce, so that we can recover the
      cost we pay for portfolios, repay funds borrowed to purchase portfolios, pay
      our
      collection and operating costs and still have a profit. We believe that market
      conditions currently make it difficult, although not impossible, to purchase
      portfolios at prices that will permit us to accomplish these objectives. We
      record our portfolios at cost based on the purchase price. We reduce the cost
      bases of our portfolios on a portfolio-by-portfolio basis: (i) based on
      collections under the cost recovery revenue recognition method; and (ii) by
      amortizing over the life expectancy of the portfolio under the interest revenue
      recognition method, which we will be using for the majority of our loan
      portfolios purchased in 2007 and thereafter. The cost basis of a portfolio
      is
      also reduced by sales of a portion or all of the portfolio and by impairment
      of
      the net realizable value of the portfolio.





We
      frequently sell certain portions of portfolios we purchase, in many instances
      to
      retain those accounts that best fit our collection profile and to reduce our
      purchase commitment by reselling the others. We then collect those accounts
      we
      retain as a distinct portfolio. We do not generally purchase loan portfolios
      solely with a view to their resale, and for this reason we generally do not
      show
      portfolios on our balance sheet as "held for investment". From time to time
      we
      sell some of our portfolios either to capitalize on market conditions, to
      dispose of a portfolio that is not performing or to dispose of a portfolio
      whose
      collection life, from our perspective, has run its course. When we engage in
      these sales, we continue collecting the portfolio right up until the closing
      of
      the sale.





17
 ***Index***





We
      earn
      revenues from collecting our portfolios and from selling our portfolios or
      portions of our portfolios. Under the cost recovery method, we recognize gross
      revenue when we collect an account and when we sell a portfolio or a portion
      of
      it. Under the interest method of accounting, portfolio collection revenue is
      accrued based on each pool’s effective interest rate applied to the pool’s
      adjusted cost basis.  The cost basis of each pool is increased by
      revenue earned and decreased by gross collections and impairments.





On
      our
      statement of operations, when using the cost recovery method, we reduce our
      total revenues by the cost basis recovery of our portfolios to arrive at net
      revenue. For collections revenue, we reduce the cost basis of the portfolio
      dollar-for-dollar until we have completely recovered the cost basis of the
      portfolio. Alternatively, the interest method applies an effective interest
      rate, or internal rate of return (“IRR”), to the cost basis of the pool, which
      is to remain unchanged throughout the life of the pool unless there is an
      increase in subsequent expected cash flows. The interest method of accounting
      will be used for most loan portfolios purchased after December 31, 2006. When
      we
      sell all or a portion of a portfolio, to the extent of remaining cost basis
      for
      the portfolio, we reduce the cost basis of the portfolio by a percentage
      of  the original portfolio cost.





For
      those
      portfolios where we are using the cost recovery method of accounting, our net
      revenues from portfolio collections may vary from quarter to quarter because
      the
      number and magnitude of portfolios where we are still recovering costs may
      vary,
      and because the return rates of portfolios whose costs we have already recovered
      in full may vary. Similarly, our net revenues from portfolio sales may vary
      from
      quarter to quarter depending on the number and magnitude of portfolios (or
      portions) we decide to sell and the market values of the sold portfolios (or
      portions) relative to their cost bases.





We
      refer
      to the discounted present value of the actual amount of money that we believe
      a
      portfolio will ultimately produce as the “fair value” of the portfolio. If we
      conduct our business successfully, the aggregate fair value of our portfolios
      should be substantially greater than the aggregate cost basis of our portfolios
      presented on our balance sheet. We must make assumptions to determine fair
      value, the most significant of which are the magnitude and timing of future
      collections and the discount rate used to determine present value. Because
      of
      the inherent uncertainty associated with predicting future events, our
      determinations of fair value at any particular point in time are only estimates,
      and actual fair value could ultimately vary significantly from our
      estimate.





In
      general, we expect increases in the cost basis of our portfolios presented
      on
      our balance sheet to accompany increases in portfolio fair value. For those
      portfolios where we are using the cost recovery method, the magnitude and timing
      of our collections could cause cost basis to decline in some quarters when
      fair
      value actually increases as a result of “front-loading” our cost basis recovery
      instead of matching portfolio cost basis recovery to revenue on a proportionate
      basis over the life of the portfolio. Our purchasing patterns could reinforce
      this divergence. A decrease in the magnitude of new portfolio acquisitions
      (i.e., failing to reinvest all of cash collections representing cost basis
      recovery) may still result in a fair value increase because new portfolios
      generally have a fair value that exceeds their purchase price.  This
      effect is being mitigated to some extent by the Company’s switch to the
      interest method of accounting for most loan portfolios purchased after December
      31, 2006.





We
      plan
      to realize the difference between fair value and cost basis over time as we
      collect our portfolios. We generally collect our portfolios over periods of
      time
      ranging from three to seven years, with the bulk of a portfolio's yield coming
      in the first three years we collect it. If we succeed in collecting our
      portfolios and realize the difference between fair value and cost basis of
      our
      portfolios, we will recover the cost we paid for them, repay the loans used
      to
      purchase them, pay our collection and operating costs, and still have excess
      cash.





Our
      statement of operations has generally reported proportionately low net revenues
      in periods that have substantial collections of recently purchased portfolios,
      due to the “front-loaded” cost basis recovery associated with new portfolios. As
      a result, during times of rapid growth in our portfolio purchases (and probably
      for several quarters thereafter), our statement of operations has shown a net
      loss. As purchases slow and more collections come from older portfolios whose
      cost bases have been completely recovered, and with the implementation of the
      interest method of accounting, our statement of operations is expected to begin
      reporting net income, assuming our portfolios perform over time as anticipated
      and we collect them in an efficient manner. The switch to the interest method
      of
      accounting as of January 1, 2007 contributes to a decrease in the
      front-loading effect by amortizing the portfolio loan costs over the
      expected life of the loan portfolio.  For the foreseeable future, we
      intend to continue seeking new large dollar-volume portfolio purchases using
      our
      loan facility with Varde Investment Partners, L.P. (“Varde”).





18
 ***Index***





Our
      operating costs and expenses consist principally of salaries and benefits and
      general and administrative expenses.  Fluctuations in our salaries and
      benefits correspond roughly to fluctuations in our headcount. Our general and
      administrative expenses include non-salaried collection costs, legal collections
      costs and telephone, rent and professional expenses. Fluctuations in
      telephone and collection costs generally correspond to the volume of accounts
      we
      are attempting to collect. Professional expenses tend to vary based on specific
      issues we must resolve.








**BASIS
      OF PRESENTATION**





We
        present our financial statements based on our February 4, 2002, emergence
        from
        bankruptcy being treated as the inception of our business. In our emergence
        from
        bankruptcy, we succeeded to the assets and liabilities of six entities that
        were
        in bankruptcy. The equity owners of these entities approved a reorganization
        plan under which the owners of these six entities agreed to receive ownership
        interests in Performance Capital Management, LLC, in exchange for their
        ownership interests in the predecessor entities. Our consolidated financial
        statements include the accounts of our parent operating company, Performance
        Capital Management, LLC, and its wholly-owned special purpose subsidiary
        Matterhorn Financial Services LLC, a California limited liability company
        (“Matterhorn"). All significant inter-company balances and transactions have
        been eliminated.






**CRITICAL
      ACCOUNTING ESTIMATES**





We
      present investments in portfolios on our consolidated balance sheet at the
      lower
      of cost, market, or estimated net realizable value. As discussed above, we
      reduce the cost basis of a portfolio on a proportionate basis when we sell
      a
      portion of the portfolio, and we treat amounts collected on a portfolio as
      a
      reduction to the carrying basis of the portfolio (i) on an individual portfolio
      basis using the cost recovery method and (ii) over the life of the pool using
      the interest method. When we present financial statements, we assess the
      estimated net realizable value of our portfolios or pools each quarter on a
      portfolio-by-portfolio basis under the cost recovery method or on a pooling
      basis under the interest method, and we reduce the value of any portfolio or
      pool that has suffered impairment because its cost basis exceeds its estimated
      net realizable value. Estimated net realizable value represents management’s
      estimates, based upon present plans and intentions, of the discounted present
      value of future collections. We must make assumptions to determine estimated
      net
      realizable value, the most significant of which are the magnitude and timing
      of
      future collections and the discount rate used to determine present value. Unlike
      a pool under the interest method, once we write down a particular portfolio
      under the cost recovery method we do not increase it in subsequent periods
      if
      our plans and intentions or our assumptions change.





We
      present the fair value of our portfolios only in the notes to our financial
      statements, not in the basic financial statements themselves. In order to
      understand our financial statements, the reader must understand the concepts
      involved in estimation of the fair value of our portfolios, as discussed in
      the
      section above entitled “Overview”. Because of the inherent uncertainty
      associated with predicting future events, our determinations of fair value
      at
      any particular point in time are only estimates, and actual fair value could
      ultimately vary significantly from our estimate.





Under
      the
      cost recovery method, when we collect an account in a portfolio, we reduce
      the
      cost basis of the portfolio dollar-for-dollar until we have completely recovered
      the cost basis of the portfolio. We believe this method of accounting for the
      amortization of the purchase price of our portfolios is conservative and
      minimizes the effect of estimation on our results of operations. This policy
      has
      the effect of “front-loading” expenses, however, and may result in a portfolio
      initially showing no net revenue for a period of time and then showing only
      net
      revenue once we have recovered its entire cost basis.





We
      recently retained an outside consultant to conduct a study to determine whether
      we should continue using the cost recovery method of accounting for all of
      our
      portfolios or switch to a method that matches portfolio cost basis to revenue
      over the projected life of the portfolio. The accounting method used depends
      largely upon a determination of our ability to accurately project the timing
      and
      amount of collections for portfolios we acquire. The consultant found that
      we
      are capable of determining the amount of revenue a portfolio is expected to
      generate over its life for portfolios that we have sufficient historical data
      and experience to accurately estimate future cash flows. As a result of this
      finding and further analysis by our Audit Committee members and management,
      our
      Audit Committee recommended to the Board of Directors, which approved, the
      adoption of the interest method of accounting to be applied to the majority
      of
      portfolios purchased after December 31, 2006.  For those portfolios
      purchased on or before December 31, 2006, and for portfolios purchased after
      that date where we do not have sufficient historical data and experience to
      accurately estimate the timing of collections revenue over its life, we will
      use
      the cost recovery method.





19
 ***Index***





When
      we
      sell a portfolio or a portion of it, to the extent of remaining cost basis
      for
      the portfolio, we reduce the cost basis of the portfolio by a percentage of
      the
      original portfolio cost. Our policy does not take into account whether the
      portion of the portfolio we are selling may be more or less valuable than the
      remaining accounts that comprise the portfolio. We believe our policy, which
      is
      grounded in this objective measure for cost basis recovery, is preferable to
      a
      policy that would attempt to estimate whether a portion of a portfolio being
      sold is more or less valuable than the remaining accounts that comprise the
      portfolio, because our policy minimizes the effect of estimation on our results
      of operations.





As
      discussed in greater detail below, our credit facility with Varde provides
      for
      up to $25 million of capital (counting each dollar loaned on a cumulative basis)
      over a five-year term ending in July 2009. The facility provides for Varde
      to
      receive a residual interest in portfolio collections after all funds invested
      in
      the portfolio have been repaid (with interest) and all servicing fees have
      been
      paid. We do not record a liability for contingent future payments of residual
      interests due to the distressed nature of the portfolio assets and the lack
      of
      assurance that collections sufficient to result in a liability will actually
      occur. When such payments actually occur, we reflect them in our statement
      of
      operations as other financing costs.





For
      ease
      of presentation in the following discussions of “Operating Results” and
“Liquidity and Capital Resources”, we round amounts less than one million
      dollars to the nearest thousand dollars and amounts greater than one million
      dollars to the nearest hundred thousand dollars.








**OPERATING
      RESULTS**





***Comparison
      of Results for the Quarters Ended September 30, 2007 and
      2006***





The
      following discussion compares our results for the three months ended September
      30, 2007, to the three months ended September 30, 2006. We had a net loss of
      $79,000 for the three months ended September 30, 2007, as compared to a net
      loss
      of $411,000 for the three months ended September 30, 2006.





Revenue





Our
      total
      net revenues increased by $339,000 to $1.9 million in the quarter ended
      September 30, 2007, from $1.6 million in the quarter ended September 30, 2006.
      Portfolio collections provided 100.0% of our total net revenues in the quarter
      ended September 30, 2007 and 98.7% of our total net revenues in the quarter
      ended September 30, 2006. The increase in net revenues is due, in part, to
      the
      effect of using the interest method of accounting to recognize revenue from
      portfolio purchases made after December 31, 2006.  The interest method
      increased third quarter 2007 net collection revenues by $356,000. This is
      because, unlike the cost recovery method which requires the portfolio cost
      to be
      recovered before revenue can be recognized, the interest method recognizes
      revenue and spreads the portfolio cost over the life of the portfolio on an
      amortized basis. The net revenue from collections for the third quarter of
      2006
      on the other hand was reported using the cost recovery method of
      accounting.  If the cost recovery method was used for all net
      portfolio collection revenue during the nine months ended September, 30 2007,
      the net portfolio collection revenue would be approximately the same for the
      third quarter of 2007 as it was for the third quarter 2006.





During
      2006, we saw our total revenue from collections increase as we began to exploit
      the purchases we made in 2005 and 2006. We expect our total net collection
      revenue to be higher in 2007 than it was in 2006, which is consistent with
      the
      change in our revenue recognition method to the interest method for portfolios
      purchased after December 31, 2006.





We
      acquired $4.2 million of new portfolios during the year ended December 31,
      2006,
      and $2.6 million of new portfolios during the nine months ended September 30,
      2007, $2.0 million of which was purchased in the latter part of the second
      quarter of 2007. During 2005, we acquired $11.5 million of new portfolios
      ($11.0 million after adjusting for a January 2006 sale of a $461,000 portion
      of
      a portfolio purchased in December 2005). The decline is due principally to
      the
      current market conditions for portfolios, which continues to make purchasing
      portfolios at a reasonable price difficult.





20
 ***Index***





During
      the fourth quarter of 2005 and the first quarter of 2006, analysts and
      participants in the debt-buying industry began to speculate whether charged-off
      debt is overpriced. The March 2006 issue of Kaulkin Ginsberg’s Global Debt
      Buying Report reports that prices in the debt buying market doubled over the
      two
      years between 2003 and 2005. The February 2006 issue of Collections and Credit
      Risk focused on the influx of $350 million to $400 million of public and private
      capital the industry has seen since November 2002 - and the demands of that
      capital to be deployed to earn returns - as a primary cause of price increases.
      The article does not predict imminent price decreases, however, suggesting
      instead that capital will not exit the industry (and relieve price pressures)
      until debt buyers and collectors begin to report unfavorable operating results.
      We are beginning to see prices in the secondary market stabilize, but expect
      overall market conditions to remain the same in the fourth quarter of 2007.
      If
      we are unable to acquire new portfolios that meet our criteria for generating
      net income, our collection revenue will continue to decline.





There
      were no portfolio sales during the quarter ended September 30, 2007 compared
      to
      $20,000 in net portfolio sales revenue during the quarter ended September 30,
      2006. We may engage in further sales if we identify portfolios or portions
      of
      portfolios that are not performing to our expectations and we believe market
      conditions are acceptable. We continue collection efforts for certain accounts
      in these portfolios right up until the point of sale. We also anticipate
      continuing to sell portions of newly acquired portfolios from time to time,
      but
      do not expect to generate substantial net revenues from these
      sales.





Operating
      Expenses





Our
      total
      operating costs and expenses were at $1.8 million for the three months ended
      September 30, 2007 as compared to $1.7 million for the three months ended
      September 30, 2006 and our total collections are at $2.8 million for the three
      months ended September 30, 2007, as compared to $3.2 million for the three
      months ended September 30, 2006. Our ratio of operating costs and expenses
      to
      total collections (i.e., excluding the effect of portfolio sales), a measure
      of
      collection efficiency, increased to 66.4% for the quarter ended September 30,
      2007, from 54.2% for the quarter ended September 30, 2006. The decline in
      collection efficiency is the result of a decrease in collection revenues and
      a
      corresponding increase in operating costs and expenses, primarily due to an
      increase in legal collections costs, which requires significant front end
      expenses with the anticipated payout coming at a later date.





We
      intend
      to continue monitoring our collection efficiency and reduce variable costs
      required to collect each dollar of revenue when necessary to maintain the
      working capital needed to run our operations. In order to maintain the working
      capital necessary to run our operations, we will continue to strive to maintain
      a careful balance between portfolios we purchase using our own cash (where
      collection revenues are immediately available to us in full) and portfolios
      we
      purchase using the Varde credit facility (where we must immediately apply a
      substantial portion of collections to debt service). These efforts have been
      somewhat hampered recently due to our lower cash reserves and higher portfolio
      prices, which has resulted in the continued use of the Varde facility to compete
      effectively for portfolios and a corresponding decrease in the percentage of
      our
      own funds used to purchase the portfolios. We expect these circumstances to
      proportionately increase our interest expense and other financing
      costs.





Our
      general and administration expenses increased by $112,000 to $807,000 for the
      quarter ended September 30, 2007, from $695,000 for the quarter ended September
      30, 2006. This was due to a large extent on the costs resulting from the
      increased use of legal collections, which increased by $142,000 to $176,000
      in
      the three months ended September 30, 2007, from $34,000 in the three months
      ended September 30, 2006. Our salaries and benefits expenses remained stable
      at
      $1.0 million for the quarters ended September 30, 2007 and September 30,
      2006.





We
      continue to manage our existing infrastructure in order to maximize
      efficiencies. Our headcount of floor collectors, including supervisors, was
      55
      at September 30, 2007, as compared to 66 at September 30, 2006. The decrease
      was
      due primarily to our efforts to: (i) keep our collections infrastructure in
      line
      with our portfolio acquisitions; (ii) focus collections on those portfolios
      or
      portions of portfolios that we believe will generate the most revenue in the
      near term; and (iii) significantly increase our legal collections using internal
      staff and third party law firms.  We do not anticipate needing to add
      personnel in connection with the increased use of legal collections since most
      of those collection efforts are performed by third parties.  In
      addition, we are working to improve the significant employee turnover we have
      experienced among our collectors in an effort to reduce expenses associated
      with
      recruitment and training.





21
 ***Index***





***Comparison
      of Results for the Nine Months Ended September 30, 2007 and
      2006***





The
      following discussion compares our results for the nine months ended September
      30, 2007, to the nine months ended September 30, 2006. We had a net loss of
      $452,000 for the nine months ended September 30, 2007, compared to a net loss
      of
      $351,000 for the nine months ended September 30, 2006.





Revenue





Our
      total
      net revenues decreased by $282,000 to $5.5 million for the nine months ended
      September 30, 2007, from $5.8 million for the nine months ended September 30,
      2006. This was largely due to a decrease in net revenue from portfolio sales
      in
      2007, which resulted in $15,000 of net revenue, as compared to 2006, which
      resulted in $552,000 of net revenue, a decrease of $537,000. As a result, net
      portfolio collections provided 99.7% of our total net revenues for the nine
      months ended September 30, 2007 and 90.5% of our total net revenues for the
      nine
      months ended September 30, 2006.





We
      expect
      our total net collection revenue to be higher in 2007 than it was in 2006,
      which
      is consistent with the change in our revenue recognition method to the interest
      method for portfolios purchased after December 31, 2006. Our net revenues from
      portfolio collections increased by $255,000 to $5.5 million for the nine months
      ended September 30, 2007, from $5.2 million for the nine months ended September
      30, 2006. The increase in net collections revenue was due in part to use of
      the
      interest method to account for revenues from portfolio purchases made after
      December 31, 2006.  The interest method increased the 2007 net
      collection revenues for the first nine months by $455,000.  This is
      because, unlike the cost recovery method which requires the portfolio cost
      to be
      recovered before revenue can be recognized, the interest method recognizes
      revenue and spreads the portfolio cost over the life of the portfolio on an
      amortized basis. The net revenue from collections for the first three quarters
      of 2006 was reported using the cost recovery method.  If the cost
      recovery method was used for all net collection revenue during the nine months
      ended September 30, 2007, the net portfolio collection revenue would be
      approximately $455,000 less for the first nine months of 2007 as compared to
      the
      first nine months of 2006.





During
      2006, we saw our total revenue from collections increase as we began to exploit
      the purchases we made in 2005 and 2006.  In 2005, we acquired $11.5 million
      of new portfolios ($11.0 million after adjusting for a January 2006 sale of
      a
      $461,000 portion of a portfolio purchased in December 2005).  In June
      2007, we purchased $2.0 million of new portfolios, resulting in total portfolio
      purchases in nine months ended September 30, 2007 of $2.6 million as compared
      to
      $4.1 million of portfolio purchases in the nine months ended September 30,
      2006.
      We have seen our gross collections from portfolios decrease as we begin to
      experience the effects of fewer portfolio purchases.  We do not expect
      our gross collections from portfolios in 2007 to be as large as our 2006
      portfolio collection revenue.





In
      an
      effort to increase the accounts we service to maximize use of our collection
      infrastructure, we started a program in the first half of 2007 to collect debt
      owned by others. In January 2007, we entered into a third-party collection
      arrangement and began collecting on portfolios owned by another party.
      Third-party debt collection arrangements are generally commission-based with
      the
      objective of earning fees in excess of the costs to collect. We will enter
      into
      third-party collection arrangements that we believe will generate enough income
      in fees to result in net returns. We generated additional net revenue of
      $106,000 from third-party collections arrangements during the nine months ended
      September 30, 2007.  We do not yet know how effective this program
      will be at supplementing the revenue we generate from portfolio collections.
      Our
      success is largely dependent upon the volume of such arrangements we secure
      and
      the quality and types of debt we service for third parties. If the portfolios
      have been heavily worked or we are not experienced at collecting the type of
      accounts being serviced, we may not generate income from such third party
      collections in excess of our costs of collection. In addition to acquiring
      our
      own portfolios and acting as a third-party collection agency, we
      are implementing other collection strategies in an effort to increase our
      revenues and collection efficiency, such as expanding use of the legal process
      to collect specific accounts determined to be suitable for such an approach
      and
      improving the accuracy and currency of debtor contact information contained
      in
      our databases.





We
      have
      substantially increased our legal collections efforts in the first three
      quarters of 2007 as we seek to generate revenue from accounts we believe might
      otherwise not be collectible. We initiate collection lawsuits on our own behalf,
      thereby internalizing the costs of such collections. We also utilize our network
      of third party law firms on a commission basis in cases where we determine
      that
      it is financially or strategically prudent. Legal collections tend to have
      longer time horizons but are expected to contribute to an increase in returns
      over two to five years. The method used to select accounts for legal collections
      is a critical component of a successful legal collections program. If accounts
      are accurately selected, overall collection efficiency should increase. We
      do
      not have a set policy regarding when to initiate legal process; we exercise
      our
      judgment based on a variety of factors to determine when we believe using legal
      process is appropriate. With all of our collections efforts, we are keenly
      aware
      that claims based on the Fair Debt Collection Practices Act (“FDCPA”) and
      comparable state statutes may result in lawsuits, including class action
      lawsuits, which could be material to the Company due to the remedies available
      under these statutes, including punitive damages. No such lawsuits have been
      filed against the Company.





22
 ***Index***





Our
      net
      revenues from portfolio sales are showing significant decreases in 2007 as
      compared to 2006 and 2005. As part of our program to emphasize efforts to
      continue to collect and realize a reasonable return on our portfolios, in 2006
      we identified one larger portfolio that was not performing to our expectations.
      We sold this portfolio for $1.1 million with Varde’s consent in the first
      quarter of 2006 on terms we considered acceptable. We also sold a $461,000
      portion of a portfolio purchased in December 2005. Our overall net income of
      $264,000 in the quarter ended March 31, 2006 was essentially due to the net
      revenues we derived from these portfolio sales. We have had no similar sales
      in
      2007. We may engage in further sales if we identify portfolios that are not
      performing to our expectations and we believe market conditions are acceptable.
      We continue collection efforts for certain accounts in portfolios right up
      until
      the point of sale. We also anticipate continuing to sell portions of newly
      acquired portfolios from time to time, but we do not expect to generate
      substantial net revenues from these sales.





Net
      revenues from portfolio sales of $15,000 for the nine months ended September
      30,
      2007, as compared to $552,000 for the nine months ended September 30, 2006,
      a
      $537,000 decrease, was primarily responsible for increasing our net loss to
      $452,000 for the nine months ended September 30, 2007, from a net loss of
      $351,000 for the nine months ended September 30, 2006.  If we exclude
      the effect of portfolio sales, our net loss for the nine months ended September
      30, 2006, increased to $903,000, and our net loss for the nine months ended
      September 30, 2007, increased to $467,000.  Our net loss, excluding
      the effect of portfolio sales, decreased period-to-period due to the effect
      of changing to the interest method for income recognition for portfolios
      purchased after December 31, 2006, which resulted in an increase in
      portfolio collection revenue of $455,000.  If our purchasing patterns
      continue to be slow, however, we believe our collection activity may eventually
      show net income for those portfolios where we use the cost recovery method
      due
      to front-loaded cost basis recovery and these older portfolios becoming fully
      recovered.





Operating
      Expenses





Our
      total
      operating costs and expenses remained relatively constant at $5.5 million at
      September 30, 2007 and September 30, 2006, while our total collections decreased
      to $9.0 million in the nine months ended September 30, 2007, from $10.5 million
      in the nine months ended September 30, 2006, a $1.4 million decline. Our ratio
      of operating costs and expenses to total collections (i.e., excluding the effect
      of portfolio sales), a measure of collection efficiency, increased to 61.1%
      for
      the nine months ended September 30, 2007, from 52.6% for the nine
      months ended September 30, 2006. The decline in collection efficiency is
      the result of a decrease in collection revenues without a corresponding decrease
      in operating costs and expenses, primarily due to an increase in legal
      collections costs, which requires significant front end expenses with the
      anticipated payout coming at a later date. The total operating costs and
      expenses do not include the effects of interest expense and other financing
      costs, which decreased from $629,000 for the nine months ended September 30,
      2006 to $448,000 for the same period in 2007. If interest and other financing
      costs are added to total operating costs and expenses for the nine months ended
      September 30, 2007, the total operating and interest and finance expenses was
      $6.0 million compared to total operating and interest and finance expenses
      of
      $6.1 million for  the nine months ended September 30,
      2006.  We were not successful in executing our plan to continue
      increasing total revenues (while holding infrastructure costs down) and reducing
      variable costs required to collect each dollar of revenue. Our primary obstacle
      has been the inability to obtain sufficient portfolios at reasonable prices,
      which has caused a decrease in portfolio collections.  We believe that
      our agreement with Varde has played, and will continue to play, a significant
      role in enabling us to purchase additional portfolios and thereby increase
      the
      volume of accounts we have available to collect. Any portfolio purchases,
      whether using the Varde facility or our own funds, depends largely upon the
      availability of reasonably priced portfolios.





23
 ***Index***





Our
      interest expense and other financing costs decreased to $448,000 for the nine
      months ended September 30, 2007, from $629,000 for the nine months ended
      September 30, 2006. This corresponds with the decrease in the amount of loans
      payable to Varde.  This trend was offset somewhat by the purchases we
      made in June 2007. In order to maintain the working capital necessary to run
      our
      operations, we will continue to strive to maintain a careful balance between
      portfolios we purchase using our own cash (where collection revenues are
      immediately available to us in full) and portfolios we purchase using the Varde
      credit facility (where we must immediately apply a substantial portion of
      collections to debt service). These efforts have been somewhat hampered recently
      due to our lower cash reserves and higher portfolio prices, which has resulted
      in the continued use of the Varde facility to compete effectively for portfolios
      and a corresponding decrease in the percentage of our own funds used to purchase
      the portfolios. We expect these circumstances to proportionately increase our
      interest and other financing costs over time.





Our
      salaries and benefits expenses remained relatively constant at $3.1 million
      for
      the first three quarters of 2007 and $3.2 million for the first three quarters
      of 2006. Our general and administrative expenses were comparable at $2.3 million
      for the nine months ended September 30, 2007 and $2.2 million for the nine
      months ended September 30, 2006, respectively.  Our legal collections
      expenses increased by over $239,000 for the nine months ended September 30,
      2007, as compared to the same period in 2006 and were included in our general
      and administrative expenses.  This increase was due to an increased
      emphasis on our legal collections, which results in considerable front end
      expenses.  In June 2007, we were able to purchase $2.0 million of
      portfolios, resulting in total portfolio purchases during the nine months ended
      September 30, 2007 of $2.6 million as compared to $4.1 million of portfolio
      purchases during the same period in 2006. We expect our operating expenses
      to
      remain relatively constant due to our efforts to continue to utilize our
      existing infrastructure as we work to increase portfolio collection
      revenues.








**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      cash,
      including restricted cash, and cash equivalents decreased to $850,000 at
      September 30, 2007 from $1.2 million at December 31, 2006. During the nine
      months ended September 30, 2007, our portfolio collections and sales generated
      $9.1 million of cash, we borrowed $1.4 million, and we used $5.9 million for
      operating and other activities, $2.6 million to purchase new portfolios, $1.9
      million to repay loans, $483,000 for distributions to unit holders, and $34,000
      to acquire computer and office equipment. Historically, our primary sources
      of
      cash have been cash flows from operations and borrowings. Recently, cash has
      been used for acquisitions of loan portfolios, the repurchase of LLC Units,
      moving expenses, payment of cash distributions to our unit
      holders, repayments of borrowings, purchases of property and equipment,
      growing our legal collections program and general working capital.





The
      large
      cost basis recovery associated with our portfolios under the cost recovery
      method has made it difficult to generate the profit called for in our business
      plan – to recover the cost we pay for our portfolios, repay funds borrowed to
      purchase portfolios, pay our collecting and operating costs and still have
      a
      profit – and may continue to cause our statement of operations to show a net
      loss. Excluding the results from portfolio sales in the nine months ended
      September 30, 2007, our operating, interest and other expenses of $6.0 million
      exceeded our total net revenues from collections of $5.5 million. We believe
      these results are partly due to the higher prices of recently purchased
      portfolios. In an effort to offset the decline in portfolio purchases, we
      continue to strive to maximize the use of our collections infrastructure by
      focusing our efforts on collecting the right portfolios or portions of
      portfolios in an efficient manner as well as increase our legal collections.
      We
      believe our future results will reflect progress in this area.





Cash
      generated from operations is dependent upon our ability to collect on our loan
      portfolios. Many factors, including the economy and our ability to hire and
      retain qualified collectors, are essential to our ability to generate cash
      flows. Fluctuations in these factors that cause a negative impact on our
      business could have a material impact on our expected future cash
      flows.





We
      did
      not experience the level of cash reserves that we expected during the nine
      months ended September 30, 2007, largely due to the decrease in collection
      revenues and continued expenditures to purchase new loan portfolios, as well
      as
      expenditures outside of historical operating expenses in the latter part of
      2006
      and in the first half of 2007, including the repurchase of LLC Units from our
      unit holders, moving expenses, costs associated with the addition of a third
      party collections program and expansion of our legal collections efforts. Both
      of these collection efforts require front end investment with the goal of
      producing positive cash flows in the future. In order to conserve working
      capital necessary to run our business, our Board of Directors decided at its
      October 2007 meeting to forego third quarter distributions to our unit holders,
      which would normally have occured in October. In addition to foregoing
      distributions, we will continue to monitor our collection infrastructure to
      maximize efficiencies in an effort to maintain or reduce expenses.





24
 ***Index***





According
      to the February 2006 issue of Collections and Credit Risk, the increasing prices
      of portfolios have resulted in buyers having to abandon the old rule of thumb
      that they will collect three times a portfolio’s purchase price in three years
      and instead are settling for collecting two to two and a half times the
      portfolio’s purchase price in three to five years. In addition, our
      participation in portfolio purchases using the Varde credit facility has been
      decreasing, which has proportionately increased the size of the Varde loans
      and
      we expect will result in an increase in our interest expense and other financing
      costs. In June 2007, we entered into an amendment to the Master Loan Agreement
      with Varde to address these issues. The amendment extends the maturity date
      for
      principal and any other accrued but unpaid amounts on each loan purchased on
      or
      after the effective date of the amendment from up to two years to up to three
      years. This change was made to allow more time for a portfolio purchased using
      the Varde facility to generate sufficient collection revenues to pay the balance
      of the Varde loans in full by their due dates.





Under
      the
      loan agreement with Varde, we were required to pay the balance of one
      of our loans in full by the due date of April 28, 2007. The balance
      outstanding of the loan on that date was approximately $702,000. The balance
      outstanding of the loan at September 30, 2007 was $466,000. The portfolio
      continues to generate revenue through collections but at a slower rate than
      forecasted. In May 2007, Varde gave us an extension and a limited forbearance
      from any action until July 31, 2007. After further discussions with Varde
      regarding the timing of the payment and consistent with the amendment to the
      Master Loan Agreement to extend maturity dates of loans, in July 2007, we
      obtained another extension and limited forbearance from any action until
      December 31, 2007. We will continue to work the portfolio, and may sell all
      or a
      portion of it, to generate sufficient income to pay the balance due to Varde
      on
      or before December 31, 2007 or we may seek another extension and limited
      forbearance from Varde.





During
      2006, we purchased $4.2 million of portfolios. The current market conditions
      make it likely that we will acquire portfolios at a slower pace in 2007 as
      compared to 2006.  In the nine months ended September 30, 2007, we
      purchased $2.6 million of new portfolios.  What we purchase will
      continue to depend on our assessment of market conditions, as well as the amount
      of liquid cash and other financial resources available to us.  In an
      attempt to compete in a highly competitive marketplace and operate as
      efficiently as possible, we will continue to focus on becoming more
      sophisticated in determining which portfolios or portions of portfolios provide
      the greatest return and which bring collection efficiency down. As a result
      of
      this analysis, we continue to focus our collection efforts on those portions
      of
      portfolios that we expect will generate the most returns.





We
      have
      used our dialer to ensure that our collectors focus on portfolios that continue
      to show results. By monitoring the results of calls originated through our
      dialer, we identified portfolios that required more cost to collect than others.
      Particularly where we had worked to collect these portfolios over an extended
      period of time, we determined that some of our portfolios’ collection lives had
      run their course from our perspective. We sold a number of older portfolios
      identified by this process in the first quarter of 2006. We believe this process
      of constantly evaluating portfolio returns against costs of collection should
      continue to improve the balance between our new and old portfolios. We may
      engage in further sales in the fourth quarter of 2007 if we believe market
      conditions are acceptable and portfolio performance is not up to our
      expectations, but do not anticipate sales at the same levels as in the prior
      two
      years.





Our
      portfolios provide our principal long-term source of liquidity. Over time,
      we
      expect to convert our portfolios to cash in an amount that equals or exceeds
      the
      cost basis of our portfolios. In addition, some portfolios whose cost bases
      we
      have completely recovered will continue to return collections to us. The total
      fair value of our portfolios includes fair value attributable to the residual
      interests of third parties in collections once all funds (including funds
      invested by us) invested in a portfolio have been repaid (with interest) and
      all
      servicing fees have been paid. The retained fair value of our portfolios
      excludes fair value attributable to these residual interests. Our estimate
      of
      the total fair value of our portfolios at September 30, 2007, decreased $3.0
      million to $19.0 million from $22.0 million at December 31, 2006. At the same
      time, the cost basis of our portfolios decreased to $3.7 million at September
      30, 2007, from $5.0 million at December 31, 2006. Our estimate of the retained
      fair value of our portfolios at September 30, 2007, decreased $2.8 million
      to
      $18.5 million from $21.3 million at December 31, 2006. Correspondingly, our
      notes payable used to purchase portfolios decreased from $4.5 million at
      December 31, 2006 to $4.0 million at September 30, 2007. The decrease in the
      fair value can be due to factors such as the availability of new portfolios,
      market pricing conditions for new portfolios, the timing of loan repayments
      and
      residual interest payments to Varde, and the timing of distributions to our
      members.





25
 ***Index***





Our
      estimates of fair value decreased due principally to our cash collections and
      portfolio sales of $9.2 million exceeding the fair value of the $2.6 million
      of
      new portfolio purchases in 2007. Our portfolio cost basis also decreased, due
      principally to the cost basis recovery associated with our collections and
      sales
      exceeding the $2.6 million of portfolio purchases made in the nine months ended
      September 30, 2007. Whether the fair value and cost basis of our portfolios
      will
      resume the growth we experienced in 2005 will depend on our ability to find
      portfolios at a reasonable price in a very competitive market. The purchase
      of
      portfolios is also limited by the amount of cash we have available to purchase
      portfolios. If we can find reasonably priced portfolios, we believe our
      portfolio fair value and cost basis will increase in the near term because
      we
      can use the Varde credit facility as well as reinvest some cash proceeds from
      collections to purchase new portfolios. Long-term growth in portfolio fair
      value
      and cost basis will depend on whether market conditions continue to permit
      us to
      purchase portfolios at reasonable prices and on our financial
      resources.





We
      used a
      discount rate of 20% to determine the fair values of our portfolios at September
      30, 2007, and December 31, 2006. The following table sets forth alternative
      estimates of total fair value, retained fair value, and the portion of fair
      value attributable to residual interests of third parties in collections, if
      we
      assessed collection risk as higher (using a discount rate of 25%) or lower
      (using a discount rate of 15%).








Total
                  Fair Value
            
            
            Retained
                  Fair Value
            
            
            Fair
                  Value of Residual InterestsSep 30,
                  2007
            
            
            Dec 31,
                  2006
            
            
            Sep 30,
                  2007
            
            
            Dec 31,
                  2006
            
            
            Sep 30,
                  2007
            
            
            Dec 31,
                  2006($
                in millions)
            
            
            ($
                in millions)
            
            
            ($
                in millions)Higher
                collection risk (25% discount rate)
            
            $
            17.7
            
            
            $
            20.5
            
            
            $
            17.3
            
            
            $
            19.9
            
            
            $
            0.4
            
            
            $
            0.6Assumed
                collection risk (20% discount rate)
            
            $
            19.0
            
            
            $
            22.0
            
            
            $
            18.5
            
            
            $
            21.3
            
            
            $
            0.5
            
            
            $
            0.7Lower
                collection risk (15% discount rate)
            
            $
            20.5
            
            
            $
            23.8
            
            
            $
            20.0
            
            
            $
            23.0
            
            
            $
            0.5
            
            
            $
            0.8








Our
      estimates of fair values also would change if we revised our projections of
      the
      magnitude and timing of future collections. Because of the inherent uncertainty
      associated with predicting future events, our determinations of fair value
      at
      any particular point in time are only estimates, and actual fair value could
      ultimately vary significantly from our estimate.





We
      do not
      present the portion of fair value attributable to residual interests of third
      parties in collections as a liability in our financial statements, although
      it
      does represent a contingent obligation to make payments to a third
      party.  Because we will receive a servicing fee and our share of
      residual collections, we believe collections of the specified portfolios will
      generate funds sufficient to pay these residual interests to third parties
      as
      they come due and cover our operating costs, with the potential for some profit
      on our part. If our collection efficiency declines significantly, however,
      we
      might have to use some of our own capital to cover operating costs as well
      as
      forego distributions to our investors as we had to do for the third quarter
      of
      2007.





With
      a
      decrease in total collection revenues, we will reserve a greater portion of
      our
      cash to pay for operating expenses, focusing primarily upon utilizing our
      collections infrastructure and legal collections to work our existing
      portfolios and expand our third party collections program.





Beginning
      in April 2003, we began making quarterly distributions. During 2006, we made
      distributions totaling $664,000. We made a distribution of $161,000 in each
      of
      January 2007, April 2007 and July 2007 relating to quarters ended December
      31,
      2006, March 31, 2007, and June 30, 2007, respectively. In order to provide
      additional working capital necessary to run our business, however, our Board
      of
      Directors decided to forego payment of distributions to our members and interest
      holders for the three month period ending September 30, 2007. In an effort
      to
      rebuild our cash reserves to cover our operational expenses and continue
      purchasing new portfolios, we anticipate that distributions may be
      suspended or reduced until we are able to generate the profit called for in
      our
      business plan – to recover the cost we pay for our portfolios, repay funds
      borrowed to purchase portfolios, pay our collecting and operating costs and
      still have a profit.





26
 ***Index***





Our
      agreement with Varde provides us with a source of capital to purchase new
      portfolios. The agreement provides up to $25 million of capital (counting each
      dollar loaned on a cumulative basis) over a five-year term. We will never have
      outstanding indebtedness approaching the full $25 million at any one time,
      due
      to the cumulative nature of the facility. At September 30, 2007, Matterhorn
      owed
      $3.9 million under the facility in connection with purchases of certain
      charged-off loan portfolios. Under the credit facility, Varde has a first
      priority security interest in Matterhorn’s assets. The assets of Matterhorn that
      provide security for Varde's loan were carried at a cost of $2.5 million at
      September 30, 2007. The loan advances have minimum payment threshold points
      with
      terms of up to three years and bear interest at the rate of 12% per annum.
      These
      obligations are scheduled to be repaid in full on dates ranging from December
      2007 to June 2010. Once all funds (including those invested by us) invested
      in a
      portfolio financed by Varde have been repaid (with interest) and all servicing
      fees have been paid, Varde will begin to receive a residual interest in
      collections of that portfolio. Depending on the performance of the portfolio,
      these residual interests may never be paid, they may begin being paid a
      significant time later than Varde’s loan is repaid (i.e., after the funds
      invested by us are repaid with interest), or, in circumstances where the
      portfolio performs extremely well, the loan could be repaid early and Varde
      could conceivably begin to receive its residual interest on or before the date
      that the loan obligation was originally scheduled to be paid in full. The amount
      of remaining available credit under the facility at September 30, 2007 was
      $11.0
      million. Matterhorn has borrowed a total of $14.0 million, with $3.9 million
      outstanding at September 30, 2007.





There
      can
      be no assurance that Varde will advance any new money under the facility,
      because in each instance Varde must approve of the portfolio(s) we propose
      to
      acquire and the terms of the acquisition. We do not have any plans to raise
      equity capital. Based on our cash position and current financial resources,
      we
      believe we have adequate capital resources to continue our business as presently
      conducted for the next twelve months. We plan to continue to use the Varde
      credit facility to maximize the return on our infrastructure and to continue
      to
      reduce variable costs required to collect each dollar of revenue. We have also
      taken steps, such as increased legal collections and third party collections
      arrangements, and will continue to consider other alternatives to increase
      the
      volume of accounts we service other than through new portfolio acquisitions
      using only our cash resources, however, if the economic returns to us seem
      reasonable.





The
      expenditures that we are making on our legal collections effort could continue
      into 2008, but should be at a lower level than 2007.  We may from time
      to time acquire capital assets on an as needed basis. Our most significant
      capital assets are our dialer and our telephone switch, which we do not
      anticipate having to replace within the next year. We do not have any
      contractual commitments to make capital expenditures, and we have not budgeted
      any capital expenditures for the coming year.








**ITEM
      3.  CONTROLSAND PROCEDURES**





In
      accordance with the Exchange Act, we carried out an evaluation, under the
      supervision and with the participation of management, including our Chief
      Operations Officer and our Accounting Manager, of the effectiveness of our
      disclosure controls and procedures as of the end of the period covered by this
      report. In designing and evaluating disclosure controls and procedures,
      management recognized that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurance of achieving the
      desired control objectives. Further, the design of a control system must reflect
      the fact that there are resource constraints. Because of the inherent
      limitations in all control systems, no evaluation of controls can provide
      absolute assurance that all control issues and instances of fraud, if any,
      may
      be detected. Based on this evaluation, our Chief Operations Officer and our
      Accounting Manager concluded that our disclosure controls and procedures were
      effective as of September 30, 2007, to provide reasonable assurance that
      information required to be disclosed in our reports filed or submitted under
      the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and
      forms.





27
 ***Index***





There
      has
      been no change in our internal controls over financial reporting that occurred
      during the quarter ended September 30, 2007 that has materially affected, or
      is
      reasonably likely to materially affect, our internal controls over financial
      reporting.








**PART
      II – OTHER INFORMATION**





**ITEM
      5.  OTHERINFORMATION**





Change
      in Accounting Method





In
      the
      first half of 2007, we retained an outside consultant to conduct a study to
      determine whether we should continue using the cost recovery method of
      accounting for all of our portfolios or switch to a method that matches
      portfolio cost basis to revenue over the projected life of the portfolio. The
      accounting method used depends largely upon a determination of our ability
      to
      accurately project the timing and amount of collections for portfolios we
      acquire. The consultant found that we are capable of determining the amount
      of
      revenue a portfolio is expected to generate over its life for portfolios that
      we
      have sufficient historical data and experience to accurately estimate future
      cash flows. As a result of this finding and further analysis by our Audit
      Committee members and management, our Audit Committee recommended to the Board
      of Directors, which approved, the adoption of the interest method of accounting
      to be applied to the majority of portfolios purchased after December 31,
      2006.  For those portfolios purchased on or before December 31, 2006
      and for portfolios purchased after that date where we do not have sufficient
      historical data and experience to accurately estimate the timing of collections
      revenue over its life, we will use the cost recovery method.





In
      addition to risks disclosed elsewhere in this report on Form 10-QSB, the
      following are risk factors specifically associated with the use of the interest
      method of accounting.





THE
      STATISTICAL MODEL WE USE TO PROJECT REMAINING CASH FLOWS FROM OUR PORTFOLIOS
      MAY
      PROVE TO BE INACCURATE, WHICH COULD RESULT IN REDUCED REVENUES OR THE RECORDING
      OF AN IMPAIRMENT CHARGE IF WE DO NOT ACHIEVE THE COLLECTIONS FORECASTED BY
      OUR
      MODEL





We
      use
      our internally developed collection score model to project the remaining cash
      flows from our portfolios. Our collection score model considers known data
      about
      our accounts, including, among other things, our collection experience and
      changes in external market factors, in addition to all data known when we
      acquired the accounts. There can be no assurance, however, that we will be
      able
      to achieve the collections forecasted by our collection score model. If we
      are
      not able to achieve these levels of forecasted collection, our revenues will
      be
      reduced or we may be required to record an impairment charge, which could result
      in a reduction of our earnings.





WE
      USE
      ESTIMATES IN OUR REVENUE RECOGNITION AND OUR EARNINGS WILL BE REDUCED IF ACTUAL
      RESULTS ARE LESS THAN ESTIMATED





We
      utilize the interest method to determine revenue recognized on most of our
      loan
      portfolios purchased after December 31, 2006. Under this method, each pool
      of
      portfolios is modeled based upon its projected cash flows. A yield is then
      established which, when applied to the outstanding balance of the loan
      portfolios, results in the recognition of revenue at a constant yield relative
      to the remaining balance in the static pool. The actual amount recovered by
      us
      on portfolios may substantially differ from our projections and may be lower
      than initially projected. If differences are material, we may take a write-off
      on all or a portion of our investment, which would negatively affect our
      earnings.





WE
      MAY
      INCUR IMPAIRMENT CHARGES BASED ON THE PROVISIONS OF AMERICAN INSTITUTE OF
      CERTIFIED PUBLIC ACCOUNTANTS STATEMENT OF POSITION 03-03





The
      American Institute of Certified Public Accountants, or AICPA, SOP, 03-03,
“Accounting for Loans or Certain Securities Acquired in a Transfer.” The SOP
      provides guidance on accounting for differences between contractual and expected
      cash flows from an investor’s initial investment in loans or debt securities
      acquired in a transfer if those differences are attributable, at least in part,
      to credit quality. The SOP limits the revenue that may be accrued to the excess
      of the estimate of expected future cash flows over a portfolio’s initial cost
      basis. The SOP requires that the excess of the contractual cash flows over
      expected cash flows not be recognized as an adjustment of revenue, expense,
      or
      on the balance sheet. The SOP freezes the internal rate of return (“IRR”)
      originally estimated when the loan portfolio pools are purchased for subsequent
      impairment testing. Rather than lower the estimated IRR if the expected future
      cash flow estimates are decreased, the carrying value of our loan portfolios
      would be written down to maintain the then-current IRR. Increases in expected
      future cash flows would be recognized prospectively through an upward adjustment
      of the IRR over a portfolio’s remaining life. Any increased yield then becomes
      the new benchmark for impairment testing. The SOP provides that previously
      issued annual financial statements do not need to be restated. Since the new
      SOP
      guidance does not permit yields to be lowered, it will increase the probability
      of our having to incur impairment charges in the future, which would negatively
      impact our profitability.





28
 ***Index***





**ITEM
      6.  EXHIBITS**





An
      Exhibit Index precedes the exhibits following the signature page and is
      incorporated herein by reference.





29
 ***Index***





**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.





PERFORMANCE
                CAPITAL MANAGEMENT, LLCNovember
                13, 2007
            
            By:
            /s/
                David J. Caldwell(Date)
            
            
            Name:
                David J. CaldwellIts:
                Chief Operations Officer





30
 ***Index***





**EXHIBIT
      INDEX**





**Exhibit
                Number**
            **Description**2.1
            Joint
                Chapter 11 Plan of Reorganization Proposed by Chapter 11 Trustee
                and the
                Official Committee of Equity Security Holders effective February
                4, 2002
                (1)2.2
            First
                Amended Disclosure Statement Describing Joint Chapter 11 Plan Proposed
                by
                Chapter 11 Trustee and the Official Committee of Equity Security
                Holders
                approved on October 12, 2001 (1)3.1
            Performance
                Capital Management, LLC Articles of Organization (1)3.2
            Operating
                Agreement for Performance Capital Management, LLC (1)3.3
            First
                Amendment to Operating Agreement for Performance Capital Management,
                LLC
                (1)3.4
            Second
                Amendment to Operating Agreement for Performance Capital Management,
                LLC
                (2)3.5
            Third
                Amendment to Operating Agreement for Performance Capital Management,
                LLC
                (3)4.1
            Specimen
                Performance Capital Management, LLC Unit Certificate
                (1)4.2
            Specimen
                Performance Capital Management, LLC Economic Interest Unit Certificate
                (1)4.3
            Provisions
                in the Operating Agreement for Performance Capital Management, LLC
                pertaining to the rights of LLC Unit holders (see Exhibits 3.2 and
                3.3)
                (1)10.1
            Agreement
                of Employment by and between Performance Capital Management, LLC
                and David
                J. Caldwell dated July 11, 2007 (4)10.2
            Agreement
                of Employment by and between Performance Capital Management, LLC
                and
                Darren S. Bard dated July 11, 2007 (4)10.3
            Agreement
                of Employment by and between Performance Capital Management, LLC
                and
                William D. Constantino dated July 11, 2007 (4)31.1
            Certification
                of Chief Executive Officer Pursuant to Rule 13a-14(a)31.2
            Certification
                of Principal Financial Officer Pursuant to Rule
                13a-14(a)32.1
            Certification
                of Principal Executive Officer and Principal Financial Officer Pursuant
                to
                18 U.S.C. § 1350 *





*
      The
      certifications filed under Exhibit 32.1 are not deemed “filed” for purposes of
      Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated
      by reference into any filing of Performance Capital Management, LLC under the
      Securities Exchange Act of 1933, as amended, or the Securities Exchange Act
      of
      1934, as amended, whether made before or after the date hereof irrespective
      of
      any general incorporation by reference language contained in any such filing,
      except to the extent that Performance Capital Management, LLC specifically
      incorporates it by reference.




***Index***




(1) Filed on April 2, 2003 as an exhibit to our report
      on Form
      8-K dated February 4, 2002, and incorporated herein by reference.




(2)
      Filed
      on November 14, 2003 as an exhibit to our report on Form 10-QSB for the period
      ended September 30, 2003, and incorporated herein by reference.





(3)
      Filed
      on August 14, 2006 as an exhibit to our report on Form 10-QSB for the period
      ended June 30, 2006, and incorporated herein by reference.





(4)
      Filed
      on August 14, 2007, as an exhibit to our report on Form 10-QSB for the period
      ended June 30, 2007, and incorporated herein by reference.