UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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





For the
quarterly period ended June
30, 2008





OR





£TRANSITION REPORT PURSUANT TO 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 registrant 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(Registrant’s
      telephone number)





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





Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes T  No
£





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


Large
      accelerated filer £
            Accelerated
      filer £Non-accelerated
      filer £
            Smaller
      reporting company T





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


Yes £  No
T





As of
August 1, 2008, the registrant had 549,239 LLC Units issued and
outstanding.













PERFORMANCE CAPITAL MANAGEMENT, LLC





Index
to


Quarterly
Report on Form 10-Q


For
the Quarter Ended June 30, 2008








PART
      I – FINANCIAL INFORMATION
            PageItem
      1
            Consolidated Financial StatementsReview Report of Independent Registered Public Accounting
      Firm
            1Consolidated Balance Sheets as of June 30, 2008 (unaudited) and
      December 31, 2007
            2Consolidated Statements of Operations for the three and
      six months ended June 30, 2008 and 2007 (unaudited)
            3Consolidated Statements of Members’ Equity for the six months
      ended June 30, 2008 (unaudited) and the year ended December 31,
      2007
            4Consolidated Statements of Cash Flows for the six months ended
      June 30, 2008 and 2007 (unaudited)
            5Condensed Notes to the Consolidated Financial Statements
      (unaudited)
            6Item
      2
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            20Item
      4T
            Controls and Procedures
            31PART
      II – OTHER INFORMATIONItem
      2
            Member Forfeitures of Securities
            31Item
      4
            Submission of Matters to a Vote of Security
      Holders
            31Item
      6
            Exhibits
            31SIGNATURES
            32





Index





PART
I – FINANCIAL INFORMATION





ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS











[MOORESTEPHENS 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 June 30, 2008 and the related consolidated statements of
operations for the three-month and six-month periods ended June 30, 2008 and
2007, and the consolidated statements of members’ equity and the consolidated
statements of cash flows for the six-month periods ended June 30, 2008 and 2007.
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 review, 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, 2007, and the related
consolidated statements of operations, members’ equity and cash flows for the
year ended December 31, 2007 (not presented herein); and in our report dated
March 31, 2008, 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, 2007, 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








August
18, 2008


Orange,
California





1
 Index





PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
BALANCE SHEETS


AS OF
JUNE 30, 2008 AND DECEMBER 31, 2007





June 30,
      2008
            
            
            December 31,(unaudited)
            
            
            2007ASSETSCash
      and cash equivalents
            
            $
            362,730
            
            
            $
            693,227Restricted
      cash
            
            
            789,148
            
            
            
            397,393Other
      receivables
            
            
            214,422
            
            
            
            16,655Purchased
      loan portfolios, net
            
            
            3,063,357
            
            
            
            3,222,642Property
      and equipment, net
            
            
            374,505
            
            
            
            365,727Deposits
            
            
            36,575
            
            
            
            36,575Prepaid
      expenses and other assets
            
            
            118,869
            
            
            
            107,074Total
      assets
            
            $
            4,959,606
            
            
            $
            4,839,293LIABILITIES AND
      MEMBERS' EQUITYLIABILITIES:Accounts
      payable
            
            $
            131,857
            
            
            $
            104,517Accrued
      liabilities
            
            
            576,994
            
            
            
            601,243Accrued
      interest
            
            
            25,762
            
            
            
            37,513Notes
      payable
            
            
            3,694,956
            
            
            
            3,630,359Income
      taxes payable
            
            
            16,000
            
            
            
            23,580Total
      liabilities
            
            
            4,445,569
            
            
            
            4,397,212COMMITMENTS
      AND CONTINGENCIES
            
            
            -
            
            
            
            -MEMBERS'
      EQUITY
            
            
            514,037
            
            
            
            442,081Total
      liabilities and members' equity
            
            $
            4,959,606
            
            
            $
            4,839,293





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 three months ended June 30, 2008
            
            
            For
      the three months ended June 30, 2007
            
            
            For
      the six months ended June 30, 2008
            
            
            For
      the six months ended June 30, 2007(unaudited)
            
            
            (unaudited)
            
            
            (unaudited)
            
            
            (unaudited)REVENUES:Portfolio
      collections, net
            
            $
            2,064,118
            
            
            $
            1,722,267
            
            
            $
            4,371,752
            
            
            $
            3,609,507Portfolio
      sales, net
            
            
            76,829
            
            
            
            24,576
            
            
            
            485,002
            
            
            
            14,789TOTAL
      NET REVENUES
            
            
            2,140,947
            
            
            
            1,746,843
            
            
            
            4,856,754
            
            
            
            3,624,296OPERATING
      COSTS AND EXPENSES:Salaries
      and benefits
            
            
            950,485
            
            
            
            1,042,697
            
            
            
            1,967,190
            
            
            
            2,160,952General
      and administrative
            
            
            761,346
            
            
            
            825,533
            
            
            
            1,554,471
            
            
            
            1,505,023Provision
      for portfolio impairment
            
            
            595,000
            
            
            
            -
            
            
            
            976,000
            
            
            
            -Depreciation
            
            
            27,046
            
            
            
            25,327
            
            
            
            52,038
            
            
            
            49,695Total
      operating costs and expenses
            
            
            2,333,877
            
            
            
            1,893,557
            
            
            
            4,549,699
            
            
            
            3,715,670INCOME
      (LOSS) FROM OPERATIONS
            
            
            (192,930
            )
            
            
            (146,714
            )
            
            
            307,055
            
            
            
            (91,374
            )OTHER
      INCOME (EXPENSE):Interest
      expense and other financing costs
            
            
            (97,299
            )
            
            
            (137,204
            )
            
            
            (218,276
            )
            
            
            (287,481
            )Interest
      income
            
            
            144
            
            
            
            5,192
            
            
            
            855
            
            
            
            8,856Other
      income
            
            
            -
            
            
            
            -
            
            
            
            9
            
            
            
            10,493Total
      other expense, net
            
            
            (97,155
            )
            
            
            (132,012
            )
            
            
            (217,412
            )
            
            
            (268,132
            )INCOME
      (LOSS) BEFORE INCOME TAX PROVISION
            
            
            (290,285
            )
            
            
            (278,726
            )
            
            
            89,643
            
            
            
            (359,506
            )INCOME
      TAX PROVISION
            
            
            -
            
            
            
            -
            
            
            
            17,600
            
            
            
            13,600NET
      INCOME (LOSS)
            
            $
            (290,085
            )
            
            $
            (278,726
            )
            
            $
            72,043
            
            
            $
            (373,106
            )NET
      INCOME (LOSS) PER LLC UNIT – BASIC AND DILUTED
            
            $
            (0.53
            )
            
            $
            (0.51
            )
            
            $
            0.13
            
            
            $
            (0.68
            )





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


See
Review Report of Independent Registered Public Accounting Firm.





3
 Index





PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
STATEMENTS OF MEMBERS' EQUITY





TotalMember
            
            
            Unreturned
            
            
            Abandoned
            
            
            Accumulated
            
            
            Members'Units
            
            
            Capital
            
            
            Capital
            
            
            Deficit
            
            
            EquityBalance,
      December 31, 2006
            
            
            550,244
            
            
            $
            22,752,550
            
            
            $
            1,048,712
            
            
            $
            (22,097,635
            )
            
            $
            1,703,627Distributions
      to investors
            
            
            -
            
            
            
            (321,881
            )
            
            
            -
            
            
            
            -
            
            
            
            (321,881
            )Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (373,106
            )
            
            
            (373,106
            )Balance,
      June 30 2007 (unaudited)
            
            
            550,244
            
            
            
            22,430,669
            
            
            
            1,048,712
            
            
            
            (22,470,741
            )
            
            
            1,008,640Adjustment
      to repurchased units
            
            
            16
            
            
            
            1,706
            
            
            
            (592
            )
            
            
            (1,114
            )
            
            
            -Reinstatement
      of units to investors
            
            
            199
            
            
            
            17,338
            
            
            
            (17,338
            )
            
            
            -
            
            
            
            -Member
      units returned by investors
            
            
            (548
            )
            
            
            (21,164
            )
            
            
            21,164
            
            
            
            -
            
            
            
            -Distributions
      to investors
            
            
            -
            
            
            
            (171,079
            )
            
            
            -
            
            
            
            -
            
            
            
            (171,079
            )Net  loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (395,480
            )
            
            
            (395,480
            )Balance,
      December 31, 2007
            
            
            549,911
            
            
            
            22,
      257,470
            
            
            
            1,051,946
            
            
            
            (22,867,335
            )
            
            
            442,081Member
      units returned by investors
            
            
            (249
            )
            
            
            (11,897
            )
            
            
            11,897
            
            
            
            -
            
            
            
            -Distributions
      to investors
            
            
            -
            
            
            
            (87
            )
            
            
            -
            
            
            
            -
            
            
            
            (87
            )Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            72,043
            
            
            
            72,043Balance,
      June 30, 2008 (unaudited)
            
            
            549,662
            
            
            $
            22,
      245,486
            
            
            $
            1,063,843
            
            
            $
            (22,795,292
            )
            
            $
            514,037





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


See
Review Report of Independent Registered Public Accounting Firm.





4
 Index





PERFORMANCE CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
STATEMENTS OF CASH FLOWS





For
      the Six Months Ended June 30, 2008
            
            
            For
      the Six Months Ended June 30, 2007(unaudited)
            
            
            (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            
            $
            72,043
            
            
            $
            (373,106
            )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
            
            
            52,038
            
            
            
            49,695(Increase)
      decrease in assets:Other
      receivables
            
            
            (197,767
            )
            
            
            6,257Prepaid
      expenses and other assets
            
            
            (11,795
            )
            
            
            (18,803
            )Loan
      portfolios
            
            
            159,285
            
            
            
            474,732Deposits
            
            
            -
            
            
            
            42,373Increase
      (decrease) in liabilities:Accounts
      payable
            
            
            27,339
            
            
            
            (42,838
            )Accrued
      liabilities
            
            
            (24,249
            )
            
            
            122,783Accrued
      interest
            
            
            (11,751
            )
            
            
            (4,942
            )Income
      taxes payable
            
            
            (7,580
            )
            
            
            (15,580
            )Net
      cash provided by operating activities
            
            
            57,563
            
            
            
            240,571CASH
      FLOWS FROM INVESTING ACTIVITIES:Additions
      to property and equipment
            
            
            (60,815
            )
            
            
            (28,584
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      change in restricted cash
            
            
            (391,755
            )
            
            
            30,563Borrowings
      on loans payable
            
            
            2,292,885
            
            
            
            1,396,825Repayment
      of loans
            
            
            (2,228,288
            )
            
            
            (1,293,386
            )Distributions
      to investors
            
            
            (87
            )
            
            
            (321,881
            )Net
      cash used in financing activities
            
            
            (327,245
            )
            
            
            (187,879
            )NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            (330,497
            )
            
            
            24,108CASH
      AND CASH EQUIVALENTS, beginning of period
            
            
            693,227
            
            
            
            689,888CASH
      AND CASH EQUIVALENTS, end of period
            
            $
            362,730
            
            
            $
            713,996SUPPLEMENTAL
      DISCLOSURE FOR CASH FLOW INFORMATION:Income
      taxes paid
            
            $
            25,180
            
            
            $
            29,180Interest
      paid
            
            $
            198,438
            
            
            $
            238,526





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


See
Review Report of Independent Registered Public Accounting Firm.





5
 Index





PERFORMANCE CAPITAL MANAGEMENT, 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, 2007.





Reorganization under
Bankruptcy





PCM LLC
was formed under a Chapter 11 Bankruptcy Reorganization Plan (“Reorganization
Plan”) and operating agreement. The Reorganization 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 the
Reorganization Plan on February 4, 2002. The entities that were consolidated
under the Reorganization Plan are as follows:





•
            Performance
      Capital Management, Inc., a California
  corporation;


•
            Performance
      Asset Management Fund, Ltd., a California limited
    partnership;


•
            Performance
      Asset Management Fund II, Ltd., a California limited
      partnership;


•
            Performance
      Asset Management Fund III, Ltd., a California limited
      partnership;


•
            Performance
      Asset Management Fund IV, Ltd., a California limited partnership;
      and


•
            Performance
      Asset Management Fund V, Ltd., a California limited
      partnership.





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.





Note
2 - Basis of Presentation





The
unaudited consolidated financial statements have been prepared by the Company,
pursuant to the rules and regulations of 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 consolidated
financial








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)





statements
should be read in conjunction with the audited financial statements and
footnotes for the year ended December 31, 2007, included in the Company's
Current Report on Form 10-KSB filed with the Securities and Exchange Commission
on March 31, 2008. The results for the six months ending June 30, 2008 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2008.





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;
      and





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.








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
2 - Basis of Presentation (continued)





Transfer of Assets to
Successor Company





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





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 purchased 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.





Recent Accounting
Pronouncements





In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business
Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
the acquisition method of accounting (which SFAS 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. SFAS 141R
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141R). SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An entity
may not apply it before that date. The Company is currently evaluating the
impact that adopting SFAS No. 141R will have on its consolidated financial
statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”),
which changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company has not
determined the effect that the application of SFAS 161 will have on its
consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement will not have an impact
on the Company’s consolidated financial statements.








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)





In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
this Statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This Statement
also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s consolidated financial
statements.





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 $858,000
as of June 30, 2008.





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.





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 June 30, 2008, 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.








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)





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. The interest method is being used by the
Company for the majority of portfolios purchased after December 31, 2006.
However, if 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 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. The use
of the interest method was reflected for the first time in the Company’s report
on Form 10-QSB for the period ended September 30, 2007.





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 a 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.





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 an impairment expense 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.








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)




The cost
recovery method prescribed by SOP 03-03 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 03-03 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.





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. The Company continues collection
efforts for certain accounts in these portfolios right up until the point of
sale. 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 unit holders.





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.





The
operations of a limited liability company are generally not subject to income
taxes at the entity level, because its net income or net loss is distributed
directly to and reflected on the tax returns of its unit holders. The net tax
basis of PCM LLC’s assets and liabilities is more than the reported amounts on
the financial statements by approximately $481,000 for the 2007 tax year, due
primarily to the timing differences of purchased loan portfolio loss reserves
and impairments.








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
3 - Summary of Significant Accounting Policies (continued)





Members’
Equity





Members’
equity includes voting LLC units held by members and non-voting LLC units held
by one economic interest owner. As of June 30, 2008, PCM LLC had 525,989 voting
LLC units and 23,673 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 January 2008
and April 2008, one member voluntarily returned 99 LLC units and one member
voluntarily returned 150 LLC units, respectively, to the Company. The forfeited
LLC units represented each member’s entire respective investment interest in the
Company.





Adjustments and
Reclassifications





Certain
adjustments have been made to the financial statements that were previously
filed for the three and six month periods ended June 30, 2007 due to application
of the interest method of accounting under SOP 03-03 for most of the portfolios
purchased after January 1, 2007.  The interest method of accounting
was first applied in the Company’s report on Form 10-QSB for the three and nine
month periods ended September 30, 2007. Use of the interest method in the
financial statements for the three and six month periods ended June 30, 2007
resulted in an increase in net revenues from portfolio collections by $99,620
and a decrease in the net loss by $99,620.  Use of the interest method
also resulted in an increase to earnings (loss) per LLC unit. For the three and
six month periods ended June 30, 2007, earnings (loss) per LLC unit were ($0.51)
and ($0.68), respectively, compared to ($0.69) and ($0.86) as shown previously.
Certain amounts in the prior year have been reclassified to conform to the
current year financial statement presentation.





Note
4 – Fair Value of Financial Instruments





The
Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Accounting Standard No. 157, “Fair Value Measurements” (“FAS 157”).
FAS 157 defines fair value, provides guidance for measuring fair value and
requires certain disclosures. It does not require any new fair value
measurements, but rather applies to all other accounting pronouncements that
require or permit fair value measurements. FAS 157 emphasizes that fair value is
a market-based measurement, not an entity-specific measurement. Therefore, a
fair value measurement would need to be determined based on the assumptions that
market participants would use in pricing the asset or liability.





On
January 1, 2008, the Company adopted FAS 157 for financial assets and
liabilities. The Company will adopt the provisions of FAS 157 for non-financial
assets and non-financial liabilities that are recognized and disclosed at fair
value on a nonrecurring basis, for its fiscal year beginning January 1,
2009.





The fair
values of the Company’s financial instruments reflect the amounts that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (i.e. the “exit
price”). The statement utilizes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels. The following is a brief description of those three levels:





§
            Level
      1:  Observable inputs such as quoted prices (unadjusted)
      in active markets for identical assets or
  liabilities.





§
            Level
      2:  Inputs other than quoted prices that are observable
      for the asset or liability, either directly or indirectly. These include
      quoted prices for similar assets or liabilities in active markets and
      quoted prices for identical or similar assets or liabilities in markets
      that are not active.





§
            Level
      3:  Unobservable inputs that reflect the reporting
      entity’s own assumptions.








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
4 – Fair Value of Financial Instruments (continued)





The
Company’s financial instruments consist of the following:





Financial Instruments With
Carrying Value Equal to Fair Value





§
            Cash
      and cash equivalents


§
            Other
      receivables





The fair
value of cash and cash equivalents and other receivables approximates their
respective carrying value.





Financial Instruments Not
Required to Be Carried at Fair Value





§
            Investment
      in loan portfolios, net


§
            Long
      term debt





The
Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Accounting Standard No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“FAS 159”). The Company has elected not to
adopt the provisions of FAS 159 for its fiscal year ended December 31, 2008.
Therefore, the above instruments are not required to be recorded at their fair
value. However, for disclosure purposes in connection with the provisions of
Statement of Financial Accounting Standard No. 107, “Disclosures about Fair
Value of Financial Instruments,” the Company is required to estimate the fair
value of financial instruments when it is practical to do so. Borrowings under
the Company’s revolving credit facility are carried at historical cost, adjusted
for additional borrowings less principal repayments, which approximates fair
value.





Historically,
the Company has measured the fair value of its loan portfolios based on the
discounted present value of the actual amount of money that the Company believed
a loan portfolio would ultimately produce. Under FAS 157, the Company would have
to attempt to determine the fair market value of hundreds of loan portfolios on
a recurring basis. There is no active market for loan portfolios or observable
inputs for the fair value estimation. Therefore, there is potential for a
significant variance in the actual fair value of a loan portfolio and the
Company’s estimate. Given this inherent uncertainty associated with measuring
the fair value of its loan portfolios under FAS 157 and the excessive costs that
would be incurred, the Company considers it not practical to measure the fair
value of its loan portfolios.





Note
5 - Purchased Loan Portfolios





The
Company acquires loan portfolios 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 June 30, 2008
and December 31, 2007 totaled approximately $802 million and $796 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.








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)





The
carrying amount of purchased loan portfolios included in the accompanying
consolidated balance sheets is as follows:





As
      of
            
            
            As
      ofJune 30, 2008
            
            
            Dec. 31, 2007Unrecovered
      cost balance beginning of period
            
            $
            3,582,983
            
            
            $
            5,059,283Valuation
      allowance, beginning of period
            
            
            (360,341
            )
            
            
            (58,341
            )Net
      balance, beginning of period
            
            
            3,222,642
            
            
            
            5,000,942Net
      portfolio activity
            
            
            816,715
            
            
            
            (1,476,300
            )Subtotal
            
            
            4,039,357
            
            
            
            3,524,642Provision
      for portfolio impairment
            
            
            (976,000
            )
            
            
            (302,000
            )Net
      balance, end of period
            
            $
            3,063,357
            
            
            $
            3,222,642








Purchases by
Quarter





The
following table summarizes portfolio purchases the Company made during each of
the first and second quarters of 2008 and during the year ended December 31,
2007, that were accounted for using the interest method, and the respective
purchase prices(in
thousands):





For
      the three
            
            For
      the three
            
            For
      the yearmonths
      ended
            
            months
      ended
            
            endedMarch 31, 2008
            
            June 30, 2008
            
            December 31, 2007Fair
      Value Date of Purchase
            $0.7
      million
            
            $0.7
      million
            
            $2.8
      millionForward
      Flow Allocation (Accretable Yield )
            $0.9
      million
            
            $0.9
      million
            
            $3.6
      million





During
the six months ended June 30, 2008, the Company purchased $2.9 million of loan
portfolios, $1.3 million of which was immediately sold after being purchased.
The Company used the cost recovery method for a $62,000 portion of the $1.6
million net amount of the loan portfolios that the Company retained because that
portion’s future collections could not be reasonably estimated. During the year
ended December 31, 2007, the Company purchased $3.3 million of loan portfolios,
$204,000 of which was immediately sold after being purchased. The Company used
the cost recovery method for a $300,000 portion of the $3.1 million net amount
of the loan portfolios that the Company retained because that portion’s future
collections could not be reasonably estimated.





Changes in Investment in
Purchased Loan Portfolios





The
Company utilizes the interest method for most 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 and 2008 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.








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
5 - Purchased Loan Portfolios (continued)





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 June
30, 2008, the portfolios accounted for using the cost recovery method consisted
of $300,000 in net book value of investment in loan, where future cash flows
could not be reasonably estimated.





The
activity in the loan portfolios in the accompanying consolidated financial
statements is as follows:





Three
      Months
            
            
            Three
      Months
            
            
            Six
      Months
            
            
            Six
      MonthsEnded
            
            
            Ended
            
            
            Ended
            
            
            EndedJune30,
      2008
            
            
            June30,
      2007
            
            
            June 30,
      2008
            
            
            June30,
      2007Balance,
      beginning of period
            
            $
            3,131,404
            
            
            $
            3,827,422
            
            
            $
            3,222,642
            
            
            $
            5,000,942Purchased
      loan portfolios
            
            
            1,084,405
            
            
            
            2,014,955
            
            
            
            2,886,069
            
            
            
            2,402,939Collections
      on loan portfolios
            
            
            (2,173,144
            )
            
            
            (2,931,631
            )
            
            
            (4,827,088
            )
            
            
            (6,312,057
            )Sales
      of loan portfolios
            
            
            (373,789
            )
            
            
            (96,082
            )
            
            
            (1,810,629
            )
            
            
            (154,613
            )Revenue
      recognized on collections
            
            
            2,064,118
            
            
            
            1,722,267
            
            
            
            4,371,752
            
            
            
            3,609,507Revenue
      recognized on sales
            
            
            76,829
            
            
            
            24,576
            
            
            
            485,002
            
            
            
            14,789Cash
      collection applied to principal
            
            
            (151,466
            )
            
            
            (35,297
            )
            
            
            (288,391
            )
            
            
            (35,297
            )Provision
      for portfolio impairment
            
            
            (595,000
            )
            
            
            -
            
            
            
            (976,000
            )
            
            
            -Balance,
      end of period
            
            $
            3,063,357
            
            
            $
            4,526,210
            
            
            $
            3,063,357
            
            
            $
            4,526,210








Projected  Amortization
of Portfolios





As of
June 30, 2008, the Company had approximately $3.1 million in investment in
purchased loan portfolios, of which approximately $2.8 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
      June 30,
            
            Amortization2009
            
            $
            795,0002010
            
            $
            765,0002011
            
            $
            649,0002012
            
            $
            424,0002013
            
            $
            134,000$
            2,767,000








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
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 June 30, 2008.  Changes in accretable yield for the
six months ended June 30, 2008 and the year ended December 31, 2007, were as
follows:




Six
      monthsEnded
            
            
            Year
      endedJune 30, 2008
            
            
            Dec. 31, 2007Balance
      at the be beginning of the period
            
            $
            2,523,000
            
            
            $
            -Additions,
      net
            
            
            1,882,000
            
            
            
            3,628,000Income
      recognized on portfolios, net
            
            
            (629,000
            )
            
            
            (803,000
            )Provision
      for portfolio impairment
            
            
            (1,486,000
            )
            
            
            (302,000
            )Reductions
      on existing portfolios
            
            
            (93,000
            )
            
            
            -Balance
      at the end of the period
            
            $
            2,197,000
            
            
            $
            2,523,000





The
valuation allowances related to the loan portfolios at  June 30, 2008
and  December 31, 2007 are as follows:





Six
      months endedJune 30, 2008
            
            Dec. 31, 2007Valuation
      allowance, beginning of period
            
            $
            360,341
            
            
            $
            58,341Increase
      in valuation allowance due to portfolio impairment
            
            
            976,000
            
            
            
            302,000Valuation
      allowance, end of period
            
            $
            1,336,341
            
            
            $
            360,341





Note
6 - Property and Equipment





Property
and equipment is as follows:





As
      of
            
            
            As
      ofJune 30, 2008
            
            
            Dec. 31, 2007Office
      furniture and equipment
            
            $
            432,139
            
            
            $
            432,139Computer
      equipment
            
            
            721,736
            
            
            
            660,921Leasehold
      improvements
            
            
            113,502
            
            
            
            113,502Totals
            
            
            1,267,377
            
            
            
            1,206,562Less
      accumulated depreciation
            
            
            (892,872
            )
            
            
            (840,835
            )Property
      and equipment, net
            
            $
            374,505
            
            
            $
            365,727





Depreciation
expense for the quarters ended June 30, 2008 and 2007 amounted to $27,046 and
$25,327, respectively. Depreciation expense for the six months ended June 30,
2008 and 2007 amounted to $52,038 and $49,695, respectively.








See
Review Report of Independent Registered Public Accounting Firm





16
 Index





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




Note
7 – Notes Payable





In 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 the agreement with Varde that 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
credit facility made on or after the effective date of the
amendment.





In
connection with the amendment, on November 27, 2007, the Company entered into a
letter agreement with Varde that modified the loan terms of five of its
pre-amendment loans by extending the loan repayment periods for those loans from
two to three years. The percentage of the principal balance that is required to
be paid on the scheduled due dates varies with each loan. The other outstanding
Varde loans are already on three-year terms since they were made on or after the
effective date of the amendment, with the exception of a loan made on November
11, 2007 with an original principal amount of approximately $240,000, that has a
term of two and one-half years.





PCM LLC’s
wholly-owned subsidiary Matterhorn owed approximately $3.7 million and $3.6
million at June 30, 2008 and December 31, 2007, respectively, under the facility
in connection with its purchase of certain charged-off loan portfolios. The
total amount borrowed under the facility was approximately $16.5 million and
$14.3 million at June 30, 2008 and December 31, 2007, respectively.





Each loan
has minimum payment threshold points, 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 October 2008 to June 2011, with the
approximate following principal payments due:





Twelve
      Months EndingJune 30,2009
            
            $2.2
      million2010
            
            $0.9
      million2011
            
            $0.6
      million





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, our parent
operating company, has guaranteed certain of Matterhorn's operational
obligations under the loan documents. The amount of remaining available credit
under the facility was approximately $8.5 million and $10.7 million at June 30,
2008 and December 31, 2007, respectively. The assets of Matterhorn that provide
security for Varde's loan were carried at a cost of approximately $2.5 million
at June 30, 2008.





A
Matterhorn loan portfolio that was purchased using Varde financing in June 2007
did not generate enough collection revenue to meet its first minimum principal
threshold point in December 2007 that was called for under the loan agreement
with Varde. In March 2008, the Company made a remedial payment of approximately
$16,000 to Varde to cover the difference. This loan portfolio again failed to
meet its minimum principal threshold point in June 2008, as called for under the
loan agreement with Varde, by approximately $60,000. The Company is currently
exploring selling a portion of this portfolio to bring the loan in compliance
with the minimum principal threshold amount. Another loan portfolio that was
purchased using Varde financing in November 2007 did not generate enough
collection revenue to meet its first minimum principal threshold point in May
2008 that was called for under the loan agreement with Varde. In June 2008, the
Company made a remedial payment of approximately $22,000 to Varde to cover the
difference.








See
Review Report of Independent Registered Public Accounting Firm





17
 Index





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




Note
7 – Notes Payable (continued)





Under one
of the Company’s loan agreements with Varde that was entered into in April 2005,
the Company was required to pay the balance of the loan in full by the due date
of April 30, 2008. The portfolio continues to generate revenue through
collections but at a slower rate than forecasted. After discussions with Varde
regarding the timing of the payments, the Company requested and Varde has agreed
to an amendment to the loan terms that extends the maturity date of the loan
from 36 months to 42 months, from April 2008 to October 2008. Under the revised
loan terms, considering the portfolio’s cash collections through April 2008, the
principal balance of the loan did not meet the April 2008 required minimum
principal threshold point by approximately $45,000. The Company has not received
a notice of default from Varde and anticipates paying this loan off in full by
the fourth quarter of 2008.





Note
8 - 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 June 30, will
be:





Year
      ending
            
            Approximate AnnualJune 30
            
            Lease Commitments2009
            
            $    345,0002010
            
            $    353,0002011
            
            $    355,0002012
            
            $    358,0002013
            
            $    364,000Thereafter
            
            $    242,000





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 June 30, 2008 and December 31, 2007 was
$209,000 and $222,000, respectively.  Rental expense for the three
months ended June 30, 2008 and 2007 amounted to approximately $80,000 for each
quarterly period.  Rental expense for the six months ended June 30,
2008 and 2007 amounted to approximately $160,000 for each six month
period.  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
9 - Earnings Per LLC Unit





Basic and
diluted earnings per LLC unit are calculated based on the weighted average
number of LLC units issued and outstanding, 549,737 for the six
months  ended June 30, 2008 and 550,244 for the six months ended June
30, 2007.








See
Review Report of Independent Registered Public Accounting Firm





18
 Index





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)




Note
10 - Employee Benefit Plans





The
Company has a defined contribution plan (the “Plan”) covering all eligible
full-time employees of PCM LLC (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
11 – Subsequent Event





In July
2008, two members voluntarily returned 423 LLC units to the Company. The
forfeited LLC units represent each member’s entire investment interest in the
Company.








See
Review Report of Independent Registered Public Accounting Firm





19
 Index





ITEM2.  MANAGEMENT’S DISCUSSION 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-Q, and specifically in the section entitled “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,” “intends,” “plans,” “expects,” “may,” “will,”
“should,” 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 these 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-Q 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, 2007. 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 2007, we began entering into fee-based
third-party collection arrangements in an effort to generate additional income
and cash flow and to offset the expected decline in purchases of
portfolios.





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 or pools: (i) based on collections under the cost
recovery revenue recognition method; and (ii) by amortizing over the life
expectancy of the pool under the interest revenue recognition method, which we
are using for the majority of our loan portfolios purchased in 2007 and
thereafter. The cost basis of a portfolio or pool is also reduced by sales of
all or a portion of a portfolio and by impairment of the net realizable value of
a 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. At times we also sell
portions of portfolios to cover shortfalls in principal payments on the loans
used to purchase the portfolios. When we engage in these sales, we continue
collecting the accounts right up until the closing of the sale.





Historically,
we have measured the fair value of our loan portfolios based on the discounted
present value of the actual amount of money that we believed a loan portfolio
would ultimately produce. The Financial Accounting Standards Board (FASB),
however, recently issued Statement of Financial Accounting Standard No. 157,
“Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, provides
guidance for measuring fair value and requires certain disclosures. It does not
require any new fair value measurements, but rather applies to all other
accounting pronouncements that require or permit fair value measurements. FAS
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement would need to
be determined based on the assumptions that market participants would use in
pricing the asset or liability.





20
 Index





Under FAS
157, we would have to attempt to determine the fair market value of hundreds of
loan portfolios on a recurring basis. There is no active market for loan
portfolios or observable inputs for the fair value estimation. Therefore, there
is potential for a significant variance in the actual fair value of a loan
portfolio and our estimate. Given this inherent uncertainty associated with
measuring the fair value of our loan portfolios under FAS 157 and the excessive
costs that would be incurred, we consider it not practical to measure the fair
value of our loan portfolios.





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
remains unchanged throughout the life of the pool unless there is an increase in
subsequent expected cash flows. We use the interest method of accounting for
most of our 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 or pool by a pro rata
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
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, 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.





Historically,
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
portfolios where we use the cost basis recovery method. 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. The use
of the interest method of accounting as of January 1, 2007, eliminates this
front-loading effect by amortizing the portfolio loan costs over the expected
life of the loan portfolio. With fewer purchases and more collections from older
portfolios whose cost bases have been completely recovered, along with the use
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.





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. Interest and financing costs tend to decrease as the
amount we borrow decreases.





21
 Index





BASIS
OF PRESENTATION





We
present our financial statements based on February 4, 2002, the date we emerged
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 intercompany balances and transactions
have been eliminated.





CRITICAL
ACCOUNTING POLICIES





Investments in
Portfolios





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 or a pool on a proportionate basis when we
sell a portion of the portfolio, and we treat amounts collected on a portfolio
or pool 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 of accounting, 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. Our calculation of net realizable value does not take
into account the cost to collect the future cash streams. Using the cost
recovery method, once we write down a particular portfolio we do not increase it
in subsequent periods if our plans and intentions or our assumptions change.
Using the interest method, if the cash flow estimates increase subsequent to
recording an impairment, a reversal of the previously recognized impairment is
made prior to any increases to the IRR.





We
account for our investment in loan portfolios in accordance with the provisions
of The American Institute of Certified Public Accountants, or AICPA, previously
issued SOP, 03-03, “Accounting for Loans or Certain Securities Acquired in a
Transfer” (“SOP 03-03”), using either the interest method or the cost recovery
method. SOP 03-03 addresses accounting for differences between initial estimated
cash flows expected to be collected from purchased loans, or “pools,” and
subsequent changes to those estimated cash flows. For portfolios purchased on or
before December 31, 2006, and for portfolios purchased after that date where the
amount and timing of future cash collections on a pool of loans are not
reasonably estimable, we account for such portfolios using the cost recovery
method. If the accounts in these portfolios have different risk characteristics
than those included in other portfolios acquired during the same quarter, or the
necessary information is not available to estimate future cash flows, then they
are not aggregated with other portfolios and they are accounted for under the
cost recovery method.





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. This method has the effect of “front-loading”
expenses, which 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.





For the
majority of portfolios purchased after December 31, 2006, we use the interest
method. 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 level, or
unchanged throughout the life of the pool unless there is an increase in
subsequent expected cash flows. Subsequent increases in cash flows expected to
be collected generally are recognized prospectively through an upward adjustment
of the pool’s effective interest rate over its remaining life. Subsequent
decreases in expected cash flows do not change the effective interest rate, 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 loan portfolios
in the consolidated statements of financial condition. 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. Any
change to our estimates could be material to our financial
statements.





22
 Index





We
account for each static pool as a unit for the economic life of the pool
(similar to one loan) for recognition of revenue from loan portfolios, for
collections applied to the cost basis of loan portfolios and for provision for
loss or impairment. Revenue from 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.





When we
sell a portfolio or a portion of it, to the extent of remaining cost basis for
the portfolio or pool, we reduce the cost basis of the portfolio or pool 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.





Credit
Facility





As
discussed in greater detail below, our credit facility with Varde Investment
Partners, L.P. (“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 will reflect them in our statement of operations as
other financing costs. For the foreseeable future, we intend to continue seeking
new portfolio purchases using our loan facility with Varde.





OPERATING
RESULTS





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.





Comparison
of Results for the Quarters Ended June 30, 2008 and 2007





The
following discussion compares our results for the three months ended June 30,
2008, to the three months ended June 30, 2007. We had a net loss of $290,000 for
the three months ended June 30, 2008, as compared to a net loss of $279,000 for
the three months ended June 30, 2007.





Revenue





Our gross
collections from portfolios are decreasing significantly as we experience the
effects of fewer portfolio purchases, lower than projected performance of our
portfolios and a significant slow down in the economy. While prices of loan
portfolios have fallen recently, we believe they are still somewhat inflated
relative to the economic conditions in the industry. The downturn in the economy
appears to have resulted in a decrease in debtor liquidity, which generally has
the effect of reducing the number of collectable accounts and increasing the
time and resources it takes to collect amounts owed. In the three months ended
June 30, 2007, our gross collections on loan portfolios were $2.9 million
due principally to the relatively large portfolio purchases we made in 2005 and
the first quarter of 2006. In the three months ended June 30, 2008,
our gross collections on loan portfolios were $2.2 million, a $758,000
decrease over the same period in 2007.





Our
consolidated statement of operations, however, shows an increase in total net
revenues of $394,000 to $2.1 million for the three months ended June 30, 2008,
from $1.7 million for the three months ended June 30, 2007. The increase in
total net revenues reflected on our consolidated statement of operations was due
to the following:


§
            The
      effect of using the interest method of accounting to recognize revenue
      from the majority of the portfolios we purchased after December 31,
      2006;





23
 Index





§
            In
      the first half of 2007, most of the collections revenue was generated from
      portfolios purchased prior to 2007 and therefore accounted for using the
      cost recovery method, which postpones revenue recognition until the cost
      of the portfolio is fully recovered, and a higher amount of loan
      portfolios were fully recovered in the second quarter of 2008 than in the
      same period in 2007 thereby reducing the amount of cost recovery applied
      against gross collections; and


§
            A
      period-to-period increase in net revenues from portfolio sales of $52,000,
      with $77,000 generated during the three months ended June 30, 2008 as
      compared to $25,000 generated during the three months ended in
      2007.





Portfolio
collections provided 96.4% of our total net revenues for the three months ended
June 30, 2008, and 98.6% of our total net revenues for the three months ended
June 30, 2007 due to a period-to-period increase in portfolio sales. The
increase in net revenues from portfolio collections does not, however, take into
consideration the $595,000 provision for portfolio impairment under operating
costs and expenses, which is the result of lower than projected portfolio
performance and which results in the $290,000 net loss. Also, if we exclude the
effect of portfolio sales, our net loss for the three months ended June 30, 2008
decreases to a net loss of $367,000, as compared to a net loss of $303,000 for
the three months ended June 30, 2007.





In an
effort to increase the number of accounts we service to maximize use of our
collection infrastructure, we started a program within Performance Capital
Management to collect debt owned by others. Since January 2007, we have entered
into two third-party collection arrangements. 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 produce enough income in fees to generate net
returns. In the three months ended June 30, 2008, we generated $91,000 in net
revenue from third-party collections (and $172,000 for the six months ended June
30, 2008). Our success with this program 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. During 2008, we plan to periodically assess the performance of our
third-party collections program to determine if we should continue or eliminate
it. This decision will be based largely upon our ability to expand the number of
arrangements where we are collecting on behalf of others and the level of total
collections we generate from such arrangements.





In
addition to acquiring our own portfolios and acting as a third-party collection
agency, we are using other collection strategies in an effort to increase our
revenues and collection efficiency, such as expanding use of our legal
collections program 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. During 2007, we substantially increased
our legal collections efforts primarily using third party law firms in an
attempt to generate revenue from accounts we believe might otherwise not be
collectible. The level of our expenditures on legal collections going forward
is, however, expected to be significantly lower than the level of expenditures
we made in 2007 due to: (i) increased use of our in-house legal collections
program, which has a lower cost to revenue ratio than outsourcing legal
collections to third parties; (ii) continued monitoring of the amount of revenue
generated from such efforts in relation to the expenditures; and (iii) selecting
fewer accounts for legal collections by continuing to fine-tune our selection
criteria.





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 that have a higher
likelihood of being collected using legal process are accurately selected,
overall collection efficiency should increase. We do not have a set policy
regarding when to initiate legal process. Given the varying nature of each case,
we exercise our business judgment following an analysis of accounts using
computer-based guidance to determine when we believe using legal process is
appropriate (i.e., where a debtor has sufficient assets to repay the
indebtedness and has, to date, been unwilling to pay).





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
Performance Capital Management due to the remedies available under these
statutes, including punitive damages. No such lawsuits have been filed against
Performance Capital Management.





24
 Index





Net
revenues from portfolio sales of $77,000 in the second quarter of 2008 was the
result of selling older portfolio accounts. We may engage in further sales to
capitalize on market conditions, dispose of a portfolio that is not performing
or dispose of a portfolio whose collection life, from our perspective, has run
its course. At times we also sell portions of portfolios to cover
shortfalls in principal payments on the loans used to purchase the portfolios.
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 increased to $2.3 million in the three months ended
June 30, 2008 from $1.9 million in three months ended June 30, 2007, a $440,000
increase, as a result of a second quarter 2008 impairment expense of $595,000,
due to actual portfolio collections coming in at a slower rate than forecasted
using the interest method. The effect of the portfolio impairment of $595,000
was slightly offset by the decrease in general and administrative expenses of
$64,000 and salaries and benefits of $92,000.





Our ratio
of operating costs and expenses to gross collections (i.e., excluding the effect
of portfolio sales), a measure of collection efficiency, was 107.4% for the
quarter ended June 30, 2008 as compared to 64.6% for the
quarter ended June 30, 2007. The decline in collection efficiency is the
result of a decrease in gross collection revenues and a corresponding increase
in operating costs and expenses, primarily due to the provision for portfolio
impairment of $595,000.





Our
interest expense and other financing costs were $97,000 and $137,000 in the
three months ended June 30, 2008 and 2007, respectively, a $40,000 decrease. The
decrease was due primarily to paying down debt owed to Varde. Due to the recent
June 2008 Varde loans to finance portfolio purchases, the amount we owe to Varde
increased to $3.7 million at June 30, 2008, compared to $3.6 million at June 30,
2007. We intend to continue monitoring the magnitude of the change in the margin
by which our total collection revenues exceed our operating costs and expenses
relative to the principal and interest we pay to Varde under the credit facility
to determine whether the Varde facility is providing additional liquidity to us
or resulting in loan payments that will deplete our cash balances.





Total
salaries and benefits expenses together with total general and administrative
expenses decreased to $1.7 million for the three months ended June 30, 2008,
compared to $1.9 million for the three months ended June 30, 2007. This decrease
in expenses associated with collecting portfolios is the result of a decrease in
portfolio purchases as well as a reduction in collection and administrative
personnel. In 2008, we expect our operating expenses, excluding impairment
charges, to remain at or below our 2007 level of operating expenses due to our
efforts to adjust our infrastructure to correspond to our portfolio purchases
and other collection activities.





Comparison
of Results for the Six Months Ended June 30, 2008 and 2007





The
following discussion compares our results for the six months ended June 30,
2008, to the six months ended June 30, 2007. We had net income of $72,000 for
the six months ended June 30, 2008, as compared to a net loss of $373,000 for
the six months ended June 30, 2007.





Revenue





As
discussed above in the quarter-to-quarter comparison, our gross collections from
portfolios are decreasing significantly as we experience the effects of fewer
portfolio purchases, lower than projected performance of our portfolios and a
significant slow down in the economy. The decrease in debtor liquidity from
a down economy has the effect of reducing the number of collectable accounts and
increasing the time it takes to collect amounts owed. In the six months ended
June 30, 2007, our gross collections on loan portfolios were $6.3 million due
principally to the relatively large portfolio purchases we made in 2005 and the
first quarter of 2006. In the six months ended June 30, 2008, our gross
collections on loan portfolios were $4.8 million, a $1.5 million decrease over
the same period in 2007.





25
 Index





Our
consolidated statement of operations, however, shows an increase in total net
revenues of $1.2 million to $4.9 million for the six months ended June 30, 2008,
from $3.6 million for the three months ended June 30, 2007. The increase in
total net revenues reflected on our consolidated statement of operations was due
to the following:





§
            The
      effect of using the interest method of accounting to recognize revenue
      from the majority of the portfolios we purchased after December 31,
      2006;


§
            In
      the first half of 2007, most of the collections revenue was generated from
      portfolios purchased prior to 2007 and therefore accounted for using the
      cost recovery method, which postpones revenue recognition until the cost
      of the portfolio is fully recovered, and in the first half of 2008, a
      higher amount of these loan portfolios were fully recovered than in the
      same period in 2007, thereby reducing the amount of cost recovery applied
      against gross collections; and


§
            A
      period-to-period increase in net revenues from portfolio sales of
      $470,000, with $485,000 generated during the six months ended June 30,
      2008 as compared to $15,000 generated during the six months ended in
      2007.





Portfolio
collections provided 90.0% of our total net revenues for the six months ended
June 30, 2008, and 99.6% of our total net revenues for the six months ended June
30, 2007 due to a period-to-period increase in portfolio sales. The increase in
net revenues from portfolio collections does not, however, take into
consideration the $1.0 million provision for portfolio impairment under
operating costs and expenses, which is the result of lower than projected
portfolio performance. Also, if we exclude the effect of portfolio sales, our
net loss for the six months ended June 30, 2008 decreases to a net loss of
$413,000, as compared to a net loss of $388,000 for the six months ended June
30, 2007.





We
purchased $3.3 million of new portfolios ($3.1 million after considering the
portion that was immediately sold) in the year ended December 31, 2007, as
compared to $4.2 million of portfolio purchases in the year ended December 31,
2006. In the first six months of 2008, we purchased $1.6 million of loan
portfolios, net of the $1.3 million portion that was sold immediately after its
purchase. If we are unable to acquire new portfolios that meet our criteria for
generating net income, we expect our cash collection revenues to remain flat or
continue to decline, which decreases the amount of funds we have available to
purchase new loan portfolios and pay for operating expenses. We expect our
portfolio purchases in 2008 to be at or lower than our portfolio purchases in
2007. In an effort to offset relatively lower overall portfolio purchases in
2006 and 2007 and maintain collection efficiency, we began implementing other
collection strategies in 2007, such as serving as a third-party collection
agency and expanding use of the judicial process to collect specific accounts
determined to be suitable for such an approach, as well as improving the
accuracy and currency of debtor contact information contained in our databases,
but have not realized significant gains from these strategies to date partly due
to the significant upfront investment required for third-party and legal
collections.





Net
revenues from portfolio sales of $485,000 in the first half of 2008 was
primarily the result of selling older portfolio accounts where the initial
purchase costs have been fully recovered.  We may engage in further
sales to capitalize on market conditions, dispose of a portfolio that is not
performing or dispose of a portfolio whose collection life, from our
perspective, has run its course. 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.





During
the six months ended June 30, 2008, we generated positive cash flow from
operating activities of $58,000, as compared to $241,000 in the same period in
2007, a $183,000 decrease. We paid down third-party loans by $2.2 million. At
the same time, total members’ equity increased by $72,000 in the six months
ended June 30, 2008, which is the amount of net income for the six months
ended June 30, 2008.





The net
income in the six months ended June 30, 2008 was $72,000 compared to a $373,000
loss in the six months ended June 30, 2007. The net income was primarily due,
however, to recent sales of loan portfolios and the use of the interest method
of accounting, which recognizes revenue over the life of a loan portfolio
instead of waiting to recognize it until the cost of a portfolio has been fully
recovered, and not to income generated from operations. As discussed previously,
if we exclude the effect of portfolio sales, we would have incurred a net loss
of $413,000 in the six months ended June 30, 2008. Also, operating costs
and expenses, including the provision for portfolio impairment, increased
by $834,000 in first half of 2008 as compared to the first half of 2007. This
was due primarily to the provision for portfolio impairment of $1.0 million,
which was the result of our portfolios generating much less collections revenue
than we expected. The impairment was slightly offset by a decrease in salaries
and benefits expenses from a reduction in staff during the six months ended June
20, 2008.





26
 Index





Operating
Expenses





Our total
operating costs and expenses increased to $4.5 million in the six months ended
June 30, 2008 from $3.7 million in six months ended June 30, 2007, an $834,000
increase, due to: (i) a $49,000 increase in general and administrative expenses
primarily associated with the increase in consulting costs, collection
costs,  and offset by lower accounting and legal expenses; and (ii) an
impairment expense of $1.0 million, due to actual portfolio collections coming
in at a slower rate than forecasted using the interest method.  The
effect of the portfolio impairment of $1.0 million was slightly offset by the
$194,000 decrease in salaries and benefits expenses.





Our ratio
of operating costs and expenses to gross collections (i.e., excluding the effect
of portfolio sales), a measure of collection efficiency, was 94.3% for the
six months ended June 30, 2008 as compared to 58.9% for six months ended
June 30, 2007. The decline in collection efficiency is the result of the $1.0
million provision for portfolio impairment.





Our
interest expense and other financing costs were $218,000 and $287,000 in the six
months ended June 30, 2008 and 2007, respectively, a $69,000 decrease. The
decrease was due primarily to paying down the debt that is owed to
Varde.  Due to the recent June 2008 Varde loans to finance portfolio
purchases, the Varde debt increased to $3.7 million at June 30, 2008, from $3.6
million at December 31, 2007.  We intend to continue monitoring the
magnitude of the change in the margin by which our total collection revenues
exceed our operating costs and expenses relative to the principal and interest
we pay to Varde under the credit facility to determine whether the Varde
facility is providing additional liquidity to us or resulting in loan payments
that will deplete our cash balances.





The total
of salaries and benefits together with general and administrative expenses in
the six months ended June 30, 2008 decreased from $3.7 million to $3.5 million
as compared to the six months ended June 30, 2007. The decrease was due
primarily to a reduction in collection and administrative personnel resulting in
a decrease in salaries and benefits expenses of $194,000.  This was
offset by an increase in general and administrative expenses of $49,000. In
2008, we expect our operating expenses, excluding impairment charges, to remain
at or below our 2007 level of operating expenses due to our efforts to adjust
our infrastructure to the level of our portfolio purchases and other collection
activities. If we continue to incur significant portfolio impairments, however,
decreases in our operating expenses will be largely offset by such
impairments.





LIQUIDITY
AND CAPITAL RESOURCES





Our cash
and cash equivalents decreased during the first six months of 2008. Cash and
cash equivalents, including restricted cash, was $1.2 million at June 30, 2008
compared to a balance of $1.1 million at December 31,
2007.  Restricted cash was $789,000 at June 30, 2008, compared to
$397,000 at June 30, 2007.  During the six months ended June 30, 2008,
our portfolio collections and sales generated $6.6 million of cash, we borrowed
$2.3 million, and we used $5.4 million for operating and other activities, $1.6
million for purchases of new portfolios (net of the $1.3 million portion that
was immediately sold), and $2.2 million to repay loans.





Historically,
our primary sources of cash have been cash flows from operations and borrowings.
Recently, cash has been used for acquisitions of loan portfolios, repayments of
borrowings, purchases of property and equipment, growing our third party and
legal collections programs and general working capital.





The net
income of $72,000 was largely due to the sale of older portfolios whose cost
bases had been fully recovered, which generated total proceeds in the first six
months of 2008 of $1.8 million, $1.0 million of which was from portfolios that
were sold immediately after purchase (compared to total proceeds from portfolio
sales of $155,000 in the first half of 2007). The net income from these sales
was $485,000. Without these sales, we would have incurred a net loss of
$413,000.





The cash
we generate from portfolio collections has been steadily declining. Actual
portfolio cash collections decreased by $1.5 million to $4.8 million for the six
months ended June 30, 2008, as compared to $6.3 million for the six months ended
June 30, 2007. We can attribute the significant decline to fewer portfolio
purchases and the underperformance of our portfolios (collections coming in at a
slower rate than we projected). The slower rate of collections can largely be
attributed to a slow down in the economy, which has contributed to debtors
inability to pay or delayed repayment of the debt.





The
reasons for the problems being experienced not only by PCM but throughout this
industry include the credit crunch, the mortgage meltdown, and the rise in
unemployment, inflation, foreclosures, and bankruptcy filings. As a result, the
most recent issue of the collection industry magazine Credit & Collection Risk
reports, “over-leveraged consumers – burdened by too much credit card and
mortgage debt – cannot repay their creditors.”  Bankruptcy filings
increased by 48% in April from the same period a year
ago.  Foreclosures in the first quarter of 2008 rose 23% from the
previous quarter, and 112% from the first quarter of 2007.  In March
the unemployment rate hit 5.1%, the highest mark since 2005, and is now forecast
to rise to between 5.5% and 5.7%.  Many agencies report that
recoveries on debt are down by an average of 20% this year over last – a drop
consistent with our own collection experience in that period.





27
 Index





Looking
ahead, Credit & Collection
Risk concludes, “it is hard to predict when the economy might improve” –
especially as the radical increase in the price of oil makes itself felt not
just in rising gas prices but in many other dimensions of economic
activity.  Most observers are reported to believe that stabilization
will take between six and 18 months. Optimistic projections suggest a recovery
is possible beginning in mid-2009.





The cash
constraint has a compounding effect because it results in (i) further reducing
our loan portfolio purchases and (ii) increasing our use of financing to
purchase portfolios, which commensurately increases the transactional costs of a
portfolio purchase. We expect this trend to continue unless the economy
improves, our portfolio collections commensurately improve and we are able to
purchase additional portfolios at reasonable prices. If cash collections
continue to decline, we may be unable to recover the cost we pay for our
portfolios, repay funds borrowed to purchase portfolios and pay our collecting
and operating costs, which could result in a material reduction in our
operations or an inability to continue our operations.





In the
meantime, we have begun instituting cost-cutting measures in an effort to
address the lower cash collections by foregoing payment of regular distributions
to our unit holders, purchasing portfolios with borrowed funds, increasing
portfolio sales and reducing salaries and benefits through a reduction in our
administrative and collection personnel. In addition to cost cutting, we are
also taking steps to increase our cash collections by using legal collections
for a greater number of accounts than we have in the past and collecting
accounts on behalf of third parties. However, both of these efforts require
front-end investment with the goal of producing positive cash flow in the
future, which could further deplete our cash reserves in the meantime. Our goal
is to achieve at least break-even results until economic conditions improve
enough for us to secure additional capital and increase our portfolio purchases
and collections.





Beginning
in April 2003, we began making quarterly distributions to our unit holders. 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
regular distributions to our unit holders beginning in the third quarter of
2007. Any determination with regard to the payment of future distributions is at
the discretion of our Board of Directors and will depend upon our future
earnings, financial condition, applicable distribution restrictions and capital
requirements and other factors deemed relevant by our Board of Directors. In
addition to foregoing distributions to our unit holders, we will continue to
monitor our collections infrastructure to maximize efficiencies in an effort to
maintain or reduce expenses.





In the
first half of 2008, we have reduced our collection and administrative staff in
an effort to align our operating expenses to our lower collections revenues
resulting primarily from fewer portfolio purchases. As of March 1, 2008, we had
a total of 83 full-time employees and 3 part-time employees. As of June 30,
2008, we had a total of 74 full-time employees and 3 part-time employees. Our
reduction in collections staff, however, must take into consideration the
significant upfront investment in recruiting and training collection personnel
and the need to retain enough collectors to effectively service our portfolios.
In an effort to reduce costs associated with fluctuations in the number of
collection personnel we employ, we may increase our use of third-party
collection agencies to service portions of our loan portfolios when the volume
of our loan portfolios exceeds the capacity of our existing collections
infrastructure to service them.





Our
portfolios provide our principal long-term source of liquidity. Our purchase of
portfolios is limited by the amount of cash reserves and borrowed funds we have
available and the availability of reasonably priced portfolios. Over time, our
goal is 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. Many
factors, including the state of the economy, paying too much for a portfolio,
the liquidity of debtors, and our ability to hire and retain qualified
collectors, may impact our ability to collect an amount of cash necessary 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.
Fluctuations in these factors that cause a negative impact on our business could
have a material impact on our expected future cash flows. Although non-cash
items, the provision for portfolio impairment of $381,000 in the first quarter
of 2008 and $595,000 in the second quarter of 2008 reveal a continued decline in
the performance of our portfolios as compared with our projections. We are in
the process of assessing the timing and amount of our portfolio cash collections
estimates under the interest method of accounting and will begin making
adjustments to those estimates in an effort to align our projections to the
factors, including those discussed above, that determine what we can expect to
collect on our portfolios.





28
 Index





During
the first half of 2008, we purchased $1.6 million (net of that portion that was
immediately sold) of loan portfolios, $377,000 of which was purchased for our
own account. This compares with net purchases in the first six months of 2007 of
$2.4 million, $683,000 of which was purchased for our own account. Our
assessment of market conditions, as well as the amount of liquid cash and other
financial resources we have available to us, will continue to direct whether and
when we purchase portfolios.





In an
attempt to compete in a highly competitive marketplace and operate as
efficiently as possible, we 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 and to shift our collections
efforts accordingly. We use a dialer to assist our collectors with focusing on
portfolios that continue to show results. By monitoring the results of calls
originated through our dialer, we are able to identify portfolios that
require more cost to collect than others. At times, generally where we have
worked to collect portfolios over an extended period of time, we determine that
some of our portfolios’ collection lives have run their course. We sold a number
of older portfolios identified by this process in the first half of 2008. 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 will continue to sell portfolios or portions of portfolios if we
believe market conditions are acceptable and portfolio performance is not up to
our expectations.





Based on
our cash position and current financial resources, we believe we have adequate
capital resources to continue our business 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.





Credit
Facility





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 June 30, 2008, Matterhorn owed $3.7
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 June 30, 2008. 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 October 2008 to June 2011.
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 June 30, 2008 was $8.5 million. Matterhorn has
borrowed a total of $16.5 million, with $3.7 million outstanding at June 30,
2008.





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.





The
percentage of funds that we contributed to a portfolio purchase using the Varde
credit facility in 2007 was lower in proportion to the purchase price than in
2006 and 2007, which would generally result in larger loans and commensurately
higher interest expense and other financing costs per loan. However, with fewer
recent portfolio purchases, our interest expense and other financing costs have
decreased commensurately. We expect this to continue to be the case in 2008
unless we are able to sufficiently increase our cash reserves and thereby
increase our portfolio purchases.





29
 Index





In June
2007, we entered into an amendment to the Master Loan Agreement with Varde to
extend 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, including interest expense and
other financing costs, in full by their due dates.





On
November 27, 2007, we entered into a letter agreement with Varde that modified
the loan terms of five of our outstanding loans by extending the loan repayment
periods from two to three years, with scheduled minimum payments of principal
and interest due every six months during the term. The percentage of the
principal balance that is required to be paid on the scheduled due dates varies
with each loan. The five loans had an unpaid principal balance of $2.3 million
at December 31, 2007. The loans continue to bear interest at the rate of 12% per
annum. The other outstanding Varde loans are already on three-year terms since
they were made on or after the effective date of the amendment to the Master
Loan Agreement with the exception of a loan made on November 11, 2007, with an
original principal amount of $240,000, that has a term of two and one-half
years.




Under one
of the Company’s loan agreements with Varde that was entered into in April 2005,
the Company was required to pay the balance of the loan in full by the due date
of April 30, 2008. The portfolio continues to generate revenue through
collections but at a slower rate than forecasted. After discussions with Varde
regarding the timing of the payments, the Company requested and Varde has agreed
to an amendment to the loan terms that extends the maturity date of the loan
from 36 months to 42 months, from April 2008 to October 2008. Under the revised
loan terms, considering the portfolio’s cash collections through April 2008, the
principal balance of the loan is below the April 2008 minimum payment threshold
by $45,000. The Company has not received a notice of default from Varde and
anticipates paying off this loan in the fourth quarter of 2008.





A
Matterhorn loan portfolio that was purchased using Varde financing in June 2007
did not generate enough collection revenue to meet its first minimum principal
threshold point in December 2007 that was called for under the loan agreement
with Varde. In March 2008, the Company made a remedial payment of $16,000 to
Varde to cover the difference. This loan portfolio again failed to meet its
minimum principal threshold point in June 2008, as called for under the loan
agreement with Varde, by $60,000. The Company is currently exploring selling a
portion of this portfolio to bring the loan in compliance with the minimum
principal threshold amount.




Another
loan portfolio that was purchased using Varde financing in November 2007 did not
generate enough collection revenue to meet its first minimum principal threshold
point in May 2008 that was called for under the loan agreement with Varde. In
June 2008, the Company made a remedial payment of approximately $22,000 to Varde
to cover the difference.





Future Cash
Expenditures





We plan
to continue making expenditures on our legal collections efforts in 2008, but
the level of our expenditures on legal collections going forward is, however,
expected to be significantly lower than the level of expenditures we made in
2007 due to: (i) increased use of our in-house legal collections program, which
has a lower cost to revenue ratio than outsourcing legal collections to third
parties; (ii) continued monitoring of the amount of revenue generated from such
efforts in relation to the expenditures; and (iii) selecting fewer accounts for
legal collections by continuing to fine-tune our selection
criteria.





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. We are
currently in the process of replacing our dialer due to the manufacturer of the
dialer no longer supporting the system. We expect the new dialer to perform as
well or better than our current dialer. We have spent $48,000 as of June 30,
2008, and anticipate spending an additional approximately $50,000 to $60,000 for
the new dialer in 2008.





30
 Index





ITEM 4T.  CONTROLS AND 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, our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. 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 June 30, 2008, 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.





There has
been no change in our internal controls over financial reporting that occurred
during the quarter ended June 30, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.





PART
II – OTHER INFORMATION





ITEM 2.  MEMBERFORFEITURES OF SECURITIES





In
January 2008 and April 2008, one member voluntarily returned 99 LLC units and
one member voluntarily returned 150 LLC units, respectively, to the Company. The
forfeited LLC units represented each member’s entire respective investment
interest in the Company.





ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
HOLDERS





On June
9, 2008, we held our duly convened Annual Meeting of Members in Orange,
California. There were 198,199 voting LLC units in attendance at the meeting
either in person or by proxy. At the meeting, our members were asked to vote on
the election of Class I directors to the Board of Directors. All of the
directors nominated for election served as directors immediately prior to the
annual meeting. The following directors were elected by our members as a result
of the following votes:





Directors
            Votes “For” Election
            
            Votes “Withheld”Larisa
      Gadd
            187,537
            
            11,433Rodney
      Woodworth
            187,439
            
            11,532Donald
      Rutherford
            187,290
            
            11,681





The
following Class II directors continued to serve as directors following the
annual meeting: Lester Bishop; Larry Smith; David Barnhizer; and Sanford
Lakoff.





In
addition to the election of directors, the following matters were voted upon at
the annual meeting:


·
            To
      ratify the selection of Moore Stephens Wurth Frazer and Torbet, LLP, as
      the Company’s independent registered public accounting firm for the fiscal
      year ending December 31, 2008. The votes were cast as follows: 194,296 in
      favor of ratification; 795 against ratification; and 6,678
      abstaining.





·
            To
      approve the minutes from the 2007 Annual Meeting. The votes were cast as
      follows: 198,199 in favor of approval; none against approval; and none
      abstaining.





No other
matters were submitted to our members at the annual meeting.





ITEM 6.  EXHIBITS





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





31
 Index





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





PERFORMANCE
      CAPITAL MANAGEMENT, LLCAugust  18, 2008
            
            
            By:
            /s/ David J. Caldwell(Date)
            
            
            
            Name:
      David J. CaldwellIts:
      Chief Operations Officer





32
 Index





EXHIBIT
INDEX





Exhibit
              Number
            
            Description2.1
            
            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
      (5)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
            
            Office
      Lease Agreement by and between LBA Realty Fund-Holding Co. II, LLC and
      Performance Capital Management, LLC dated July 17, 2006 (with confidential
      portions omitted) (6)10.2
            
            Master
      Loan Agreement by and among Performance Capital Management, LLC, Varde
      Investment Partners, L.P. and Matterhorn Financial Services, LLC, dated
      June 10, 2004 (4)10.3
            
            Amendment
      to Master Loan Agreement by and among Matterhorn Financial Services LLC,
      Performance Capital Management, LLC and Varde Investment Partners, L.P.
      dated June 1, 2007 (7)14.1
            
            Code
      of Business Conduct and Ethics (3)31.1
            
            Certification
      of Chief Operations Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            
            Certification
      of Accounting Manager pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
            
            Certification
      of Chief Operations Officer and Accounting Manager pursuant to 18 U.S.C.
      Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002 *





* 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 and 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.





(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.





Index





(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 April 14, 2004 as an exhibit to our annual report on Form 10-KSB for the year
ended December 31, 2003 and incorporated herein by reference.





(4) Filed
on July 29, 2004 as an exhibit to our report on Form 8-K dated July 13, 2004 and
incorporated herein by reference.





(5) 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.





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





(7) 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.