UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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





For the quarterly period ended September
30,
2008





OR





o           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 x  No
o





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


Large
      accelerated filer o
              
              Accelerated
      filer oNon-accelerated
      filer   o
              
              Smaller
      reporting company x





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


Yes o  No
x





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













PERFORMANCECAPITAL MANAGEMENT, LLC





Index
to


Quarterly
Report on Form 10-Q


For
the Quarter Ended September 30, 2008





PART
      I – FINANCIAL INFORMATION
                    PageItem
      1
                    Consolidated Financial StatementsConsolidated Balance Sheets as of  September 30,
      2008 (unaudited) and December 31, 2007
                    3Consolidated Statements of Operations for the three and nine
      months ended September 30, 2008 and 2007 (unaudited)
                    4Consolidated Statements of Members’ Equity for the nine months
      ended September 30, 2008 (unaudited) and the year ended December 31,
      2007
                    5Consolidated Statements of Cash Flows for the nine months ended
      September 30, 2008 and 2007 (unaudited)
                    6Condensed Notes to the Consolidated Financial Statements
      (unaudited)
                    7Item
      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
                    32Item
      5
                    Other Information
                    32Item
      6
                    Exhibits
                    32SIGNATURES
                    33EXHIBITS




Index





PARTI – FINANCIAL INFORMATION





ITEM
1.  CONSOLIDATED FINANCIAL STATEMENTS





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
BALANCE SHEETS


AS OF
SEPTEMBER 30, 2008 AND DECEMBER 31, 2007





September
      30,2008
                            
                            
                            December
      31,(unaudited)
                            
                            
                            2007ASSETSCash
      and cash equivalents
                            
                            $
                            414,167
                            
                            
                            $
                            693,227Restricted
      cash
                            
                            
                            414,466
                            
                            
                            
                            397,393Other
      receivables
                            
                            
                            9,947
                            
                            
                            
                            16,655Purchased
      loan portfolios, net
                            
                            
                            2,558,299
                            
                            
                            
                            3,222,642Property
      and equipment, net
                            
                            
                            387,036
                            
                            
                            
                            365,727Deposits
                            
                            
                            36,575
                            
                            
                            
                            36,575Prepaid
      expenses and other assets
                            
                            
                            63,313
                            
                            
                            
                            107,074Total
      assets
                            
                            $
                            3,883,803
                            
                            
                            $
                            4,839,293LIABILITIES AND MEMBERS'
    EQUITYLIABILITIES:Accounts
      payable
                            
                            $
                            94,110
                            
                            
                            $
                            104,517Accrued
      liabilities
                            
                            
                            516,567
                            
                            
                            
                            601,243Accrued
      interest
                            
                            
                            21,792
                            
                            
                            
                            37,513Notes
      payable
                            
                            
                            2,891,068
                            
                            
                            
                            3,630,359Income
      taxes payable
                            
                            
                            21,790
                            
                            
                            
                            23,580Total
      liabilities
                            
                            
                            3,545,327
                            
                            
                            
                            4,397,212COMMITMENTS
      AND CONTINGENCIES
                            
                            
                            -
                            
                            
                            
                            -MEMBERS'
      EQUITY
                            
                            
                            338,476
                            
                            
                            
                            442,081Total
      liabilities and members' equity
                            
                            $
                            3,883,803
                            
                            
                            $
                            4,839,293





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





3
 Index





PERFORMANCECAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
STATEMENTS OF OPERATIONS








For
      the three months ended
                
                
                For
      the three months ended
                
                
                For
      the nine months ended
                
                
                For
      the nine months endedSeptember
      30, 2008
                
                
                September
      30, 2007
                
                
                September
      30, 2008
                
                
                September
      30, 2007(unaudited)
                
                
                (unaudited)
                
                
                (unaudited)
                
                
                (unaudited)REVENUES:Portfolio
      collections, net
                
                $
                1,671,290
                
                
                $
                1,889,294
                
                
                $
                6,043,042
                
                
                $
                5,498,801Portfolio
      sales, net
                
                
                215,765
                
                
                
                -
                
                
                
                700,767
                
                
                
                14,789TOTAL
      NET REVENUES
                
                
                1,887,055
                
                
                
                1,889,294
                
                
                
                6,743,809
                
                
                
                5,513,590OPERATING
      COSTS AND EXPENSES:Salaries
      and benefits
                
                
                824,729
                
                
                
                994,094
                
                
                
                2,791,919
                
                
                
                3,155,046General
      and administrative
                
                
                681,385
                
                
                
                807,217
                
                
                
                2,235,856
                
                
                
                2,312,240Provision
      for portfolio impairment
                
                
                408,000
                
                
                
                -
                
                
                
                1,384,000
                
                
                
                -Depreciation
                
                
                27,469
                
                
                
                24,954
                
                
                
                79,507
                
                
                
                74,649Total
      operating costs and expenses
                
                
                1,941,583
                
                
                
                1,826,265
                
                
                
                6, 491,282
                
                
                
                5,541,935INCOME
      (LOSS) FROM OPERATIONS
                
                
                (54,528
                )
                
                
                63,029
                
                
                
                252,527
                
                
                
                (28,345
                )OTHER
      INCOME (EXPENSE):Interest
      expense and other financing costs
                
                
                (116,259
                )
                
                
                (160,794
                )
                
                
                (334,535
                )
                
                
                (448,275
                )Interest
      income
                
                
                483
                
                
                
                1,066
                
                
                
                1,338
                
                
                
                9,922Other
      income
                
                
                548
                
                
                
                17,571
                
                
                
                557
                
                
                
                28,064Total
      other income (expense), net
                
                
                (115,228
                )
                
                
                (142,157
                )
                
                
                (332,640
                )
                
                
                (410,289
                )LOSS
      BEFORE INCOME TAX PROVISION
                
                
                (169,756
                )
                
                
                (79,128
                )
                
                
                (80,113
                )
                
                
                (438,634
                )INCOME
      TAX PROVISION
                
                
                5,790
                
                
                
                -
                
                
                
                23,390
                
                
                
                13,600NET
      LOSS
                
                $
                (175,546
                )
                
                $
                (79,128
                )
                
                $
                (103,503
                )
                
                $
                (452,234
                )NET
      LOSS PER LLC UNIT – BASIC AND DILUTED
                
                $
                (0.32
                )
                
                $
                (0.14
                )
                
                $
                (0.19
                )
                
                $
                (0.82
                )





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





4
 Index





PERFORMANCECAPITAL 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
                
                
                -
                
                
                
                (482,936
                )
                
                
                -
                
                
                
                -
                
                
                
                (482,936
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (452,234
                )
                
                
                (452,234
                )Balance,
      September 30, 2007
                
                
                550,244
                
                
                
                22,269,614
                
                
                
                1,048,712
                
                
                
                (22,549,869
                )
                
                
                768,457Adjustment
      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
                
                
                -
                
                
                
                (10,024
                )
                
                
                -
                
                
                
                -
                
                
                
                (10,024
                )Net  loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (316,352
                )
                
                
                (316,352
                )Balance,
      December 31, 2007
                
                
                549,911
                
                
                
                22,
      257,470
                
                
                
                1,051,946
                
                
                
                (22,867,335
                )
                
                
                442,081Member
      units returned by investors
                
                
                (672
                )
                
                
                (28,954
                )
                
                
                28,954
                
                
                
                -
                
                
                
                -Distributions
      to investors
                
                
                -
                
                
                
                (102
                )
                
                
                -
                
                
                
                -
                
                
                
                (102
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (103,503
                )
                
                
                (103,503
                )Balance,
      September 30, 2008
                
                
                549,239
                
                
                $
                22,228,414
                
                
                $
                1,080,900
                
                
                $
                (22,
      970,838
                )
                
                $
                338,476





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





5
 Index





PERFORMANCECAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONSOLIDATED
STATEMENTS OF CASH FLOWS




For
      the Nine Months
                  
                  
                  For
      the Nine MonthsEnded
                  
                  
                  EndedSeptember
      30, 2008
                  
                  
                  September
      30, 2007(unaudited)
                  
                  
                  (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (103,503
                  )
                  
                  $
                  (452,234
                  )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
                  
                  
                  79,507
                  
                  
                  
                  74,649Provision
      for Portfolio Impairment
                  
                  
                  1,384,000
                  
                  
                  
                  -(Increase)
      decrease in assets:Other
      receivables
                  
                  
                  6,708
                  
                  
                  
                  (1,157
                  )Prepaid
      expenses and other assets
                  
                  
                  43,761
                  
                  
                  
                  4,324Advance
      on loan portfolio purchase
                  
                  
                  -
                  
                  
                  
                  (410,811
                  )Loan
      portfolios
                  
                  
                  (719,657
                  )
                  
                  
                  1,313,007Deposits
                  
                  
                  -
                  
                  
                  
                  42,373Increase
      (decrease) in liabilities:Accounts
      payable
                  
                  
                  (10,407
                  )
                  
                  
                  (45,346
                  )Accrued
      liabilities
                  
                  
                  (84,676
                  )
                  
                  
                  199,949Accrued
      interest
                  
                  
                  (15,721
                  )
                  
                  
                  (6,660
                  )Income
      taxes payable
                  
                  
                  (1,790
                  )
                  
                  
                  (15,580
                  )Net
      cash provided by operating activities
                  
                  
                  578,222
                  
                  
                  
                  702,514CASH
      FLOWS FROM INVESTING ACTIVITIES:Additions
      to property and equipment
                  
                  
                  (100,816
                  )
                  
                  
                  (33,574
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      change in restricted cash
                  
                  
                  (17,073
                  )
                  
                  
                  (27,033
                  )Borrowings
      on loans payable
                  
                  
                  2,575,060
                  
                  
                  
                  1,396,825Repayment
      of loans
                  
                  
                  (3,314,351
                  )
                  
                  
                  (1,914,298
                  )Distributions
      to investors
                  
                  
                  (102
                  )
                  
                  
                  (482,936
                  )Net
      cash used in financing activities
                  
                  
                  (756,466
                  )
                  
                  
                  (1,027,442
                  )NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                  
                  
                  (279,060
                  )
                  
                  
                  (358,502
                  )CASH
      AND CASH EQUIVALENTS, beginning of period
                  
                  
                  693,227
                  
                  
                  
                  689,888CASH
      AND CASH EQUIVALENTS, end of period
                  
                  $
                  414,167
                  
                  
                  $
                  331,386SUPPLEMENTAL
      DISCLOSURE FOR CASH FLOW INFORMATION:Income
      taxes paid
                  
                  $
                  25,180
                  
                  
                  $
                  29,180Interest
      paid
                  
                  $
                  314,282
                  
                  
                  $
                  386,114




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





6
 Index





PERFORMANCECAPITAL 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 ending in July
2009.





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





7
 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 nine months ending September 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.




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.





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 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.





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 $17,000
as of September 30, 2008. The amount that exceeds federally insured limits has
greatly been reduced from prior quarters because of the recent increase in the
federally insured limits. 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.





9
 Index





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note
3 - Summary of Significant Accounting Policies (continued)





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





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.





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
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.





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.





11
 Index





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note
3 - Summary of Significant Accounting Policies (continued)





Under the
cost recovery method, when the Company sells all or a portion of a portfolio, to
the extent of remaining cost basis for the portfolio, it reduces the cost basis
of the portfolio by a pro rata percentage of the original portfolio cost. This
method of accounting also applies to portfolios purchased and then immediately
sold prior to being aggregated into a pool. Under the interest method, however,
when the Company sells all or a portion of a portfolio in a pool, it reduces the
cost basis of the pool by a pro rata percentage of the average portfolio cost in
the pool. The Company’s policy does not take into account whether the portion of
the portfolio being sold may be more or less valuable than the remaining
accounts that comprise the portfolio.





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.





Members’
Equity





Members’
equity includes voting LLC units held by members and non-voting LLC units held
by one economic interest owner. As of September 30, 2008, PCM LLC had 525,566
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.   In July 2008 two members voluntarily returned 423 LLC
units to the Company.  The forfeited LLC units represented each
member’s entire respective investment interest in the Company.





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:





12
 Index





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note
4 – Fair Value of Financial Instruments (continued)





§
            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.





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 September 30,
2008 and December 31, 2007 totaled approximately $789 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.





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
      ofSept. 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
                  
                  
                  719,657
                  
                  
                  
                  (1,476,300
                  )Subtotal
                  
                  
                  3,942,299
                  
                  
                  
                  3,524,642Provision
      for portfolio impairment
                  
                  
                  (1,384,000
                  )
                  
                  
                  (302,000
                  )Net
      balance, end of period
                  
                  $
                  2,558,299
                  
                  
                  $
                  3,222,642





Purchases by
Quarter





The
following table summarizes portfolio purchases the Company made during each of
the first, second and third 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 three
                      
                      
                      For
      the yearmonths
      ended
                      
                      
                      months
      ended
                      
                      
                      months
      ended
                      
                      
                      endedMarch 31, 2008
                      
                      
                      June 30, 2008
                      
                      
                      Sep. 30,2008
                      
                      
                      Dec. 31, 2007Fair
      Value Date of Purchase
                      
                      $
                      0.7
      million
                      
                      
                      $
                      0.7
      million
                      
                      
                      $
                      0.3 million
                      
                      
                      $
                      2.8
      millionForward
      Flow Allocation  (Accretable Yield )
                      
                      $
                      0.9
      million
                      
                      
                      $
                      0.9
      million
                      
                      
                      $
                      0.4 million
                      
                      
                      $
                      3.6
      million








During
the nine months ended September 30, 2008, the Company purchased $3.3 million of
loan portfolios, $1.4 million of which was immediately sold after being
purchased. The Company used the cost recovery method for a $62,000 portion of
the $1.9 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 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.





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
September 30, 2008, the portfolios accounted for using the cost recovery method
consisted of $527,000 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
                
                
                Nine
      Months
                
                
                Nine
      MonthsEnded
                
                
                Ended
                
                
                Ended
                
                
                EndedSept. 30, 2008
                
                
                Sept. 30, 2007
                
                
                Sept. 30, 2008
                
                
                Sept. 30,2007Balance,
      beginning of period
                
                $
                3,063,357
                
                
                $
                4,526,210
                
                
                $
                3,222,642
                
                
                $
                5,000,942Purchased
      loan portfolios
                
                
                371,541
                
                
                
                164,461
                
                
                
                3,257,610
                
                
                
                2,567,400Collections
      on loan portfolios
                
                
                (1,830,549
                )
                
                
                (2,751,537
                )
                
                
                (6,657,637
                )
                
                
                (9,063,594
                )Sales
      of loan portfolios
                
                
                (281,646
                )
                
                
                (1,211
                )
                
                
                (2,092,275
                )
                
                
                (155,824
                )Revenue
      recognized on collections
                
                
                1,671,290
                
                
                
                1,889,294
                
                
                
                6,043,042
                
                
                
                5,498,801Revenue
      recognized on sales
                
                
                215,765
                
                
                
                -
                
                
                
                700,767
                
                
                
                14,789Cash
      collection applied to principal
                
                
                (243,459
                )
                
                
                (139,282
                )
                
                
                (531,850
                )
                
                
                (174,579
                )Provision
      for portfolio impairment
                
                
                (408,000
                )
                
                
                -
                
                
                
                (1,384,000
                )
                
                
                -Balance,
      end of period
                
                $
                2,558,299
                
                
                $
                3,687,935
                
                
                $
                2,558,299
                
                
                $
                3,687,935





Projected  Amortization
of Portfolios





As of
September 30, 2008, the Company had approximately $2.6 million in investment in
purchased loan portfolios, of which approximately $2.0 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
                                      September
      30,
                                    
                                    Amortization2009
                                    
                                    $
                                    673,0002010
                                    
                                    $
                                    473,0002011
                                    
                                    $
                                    396,0002012
                                    
                                    $
                                    327,0002013
                                    
                                    $
                                    163,000$
                                    2,032,000





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




Nine
      monthsEnded
                                
                                
                                Year
      endedSept.
      30, 2008
                                
                                
                                Dec.
      31, 2007Balance
      at the be beginning of the period
                                
                                $
                                2,523,000
                                
                                
                                $
                                -Additions,
      net
                                
                                
                                2,321,000
                                
                                
                                
                                3,628,000Income
      recognized on portfolios, net
                                
                                
                                (981,000
                                )
                                
                                
                                (803,000
                                )Provision
      for portfolio impairment and other adjustments
                                
                                
                                (653,000
                                )
                                
                                
                                (302,000
                                )Balance
      at the end of the period
                                
                                $
                                3,210,000
                                
                                
                                $
                                2,523,000





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





Nine
      months
                    endedSept.
      30, 2008
                  
                  Dec.
      31, 2007Valuation
      allowance, beginning of period
                  
                  $
                  360,341
                  
                  
                  $
                  58,341Increase
      in valuation allowance due to portfolio impairment
                  
                  
                  1,384,000
                  
                  
                  
                  302,000Valuation
      allowance, end of period
                  
                  $
                  1,774,341
                  
                  
                  $
                  360,341





Note
6 - Property and Equipment





Property
and equipment is as follows:





As
      of
                      
                      
                      As
      ofSept. 30, 2008
                      
                      
                      Dec. 31, 2007Office
      furniture and equipment
                      
                      $
                      432,139
                      
                      
                      $
                      432,139Computer
      equipment
                      
                      
                      761,737
                      
                      
                      
                      660,921Leasehold
      improvements
                      
                      
                      113,502
                      
                      
                      
                      113,502Totals
                      
                      
                      1,307,378
                      
                      
                      
                      1,206,562Less
      accumulated depreciation
                      
                      
                      (920,342
                      )
                      
                      
                      (840,835
                      )Property
      and equipment, net
                      
                      $
                      387,036
                      
                      
                      $
                      365,727





Depreciation
expense for the quarters ended September 30, 2008 and 2007 amounted to
approximately $27,000 and $25,000, respectively. Depreciation expense for the
nine months ended September 30, 2008 and 2007 amounted
to  approximately $80,000 and $75,000, respectively.





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 $2.9 million and $3.6
million at September 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 $16.8 million and
$14.3 million at September 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  September 2011,
with the approximate following principal payments due:





Twelve
      Months EndingSept. 30,2009
                  
                  $
                  1.4
                  
                  million2010
                  
                  $
                  0.8
                  
                  million2011
                  
                  $
                  0.7
                  
                  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 $8.2 million and $10.7 million at September 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 $2.0 million at September
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 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





17
 Index





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note
7 – Notes Payable (continued)





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.





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 agreed to
an amendment to the loan terms that extended 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. As of November 12, 2008,
there  was an outstanding balance owing on the loan of $15,000. The
Company has not received a notice of default from Varde and anticipates paying
this loan off in full in 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 September 30,
will be:





Year
      ending
                  
                  Approximate
      AnnualSeptember 30
                  
                  Lease Commitments2009
                  
                  $
                  346,0002010
                  
                  $
                  355,0002011
                  
                  $
                  355,0002012
                  
                  $
                  360,0002013
                  
                  $
                  364,000Thereafter
                  
                  $
                  152,000





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 September 30, 2008 and December 31,
2007 was $202,000 and $222,000, respectively.  Rental expense for the
three months ended September 30, 2008 and 2007 amounted to approximately $80,000
for each quarterly period.  Rental expense for the nine months ended
September 30, 2008 and 2007 amounted to approximately $241,000 and $240,000,
respectively.  PCM LLC is obligated under two five-year equipment
leases, one expiring in 2009 with minimum payments of $4,800 per year and the
other lease expiring in 2011 with minimum payments of $3,900 per
year.





18
 Index





PERFORMANCE
CAPITAL MANAGEMENT, LLC AND SUBSIDIARY





CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





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, 549,571 for the nine months ended
September 30, 2008 and 550,244 for the nine months ended September 30,
2007.





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.





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 September 2008, however, our Board of
Directors took action to terminate our third-party collections program due to
lack of sufficient volume to justify the costs associated with
it..  We do not anticipate resuming third party collection activities
in the immediate future.





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 portfolio sales, we continue
collecting the accounts right up until the closing of the sale.





20
 Index





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.





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.





Under the
cost recovery method, when we sell all or a portion of a portfolio, to the
extent of remaining cost basis for the portfolio, it reduces the cost basis of
the portfolio by a pro rata percentage of the original portfolio cost. This
method of accounting also applies to portfolios purchased and then immediately
sold prior to being aggregated into a pool. Under the interest method, however,
when we sell all or a portion of a portfolio in a pool, it reduces the cost
basis of the pool by a pro rata percentage of the average portfolio cost in the
pool. 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.





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. More collections from older portfolios whose cost
bases have been completely recovered, along with the use of the interest method
of accounting, may contribute to our statement of operations reporting a lower
net loss or possibly net income, assuming our portfolios perform over time as
anticipated and we collect them in an efficient manner.





21
 Index





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





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.





22
 Index





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.





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.





Under the
cost recovery method, when we sell all or a portion of a portfolio, to the
extent of remaining cost basis for the portfolio, it reduces the cost basis of
the portfolio by a pro rata percentage of the original portfolio cost. This
method of accounting also applies to portfolios purchased and then immediately
sold prior to being aggregated into a pool. Under the interest method, however,
when we sell all or a portion of a portfolio in a pool, it reduces the cost
basis of the pool by a pro rata percentage of the average portfolio cost in the
pool. 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 September 30, 2008 and 2007





The
following discussion compares our results for the three months ended September
30, 2008, to the three months ended September 30, 2007. We had a net loss of
$176,000 for the three months ended September 30, 2008, as compared to a net
loss of $79,000 for the three months ended  September 30,
2007.





Revenue





Our gross
collections from portfolios are decreasing significantly as we experience the
effects of fewer portfolio purchases and lower than projected performance of our
portfolios due in large part to a significant slow down in the economy. While
prices of loan portfolios have fallen recently, our low cash reserves have
prevented us from capitalizing on the availability of lower cost portfolios. In
addition, 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 September 30, 2007, our gross
collections on loan portfolios were $2.8 million due principally to the
relatively large portfolio purchases we made in 2005 and the first quarter of
2006. In the three months ended September 30, 2008, our gross collections
on loan portfolios were $1.8 million, a $921,000 decrease over the third quarter
of 2007.





23
 Index





Our
consolidated statement of operations, however, shows comparable total net
revenues of $1.9 million for the three months ended September 30, 2008 and 2007.
The total net revenues reflected on our consolidated statement of operations
remained relatively even despite the decrease in gross collections due to the
following:


§
            The
      effect of using the interest method of accounting, which recognizes net
      revenue over the life of the portfolio, as opposed to the cost recovery
      method, which postpones recognition of revenue until after the cost of the
      portfolio has been fully recovered;


§
            In
      the third quarter of 2007, most of the collections revenue was generated
      from portfolios purchased prior to 2007 and therefore accounted for using
      the cost recovery method, 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
      $216,000, with $216,000 generated during the three months ended September
      30, 2008, as compared to no portfolio sales revenues generated during the
      same three months ended in 2007.





Portfolio
collections provided 88.6% of our total net revenues for the three months ended
September 30, 2008, and 100% of our total net revenues for the three months
ended September 30, 2007, due to a period-to-period increase in portfolio sales.
The decrease in net revenues from portfolio collections does not, however,
take into consideration the $408,000 provision for portfolio impairment under
operating costs and expenses, which is the result of lower than projected
portfolio performance and which results in a net loss of $176,000. Also, if we
exclude the effect of portfolio sales, our net loss for the three months ended
September 30, 2008 increases to a net loss of $391,000, as compared to a net
loss of $79,000 for the three months ended  September 30,
2007.





In the
three months ended September 30, 2008, we generated $73,000 in net revenue from
our third-party collections program (and $245,000 for the nine months ended
September 30, 2008).  In September 2008, however, our Board of
Directors decided to terminate our third-party collections program due to lack
of sufficient volume to justify the costs associated with it. We do not
anticipate resuming third party collection activities in the immediate
future.





During
2007, we substantially increased our legal collections efforts in an attempt to
generate revenue from accounts we believe might otherwise not be collectible.
The level of our expenditures on legal collections in 2008, however, has been
significantly lower than the level of expenditures we made in 2007 due to the
amount of revenue generated from such efforts in 2008 in relation to the
expenditures.





We
primarily utilize a network of third party law firms on a contingent fee basis
for our legal collections. 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). Once a judgment is
obtained, the primary methods for collecting on the judgment are liens on
property and garnishment, both of which have a long time horizon for
collection.





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.





Net
revenues from portfolio sales of $216,000 in the third 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 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.





24
 Index





Operating
Expenses





Our total
operating costs and expenses increased to $1.9 million in the three months ended
September 30, 2008 from $1.8 million in three months ended September 30, 2007, a
$115,000 increase, due to a third quarter 2008 impairment expense of $408,000,
which resulted from actual portfolio collections coming in at a slower rate than
forecasted using the interest method. The effect of the portfolio impairment of
$408,000 was offset by a decrease in general and administrative expenses of
$126,000 and salaries and benefits of $169,000.





Our ratio
of operating costs and expenses to gross collections (i.e., excluding the effect
of portfolio sales), a measure of collection efficiency, was 106.1% for the
quarter ended September 30, 2008 as compared to 66.4% for the
quarter ended September 30, 2007. The decline in collection efficiency is
the result of a decrease in gross collection revenues outpacing our efforts to
decrease operating costs and expenses.  In addition, the provision for
portfolio impairment of $408,000 for the quarter ended September 30, 2008
contributed to increased operating costs and expenses.





Our
interest expense and other financing costs were $116,000 and $161,000 in the
three months ended September 30, 2008 and 2007, respectively, a $45,000
decrease. The decrease was due primarily to paying down debt owed to Varde. The
amount we owed to Varde was $2.9 million at September 30, 2008, compared to $3.9
million at September 30, 2007.





Total
salaries and benefits expenses together with total general and administrative
expenses decreased to $1.5 million for the three months ended September 30,
2008, compared to $1.8 million for the three months ended September 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 are seeing that our operating expenses,
excluding impairment charges, continue to remain 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 Nine Months Ended September 30, 2008 and 2007





The
following discussion compares our results for the nine months ended September
30, 2008, to the nine months ended September 30, 2008. We had a net loss of
$104,000 for the nine months ended September 30, 2008, as compared to a net loss
of $452,000 for the nine months ended September 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 nine months ended
September 30, 2007, our gross collections on loan portfolios were $9.1 million
due principally to the relatively large portfolio purchases we made in 2005 and
the first quarter of 2006. In the nine months ended September 30, 2008, our
gross collections on loan portfolios were $6.7 million, a $2.4 million decrease
over the same period in 2007.





Our
consolidated statement of operations, however, shows an increase in total net
revenues of $1.2 million to $6.7 million for the nine months ended September 30,
2008, from $5.5 million for the three months ended September 30, 2007. The
increase in total net revenues reflected on our consolidated statement of
operations despite a decrease in gross collections was due to the
following:


§
            The
      effect of using the interest method of accounting, which recognizes net
      revenue over the life of the portfolio, as opposed to the cost recovery
      method, which postpones recognition of revenue until after the cost of the
      portfolio has been fully recovered;





25
 Index





§
            In
      the first three quarters of 2007, most of the collections revenue was
      generated from portfolios purchased prior to 2007 and therefore accounted
      for using the cost recovery method, and in the first three quarters 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
      $686,000, with $701,000 generated during the nine months ended September
      30, 2008 as compared to $15,000 generated during the nine months
      ended September 30, 2007.





Portfolio
collections provided 89.6% of our total net revenues for the nine months ended
September 30, 2008, and 99.7% of our total net revenues for the nine months
ended September 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 $1.4 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 nine months ended September 30, 2008 increases to a net loss of
$804,000, as compared to a net loss of $467,000 for the nine months ended
September 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 nine months of 2008, we purchased $1.9 million of loan
portfolios, net of the $1.4 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 continue to
decline, which decreases the amount of funds we have available to purchase new
loan portfolios and pay our operating expenses. We expect our portfolio
purchases in 2008 to be 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 of debtor
contact information contained in our databases, but have not realized
significant gains from these strategies to date. Due to lack of sufficient
volume to justify the costs associated with our third party collections program,
in September 2008, our Board of Directions decided to eliminate the program and
focus our resources on collecting our and Matterhorn’s portfolios. In addition,
we have scaled back our in-house legal collections program. Most of our legal
collections are now being handled by third party law firms, which are generally
paid on a contingency basis.





Net
revenues from portfolio sales of $701,000 in the first nine months 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. 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 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 nine months ended September 30, 2008, we generated positive cash flow from
operating activities of $578,000, as compared to $703,000 in the same period in
2007, a $124,000 decrease. We paid down third-party loans by $3.3 million and
borrowed $2.6 million for new portfolios. At the same time, total members’
equity decreased by $104,000 in the nine months ended September 30, 2008, which
is the amount of net loss for the nine months ended September 30,
2008.





The net
loss in the nine months ended September 30, 2008 was $104,000 as compared to a
$452,000 net loss in the nine months ended September 30, 2007. The net loss
decreased due 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 $804,000 in the nine months ended September 30, 2008.




26
 Index





Operating
Expenses





Our total
operating costs and expenses increased to $6.5 million in the nine months ended
September 30, 2008 from $5.5 million in nine months ended September 30, 2007, a
$949,000 increase, due to an impairment expense of $1.4 million, which resulted
from actual portfolio collections coming in at a slower rate than forecasted
using the interest method. The effect of the portfolio impairment of $1.4
million was somewhat offset by the $363,000 decrease in salaries and benefits
expenses and a $76,000 decrease in general and administrative expenses primarily
associated with the decrease in legal collections costs.





Our ratio
of operating costs and expenses to gross collections (i.e., excluding the effect
of portfolio sales), a measure of collection efficiency, was 97.5% for the
nine months ended September 30, 2008 as compared to 61.1% for nine months
ended September 30, 2007. The decline in collection efficiency is the result of
the $1.4 million provision for portfolio impairment and lower collections
revenues.





Our
interest expense and other financing costs were $335,000 and $448,000 in the
nine months ended September 30, 2008 and 2007, respectively, a $114,000
decrease. The decrease was due primarily to paying down the debt that is owed to
Varde.  The Varde debt was $2.9 million at September 30, 2008, as
compared to $3.6 million at December 31, 2007.





The total
of salaries and benefits together with general and administrative expenses in
the nine months ended September 30, 2008 was $5.0 million compared to $5.5
million in the nine months ended September 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 $363,000 and a decrease in
general and administrative expenses of $76,000. 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 nine months of 2008. Cash and
cash equivalents, including restricted cash, was $829,000 at September 30, 2008
compared to a balance of $1.1 million at December 31,
2007.  Restricted cash was $414,000 at September 30, 2008, compared to
$397,000 at December 31, 2007.  During the nine months ended September
30, 2008, our portfolio collections and sales generated $6.8 million of cash, we
borrowed $2.6 million, and we used $6.8 million for operating and other
activities, $1.9 million for purchases of new portfolios (net of the $1.4
million portion that was immediately sold), and $3.3 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
loss of $104,000 in the nine months ended September 30, 2008 was offset by net
revenues from portfolio sales of $701,000 due to the sale of older portfolios
whose cost bases had been fully recovered, which generated total proceeds in the
first nine months of 2008 of $2.1 million, $1.4 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 nine months of 2007). Without
these sales, we would have incurred a net loss of $804,000.





The cash
we generate from portfolio collections has been steadily declining. Gross
portfolio cash collections decreased by $2.4 million to $6.7 million for the
nine months ended September 30, 2008, as compared to $9.1 million for the nine
months ended September 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 a delay in payments.





27
 Index





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 112% from the
first quarter of 2007.  In March 2008, the unemployment rate hit 5.1%,
the highest mark since 2005, and is now forecast to rise above
6%.  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.





Looking
ahead, Credit & Collection
Risk concludes, “it is hard to predict when the economy might
improve”.  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 and capital preservation
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, eliminating third-party collections,
outsourcing more of our legal collections, and reducing salaries and benefits
through a reduction in our administrative and collection personnel. 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 nine months 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  September 15, 2008, we had a total of 61 full-time employees and 4
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 cause a negative impact on our business and
materially impact our expected future cash flows. Although non-cash items, the
provision for portfolio impairment of $381,000 in the first quarter of 2008,
$595,000 in the second quarter of 2008 and $408,000 in the third quarter of 2008
reveal a continued decline in the performance of our portfolios as compared with
our projections. We periodically assess the timing and amount of our portfolio
cash collections estimates under the interest method of accounting and make
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 nine months  of 2008, we purchased $1.9 million (net of that
portion that was immediately sold) of loan portfolios, $414,000 of which was
purchased for our own account. This compares with net purchases in the first
nine months of 2007 of $2.6 million, $854,000 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 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, to reduce variable costs required to collect each dollar of
revenue and to focus our efforts and resources on generating collections
revenues. If, however, such efforts, along with our cost containment measures,
do not provide sufficient capital to meet expected and unexpected operating
costs and expenses, as well as cover shortfalls in principal payments owed to
Varde, we may engage in further sales of portfolios or portions of portfolios to
third parties and/or borrow against our unencumbered portfolios to generate
supplemental capital. If these efforts fail, we may not be able to continue our
operations.





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 September 30, 2008, Matterhorn owed
$2.9 million under the facility in connection with purchases of certain
charged-off loan portfolios. Under the credit facility, Varde has a first
priority security interest in Matterhorn’s assets. The assets of Matterhorn that
provide security for Varde's loan were carried at a cost of $2.3 million at
September 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 September 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 September 30, 2008 was $8.2
million. Matterhorn has borrowed a total of $16.8 million, with $2.9 million
outstanding at September 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.





29
 Index





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.





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 agreed to
an amendment to the loan terms that extended 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. As of November 12, 2008, there was an outstanding balance owing on
the loan of $15,000. The Company has not received a notice of default from Varde
and anticipates paying off this loan in 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 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 expected to
be significantly lower than the level of expenditures we made in 2007. We may
from time to time acquire capital assets on an as needed basis. Our most
significant capital assets are our dialer and our telephone switch. 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 $88,000 as of September
30, 2008, and anticipate spending an additional approximately $15,000 to $18,000
for the new dialer in 2008.





30
 Index





ITEM4T.  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 September 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 September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.





31
 Index





PART
II – OTHER INFORMATION





ITEM2.  MEMBER FORFEITURES OF SECURITIES





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








ITEM5. OTHER INFORMATION





Departure of Chief Officer
of Legal Affairs





In
October 2008, Mr. William D. Constantino informed the Board of Directors of
Performance Capital Management, LLC (the “Company”) that he would resign from
his position as Chief Officer of Legal Affairs of the Company, and its
subsidiary, effective November 14, 2008 to pursue other career
opportunities.  Mr. Constantino will be assisting the Company in
transitioning matters prior to his departure.  Mr. Constantino has no
disagreement with the Company on any matter relating to the Company's
operations, policies or practices.








ITEM6.  EXHIBITS





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





32
 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, LLCNovember
      18, 2008
                                  
                                  By:
                                  /s/
      David J. Caldwell(Date)
                                  
                                  
                                  Name:
      David J. CaldwellIts:
      Chief Operations
Officer





33
 Index




EXHIBITINDEX





Exhibit
                    Number
                  
                  Description3.1
                  
                  Performance
      Capital Management, LLC Articles of Organization (1)3.2
                  
                  Operating
      Agreement for Performance Capital Management, LLC (1)3.3
                  
                  First
      Amendment to Operating Agreement for Performance Capital Management, LLC
      (1)3.4
                  
                  Second
      Amendment to Operating Agreement for Performance Capital Management, LLC
      (2)3.5
                  
                  Third
      Amendment to Operating Agreement for Performance Capital Management, LLC
      (3)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








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





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





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