UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C.  20549





FORM
      10-KSB





[X]           
      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      fiscal year ended:September
      30,
      2007





[_]           
      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT





For
      the
      transition period from __________ to ___________





Commission
      file number:  000-23305





US
      DRY CLEANING CORPORATION


(Name
      of
      small business issuer in its charter)





Delaware
            000-23305
            77-0357037(State
                or other jurisdiction
              of
                incorporation or organization)
            (Commission
              File
                Number)
            (I.R.S.
                Employer
              Identification
                No.)





4040
                MacArthur Blvd., Suite 305
              Newport
                Beach, CA 92660(Address
                of principal executive offices)





Issuer’s
      telephone number: (949)
      863-9669





Securities
      registered under Section 12(b) of the Exchange Act:  None





Securities
      registered under Section 12(g) of the Exchange Act:





Common
      Stock, par value
      $0.001


(Title
      of
      class)





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





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B is
      not
      contained in this form, and no disclosure will be contained, to the best of
      the
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB [X]





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


Yes
      [_]
      No [ X ]




State
                    issuer’s revenues for its most recent fiscal year:
                
                $
                8,431,733State
                    the aggregate market value of the voting and non-voting common
                    equity held
                    by
                  Non-affiliates
                    computed by reference to the price at which the common equity
                    was sold,
                  Or
                    the average bid and asked price of such common equity, as of
                    December 29,
                    2007:
                
                $
                N/AState
                    the number of shares outstanding of each of the issuer’s classes of common
                    equity,
                  As
                    of January 9, 2008:
                
                
                21,726,098
  Transitional
        Small Business Disclosure Format (Check One):  Yes [_] No:
        [X]


TABLE
      OF CONTENTS


PART
                  I.Item
                  1:
              Description
                  of Business
              1Item1A:
              Risk
                  Factors
              7Item
                  2:
              Description
                  of Property
              10Item
                  3:
              Legal
                  Proceedings
              10Item
                  4:
              Submission
                  of Matters to a Vote of Security Holders
              10PART
                  II.Item
                  5:
              Market
                  for Common Equity and Related Stockholder Matters
              11Item
                  6:
              Management’s
                  Discussion and Analysis or Plan of Operations
              13Item
                  7:
              Financial
                  Statements
              21Item
                  8:
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              22Item
                  8A:
              Controls
                  and Procedures
              22Item
                  8B:
              Other
                  Information
              22PART
                  III.Item
                  9:
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act
              23Item
                  10:
              Executive
                  Compensation
              26Item
                  11:
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              29Item
                  12:
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              31Item
                  13:
              Exhibits
              32Item
                  14:
              Principal
                  Accountant Fees and Services
              33
















PART
      I





Item
      1:                      
Description of Business





Forward
      Looking Statements




Certain
      information included in this
      Annual Report on Form 10-KSB (including Management’s Discussion and Analysis of
      Financial Condition and Results of Operations regarding revenue growth, gross
      profit margin and liquidity) constitutes forward looking statements that involve
      a number of risks and uncertainties. Forward looking statements may be
      identified by the use of forward looking words such as “may,” “will,” “expects,”
“intends,” “anticipates,” “estimates” or “continues” or the negative thereof or
      variations thereon or comparable terminology. Our forward-looking statements
      are
      based on our current expectations and are subject to numerous risks and
      uncertainties. As such, our actual future results, performance or achievements
      may differ materially from the results expressed in, or implied by, our
      forward-looking statements. Please refer to Item 1A. “Risk Factors” in this
      Annual Report on Form 10-KSB for examples of reasons why our actual results
      may
      differ materially from our forward-looking statements. We assume no future
      obligation to update our forward-looking statements or to provide periodic
      updates or guidance.





Where
      You Can Find More Information





We
      file annual, quarterly and other
      reports, proxy statements and other information with the Securities and Exchange
      Commission (“SEC”) under the Securities Exchange Act of 1934 as amended
      (“Exchange Act”). We intend, in the future,  to also make available,
      free of charge on our website at www.usdrycleaning.com, our annual report on
      Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K,
      and
      amendments to those reports filed or furnished pursuant to Section 13(a) or
      15(d) of the Exchange Act as soon as reasonably practicable after they are
      filed
      electronically with the SEC. You can inspect and copy our reports, proxy
      statements and other information filed with the SEC at the offices of the SEC’s
      Public Reference Room located at 100 F Street, NE, Washington D.C. 20549. Please
      call the SEC at 1-800-SEC-0330 for further information on the operation of
      Public Reference Rooms. The SEC also maintains an Internet website at
      http://www.sec.gov/ where you can obtain most of our SEC filings.





Description
      of Business




On
        January 20, 2005, First Virtual Communications, Inc., a Delaware corporation
        (“FVC”), and its wholly owned subsidiary, CUseeMe Networks, Inc. (collectively
        with FVC, the “Debtors”), filed voluntary petitions for relief under Chapter 11
        of Title 11 of the United States Code (the “Bankruptcy Code”) in the United
        States Bankruptcy Court for the Northern District of California, located
        in San
        Francisco (the “Bankruptcy Court”). On August 25, 2005, the Debtors and the
        Official Committee of Unsecured Creditors (the “Committee”) jointly filed a plan
        of reorganization and a related disclosure statement with the Bankruptcy
        Court.
        On September 29, 2005, the Bankruptcy Court approved the disclosure statement
        (“Disclosure Statement”) with respect to its First Amended Plan of
        Reorganization (the “Amended Plan”) as containing adequate information, as such
        term is defined in Section 1125 of Chapter 11 of the United States Bankruptcy
        Code, to permit the solicitation of votes from creditors on whether to accept
        the Amended Plan.  As also previously reported, after a hearing held
        on November 14, 2005, the Bankruptcy Court entered an order (“Confirmation
        Order”) on November 29, 2005 confirming the Amended Plan.
 
 Pursuant
        to the Amended Plan and the Confirmation Order, the Company and US Dry Cleaning
        Corporation, a Delaware corporation (“USDC”), consummated a merger transaction
        (the “Merger”) on December 30, 2005, whereby (pre-merger) USDC merged with and
        into FVC, with FVC as the surviving corporation (the “post-Merger entity”), in
        accordance with the Agreement and Plan of Merger by and between FVC and
        (pre-merger) USDC, dated December 30, 2005 (the “Merger Agreement”). FVC filed
        the Certificate of Merger with the Secretary of State of Delaware, effective
        December 30, 2005.  The Merger Agreement provided that the Certificate
        of Incorporation and the Bylaws of FVC shall be the Certificate of Incorporation
        and the Bylaws of the post-Merger entity, except that the Merger Agreement
        and
        the Certificate of Merger provided for the following two amendments to the
        Certificate of Incorporation.  First, the surviving corporation’s name
        was changed to “US Dry Cleaning Corporation”, effective as of December 30,
        2005.  The Certificate of Merger also amended the surviving
        corporation’s Certificate of Incorporation by authorizing 50,000,000 of Common
        Stock; 50,000,000 shares of Series B Common Stock; and 20,000,000 shares
        of
        convertible Preferred Stock for future issuance.  A copy of the Merger
        Agreement is included as Exhibit 10.1 and a copy of the Certificate of Merger
        is
        included as Exhibit 3.1, both of which are incorporated herein by reference
        to
        the Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on
        October 26, 2006.




1





Pursuant
      to the Merger Agreement, each issued and outstanding share of the common stock
      of (pre-merger) USDC as of immediately prior to the effective time of the Merger
      was converted into one share of the common stock of the Company (previously
      FVC), resulting in an aggregate of 9,754,320 shares of the post-Merger entity’s
      common stock issued in exchange for the outstanding shares of (pre-merger)
      USDC
      common stock. All previously issued and outstanding shares of FVC’s common stock
      were cancelled. The Merger Agreement also provided for representations and
      warranties by each of the two entities with respect to each such company’s
      organization and power, authority to enter into the agreement, capitalization,
      and other representations typical for a transaction of this
      nature.  Outstanding stock options and other convertible securities
      exercisable or convertible into shares of (pre-merger) USDC common stock are
      now
      exercisable or convertible, into shares of common stock of the post-Merger
      entity at the same exercise price or conversion ratio as set forth in such
      instruments. USDC issued 275,698 post-Effective date restricted common stock
      to
      FVC creditors and 402,942 post-Effective date restricted common stock to cover
      administrative costs. As of the effective time of the Merger, the individuals
      who were the directors and executive officers of USDC immediately prior to
      the
      Merger became the directors and executive officers of the post-Merger
      entity.





Reverse
      Merger Accounting





USDC
      was
      formed on July 19, 2005 and on December 30, 2005 completed a “reverse merger”
with a public “Shell Company” (as described above) as that term is defined in
      Rule 12b-2 of the General Rules and Regulations promulgated by the Securities
      and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934. On
      August 9, 2005, USDC purchased 100% of the outstanding common stock and
      membership of Steam Press Holdings, Inc. (“Steam Press”), and Coachella Valley
      Retail, LLC (“CVR”), respectively, in stock-for-stock type exchanges. USDC,
      Steam Press, and CVR are hereinafter collectively referred to as the
“Company.”





Subsequent
      to the closing of the Merger Transaction, the historical consolidated statements
      of operations are those of USDC and its majority-owned
      subsidiaries.  The consolidated balance sheet reflects the net assets
      of the aforementioned entities (including majority-owned subsidiaries since
      their acquisition dates) reported at historical cost.  All capital
      stock shares and amounts and per share data have been retroactively restated
      to
      reflect the exchange ratio in the Merger Transaction.




Steam
        Press owns 100% of Enivel, Inc. (“Enivel”), which does business as Young Laundry
        and Dry Cleaning (“Young”) in Honolulu, Hawaii. Young was founded in 1902 and
        operates thirteen retail laundry and dry cleaning stores, in addition to
        providing hotel and other commercial laundry and dry cleaning services. CVR
        was
        founded in 2004 and operates six retail laundry and dry cleaning stores under
        several names in the Palm Springs, California area.





At
      July
      19, 2005, upon formation, USDC issued approximately 3,875,000 shares of common
      stock to certain groups and individuals as “founders” stock at par
      value.





The
      Company





On
      August
      8, 2005, USDC purchased 100% of the outstanding common stock of Steam Press
      Holdings, Inc. (“Steam Press”), and on August 9, 2005, USDC purchased 100% of
      the membership units in Coachella Valley Retail, LLC (“CVR”) in stock-for-stock
      type transactions. On February 15, 2007, 100% of Cleaners Club, Inc.’s (“CCI”)
      outstanding common stock was acquired in a merger with USDC. The acquired shares
      were converted into 780,000 shares of $0.001 par value of USDC common
      stock.  USDC, Steam Press, CVR and CCI are hereinafter collectively
      referred to as the “Company.”





Steam
      Press owns 100% of Enivel, Inc. (“Enivel”), which does business as Young Laundry
      and Dry Cleaning (“Young”) in Honolulu, Hawaii. Young was founded in 1902 and
      operates thirteen retail laundry and dry cleaning stores, in addition to
      providing hotel and other commercial laundry and dry cleaning
      services.  The Company considers Enivel to be its predecessor, as
      defined under SEC rules and regulations. Accordingly, the audited statements
      of
      operations and cash flows for the year ended September 30, 2004 and ten months
      ended July 31, 2005, and the unaudited statements of operations and cash flows
      for year ended September 30, 2003 of Enivel are included as Exhibits 99.2
      and 99.3 respectively, which are incorporated herein by reference to the
      Form 8-K filed with the SEC on October 26, 2006.  CVR was founded in
      2004 and operates six retail laundry and dry cleaning stores under several
      names in the Palm Springs, California area.  CCI was founded in 1998
      and currently operates thirteen retail dry cleaning stores and one dry cleaning
      processing plant in the Southern California area.





We
      estimate that the domestic dry
      cleaning market generates annual revenues of approximately $10 billion - the
      exact size is unknown as it is an unregulated industry dominated by small,
      private, geographically diverse operators.





2





We
      believe that the dry cleaning industry is naturally entering a consolidation
      phase as older proprietors and recent inheritors seek to convert their
      longstanding businesses into liquid assets. The industry is very fragmented
      with
      85% of the dry cleaning operations family owned and operated without the benefit
      of professional management or access to efficient capital. There are, however,
      several regional dry cleaning chains which have multiple locations.





As
      a
      growing operator we seek to create value through economies of scale, best
      practices, access to capital markets, and introduction of management experience
      not typically seen in the industry. One can look to video stores, coffee houses,
      grocery stores, fast food and hotel chains to see the benefit of branded
      enterprises with centralized professional management and a cohesive national
      vision.





The
      Company intends to acquire high quality operations within strategic geographical
      regions in order to maximize the efficiencies of the “hub-and-spoke” concept.
      With the acquisition of Young Laundry and Dry Cleaners in Honolulu, Hawaii,
      USDC
      can track its history back to the beginning of the industry in 1902. Since
      then,
      the dry cleaning industry has been durable and has survived, among other things,
      economic downturns, fads, changes in fashion, wars, depression, and natural
      disasters.




Over
      the
      last year, USDC has completed an acquisition in California with annual revenues
      of approximately $3,000,000. USDC combines a management team with extensive
      experience in retail consolidations and dry cleaning operations, with a proven
      operating model.





The
      Company believes that the current absence of extensive competition to acquire
      the larger dominant operators will change radically if the industry
      consolidates. If the Company can generate a foundation on which to support
      its
      projected growth, it could become a well-positioned, highly valued acquisition
      candidate itself. Management believes that the greatest value achieved in any
      consolidation occurs during the earliest phases.





We
      expect that a significant driver of
      value creation post-acquisition and assimilation will be the use of a
“hub-and-spoke” method of operation. By operating between one and two local
      brands from each factory facility, thereby comprising a “district”, the Company
      may be able to integrate new, smaller operations that are added through
      acquisition or organic growth in an efficient manner.




As
      an
      example, our Hawaiian facility is a 23,000 square foot factory that has been
      operating two separate brands successfully for over ten years with a
      hub-and-spoke model. USDC plans additional acquisitions in Hawaii which would
      incorporate production for the acquired retail stores into the existing central
      production facility.





The
      Dry Cleaning Industry





The
      dry
      cleaning industry has continued to evolve with the development of numerous
      chemicals and solvents that enhance the effectiveness of the dry cleaning
      process. The industry itself now encompasses approximately 27,000 U.S. based
      providers generating estimated revenues in excess of approximately $10 billion
      per year.




Industry
      Overview





As
      the
      majority of the industry is private, there is limited information available
      for
      comparative purposes. Nevertheless, there are a few fundamental points typical
      to the average operator:





·
            Eighty-five
                percent of the 27,000 dry cleaners in the United States are small
                owner
                operated shops.




·
            Dry
                cleaning occupations consist of skilled dry cleaners, spotters, pressers,
                and counter attendants, with most dry cleaning establishments requiring
                workers to perform at least two of these jobs out of necessity. Classic
                family-owned-and-operated cleaners typically have two or three full-time
                employees (including the owner) and some additional part-time employees.
                A
                typical operation might consist of a single small storefront operation,
                with customer pickup and delivery in the front and cleaning and finishing
                in the back.




·
            We
                believe the most profitable form of dry-cleaning business is a “hub and
                spoke” company that performs all of the processing in large, centralized
                production facilities. This type of firm often includes additional
                pick-up
                and drop-off points that provide the main plant with goods to dry
                clean.








3




History
      & Highlights





Average
      annual revenues for the dry cleaning industry have historically increased by
      roughly the rate of inflation (based on SIC code 7216). In recent years, a
      number of recurring issues have pressured the dry cleaning industry,
      including:





·
            Intensified
                competition


·
            Higher
                minimum wages


·
            Changes
                by the Federal Trade Commission in care labelling rules due to fashion’s
                fabric trends


·
            Costly
                environmental regulations


·
            Non-renewal
                of leases by building owners where cleaners
                operate


·
            Increasing
                public concern that cleaning solvents may cause
                cancer





We
      believe that the Company is better equipped to address these challenges than
      small, independent operators.





Competition





The
      Company operates in an industry that is subject to intense competition. A
      handful of markets are dominated by large, well-capitalized operators who have
      implemented a model similar to USDC’s vision; serving multiple locations with
      centralized, large capacity production facilities. Smaller players are finding
      it more difficult to retain market share due to higher overall operating costs
      and constraints. The Company believes that its strategy of centralized
      operations, consolidation, and public corporate structure is unique in the
      dry
      cleaning industry. However, there can be no assurance that other enterprises
      may
      not seek to acquire a significant number of dry cleaning operations in markets
      in which the Company currently or prospectively will operate.





Other
      Risks and Uncertainties





The
      Company faces risks and uncertainties relating to its ability to successfully
      implement its business strategy. Among other things, these risks include the
      ability to develop and sustain revenue growth; managing the expansion of its
      operations; attracting and retaining qualified personnel; maintaining and
      developing new strategic relationships; and the ability to anticipate and adapt
      to the changing markets and any changes in government or environmental
      regulations. Therefore, the Company is subject to the risks of delays and
      potential business failure.





Environmental
      Regulation




The
        dry
        cleaning industry has been a target for environmental regulation during the
        past
        two decades due to the use of certain solvents in the cleaning process. For
        example, in 2002, air quality officials in Southern California approved a
        gradual phase out of Perchloroethylene (“Perc”), the most common dry cleaning
        solvent, by 2020. Under this regulation, which went into effect January 1,
        2003,
        any new dry cleaning business or facility that adds a machine must also add
        a
        non-Perc machine. While existing dry cleaners can continue to operate one
        Perc
        machine until 2020, by November 2007, all dry cleaners using Perc must utilize
        state-of-the-art pollution controls to reduce Perc emissions. The Company
        believes that it has successfully integrated the new dry cleaning
        processes.





Management
      feels that domestic media have generally sensationalized the perceived hazards
      of Perc to operators, clients and the environment in general. Perc is a
      volatile, yet non-flammable, substance that requires precautions and proper
      handling. However, it has proven safe, effective and completely manageable
      for
      years and the Company anticipates that its centralized operations and
      improvements in all facets of the business will further improve the safety
      for
      employees, clients and the environment. The Company will continue to utilize
      Perc where permitted on a limited interim basis to assure an orderly transition.
      To the extent that additional investment for environmental compliance may be
      necessary, the Company does not anticipate any significant financial impact.
      In
      the opinion of management, the Company complies in all material respects with
      all known relevant rules and regulations pertaining to the use of chemical
      agents.





As
      with
      any company involved in the use of chemical agents, the Company may, from time
      to time, be subject to any or all of the following regulatory
      guidelines:





1.
      The
      Clean Water Act;


2.
      The
      Clean Air Act;


3.
      The
      Resource Conservation & Recovery Act;


4.
      The
      Comprehensive Environmental Response, Compensation & Recovery Act;
      and


5.
      Additional State and Local guidelines and legislation.




4





The
      Company complies in all material respects with all known federal, state, and
      local legislation pertaining to the use of all chemical agents and will
      endeavour to ensure that the entire organization proactively remains in
      compliance with all such statutes and regulations in the future.





Business
      Strategy





The
      Company only seeks to acquire the leading operators in a geographic market.
      Company research indicates that there are approximately 100 market-leading
      operators in the U.S. that are environmentally compliant and have revenues
      in
      excess of $5 million annually. Typically these companies are second to third
      generation owned and lack an exit strategy. The Company then intends to make
      subsequent acquisitions within a target market, utilizing the central plant
      already established.  Notwithstanding the above, the Company will at
      times explore opportunistic acquisitions outside its target goal if the Company
      believes they will enhance share holder value.





Eliminate
      Administrative Duplication




The
      Company’s efforts to be more efficient will extend to administration and
      management affairs - human resources, advertising, payroll, legal, information
      technology, accounting, etc. will all be centralized. This will eliminate
      duplication of administrative efforts and associated personnel throughout the
      organization, while keeping day-to-day decisions close to the customer and
      employee base, allowing district managers to focus on customer service, local
      marketing, quality, and revenue growth.





Management
      Effectiveness





The
      Company intends to initially leave existing field management in place with
      each
      additional acquisition and focus initial savings on elimination of back-office
      and administrative duplication of efforts.





Real
      Estate Location Advantages





Management
      intends to establish its central plant in office parks and commercial zones
      where concerns over chemical use and storage are limited and large, noisy
      industrial operations are typical. Retail fronts become a mere access point
      for
      clients to drop-off and pick-up their orders; thus, the Company can eliminate
      the requirement for significant square footage in its store fronts, which are
      typically in high-rent, high-turnover locations. The actual cost savings to
      the
      organization will be dictated by the geographical location of each store front
      and the reduction in square footage. Finally, this arrangement eliminates the
      complication of seeking high-visibility, high-traffic locations for an
      industrial operation.





Operations
      Strategy





Management
      operates centrally located dry cleaning factories in Hawaii and California
      that
      serve as production plants for multiple dry cleaning store fronts, as well
      as
      the hub for hotel, resort, and pick-up and delivery service. Central processing
      allows for the selection of prime sites for new locations, as less square
      footage is required for these service centers. Much of the potential growth
      lies
      with ancillary services, most notably pick-up and delivery, alterations, and
      servicing the targeted area’s hotel and resort communities.





The
      Company believes it can implement the following changes that will enhance
      operations of acquired companies and support its growth
      initiatives:





·
            Leverage
                Infrastructure. The Company intends to maximize the utility and
                efficiencies of a central production facility and “hub and spoke”
                structure;




·
            Route
                Expansion. The Company intends to add additional “pickup and
                delivery” service areas;




·
            Store
                Fronts.
                The
                Company plans to expand the number of storefronts with each acquired
                market as quality locations become available. These locations will
                have
                automated systems to assist in the tracking of clothes; professionally
                trained and uniformed counter staff; a clean, bright lobby area;
                and
                quality changing/alterations areas;




·
            Brand
                Name.
                Initially, USDC will retain the brand names of the acquired market
                leaders, preserving the customer goodwill in that area. Over time,
                the
                Company intends to establish brand name awareness of its corporate
                name;
                and




·
            Additional
                Products.By
                offering
                ancillary product lines, such as pick-up and delivery service, expanded
                household services beyond clothing, on-site alterations, fire restoration,
                and shoe repair and maintenance, the Company will seek to add incremental
                profits through leveraging existing central-plant
                operations.





5





Hub
      and Spoke





The
      Company intends to utilize the “hub and spoke” operating model. This model,
      which is based on a centralized plant versus numerous smaller facilities within
      one market, has proven advantageous and more profitable for the well
      capitalized, experienced operators that are currently deploying the model.
      The
      model requires an upfront investment of capital. Upon the completion of the
      central plant, additional volume is immediately and easily absorbed at a lower
      per unit cost with improved quality. It also enables the flexibility to offer
      additional value-added services.





The
      Company intends to target those markets that are well suited for the “hub and
      spoke” method of operation, which shall possess some or all of the following
      desirable requirements:





·
            Ample
                high-income population within a tight geographic area with a high
                demand
                for services and a low threshold of
                competition;




·
            A
                traffic infrastructure allowing for the ease of transportation 1)
                between
                stores and production facility, and 2) for the Company’s route drivers
                when picking up and delivering
                clothing;




·
            An
                abundant trained labor pool, forecasted well in excess of demand
                for the
                next ten years; and




·
            Numerous
                retail center openings planned over the next 5-10 years, representing
                an
                opportunity to open new storefronts. Furthermore, the population
                should be
                growing within each of the Company’s proposed
                markets.





Districts





The
      Company will consist of a number of operating “districts”. Each district will be
      comprised of a central plant with approximately fifteen to fifty stores across
      one or two brands. Each district will be managed by one general manager who
      oversees a customer service manager, a plant manager, and an office manager.
      This arrangement and its actual parameters, headcount, and layout are subject
      to
      substantial change and revision to meet the evolving needs of the business.
      However, based upon experience in the industry, the Company’s management
      believes such an arrangement would operate efficiently. This structure allows
      for a central office infrastructure, while keeping day-to-day decision making
      close to the customer- and employee-base.




Major
      Customers





We currently provide multiple
      services under separate contracts toHilton Hawaiian Village
      which represent
      more than 10%of our annual
      revenues for our Hawaiian operations.





Employees




The
        Company has 264 employees, of which 260 are full-time. None of the Company’s
        employees are represented by a labor union. The Company currently contracts
        with
        three professional consultants.  We believe that our labor relations
        are good.





6





Item
      1A:  Risk Factors





An
      investment in our common stock involves a number of very significant risks.
      You
      should carefully consider the following risks and uncertainties in addition
      to
      other information in this Report on Form 10-KSB and other Company filings with
      the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”) and the Securities Act of 1933, as amended (the “Securities Act”) when
      evaluating the Company and its business before purchasing shares of the
      Company's common stock. Our business, operating results, and financial condition
      could be seriously harmed due to any of the following risks. The risks described
      below are material risks that we are currently aware of that are facing our
      Company. Additional risks not presently known to us or which we currently
      believe to be immaterial may also impair our business operations. You could
      lose
      all or part of your investment due to any of these risks.





Our
      ability to implement our growth strategy may be limited, and even if
      implemented, there can be no assurance that future acquisitions will not have
      a
      material adverse effect on the Company’s operating results.





The
      Company’s growth strategy includes acquisitions. There can be no assurance that
      the Company will be able to continue to successfully identify suitable
      acquisition candidates, complete acquisitions, and integrate acquired operations
      (including the operations comprising the acquisitions) into its existing
      operation and/or expand into new markets. While the acquired operations are
      being integrated into the Company’s existing operations, and even thereafter,
      the acquired operation may not achieve levels of revenue or profitability
      comparable to those achieved by the Company’s existing operations, or otherwise
      perform as expected, particularly in the fiscal quarters immediately following
      the consummation of such transactions.





In
      addition, notwithstanding its own due diligence investigation, management has,
      and will have, limited knowledge about the specific operating history, trends,
      and customer patterns of the dry cleaning stores to be acquired in connection
      with future acquisitions. Consequently, there can be no assurance that the
      Company will make future acquisitions at favorable prices, which acquired stores
      will perform as well as they had performed historically, or that the Company
      will have sufficient information to accurately analyze the markets in which
      it
      elects to make acquisitions. Failure to pay reasonable prices for acquisitions
      or to acquire profitable dry cleaning stores could have a material adverse
      effect on the Company’s financial condition and results of operations.
      Furthermore, management will be relying upon certain representations,
      warranties, and indemnities made by the sellers with respect to the
      acquisitions, as well as its own due diligence investigation. There can be
      no
      assurance that such representations and warranties will be true and correct
      or
      that the Company’s due diligence will uncover all material adverse facts
      relating to the operations and financial condition of the store acquired. Any
      material misrepresentation could have a material adverse effect on the Company’s
      financial condition and results of operations.





Competition
      for acquisitions could adversely affect our ability to continue our
      growth.





If
      larger, better-capitalized companies enter the industry and seek to acquire
      the
      same dry cleaning stores that the Company seeks to acquire, it would be likely
      that acquisition prices would increase and result in fewer acquisition
      opportunities, which could have a material adverse effect on the Company’s
      growth.





Our
      anticipated continued growth will depend in part on our ability to open and
      operate new stores on a profitable basis.





Although
      the Company intends to increase the number of stores within its current market
      areas and believes that adequate sites are currently available in these markets,
      the rate of new store openings is subject to various contingencies, some of
      which are beyond the Company’s control. These contingencies include the
      Company’s ability to hire, train and retain competent store management and other
      personnel, the ability to obtain adequate capital resources, and the successful
      integration of new stores into existing operations. There can be no assurance
      the Company will be able to achieve its planned expansion or that any
      anticipated expansion will be profitable. Failure of the Company to achieve
      its
      planned expansion on a profitable basis could have a material adverse effect
      on
      the Company’s financial condition and results of operations.





There
      can be no assurance that we will be able to generate or secure sufficient
      funding to support our growth strategy.





The
      Company intends to finance future acquisitions and new store openings with
      cash
      from operations, the issuance of capital stock, borrowings, and the net proceeds
      from the sale of debt and/or equity securities. If the Company does not have
      sufficient cash from operations, funds available under credit facilities and/or
      the ability to raise cash through the sale of debt and/or equity securities,
      or
      cannot issue its capital stock on terms suitable to the Company, the Company
      will be unable to pursue its growth strategy, which could have a material
      adverse effect on the Company’s ability to increase its revenue and net income
      (or reduce its net loss, as applicable), and on the Company’s financial
      condition and results of operations.




7





Our
      industry is highly competitive.





The
      dry
      cleaning industry is highly competitive. The Company believes there could be
      as
      many as 40,000 dry cleaning stores in the United States, and we face intense
      competition for customers and access to suitable store locations. The Company
      will compete with other dry cleaner operators in each of its projected markets.
      Some of the Company’s competitors could have greater financial and marketing
      resources, market share, and/or name recognition than the Company. In addition,
      the Company’s proposed business could be affected by fashion trends, the
      economy, and a reduction in its markets’ population growth and/or financial
      conditions and habits. There can be no assurance that we will be able to compete
      successfully with such entities in the future.





Our
      success depends on our management team.





The
      Company’s operations are dependent on the continued efforts of its Board of
      Directors and its executive officers, including Michael E. Drace, our President,
      Robbie Lee, our Chief Executive Officer and Secretary; and Kim Cox, our Chief
      Financial Officer.  The Company also maintains key-man life insurance
      on Mr. Drace. If any of these individuals become unwilling or unable to continue
      their employment or association with the Company, the Company’s business could
      be affected materially and adversely. Furthermore, the Company’s management has
      been assembled only recently and has had only a limited opportunity to work
      together as a team. As a result, there can be no assurance that the Company’s
      management team will be successful in managing the operations of the Company
      or
      be able to effectively implement the Company’s business and expansion strategy.
      Failure of the Company’s management group to successfully manage the operation
      of the Company or to effectively implement the Company’s business and expansion
      strategy could have a material adverse effect on the Company’s financial
      condition and results of operations.





If
      we are unable to attract and retain qualified personnel with dry cleaning
      service-related experience, our business could suffer.





Our
      current and future success depends in-part on our ability to identify, attract,
      assimilate, hire, train, retain, and motivate professional, highly-skilled
      technical, managerial, sales and marketing, and customer service personnel
      with
      dry cleaning service-related experience. If we fail to attract and retain the
      necessary managerial, sales and marketing, technical, and customer service
      personnel, we may not develop a sufficient customer base to adequately develop
      our proposed operations and our business could fail.





No
      independent market studies have been made to confirm the continued demand for
      our dry cleaning services.





No
      independent market studies have been made that confirm the demand for our dry
      cleaning services. If there is not a sufficient market for our dry cleaning
      services, we may suffer or fail in our business and cease
      operations.





Rights
      of our stockholders may be negatively affected if we issue any of the shares
      of
      preferred stock that our Board of Directors has the authority to
      issue.





We
      have
      available for issuance 20,000,000 shares of preferred stock, par value
      $0.001 per share. Our Board of Directors is authorized to issue any or all
      of
      this preferred stock, in one or more series, without any further action on
      the
      part of the stockholders. The rights of our stockholders may be negatively
      affected if we issue additional shares of preferred stock that has preference
      over our common stock, with respect to the payment of dividends and/or
      distribution upon our liquidation, dissolution, or winding up.





The
      success of our expansion strategy depends on the continued loyalty of the
      customers of the acquired stores.





The
      success of the dry cleaning stores to be acquired in any acquisition depends
      in
      large part on the Company’s ability to successfully convert acquired stores
      within each market to a single brand name (or in some cases, two brand names),
      logo, and format without negatively impacting customer service in these stores
      or a customer’s perception of these stores. To the extent that customers have
      developed loyalty to current names and logos, such transitions could result
      in a
      loss of customers. A significant loss of customers would have a material adverse
      effect on the Company’s financial condition and results of
      operations.




The
        fact that our directors and executive officers, beneficially own approximately
        15% of our capital stock may decrease your influence on stockholder
        decisions.
 
 Our
        executive officers and directors, in the aggregate, beneficially own 15%
        of our
        common stock. As a result, acting together these persons and entity have
        the
        ability to influence our management and affairs and the outcome of matters
        submitted to stockholders for approval, including the election and removal
        of
        directors, amendments to our bylaws, and any merger, consolidation, or sale
        of
        all or substantially all of our assets.





8





Technological
      advances and regulatory changes may erode revenues that could be derived from
      our proposed operations, which could increase competition and put downward
      pressure on prices for our proposed services.





New
      technologies and regulatory changes, particularly those relating to
      environmental issues, if any, could impair our prospects, put downward pressure
      on prices for our dry cleaning and certain proposed services, and adversely
      affect our operating results. In addition, the competition in our market from
      the incumbent providers of dry cleaning services may place downward pressure
      on
      prices for such services, which can adversely affect our operating results.
      In
      addition, we could face competition from other companies we have not yet
      identified or which may later enter into the market. If we are not able to
      compete effectively with these industry participants, our operating results
      would be adversely affected.





Many
      of our
      competitors and potential competitors could have superior resources, which
      could
      place us at a cost and price disadvantage. Thus, we may never realize revenues
      sufficient to sustain our operations, and we may fail in our business and cease
      operations.





Many
      of
      our competitors and potential competitors may have significant competitive
      advantages, including greater market presence; name recognition; superior
      financial, technological and personnel resources; superior services and
      marketing capabilities; and significantly larger customer bases. As a result,
      some of our competitors and potential competitors could raise capital at a
      lower
      cost than we can, and they may be able to adapt more swiftly to new or emerging
      technologies and changes in customer requirements, take advantage of acquisition
      and other opportunities more readily, and devote greater resources to the
      development, marketing, and sale of services than we can. Also, our competitors’
and potential competitors’ greater brand-name recognition may require us to
      price our services at lower levels in order to win business. Our competitors'
      and potential competitors’ financial advantages may give them the ability to
      reduce their prices for an extended period of time if they so
      choose.





We
      depend on third-parties for many functions. If the services of those
      third-parties become unavailable to us, we may not be able to conduct our
      business. Thus, we may never realize revenues sufficient to sustain our
      operations, and we may fail in our business and cease operations.





We
      depend
      and will continue to depend upon third parties to install and/or upgrade some
      of
      our systems, provide equipment and maintenance, and provide our customers
      ancillary services. We cannot provide any assurances that third-parties will
      perform their contractual obligations or that they will not be subject to
      environmental or economic events, which may have a material adverse effect
      on
      their ability to provide us with necessary services. If they fail to perform
      their obligations, or if any of these relationships are terminated and we are
      unable to make suitable alternative arrangements on a timely basis, we may
      not
      be able to conduct our business and will have to cease operations.





Our
      business is seasonal and is affected by general economic
      conditions.





Like
      most
      other retail businesses, our business is seasonal and our operations may be
      negatively affected by local, regional, or national economic conditions, such
      as
      levels of disposable consumer income, consumer debt, interest rates, and
      consumer confidence. Any economic downturn might cause consumers to reduce
      their
      spending, which could negatively affect our business. We cannot assure you
      that
      a long economic downturn would not have a material negative effect on
      us.





We
      do not intend to pay dividends; you will not receive funds without selling
      shares





We
      have
      never declared or paid any cash dividends on our capital stock and do not intend
      to pay dividends in the foreseeable future.  We intend to invest our
      future earnings, if any, to fund our growth.  Therefore, you may not
      receive any funds without selling your shares.




9


Our
      common stock may be subject to penny stock rules, which make it more difficult
      for our stockholders to sell their common stock.





Our
      common stock is subject to certain rules and regulations relating to “penny
      stocks” (generally defined as any equity security that is not quoted on the
      NASDAQ Stock Market and that has a price less than $5.00 per share, subject
      to
      certain exemptions).  Broker-dealers who sell penny stocks are subject
      to certain “sales practice requirements” for sales in certain non-exempt
      transactions (i.e.,
      sales to persons other
      than established customers and institutional “accredited investors”), which
      include, among certain other restrictions, the delivery of a standardized risk
      disclosure document relating to the penny stock market, a uniform two day
      waiting period following delivery of such disclosure document and receipt of
      a
      signed and dated acknowledgement of receipt of such disclosure document before
      such transaction may be effected, and monthly statements disclosing recent
      bid
      and offer quotations for the penny stock held in the
      account.    If the broker-dealer is the sole market maker,
      the broker-dealer must disclose this, as well as the broker-dealers presumed
      control over the market.  In addition, the penny stock rules generally
      require that prior to a transaction in a penny stock the broker-dealer make
      a
      special written determination that the penny stock is a  suitable
      investment for the purchaser and receive the purchaser’s written agreement to
      the transaction.  These disclosure requirements may have the effect of
      reducing the level of trading activity in the secondary market for a stock
      that
      becomes subject to the penny stock rules.  For as long as our
      securities are subject to the rules on penny stocks, the liquidity of our common
      stock could be significantly limited.  This lack of liquidity may also
      make it more difficult for us to raise capital in the future.





Item
      2:  Description of Property





We
      are currently leasing our corporate
      offices located at 4040 MacArthur Blvd., Suite 305, Newport Beach, California
      92660. The following is a list of our leased production and retail
      facilities.





·
            Main
                production plant, Honolulu, HI, approximately 23,000 square
                feet.


·
            Main
                production plant, Riverside, CA, approximately 9,524 square
                feet.


·
            We
                currently operate 32 retail locations throughout Southern California
                and Hawaii with the location ranging from approximately 300 square
                feet to
                1,600 square feet.





Item
      3:  Legal
      Proceedings





From
      time
      to time, the Company may be involved in various claims, lawsuits, or disputes
      with third-parties incidental to the normal operations of the business. The
      Company is not currently involved in any such litigation. Furthermore, the
      Company is not aware of any proceeding that a governmental authority is
      contemplating.





Item
      4:  Submission of Matters to a Vote of Security Holders





The
      Company did not submit any matters
      to a vote of security holders during the year ended September 30,
      2007.




10




PART
      II





Item
      5:  Market for Common Equity and Related Stockholder Matters





Market
      Information





Our
      common stock has been quoted on the OTC Bulletin Board since August 30, 2007,
      and is currently quoted under the symbol “UDRY”.  The following table
      sets forth the high and low bid prices for our common stock for the periods
      indicated, as reported by Yahoo!® Finance.  Such
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commissions, and may not necessarily represent actual transactions.




Closing
                  PriceHigh
              
              
              LowFor
                  the fiscal year ended September 30, 2007:Fourth
                  Quarter
              
              $
              2.50
              
              
              $
              1.75




On
        January 11, 2008, the last sales price of our common stock was
        $1.27.





Penny
      Stock Rules





The
      SEChas adopted rules that
      regulate
      broker-dealer practices in connection with transactions in penny stocks. Penny
      stocks are generally equity securities with a market price of less than $5.00,
      other than securities registered on certain national securities exchanges or
      traded on the NASDAQ system, provided that current price and volume information
      with respect to transactions in such securities is provided by the exchange
      or
      system. The penny stock rules require a broker-dealer, prior to a transaction
      (by a person other than an established customer or an “accredited investor”) in
      a penny stock,among
      certain other restrictions,to deliver a standardized
      risk
      disclosure document prepared by the SEC, that: (a) contains a description of
      the
      nature and level of risk in the market for penny stocks in both public offerings
      and secondary trading; (b) contains a description of the broker's or dealer's
      duties to the customer and of the rights and remedies available to the customer
      with respect to a violation of such duties or other requirements of the
      securities laws; (c) contains a brief, clear, narrative description of a dealer
      market, including bid and ask prices for penny stocks and the significance
      of
      the spread between the bid and ask price; (d) contains a toll-free telephone
      number for inquiries on disciplinary actions; (e) defines significant terms
      in
      the disclosure document or in the conduct of trading in penny stocks; and (f)
      contains such other information and is in such form, including language, type,
      size and format, as the SEC shall require by rule or regulation.  In addition, the penny
      stock rules require a uniform two-day
      waiting period following delivery of
      the standardized risk disclosure document and receipt of a signed and dated
      acknowledgement of receipt of such disclosure document before the penny stock
      transaction may be completed.





The broker-dealer also must
      provide, prior to effecting any transaction (by a person other than an
      established customer or an “accredited investor”) in a penny stock, the customer
      with (a) bid and offer quotations for the penny stock; (b) the compensation
      of
      the broker-dealer and its salesperson in the transaction; (c) the number of
      shares to which such bid and ask prices apply, or other comparable information
      relating to the depth and liquidity of the market for such stock; and (d) a
      monthly account statement showing the market value of each penny stock held
      in
      the customer's account.





In addition, the penny stock
      rules
      require that prior to a transaction in a penny stock not otherwise exempt from
      those rules the broker-dealer must make a special written determination that
      the
      penny stock is a suitable investment for the purchaser and receive the
      purchaser's written acknowledgment of the receipt of a risk disclosure
      statement, a written agreement as to transactions involving penny stocks, and
      a
      signed and dated copy of a written suitability statement.





If and when an active public
      market develops for our common stock, these disclosure requirements
      may have
      the effect of reducing the trading activityinour
      common stock. Therefore,
      stockholders may have difficulty selling our securities.





Holders
      of Our Common Stock





As
      of the
      date of this Report, there were approximately 363 stockholders of
      record.




11





Dividends





We
      have
      not declared any dividends since inception to the holders of our
      common stock. The declaration of any future cash dividend will be at the
      discretion of the Board of Directors and will depend upon the earnings, if
      any,
      capital requirements, and our financial position, general economic conditions,
      and other pertinent conditions. It is our present intention not to pay any
      cash
      dividends in the foreseeable future, but rather to reinvest earnings, if any,
      into the business.





Recent
      Sales of Registered and Unregistered Securities





During
      the three months ended December
      31, 2006, the Company issued 125,000 shares of its restricted common stock
      to
      the Company’s Chief Financial Officer as a bonus for past services valued at
      $231,250 based on the estimated fair market value of the Company’s common stock
      of $1.85 per share. Expenses related to this transaction have been included
      in
      administrative expenses in the accompanying condensed consolidated statements
      of
      operations.





During
      the three months ended December 31, 2006, the Company issued 80,000 shares
      of
      restricted common stock to directors for past services valued at $148,000 based
      on the estimated fair market value of the Company’s common stock of $1.85 per
      share. Expenses related to this transaction have been included in administrative
      expenses in the accompanying condensed consolidated statements of
      operations.





During
      the three months ended December 31, 2006, the Company, pursuant to a consultant
      agreement, issued 150,000 shares of its restricted common stock in exchange
      for
      certain consulting services provided to the Company, which was valued at $37,500
      based on the value of the services provided. Expenses related to this
      transaction have been included in professional fees in the accompanying
      condensed consolidated statements of operations.





During
      the three months ended March 31,
      2007, the Company issued 780,000 shares of restricted common stock with an
      estimated fair market value of $1.85 per share pursuant to an agreement of
      merger as disclosed in Note 8.





During
        the three months ended June 30, 2007, the Company issued 374,985 shares of
        restricted common stock pursuant to the terms of the Series A Convertible
        Debentures as disclosed in Note 3.





During
      the three months ended June 30, 2007, the Company issued 40,000 shares of its
      restricted common stock for conversion of $100,000 in convertible
      debentures.  The transaction described in this paragraph constituted
      an exempt offering under Section 4(2) of the Securities Act.




On
        December 27, 2006, the Company filed
        a Registration Statement on Form SB-2 with the SEC.  The registration
        statement was declared effective on May 14, 2007.  The offering,
        consisted of up to 3,000,000 units.  Each unit consisted of one share
        of common stock and one redeemable warrant to purchase one share of common
        stock.  During the year ended September 30, 2007, the Company raised
        approximately $6,112,000 offset by approximately $1,553,000 of related fees
        associated with the issuance of units through a public offering resulting
        in net
        proceeds of approximately $4,559,000.  The warrants are exercisable to
        purchase one share of common stock at an exercise price of $3.50. The warrants
        expire on the fifth anniversary of the effective date.  The Company
        will have the right to redeem some or all of the warrants issued in this
        Offering at a redemption price of $0.05 per warrant at any time after the
        date
        on which the closing price of the Company’s common stock has exceeded $5.00 for
        20 consecutive trading days.
 
 During
        the three months ended September
        30, 2007, the Company issued 36,000 shares of its common stock to the Company’s
        Director of Mergers and Acquisitions as a bonus for services valued at $68,400
        based on its estimated fair market value of the Company’s common stock of $1.90
        per share at the grant date.  Expenses related to this transaction
        have been included in administrative expenses in the accompanying statements
        of
        operations.







12





Item
      6:  Management’s Discussion and Analysis or Plan of
      Operation





Forward-Looking
      Statements





Certain
      statements made herein and in other public filings and releases by the Company
      contain “forward-looking” information (as defined in the Private Securities
      Litigation Reform Act of 1995) that involve risk and uncertainty. These
      forward-looking statements may include, but are not limited to, future capital
      expenditures, acquisitions (including the amount and nature thereof), future
      sales, earnings, margins, costs, number and costs of store openings, demand
      for
      clothing, market trends in the retail clothing business, inflation and various
      economic and business trends. Forward-looking statements may be made by
      management orally or in writing, including, but not limited to, Management's
      Discussion and Analysis or Plan of Operation section and other sections of
      our
      filings with the SEC under the Exchange Act and the Securities Act.





Actual
      results and trends in the future may differ materially depending on a variety
      of
      factors including, but not limited to, domestic economic activity and inflation,
      our successful execution of internal operating plans and new store and new
      market expansion plans, performance issues with key suppliers, severe weather,
      and legal proceedings. Future results will also be dependent upon our ability
      to
      continue to identify and complete successful expansions and penetrations into
      existing and new markets and our ability to integrate such expansions with
      our
      existing operations.





Company
      Overview and Recent Trends





Overview




USDC
      is a
      Delaware corporation that was formed on July 19, 2005 and on December 30, 2005
      completed a reverse merger with a public “Shell Company”, as discussed
      herein.  Members of USDC’s management are experienced in acquisition
      and the operating of retail and dry cleaning operations.




The
        operating results for the periods presented should not be deemed to be
        reflective of expected future operating results as such results only reflect
        operations for the year ended September 30, 2007 and for the year ended
        September 30, 2006.  These results are not indicative of the Company’s
        operations on a going-forward basis. The results were adversely affected
        by
        several factors including a fire at the primary Palm Springs location which
        shut
        down operations at that facility for over ten months and required the Company
        to
        process dry cleaning with third-party processors in order to retain market
        share. Other factors include the fact that  CVR, Steam Press and CCI
        were significantly under-capitalized prior to being acquired by the Company
        and,
        as such, were unable to implement operational improvements and initiate
        significant marketing plans. We have initiated corrective actions, and are
        preparing these operations for additional sales volume resulting from planned
        future acquisitions.





Revenues




Net
        sales
        from continuing operations were approximately $8.4 million for the year ended
        September 30, 2007, an increase of approximately $2.3 million compared to
        the
        year ended September 30, 2006 of approximately $6.1 million. Our normal revenue
        of approximately $8.4 million for the year represents approximately a 38%
        increase year over year.  The increase was primarily due to the
        February 2007 acquisition of Cleaners Club, Inc. dba Boston
        Cleaners.





Operating
      Expenses





Operating
      expenses were approximately $11.9 million for the year ended September 30,
      2007,
      an increase of approximately $5.3 million compared to the year ended September
      30, 2006 of approximately $6.6 million.  Delivery, store, and sales
      expenses increased approximately $1.2 million to approximately $3.8 million
      for
      the year ended September 30, 2007 compared to approximately $2.6 million for
      the
      year ended September 30, 2006.  The increase in operating expenses was
      primarily due to the acquisition of CCI and related to the operation of our
      retail stores. Administrative expenses increased approximately $4.1 million
      from
      approximately $8.1 million for the year ended September 30, 2007 compared to
      approximately $4.0 million for the year ended September 30, 2006.  The
      increase was primarily due to an increase in financing, mergers and acquisition
      costs and the impairment of goodwill of approximately $2.0 million.





Operating
      Loss




Our
      operating loss increased by
      approximately $3.9 million from approximately $3.8 million for the year ended
      September 30, 2006 to approximately $7.7 million for the year ended September
      30, 2007.  The increase in our operating loss was primarily due to an
      increase in financing, mergers and acquisition costs and the impairment of
      goodwill.




13




Other
        Income and Expenses
 
 Other
        income and expenses decreased by approximately $2.5 million from approximately
        $4.6 million for the year ended September 30, 2006 to approximately $(2.1)
        million for the year ended September 30, 2007.  The decrease was
        primarily due to a decrease in interest expense of approximately $2.1 million
        and a decrease of approximately $1.7 million in loss on debt extinguishment
        offset by a decrease in other income of approximately $1.3
        million.




Net
        Loss
 
 For
        fiscal 2007 compared to fiscal 2006, our net loss grew by approximately $1.4
        million from $8.4 million or $0.70 per common share to approximately $9.8
        million or $0.53 per common share respectively.


Liquidity
      and Going Concern Considerations




Liquidity




As
        of
        September 30, 2007, we had a working capital deficit of approximately $3.7
        million. Our current assets were approximately $2.8 million, which consisted
        primarily of approximately $1.6 million in cash, approximately $0.5 million
        in
        net trade  receivables, approximately $0.6 million in deferred
        acquisition costs and approximately $0.1 million in prepaid expenses and
        other
        current assets. Our current liabilities were approximately $6.5 million,
        which
        consisted primarily of approximately $1.5 million in trade accounts payable,
        and
        accrued expenses of approximately $1.4 million and approximately $3.6 million
        in
        current portion of long-term debt.
  Net
        cash
        used in operating activities during the year ended September 30, 2007 was
        approximately $4.4 million. The current period results were due primarily
        to the
        operating loss of approximately $9.8 million which was offset by approximately
        $4.2 million in non cash transactions made up primarily of depreciation and
        amortization, amortization of debt discounts, deferred financing costs and
        impairment of goodwill; an increase of approximately $1.1 million in accounts
        payable; and a decrease in accounts receivable and other current assets of
        approximately $0.2 million.
 
 Cash
        flow
        used in investing activities for the year ended September 30, 2007, was
        approximately $1.8 million which consisted of capital expenditures, deferred
        acquisition costs and proceeds loaned to a stockholder.
 
 For
        the
        year ended September 30, 2007, cash flow provided by financing activities
        totalled approximately $6.5 million which consisted primarily of the net
        proceeds from the issuance of notes payable (including convertible notes
        and
        line of credit) of approximately $3.0 million and net proceeds from the issuance
        of the Company’s common stock of approximately $4.6 million, offset by
        repayments on notes payable, convertible notes payable and capital leases
        of
        approximately $1.0 million.





Going
      Concern Considerations





The
      consolidated financial statements included elsewhere herein have been prepared
      assuming the Company will continue as a going concern, which contemplates,
      among
      other things, the realization of assets and satisfaction of liabilities in
      the
      ordinary course of business. At September 30, 2007, the Company had an
      accumulated deficit of approximately $19.4 million, working capital deficit
      of
      approximately $3.7 million, and has suffered significant net losses since
      inception.  The Company’s business plan calls for various business
      acquisitions which will require substantial capital.  These factors,
      among others, raise substantial doubt about the Company's ability to continue
      as
      a going concern. The Company intends to fund operations through debt and/or
      equity financing transactions. However, such financing transactions may be
      insufficient to fund its planned acquisitions, capital expenditures, working
      capital, and other cash requirements for the fiscal year ending September 30,
      2008.





The
        Company will be required to seek additional funds to finance its long-term
        operations. The successful outcome of future activities cannot be determined
        at
        this time, and there is no assurance that, if achieved, the Company will
        have
        sufficient funds to execute its intended business plan or generate positive
        operating results subsequent to September 30, 2007.





The
      Company’s capital requirements depend on numerous factors, including the rate of
      market acceptance of the Company’s products and services, the Company’s ability
      to service its customers, the Company’s ability to maintain and expand its
      customer base, the level of resources required to expand the Company’s marketing
      and sales organization, and other factors. As more fully explained elsewhere
      herein, the Company’s management presently believes that cash generated from
      operations (if any), combined with the Company’s current cash positions and debt
      and/or equity financing proposals now under consideration will be sufficient
      to
      meet the Company’s anticipated liquidity requirements through September
      2008.  However, there can be no assurances that any debt and/or equity
      financing transactions now under consideration will be successful at acceptable
      terms.


The
          Company completed the initial closing of a private placement to accredited
          investors and received gross proceeds of approximately
          $3,325,000.  See further discussion in Note 13 in the accompanying
          notes to the financial statements.  In addition, the Company has
          developed a plan to increase revenues at certain stores thereby cutting
          losses.  Furthermore, the Company is embarking on a cost cutting
          campaign to further enhance cash flow at the store
          level.




14





Critical
      Accounting Policies





To
      prepare the financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      to
      make significant estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and 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. In particular, we provide for estimates
      regarding the collectability of accounts receivable, the recoverability of
      long-lived assets, as well as our deferred tax asset valuation allowance. On
      an
      ongoing basis, we evaluate our estimates based on historical experience and
      various other assumptions that we believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities. Future financial results could
      differ materially from current financial results.





Revenue
      Recognition




We
        recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104,
        “Revenue Recognition”
(“SAB 104”). SAB 104 requires
        that four basic criteria be met before revenue can
        be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery
        has occurred; (3) the selling price is fixed or determinable; and (4)
        collectability is reasonably assured. The Company recognizes revenue on retail
        laundry and dry cleaning services when the services are deemed to have been
        provided and the earnings process is complete. For “walk-in and
        pickup-and-delivery” type retail customers, the order is deemed to have been
        completed when the work-order ticket is created and the sale and related
        account
        receivable are recorded. For commercial customers, the sale is not recorded
        until the Company delivers the cleaned garments to the commercial customer.
        Generally, the Company delivers the cleaned garments to commercial customers
        the
        same day they are dropped off (same-day service).
 
 Returns
        and Allowances
 
 We
        experience claims for items damaged during processing, adjustments in resolution
        of customer disputes, and promotional discounts, all of which are recorded
        as
        incurred. Such charges average about one percent of gross revenue. Sales
        are
        reported in the accompanying consolidated financial statements net of “Returns
        and Allowances”, which are reflected as a reduction of gross sales.
 
 Accounts
        Receivable
 
 We
        perform ongoing credit evaluations of our customers and adjust credit limits
        based on payment history and the customers’ current buying habits. We monitor
        collections and payments from our customers and maintain a provision for
        estimated credit losses based on specific customer collection issues that
        have
        been identified.
 
 Long-lived
        Assets
 
 The
        Company follows Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment
        of Long-Lived Assets and for Long-Lived Assets to be Disposed of”,which
        addresses financial accounting and reporting for the impairment or disposal
        of
        long-lived assets.  SFAS No. 144 requires that long-lived assets be
        reviewed for impairment whenever events or changes in circumstances indicate
        that their carrying amount may not be recoverable.  If the cost basis
        of a long-lived asset is greater than the projected future undiscounted cash
        flows from such asset, an impairment loss is recognized.  Impairment
        losses are calculated as the difference between the cost basis of an asset
        and
        its estimated fair value.  See below for additional information
        regarding the identification and measurement of impairment of certain long-lived
        assets governed by SFAS No. 144.




15





We
      assess
      the impairment of long-lived assets, including goodwill, annually or whenever
      events or changes in circumstances indicate the carrying amount of an asset
      may
      not be recoverable.  Recoverability of assets to be held for use is
      based on expectations of the estimated fair value of the asset, and when
      circumstances dictate, we adjust the asset to the extent that the carrying
      value
      exceeds the estimated fair value of the asset. Our judgments related to the
      expected useful lives of long-lived assets and our ability to estimate fair
      value in excess of the carrying amounts of such assets are affected by factors
      such as the ongoing maintenance and improvements of the assets, changes in
      economic conditions, and changes in operating performance. As we assess the
      ongoing estimated fair value and carrying amounts of our long-lived assets,
      these factors could cause us to realize a material impairment charge, which
      would result in decreased net income (or increased net loss) and reduce the
      carrying value of these assets.





Deferred
      Tax Assets





Deferred
      tax assets are recorded net of a valuation allowance. The valuation allowance
      reduces the carrying amount of deferred tax assets to an amount the Company’s
      management believes is more likely than not realizable. In making the
      determination, projections of taxable income (if any), past operating results,
      and tax planning strategies are considered.





Purchase
      Price Allocations for Acquisitions





The
      allocation of the purchase price for acquisitions requires extensive use of
      accounting estimates and judgments to allocate the purchase price to the
      identifiable tangible and intangible assets acquired and liabilities assumed
      based upon their respective estimated fair values. We reached our conclusions
      regarding the estimated fair values assigned to such assets based upon the
      following factors:





Customer
      Relationship Assets





The
      Company has contractual relationships with several hotels to service the laundry
      needs of their guests.  These contracts constitute roughly one-half of
      the total business.  Our valuation is based on a discounted cash flow
      (“DCF”) analysis of the cash flows attributable to the contracts that were in
      force.  Revenue from these contracts were projected out for eighteen
      months and incorporating straight-line attrition during that
      period.  We applied the industry operating margin to projected
      revenues and tax-affected the requisite return to arrive at a debt-free net
      cash
      flow attributable to the customer relationship contracts.  The cash
      flows were then discounted to present to arrive at a total present value with
      a
      useful life based on the average contract term.




Non-contractual
        customer relationships were valued pursuant to the guidance of Emerging Issues
        Task Force (“EITF”) bulletin 02-17.  Annual attrition in the Company’s
        base is generally low.  Accordingly, our valuation is based on a ten
        year forecast horizon of revenues from these relationships.  All
        operating expenses have been allocated based on revenue and operating income
        and
        tax-affected to arrive at debt-free net cash flow attributable to these
        relationships.  The cash flows were then discounted to present to
        arrive at a present value with a useful life of ten years based on the
        reciprocal of the attrition rate.





Trade
      Name/Trademarks





Our
      valuation of the Trade
      Name/Trademarks is based on a derivative of the DCF method that estimated the
      present value of a hypothetical royalty stream.  The royalty rate was
      derived by examining the royalties paid for dry cleaning franchises as well
      as
      the industry operating margin of sales.  The royalty rate was applied
      to the appropriate revenue base to arrive at the periodic royalty
      due.  The royalty was then reduced for the cost of administering and
      enforcing agreement and then reduced by income taxes to arrive at after-tax
      net
      royalties.  The after-tax net royalties were discounted to present
      cost of equity, thereby yielding a value on Trade Name/Trademarks with a useful
      life of ten years.


Identifying
        and Measuring Impairment of Long-Lived Assets





Introduction





We
        follow
        the substance of the procedures outlined below (which are specified in the
        aforementioned accounting pronouncements) in identifying and measuring
        impairment of our intangible and other long-lived assets.




16







Intangible
        Assets





SFAS
        No.
        142, "Goodwill and Other
        Intangible Assets" addresses how intangible assets that are acquired
        individually or with a group of other assets should be accounted for upon
        their
        acquisition and after they have been initially recognized in the consolidated
        financial statements. SFAS No. 142 requires that goodwill and identifiable
        intangible assets that have indefinite lives not be amortized but rather
        be
        tested at least annually for impairment, and intangible assets that have
        finite
        useful lives be amortized over their estimated useful lives. SFAS No. 142
        provides specific guidance for testing goodwill and intangible assets that
        will
        not be amortized for impairment. In addition, SFAS No. 142 expands the
        disclosure requirements about intangible assets in the years subsequent to
        their
        acquisition. See below for additional information regarding the identification
        and measurement of impairment of goodwill and identifiable intangible assets
        governed by SFAS No. 142.





The
        principal effect of SFAS No. 142 on our accompanying consolidated financial
        statements is that the goodwill in the accompanying consolidated financial
        statements is not required to be amortized.





Identifiable
        Intangible Assets





Except
        for Trade Name/Trademark, our only significant identifiable intangible assets
        are customer relationships, which arose in accounting for certain business
        combinations.  As contemplated by GAAP, a "customer relationship"
        exists when an entity has information about the customer and is in regular
        contact with the customer, who in turn has the ability to make direct contact
        with the entity. Since these assets are subject to amortization, management
        reviews customer relationship assets for impairment using the methodology
        of
        SFAS No. 144. As noted above, that pronouncement requires that an impairment
        loss be recognized when an asset's carrying amount is not recoverable and
        the
        carrying amount exceeds its estimated fair value.  As with goodwill,
        the traditional marketplace definition of fair value applies.





Customer
        relationship assets are tested for impairment whenever events or changes
        in
        circumstances suggest that their carrying amount may not be recoverable.
        Examples of such trigger events include a significant adverse change in the
        manner in which a long-lived asset is being used and a current period operating
        loss or negative operating cash flow. We generally apply the impairment testing
        required by SFAS No. 144 as summarized below.





A
        cash
        flow projection for a period approximating the estimated remaining useful
        life
        of the asset is prepared, based on available historical data and management's
        current estimate of future-year revenues associated with the acquired customers
        which are still in place on the testing date. Total annual revenues are
        typically forecasted to increase at a constant or decreasing rate based on
        the
        above criteria (and with due consideration of expected inflation), with the
        percentage attributable to existing customers declining over the estimated
        life
        of the customer relationship asset. Cost of sales and operating expenses
        for the
        first year of the forecast period are based on the entity's most recent budget;
        in subsequent years, these amounts are generally consistent with the year-one
        amounts on a percentage basis.





Based
        on
        the evaluation process summarized in the preceding paragraphs, it was determined
        that the customer relationship assets' estimated fair value was above their
        carrying amounts.





Goodwill





SFAS
        No.
        142 establishes a two-step process that governs the review of goodwill for
        possible impairment at the reporting unit level. A reporting unit is either
        an
        operating segment (as defined in SFAS No. 131, "Disclosures About Segments
        of an
        Enterprise and Related Information"), or a component of an operating
        segment. A component must meet the definition of a "business" under the criteria
        established by GAAP. When applicable, other assets and asset groups (see
        "Identifiable Intangible Assets" and "Property and Equipment," below) are
        tested
        for impairment and any adjustment of the carrying values is reflected before
        the
        goodwill impairment test is performed.





The
        first
        phase, which is only designed to identify potential impairment, requires
        a
        comparison of a reporting unit's carrying amount (including goodwill) with
        its
        estimated fair value. For this purpose, the traditional marketplace definition
        of fair value applies. If the reporting unit's estimated fair value exceeds
        its
        carrying amount, the related goodwill is considered not impaired; under these
        circumstances, the second step of the impairment test described in the following
        paragraph is unnecessary.




17







The
        second phase, to measure an impairment loss, the carrying amount of the
        reporting unit's goodwill is compared to its "implied fair value." An entity
        is
        required to estimate the implied fair value of its goodwill by allocating
        the
        reporting unit's total fair value to all of its assets (including unrecognized
        intangible assets) and liabilities as if (1) the reporting unit had been
        acquired in a business combination and (2) the reporting unit's fair value
        was
        the purchase price. The excess of the reporting unit's fair value over the
        amounts assigned to its assets and liabilities represents the implied fair
        value
        of goodwill. We apply step one of the goodwill evaluation process as described
        in the following paragraph.
 
 For
        goodwill-impairment testing the Company engaged an independent third party
        expert to conduct the impairment review and make impairment recommendations
        to
        management.





To
        estimate the fair value of a group of net assets (such as a reporting unit)
        as a
        whole, the market approach was used because; the quoted market price of the
        Company’s stock does not represent the fair values of the operating units
        because their respective fair values were significantly higher or lower than
        the
        central tendency of the other fair values (the values were outliers); there
        were
        no prices available for goodwill in the dry cleaning
        industry.  Notably, there are only two publicly traded companies in
        the dry cleaning industry;  the Company had only developed a forecast
        with assumptions for fiscal year 2008 and at least three projected years
        are
        necessary for use of the discounted cash flow technique.





After
        employing the market approach for the first phase of goodwill-impairment
        testing
        two out of three of the Company’s operating units failed the first phase,
        therefore, phase two was required.  After employing the market
        approach for phase two both operating units’ fair values at September 30, 2007
        were lower than their carrying values.





Based
        on
        the evaluation process summarized in the preceding paragraphs, a recommendation
        to impair the goodwill of two of the Company’s operating units was made to
        management.  Management reviewed and accepted the recommendation and
        partially impaired the goodwill of two of the Company’s operating units
        aggregating approximately $1,960,000 as described in Note 2.





Contractual
      Commitments




Effective
      on December 12, 2006, in connection with his appointment as the Company’s new
      Chief Executive Officer, the Company entered into an employment agreement with
      Robert Y. Lee for a three-year term. The employment agreement provides for
      a
      base salary at the rate of $20,000 per month, which increases to $25,000 upon
      the Company achieving certain milestones in revenue and income. Mr. Lee is
      also
      entitled to a bonus, which will be represented by a promissory note issued
      by
      the Company bearing interest at eight percent per annum and in the principal
      amount of $200,000, of which $50,000 is payable at the earlier of the expiration
      of his employment term and the closing by the Company of a debt or equity
      financing of at least $1,500,000, and the balance of which payable upon the
      earlier of the expiration of his employment term and the closing by the Company
      of stock offering with proceeds of at least $3,000,000. In addition, upon the
      achievement of certain milestones by the Company, Mr. Lee will be entitled
      to
      additional bonuses ranging from $250,000 to $500,000. Furthermore, the Company
      agreed to issue to Mr. Lee fully vested options to purchase an aggregate of
      800,000 shares of the Company’s common stock, at exercise prices ranging from
      $3.50 to $10.00 per share, which options will be evidenced by a stock option
      agreement approved by the Board of Directors. The Company also agreed to pay
      an
      expense allowance for an automobile in an amount of $2,000 per month. The
      agreement also provides for non-competition covenant by Mr. Lee in favor of
      the
      Company and confidentiality provisions.





Effective
      on December 21, 2006, the Company entered into an employment agreement with
      Riaz
      Chauthani as Director of Real Estate and Business Development for a three-year
      term. The employment agreement provides for a base salary at the rate of
      $150,000 per year. The Company also agreed to pay an expense allowance for
      an
      automobile in an amount of $1,000 per month and benefits and other compensation
      such as health, disability, dental, life and other insurance plans that the
      Company may have in effect from time to time. Furthermore, the Company agreed
      to
      issue to Mr. Chauthani fully vested options to purchase an aggregate of 400,000
      shares of the Company’s common stock, at exercise prices ranging from $3.50 to
      $10.00 per share valued at $171,000 based on the estimated fair market value
      of
      the Company’s common stock of $1.85 per share, which was that was included as
      part of the purchase price consideration in the acquisition of Cleaners Club,
      Inc.  Additionally, the Company is obligated to pay Mr. Chauthani all
      accrued but unpaid base salary as of the effective date of termination together
      with the base salary payable through the end of the term upon termination
      without cause.





Effective
      on July 24, 2007, the Company entered into an employment agreement with F.
      Kim
      Cox to serve as CFO for a period of three years, which may be extended for
      up to
      three additional years. Mr. Cox will initially be paid at the rate of $16,667
      per month which increases to $20,850 per month thereafter upon the Company
      achieving certain milestones in revenue and income.  Mr. Cox will be
      eligible to earn a performance bonus at the discretion of the Board of
      Directors. Pursuant to his employment agreement, Mr. Cox was granted
      fully-vested stock options to purchase up to 300,000 shares of the Company’s
      common stock, at exercise prices of $3.50, $5.00 and $7.00 per share for each
      increment of 100,000 shares, respectively.




18





Effective
      on September 1, 2007, the Company entered into a private placement agreement
      with Mercer Capital, Ltd. To raise a minimum of $2.0 million and a maximum
      of up
      to $20.0 million of Senior Secured Convertible Notes.  Mercer Capital
      will be paid a $35,000 non-refundable retainer; thirteen percent (13%) of the
      gross proceeds raised by Mercer Capital; a non-accountable expense allowance
      equal to two percent (2%) of the gross proceeds raised by Mercer Capital; upon
      conversion of the notes, Mercer Capital will receive an additional nine percent
      (9%) of the issue price of the notes converted and the Company will issue Mercer
      Capital three year warrants to purchase such number of shares of the Company’s
      common stock as is equal to fifteen percent (15%) of the fully-diluted number
      of
      shares sold in this offering.  The warrants have an exercise price
      equal to the conversion price of the notes sold in the private placement
      offering.




A
      summary
      of the Company’s contractual obligations and commitments as of September 30,
      2007 is as follows:




Contractual
                  Obligations and Commitments
              
              Total
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              BeyondOperating
                  leases
              
              $
              6,848,000
              
              
              $
              1,240,000
              
              
              $
              1,095,000
              
              
              $
              942,000
              
              
              $
              606,000
              
              
              $
              503,000
              
              
              $
              2,462,000Capital
                  lease obligations
              
              
              573,000
              
              
              
              242,000
              
              
              
              183,000
              
              
              
              95,000
              
              
              
              37,000
              
              
              
              16,000
              
              
              
              -Long-term
                  debt
              
              
              3,753,000
              
              
              
              3,401,000
              
              
              
              77,000
              
              
              
              74,000
              
              
              
              73,000
              
              
              
              67,000
              
              
              
              61,000Total
                  Contractual Obligations and Commitments
              
              $
              11,174,000
              
              
              $
              4,883,000
              
              
              $
              1,355,000
              
              
              $
              1,111,000
              
              
              $
              716,000
              
              
              $
              586,000
              
              
              $
              2,523,000





Off-Balance
      Sheet Arrangements





We
      are
      not a party to any off-balance sheet arrangements, do not engage in trading
      activities involving non-exchange traded contracts, and are not a party to
      any
      transaction with persons or entities that derive benefits, except as disclosed
      herein, from their non-independent relationships with us.





Inflation





We
      believe that inflation generally causes an increase in sales prices with an
      offsetting unfavorable effect on the cost of products and services sold and
      other operating expenses. Accordingly, with the possible exception of the impact
      on interest rates, we believe that inflation will have no significant effect
      on
      our results of operations or financial condition.





Significant
      Recent Accounting Pronouncements




In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 157, "Fair Value
        Measurements," which defines fair value, establishes a framework for
        measuring fair value in accordance with GAAP, and expands disclosures about
        fair
        value measurements. SFAS No. 157 simplifies and codifies related guidance
        within
        GAAP, but does not require any new fair value measurements. The guidance
        in SFAS
        No. 157 applies to derivatives and other financial instruments measured at
        estimated fair value under SFAS No. 133 and related pronouncements. SFAS
        No. 157
        is effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal years. Management
        does not expect the adoption of SFAS No. 157 to have a significant effect
        on the
        Company's consolidated financial position or results of operations.
 
 On
        February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option
        for Financial
        Assets and Financial Liabilities - Including an Amendment
        of FASB
        Statement No. 115.” This standard permits an entity to measure many
        financial instruments and certain other items at estimated fair
        value.  Most of the provisions of SFAS No. 159 are elective; however,
        the amendment to SFAS No. 115 (“Accounting for Certain Investments in Debt and
        Equity Securities”) applies to all entities that own trading and
        available-for-sale securities. The fair value option created by SFAS No.
        159
        permits an entity to measure eligible items at fair value as of specified
        election dates. Among others, eligible items exclude (1) financial instruments
        classified (partially or in total) as permanent or temporary stockholders’
equity (such as a convertible debt security with a non-contingent beneficial
        conversion feature) and (2) investments in subsidiaries and interests in
        variable interest entities that must be consolidated. A for-profit business
        entity will be required to report unrealized gains and losses on items for
        which
        the fair value option has been elected in its statements of operations at
        each
        subsequent reporting date. The fair value option (a) may generally be applied
        instrument by instrument, (b) is irrevocable unless a new election date occurs,
        and (c) must be applied to the entire instrument and not to only a portion
        of
        the instrument. SFAS No. 159 is effective as of the beginning of the first
        fiscal year that begins after November 15, 2007. Early adoption is permitted
        as
        of the beginning of the previous fiscal year provided that the entity (i)
        makes
        that choice in the first 120 days of that year, (ii) has not yet issued
        financial statements for any interim period of such year, and (iii) elects
        to
        apply the provisions of SFAS No. 157 (“Fair Value Measurements”). Management
        does not expect the adoption of SFAS No. 157 to have a significant effect
        on the
        Company's consolidated financial position or results of
        operations.




19


In
        June
        2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty
        in
        Income Taxes, an interpretation of FASB Statement No. 109.” This
        interpretation clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with SFAS No.
        109,”Accounting for Income
        Taxes.” FIN No. 48 prescribes a more-likely-than-not recognition
        threshold and a measurement attribute for the financial statement recognition
        and measurement of tax positions taken (or expected to be taken) in an income
        tax return. It also provides guidance on de-recognition, classification,
        interest and penalties, accounting in interim periods, disclosure and
        transition. The requirement to assess the need for a valuation allowance
        on net
        deferred tax assets is not affected by FIN No. 48. This pronouncement is
        effective for fiscal years beginning after December 31, 2006 (the fiscal
        year
        beginning October 1, 2007 for the Company). Management is in the process
        of
        evaluating this guidance, and therefore has not yet determined the impact
        (if
        any) that FIN No.48 will have on the Company’s financial position or results of
        operation upon adoption.





On
      December 4, 2007, the FASB issued SFAS No. 141 (R), “Business
      Combinations.”  SFAS No. 141(R) will significantly change the
      accounting for business combinations such that an acquiring entity will be
      required to recognize all the assets acquired and liabilities assumed in a
      transaction at the acquisition-date fair value with limited exceptions. SFAS
      141(R) will change the accounting treatment for certain specific items,
      including:




·
            Acquisition
                costs will be generally expensed as
                incurred;


·
            Noncontrolling
                interests (formerly known as "minority interests" -- see SFAS No.
                160
                discussion below) will be valued at fair value at the acquisition
                date;


·
            Acquired
                contingent liabilities will be recorded at fair value at the acquisition
                date and subsequently measured at either the higher of such amount
                or the
                amount determined under existing guidance for non-acquired
                contingencies;


·
            In-process
                research and development will be recorded at fair value as an
                indefinite-lived intangible asset at the acquisition
                date;


·
            Restructuring
                costs associated with a business combination will be generally expensed
                subsequent to the acquisition date;
                and


·
            Changes
                in deferred tax asset valuation allowances and income tax uncertainties
                after the acquisition date generally will affect income tax
                expense.




SFAS
      No.
      141(R) also includes a substantial number of new disclosure requirements and
      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. Earlier adoption is prohibited. Accordingly, the
      Company will be required to account for business combinations under SFAS No.
      141(R) beginning October 1, 2009 (fiscal year ending September 30,
      2010).  Management is evaluating what effect such statement will have
      on its future financial statements.




Also,
        on
        December 4, 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests
        in
        Consolidated Financial Statements - An Amendment of ARB No.
        51.”SFAS No. 160 establishes new accounting and reporting
        standards for the noncontrolling interest in a subsidiary and for the
        deconsolidation of a subsidiary. Specifically, this statement requires the
        recognition of a noncontrolling interest (minority interest) as equity in
        the
        consolidated financial statements and separate from the parent's equity.
        The
        amount of net income attributable to the noncontrolling interest will be
        included in consolidated net income on the face of the income statement.
        SFAS
        No. 160 clarifies that changes in a parent's ownership interest in a subsidiary
        that do not result in deconsolidation are equity transactions if the parent
        retains its controlling financial interest. In addition, this statement requires
        that a parent recognize a gain or loss in net income when a subsidiary is
        deconsolidated. Such gain or loss will be measured using the fair value of
        the
        noncontrolling equity investment on the deconsolidation date. This statement
        also includes expanded disclosure requirements regarding the interests of
        the
        parent and its noncontrolling interest.  SFAS No. 160 is effective for
        fiscal years, and interim periods within those fiscal years, beginning on
        or
        after December 15, 2008, such that for the Company the effective date is
        October
        1, 2009. Like SFAS 141(R) discussed above, earlier adoption is
        prohibited.  Management is evaluating what effect such statement will
        have on its future financial statements.





Other
      recent accounting pronouncements issued by the FASB (including its Emerging
      Issues Task Force), the AICPA, and the SEC did not or are not believed by
      management to have a material impact on the Company's present or future
      consolidated financial statements.




20





Item
      7:   Financial Statements


Index
      to
      Consolidated Financial Statements:





Audited
      Financial
      Statements:




F-1
              Report
                  of Independent Registered Public Accounting FirmF-2
              Consolidated
                  Balance Sheet as of September 30, 2007F-3
              Consolidated
                  Statements of Operations for the years ended September 30, 2007
                  and
                  2006F-4
              Consolidated
                  Statements of Stockholders’ Equity for the years ended September 30, 2007
                  and 2006F-5
              Consolidated
                  Statements of Cash Flows for the years ended September 30, 2007
                  and
                  2006F-6
              Notes
                  to Consolidated Financial
                  Statements











21




REPORT
      OF INDEPENDENT


REGISTERED
      PUBLIC ACCOUNTING FIRM








To
      the
      Board of Directors and Stockholders


US
      Dry
      Cleaning Corporation and Subsidiaries




We
        have
        audited the accompanying consolidated balance sheet of US Dry Cleaning
        Corporation and Subsidiaries (the "Company") as of September 30, 2007, and
        the
        related consolidated statements of operations, stockholders’ equity and cash
        flows for the years ended September 30, 2007 and 2006. These financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. The Company was not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        were appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        presentation of the financial statements. We believe that our audits provide
        a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of US Dry Cleaning Corporation
        and
        Subsidiaries as of September 30, 2007, and the results of their operations
        and
        their cash flows for the years ended September 30, 2007 and 2006, in conformity
        with accounting principles generally accepted in the United States of
        America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. The Company has recurring losses
        from operations and had an accumulated deficit of approximately $19,356,000
        at
        September 30, 2007. As discussed in Note 1 to the consolidated financial
        statements, a significant amount of additional capital will be necessary
        to
        advance roll up activities to the point at which operations may become
        profitable. These conditions, among others, raise substantial doubt about
        the
        Company's ability to continue as a going concern. Management's plans regarding
        these matters are also described in Note 1. The accompanying consolidated
        financial statements do not include any adjustments that might result from
        the
        outcome of this uncertainty.
 
 Squar,
        Milner, Peterson, Miranda & Williamson, LLP
 
 Squar,
        Milner, Peterson, Miranda & Williamson, LLP
 Newport
        Beach, California
 January
        15, 2008




F-1




US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEET
 SEPTEMBER
        30, 2007
 
 
 ASSETS
 
 Current
                  AssetsCash
                  and cash
                  equivalents
              
              $
              1,617,364Accounts
                  receivable, net
              
              
              479,796Deferred
                  acquisition
                  costs
              
              
              560,446Prepaid
                  expenses and other current assets
              
              
              104,211Total
                  Current Assets
              
              
              2,761,817Property
                  and Equipment,
                  net
              
              
              1,774,273Non-Current
                  AssetsDeposits
              
              
              147,957Deferred
                  financing costs
              
              
              35,000Intangible
                  assets, net
              
              
              530,059Goodwill
              
              
              5,362,408Total
                  Non-Current Assets
              
              
              6,075,424Total
                  Assets
              
              $
              10,611,514LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  LiabilitiesAccounts
                  payable
              
              $
              1,471,837Accrued
                  liabilities
              
              
              1,360,049Capital
                  lease
                  obligations
              
              
              222,410Notes
                  payable
              
              
              581,403Convertible
                  notes payable,
                  net
              
              
              2,319,268Line
                  of
                  credit
              
              
              500,000Total
                  Current Liabilities
              
              
              6,454,967Long
                  Term LiabilitiesCapital
                  lease obligations, net of current portion
              
              
              267,163Notes
                  payable, net of current
                  portion
              
              
              352,559Total
                  Long Term Liabilities
              
              
              619,722Total
                  Liabilities
              
              
              7,074,689Stockholders'
                  EquityConvertible
                  preferred stock; par value $0.001 per share;20,000,000
                  authorized shares;1,200,000
                  shares issued and none outstanding; liquidation preference of $2.40
                  per
                  share
              
              
              -Common
                  stock; par value $0.001 per share;50,000,000
                  Series B authorized shares; none issued and outstanding
              
              
              -Common
                  stock; par value $0.001 per share;50,000,000
                  authorized shares; 21,726,098 shares issued and
                  outstanding
              
              
              21,726Additional
                  paid-in capital
              
              
              23,637,751Stockholder
                  receivable
              
              
              (766,280
              )Accumulated
                  deficit
              
              
              (19,356,372
              )Total
                  Stockholders' Equity
              
              
              3,536,825Total
                  Liabilities and Stockholders' Equity
              
              $
              10,611,514
 The
        accompanying notes are an integral part of these consolidated financial
        statements.





F-2





US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
 
 
 2007
              
              
              2006Net
                  Sales
              
              $
              8,431,733
              
              
              $
              6,082,103Cost
                  of Sales
              
              
              (4,233,500
              )
              
              
              (3,233,763
              )Gross
                  Profit
              
              
              4,198,233
              
              
              
              2,848,340Operating
                  ExpensesDelivery
                  expenses
              
              
              752,203
              
              
              
              566,145Store
                  expenses
              
              
              2,172,427
              
              
              
              1,422,765Selling
                  expenses
              
              
              834,717
              
              
              
              603,209Administrative
                  expenses
              
              
              5,773,010
              
              
              
              1,353,310Related
                  party consulting
              
              
              -
              
              
              
              1,518,000Impairment
                  of goodwill
              
              
              1,960,494
              
              
              
              -Depreciation
                  and amortization
              
              
              346,368
              
              
              
              272,314Other
              
              
              50,043
              
              
              
              910,613Total
                  operating expenses
              
              
              11,889,262
              
              
              
              6,646,356Operating
                  Loss
              
              
              (7,691,029
              )
              
              
              (3,798,016
              )Other
                income (expenses)Insurance
                  funds
              
              
              -
              
              
              
              566,174Loss
                  on extinguishment of debt
              
              
              -
              
              
              
              (1,751,000
              )Interest
                  expense
              
              
              (1,468,037
              )
              
              
              (3,547,562
              )Other
                  expense (loss)
              
              
              (674,756
              )
              
              
              104,718Total
                  other expenses
              
              
              (2,142,793
              )
              
              
              (4,627,670
              )Loss
                before provision for income
                taxes
              
              
              (9,833,822
              )
              
              
              (8,425,686
              )Provision
                for income taxes
              
              
              -
              
              
              
              -Net
                  Loss
              
              $
              (9,833,822
              )
              
              $
              (8,425,686
              )Basic
                  and diluted loss per common share
              
              (0.53
              )
              
              $
              (0.70
              )Basic
                  and diluted weighted average numberof
                  common shares outstanding
              
              
              18,610,149
              
              
              
              12,033,240
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 F-3
 
 US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
 
 
 Series
                    BPreferred
                    Stock
                
                
                Common
                    Stock
                
                
                Common
                    Stock
                
                
                Additional
                
                
                StockholderPaid-in
                
                
                Note
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Receivable
                
                
                Deficit
                
                
                TotalsBalance,
                    September 30,
                    2005
                
                
                1,200,000
                
                
                $
                2,880,000
                
                
                
                -
                
                
                $
                -
                
                
                
                7,689,780
                
                
                $
                769
                
                
                $
                1,081,919
                
                
                $
                -
                
                
                $
                (1,096,864
                )
                
                $
                2,865,824Par
                    value change from $0.0001 to
                    $0.001
                
                
                -
                
                
                
                (2,878,800
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,921
                
                
                
                2,871,879
                
                
                
                -
                
                
                
                -
                
                
                
                -Issuance
                    of common stock to
                    holders of stock to holders of senior notes payable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,750,000
                
                
                
                1,750
                
                
                
                1,164,917
                
                
                
                -
                
                
                
                -
                
                
                
                1,166,667Issuance
                    of common stock to an
                    officer per employment contract
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                300,000
                
                
                
                300
                
                
                
                101,700
                
                
                
                -
                
                
                
                -
                
                
                
                102,000Issuance
                    of common stock to
                    consultant for services
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                300,000
                
                
                
                300
                
                
                
                61,780
                
                
                
                -
                
                
                
                -
                
                
                
                62,080Issuance
                    of common stock to
                    holders of debentures
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                525,300
                
                
                
                525
                
                
                
                1,750,475
                
                
                
                -
                
                
                
                -
                
                
                
                1,751,000Issuance
                    of common stock for
                    conversion of senior convertible notes payable and
                    interest
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,722,492
                
                
                
                3,722
                
                
                
                3,534,560
                
                
                
                -
                
                
                
                -
                
                
                
                3,538,282Issuance
                    of common stock for
                    conersion of convertible debentures and interest
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,099,372
                
                
                
                2,100
                
                
                
                5,143,552
                
                
                
                -
                
                
                
                -
                
                
                
                5,145,652Cancellation
                    of common stock
                    issued to employees for services
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (4,000
                )
                
                
                (4
                )
                
                
                (11,761
                )
                
                
                -
                
                
                
                -
                
                
                
                (11,765
                )Net
                    loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (8,425,686
                )
                
                
                (8,425,686
                )Balance,
                    September 30,
                    2006
                
                
                1,200,000
                
                
                $
                1,200
                
                
                
                -
                
                
                $
                -
                
                
                
                16,382,944
                
                
                $
                16,383
                
                
                $
                15,699,021
                
                
                $
                -
                
                
                $
                (9,522,550
                )
                
                $
                6,194,054
 
 The
        accompanying notes are an integral
        part of these consolidated financial statements.





F-4a


US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
 (continued)
 
 Series
                    BPreferred
                    Stock
                
                
                Common
                    Stock
                
                
                Common
                    Stock
                
                
                Additional
                
                
                StockholderPaid-in
                
                
                Note
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Receivable
                
                
                Deficit
                
                
                TotalsBalance,
                    September 30,
                    2006
                
                
                1,200,000
                
                
                $
                1,200
                
                
                
                -
                
                
                $
                -
                
                
                
                16,382,944
                
                
                $
                16,383
                
                
                $
                15,699,021
                
                
                $
                -
                
                
                $
                (9,522,550
                )
                
                $
                6,194,054Issuance
                    of common stock for
                    consulting services
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                150,000
                
                
                
                150
                
                
                
                37,350
                
                
                
                -
                
                
                
                -
                
                
                
                37,500Issuance
                    of common stock for
                    directors fees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                80,000
                
                
                
                80
                
                
                
                147,920
                
                
                
                -
                
                
                
                -
                
                
                
                148,000Issuance
                    of common stock to
                    employees for past services
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                161,000
                
                
                
                161
                
                
                
                299,489
                
                
                
                -
                
                
                
                -
                
                
                
                299,650Issuance
                    of common stock to
                    holders of debentures
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                374,985
                
                
                
                375
                
                
                
                803,339
                
                
                
                -
                
                
                
                -
                
                
                
                803,714Issuance
                    of common stock in
                    conjunction with acquisition of Cleaners Club, Inc.
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                780,000
                
                
                
                780
                
                
                
                1,442,220
                
                
                
                -
                
                
                
                -
                
                
                
                1,443,000Issuance
                    of common stock for
                    conversion of debentures
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                40,000
                
                
                
                40
                
                
                
                99,960
                
                
                
                -
                
                
                
                -
                
                
                
                100,000Issuance
                    of common stock for
                    conversion of Series A Convertible Note
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                108,333
                
                
                
                108
                
                
                
                324,892
                
                
                
                -
                
                
                
                -
                
                
                
                325,000Issuance
                    of common stock in
                    conjunction with an IPO
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,450,836
                
                
                
                2,451
                
                
                
                4,514,685
                
                
                
                -
                
                
                
                -
                
                
                
                4,517,136Cancellation
                    of employee common
                    stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,000
                )
                
                
                (2
                )
                
                
                (678
                )
                
                
                -
                
                
                
                -
                
                
                
                (680
                )Stockholder
                    note
                    receivable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (766,280
                )
                
                
                -
                
                
                
                (766,280
                )Warrants
                    issued in conjunction
                    with employment agreement
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                171,000
                
                
                
                -
                
                
                
                -
                
                
                
                171,000Warrants
                    issued to consultant in
                    conjunction with Cleaners Club acquisition
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                32,250
                
                
                
                -
                
                
                
                -
                
                
                
                32,250Warrants
                    issued in conjunction
                    with an IPO
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,594,954
                
                
                
                -
                
                
                
                -
                
                
                
                1,594,954Conversion
                    of preferred shares to
                    common stock
                
                
                (1,200,000
                )
                
                $
                (1,200
                )
                
                
                -
                
                
                
                -
                
                
                
                1,200,000
                
                
                
                1,200
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Amortization
                    of deferred
                    consulting fees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24,375
                
                
                
                -
                
                
                
                -
                
                
                
                24,375Fees
                    in conjunction with an
                    IPO
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,553,026
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,553,026
                )Net
                    (loss)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (9,833,822
                )
                
                
                (9,833,822
                )Balance,
                    September 30,
                    2007
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                21,726,098
                
                
                $
                21,726
                
                
                $
                23,637,751
                
                
                $
                (766,280
                )
                
                $
                (19,356,372
                )
                
                $
                3,536,825
 
 The
        accompanying notes are an integral
        part of these consolidated financial statements.


F-4b


US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 FOR
          THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
 
 
 2007
                
                
                2006CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    (loss)
                
                $
                (9,833,822
                )
                
                $
                (8,425,686
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                    and amortization
                
                
                346,368
                
                
                
                272,314Amortization
                    of deferred financing costs
                
                
                24,375
                
                
                
                1,366,496Bad
                    debt expense
                
                
                130,583
                
                
                
                4,000Impairment
                    of goodwill
                
                
                1,960,494
                
                
                
                -Equity
                    instruments issued for compensation and services
                
                
                484,470
                
                
                
                152,315Amortization
                    of debt discounts
                
                
                1,197,982
                
                
                
                1,166,667Loss
                    on extinguishment of debt
                
                
                -
                
                
                
                1,751,000Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                118,572
                
                
                
                (108,395
                )Prepaid
                    expenses and other current assets
                
                
                130,209
                
                
                
                (21,528
                )Other
                    assets
                
                
                (14,559
                )
                
                
                9,025Accounts
                    payable and accrued expenses
                
                
                1,083,796
                
                
                
                786,157Liquidated
                    damages
                
                
                (61,250
                )
                
                
                106,875Net
                    cash used in operating activities
                
                
                (4,432,782
                )
                
                
                (2,940,760
                )CASH
                    FLOWS FROM INVESTING ACTIVITIES:Acquisition
                    of property and equipment
                
                
                (378,183
                )
                
                
                (390,366
                )Acquisition
                    of Cleaners Club, Inc.
                
                
                (98,233
                )
                
                
                -Proceeds
                    given to stockholder for loan
                
                
                (516,280
                )
                
                
                -Deferred
                    acquisition costs
                
                
                (842,446
                )
                
                
                -Net
                    cash used in investing activities
                
                
                (1,835,142
                )
                
                
                (390,366
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Proceeds
                    from issuance of notes payable
                
                
                675,768
                
                
                
                5,805,869Proceeds
                    from issuance of convertible notes payable
                
                
                1,800,000
                
                
                
                -Proceeds
                    from issuance of common stock
                
                
                4,559,064
                
                
                
                -Proceeds
                    from line of credit
                
                
                500,000
                
                
                
                -Repayments
                    on notes payable
                
                
                (710,392
                )
                
                
                (530,280
                )Repayments
                    on convertible notes payable
                
                
                (100,000
                )
                
                
                -Repayments
                    on capital lease obligation
                
                
                (218,608
                )
                
                
                (118,513
                )Deferred
                    financing costs
                
                
                (35,000
                )
                
                
                (1,117,207
                )Net
                    cash provided by financing activities
                
                
                6,470,832
                
                
                
                4,039,869Net
                    increase in cash
                
                
                202,908
                
                
                
                708,743Cash
                    at beginning of year
                
                
                1,414,456
                
                
                
                705,713Cash
                    at end of year
                
                $
                1,617,364
                
                
                $
                1,414,456
 The
        accompanying notes are an integral part of these consolidated financial
        statements.


F-5





US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006
 CONTINUED
 
 2007
              
              
              2006Supplemental
                  Disclosure of Cash Flow Information:Cash
                  paid during the year for:Interest
              
              $
              162,773
              
              
              $
              318,823Income
                  taxes
              
              $
              -
              
              
              $
              -Supplemental
                  Disclosure of Non-Cash Investing and Financing Activities:Adjustment
                  of common and preferred stock par value
              
              $
              -
              
              
              $
              2,878,800Discount
                  on convertible notes payable
              
              $
              1,478,714
              
              
              $
              2,917,667Conversion
                  of debt and accrued interest to common stock
              
              $
              425,000
              
              
              $
              8,683,934Capital
                  lease additions
              
              $
              87,036
              
              
              $
              205,536Assumed
                  notes payable with equipment purchase
              
              $
              -
              
              
              $
              85,000Conversion
                  of note payable to convertible note
              
              $
              200,000
              
              
              $
              -Acquisition
                  of Cleaners Club, Inc.
              
              $
              2,028,000
              
              
              $
              -Convertible
                  note issued for stockholder receivable
              
              $
              250,000
              
              
              $
              -Reclassification
                  of accrued expenses to notes payable
              
              $
              125,000
              
              
              $
              -Conversion
                  of preferred stock to common stock
              
              $
              1,200
              
              
              $
              -
 
 
 See
        notes
        to consolidated financial statements for additional disclosure of non-cash
        investing and financing activities.
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.




F-6




US
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED SEPTEMBER 30, 2007 AND 2006





1.
      ORGANIZATION AND NATURE OF OPERATIONS




US
        Dry
        Cleaning Corporation (“USDC”, “we”, or “us”) was formed on July 19, 2005 and on
        December 30, 2005 completed a “reverse merger” with a public “Shell Company”
under the Securities Exchange Act of 1934.   The Company is a
        retail service provider of laundry and dry cleaning stores and operations
        with
        thirty-four retail stores and two processing plants.  The Company’s
        operations are located in Honolulu, Hawaii (thirteen retail stores and one
        processing plant), Palm Springs, California (six retail stores), and Riverside,
        California (thirteen retail stores and one processing plant).
 
 On
        August
        9, 2005, USDC purchased 100% of the outstanding common stock and membership
        of
        Steam Press Holdings, Inc. (“Steam Press”), and Coachella Valley Retail, LLC
        (“CVR”), respectively, in stock-for-stock type exchanges.  On February
        15, 2007 the Company also completed the acquisition of Cleaners Club, Inc.
        (“CCI”).
 
 Steam
          Press owns 100% of Enivel, Inc. (“Enivel”), which does business as Young Laundry
& Dry Cleaning (“Young”) in Honolulu, Hawaii. Young was founded in 1902 and
          operates thirteen retail laundry and dry cleaning stores, in addition to
          providing hotel and other commercial laundry and dry cleaning services.
          CVR was
          founded in 2004 and operates six retail laundry and dry cleaning stores
          under
          several names in the Palm Springs California area.  CCI was founded in
          2001 and operates thirteen retail laundry and dry cleaning stores in the
          Riverside, California area.
  Going
        Concern





The
        accompanying consolidated financial statements have been prepared assuming
        the
        Company will continue as a going concern, which contemplates, among other
        things, the realization of assets and satisfaction of liabilities in the
        ordinary course of business. The Company has recurring losses from operations;
        negative cash flow from operating activities of approximately $4,433,000
        for the
        year ended September 30, 2007 and had an accumulated deficit of approximately
        $19,356,000 at September 30, 2007. The Company’s business plan calls for various
        business acquisitions which will require substantial additional capital.
        These
        factors, among others, raise substantial doubt about the Company's ability
        to
        continue as a going concern. The Company intends to fund operations through
        debt
        and equity financing transactions and facilitate such fund raising efforts
        by
        registering shares of its common stock with the SEC as a public
        company.  However, such financing transactions may be insufficient to
        fund its planned acquisitions, capital expenditures, working capital and
        other
        cash requirements for the fiscal year ending September 30, 2008. In addition
        the
        Company has developed a plan to increase revenues at certain stores thereby
        cutting losses.  Further, the Company is embarking on a cost cutting
        campaign to further enhance cash flow at the store level.  These
        efforts will decrease administrative costs.  However, there can be no
        assurance these efforts will achieve a positive cash flow.  Therefore
        additional financing efforts must be pursued.  Therefore, the Company
        will be required to seek additional funds to finance its long-term operations.
        The successful outcome of future activities cannot be determined at this
        time
        and there is no assurance that, if achieved, the Company will have sufficient
        funds to execute its intended business plan or generate positive operating
        results.
 
 The
        consolidated financial statements do not include any adjustments related
        to
        recoverability and classification of asset carrying amounts or the amount
        and
        classification of liabilities that might result should the Company be unable
        to
        continue as a going concern.





2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
      of Consolidation





The
      accompanying consolidated financial statements of the Company include the
      accounts of USDC and its wholly-owned subsidiaries Steam Press and
      CVR.  The accompanying consolidated statements of operations and cash
      flows of the Company reflect the post-acquisition operations of CCI from
      February 15, 2007 (acquisition date) to September 30, 2007.





Use
      of Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America (“GAAP”) requires management
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and disclosures of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting periods. Significant estimates made by management include
      the realization of long-lived assets, the valuation allowance on deferred tax
      assets, and the allowance for doubtful accounts receivable. Actual results
      could
      differ from those estimates.





F-7


US
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED SEPTEMBER 30, 2007 AND 2006





2.
      SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES (continued)





Cash
      and Cash Equivalents





The
      Company considers all highly liquid investments with a maturity of three months
      or less at the time of purchase to be cash equivalents.





Concentrations
      of Credit Risk




The
          Company currently maintains substantially all of its day-to-day operating
          cash
          with several major financial institutions. At times, cash balances may
          be in
          excess of amounts insured by the Federal Deposit Insurance Corporation
          (“FDIC”).  At September 30, 2007, cash balances exceeded FDIC limits
          by approximately $495,000.





The
      Company’s accounts receivable result primarily from laundry and dry cleaning
      services rendered to hotels and other commercial customers. The Company extends
      credit to its commercial customers based upon evaluation of each customer’s
      financial condition and credit history. The Company generally does not require
      collateral from commercial customers.





At
      September 30, 2007, two customers, Hilton Hawaiian Village and Industrial
      Uniforms, accounted for approximately 13% and 23% of gross accounts receivable,
      respectively.  No other single customer accounted for more than 10% of
      gross accounts receivable as of that date.  For the year ended
      September 30, 2007 and September 30, 2006, Hilton Hawaiian Village accounted
      for
      approximately 10% and 10% of net sales, respectively.  No other single
      customer accounted for more than 10% of net sales for such reporting
      periods.





Trade
      Accounts Receivable and Allowance for Doubtful Accounts





The
      Company records trade accounts
      receivable when its customers are invoiced for products delivered and/or
      services provided.  Since the Company does not grant credit on a
      regular basis to retail customers and commercial customers are large hotel
      chains, the Company has not historically experienced significant bad debts
      on
      accounts receivable.





During
      fiscal year 2007, the Company
      had written off two notes receivable totalling $125,000.





Deferred
      Financing Costs





Direct
      costs of securing debt financing are capitalized and amortized over the term
      of
      the related debt using the straight-line method. When a loan is paid in full,
      any unamortized financing costs are removed from the related accounts and
      charged to operations.





Property
      and Equipment





Property
      and equipment are stated at cost. Major renewals and improvements are
      capitalized, while replacements, maintenance and repairs which do not
      significantly extend the useful life of the asset are expensed as incurred.
      Depreciation is provided over the estimated useful lives of the assets, which
      range from five to seven years, using accelerated methods. Amortization of
      equipment under capital leases is provided for using the straight-line method
      over the lease term or the estimated useful life of the underlying asset,
      whichever is shorter. Leasehold improvements are amortized using the
      straight-line method over the shorter of the estimated useful life of the
      improvements or the remaining lease term.





Long-Lived
      Assets





The
        Company follows Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment
        of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” which
        addresses financial accounting and reporting for the impairment or disposal
        of
        long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed
        for
        impairment whenever events or changes in circumstances indicate that their
        carrying amount may not be recoverable. If the cost basis of a long-lived
        asset
        is greater than the projected future undiscounted cash flows from such asset,
        an
        impairment loss is recognized. Impairment losses are calculated as the
        difference between the cost basis of an asset and its estimated fair value.
        See
        below for additional information regarding the identification and measurement
        of
        impairment of certain long-lived assets governed by SFAS No.
        144.




F-8


US
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED SEPTEMBER 30, 2007 AND 2006




2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





The
      Company assesses the impairment of long-lived assets, including goodwill,
      annually or whenever events or changes in circumstances indicate the carrying
      amount of an asset may not be recoverable. Recoverability of assets to be held
      for use is based on expectations of future undiscounted cash flows from the
      related operations, and when circumstances dictate, the Company adjusts the
      asset to the extent that the carrying value exceeds the estimated fair value
      of
      the asset. Management’s judgments related to the expected useful lives of
      long-lived assets and the Company’s ability to realize undiscounted cash flows
      in excess of the carrying amounts of such assets are affected by factors such
      as
      the ongoing maintenance and improvements of the assets, changes in economic
      conditions, and changes in operating performance. As management assesses the
      ongoing expected cash flows and carrying amounts of the Company’s long-lived
      assets, these factors could cause the Company to realize a material impairment
      charge, which would result in decreased net income (or increased net loss)
      and
      reduce the carrying value of these assets.





During
        the year ended September 30, 2007, management determined that an impairment
        of
        goodwill in the amount of  approximately $1,960,000 was
        required.  There can be no assurance that market conditions will not
        change which could result in further impairment of long-lived assets in the
        future.  See below for more information on the 2007 impairment of
        goodwill.





Intangible
      Assets





SFAS
      No.
      142, "Goodwill and Other
      Intangible Assets," addresses how intangible assets that are acquired
      individually or with a group of other assets should be accounted for upon their
      acquisition and after they have been initially recognized in the consolidated
      financial statements. SFAS No. 142 requires that goodwill and identifiable
      intangible assets that have indefinite lives not be amortized but rather be
      tested at least annually for impairment, and intangible assets that have finite
      useful lives be amortized over their estimated useful lives. SFAS No. 142
      provides specific guidance for testing goodwill and intangible assets that
      will
      not be amortized for impairment. In addition, SFAS No. 142 expands the
      disclosure requirements about intangible assets in the years subsequent to
      their
      acquisition. See below for additional information regarding the identification
      and measurement of impairment of goodwill and identifiable intangible assets
      governed by SFAS No. 142.





Trade
      Name/Trademark Assets





The
        estimated fair value of the trade name/trademark assets of Young Laundry
&
Dry Cleaning (“Trade Assets”) is being amortized on a straight-line basis over
        an estimated useful life of ten years. The caption "Intangible assets, net"
        in
        the accompanying consolidated balance sheet includes Trade Assets of
        approximately $265,000, net of accumulated amortization of $75,000, at September
        30, 2007. Annual amortization of such assets is estimated at $34,000 for
        fiscal
        2008-2015. Management concluded that the straight-line method of amortization
        is
        appropriate for the Company's Trade Assets and that such method produces
        costs
        which reasonably correspond with the distribution of expected revenues in
        all
        material respects. Management estimated the fair value of the Trade Assets
        and
        their useful life using a discounted cash flow analysis for a period of ten
        years.


Non-Compete
      Agreement





In
        connection with the Company’s purchase of CCI in February 2007, the Company
        obtained a five year non-compete agreement from Riaz Chauthani, a former
        owner
        of CCI and Director of Real Estate and Business Development for the
        Company.  The Company valued the non-compete agreement at $226,000 and
        is amortizing such amount over five years on a straight-line
        basis.  Amortization expenses for the year ended September 30, 2007
        was approximately $28,000.  At September 30, 2007, non-compete
        agreement, net of accumulated amortization, was $198,000.




Goodwill





SFAS
      No.
      142 establishes a two-step process that governs the review of goodwill for
      possible impairment at the reporting unit level. A reporting unit is either
      an
      operating segment (as defined in SFAS No. 131, "Disclosures About Segments
      of an
      Enterprise and Related Information"), or a component of an operating
      segment. A component must meet the definition of a "business" under the criteria
      established by GAAP. When applicable, other assets and asset groups (see
      "Identifiable Intangible Assets" and "Property and Equipment," below) are tested
      for impairment and any adjustment of the carrying values is reflected before
      the
      goodwill impairment test is performed.




F-9


US
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED SEPTEMBER 30, 2007 AND 2006





2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





The
      first
      phase, which is only designed to identify potential impairment, requires a
      comparison of a reporting unit's carrying amount (including goodwill) with
      its
      estimated fair value. For this purpose, the traditional marketplace definition
      of fair value applies. If the reporting unit's estimated fair value exceeds
      its
      carrying amount, the related goodwill is considered not impaired; under these
      circumstances, the second step of the impairment test described in the following
      paragraph is unnecessary.





In
      order
      to measure an impairment loss, the carrying amount of the reporting unit's
      goodwill is compared to its "implied fair value." An entity is required to
      estimate the implied fair value of its goodwill by allocating the reporting
      unit's total fair value to all of its assets (including unrecognized intangible
      assets) and liabilities as if (1) the reporting unit had been acquired in a
      business combination and (2) the reporting unit's fair value was the purchase
      price. The excess of the reporting unit's fair value over the amounts assigned
      to its assets and liabilities represents the implied fair value of goodwill.
      We
      apply step one of the goodwill evaluation process as described in the following
      paragraph.





To
      estimate the fair value of a group of net assets (such as a reporting unit)
      as a
      whole, a five-year discounted cash flow analysis is developed based on available
      historical data, and management's current projections of future-year revenues.
      As of a given testing date, these projections may assume annual revenue growth
      at a level or declining rate during the forecast period, with modest growth
      thereafter. Management expects revenue growth during the five-year forecast
      period.





For
      goodwill-impairment testing purposes, the revenue projections include sales
      to
      both third-party customers and Company subsidiaries consistent with traditional
      valuation methodology. Year-one cost of sales and operating expenses are
      estimated based on the reporting unit's most recent budget, and are generally
      consistent on a percentage basis during the remainder of the forecast period.
      Debt-free cash flow (including a "terminal value," when applicable) is then
      present-valued, using the weighted average cost of capital.





For
      the
      year ended September 2006, management believes that the no impairment adjustment
      was required.  However, for the year ended September 30, 2007,
      management concluded that an impairment adjustment of approximately $1,230,000
      was required for goodwill associated with the August 2005 purchase of CVR and
      approximately $730,000 for the February 2007 purchase of
      CCI.  Management’s review of the undiscounted future cash flows of CVR
      and CCI (the respective reporting units under SFAS No. 142) indicated that
      cash
      flows were less than the related goodwill of approximately $1,457,000 for CVR
      and $2,318,000 for CCI.  Accordingly, using a discounted net cash flow
      valuation methodology, management valued the reporting units and concluded
      that
      goodwill totalling $1,960,000 was impaired.





A
      summary of goodwill for the years
      ended September 30, 2007 and 2006 follows:




2007
              
              
              2006Balance,
                  beginning of year
              
              $
              5,004,699
              
              
              $
              5,004,699Goodwill
                  resulting from acquired business (see Note 7)
              
              
              2,318,203
              
              
              
              -Impairment
              
              
              (1,960,494
              )
              
              
              -Balance,
                  end of year
              
              $
              5,362,408
              
              
              $
              5,004,699


Business
      Combinations





SFAS
      No.
      141, "Business
      Combinations," requires that all business combinations be accounted
      for using the purchase method. See Note 6 for additional information on the
      business combination with CCI during February 2007 and “Significant Recent
      Accounting Pronouncements” below.





Revenue
      Recognition





The
      Company recognizes revenue on retail laundry and dry cleaning services when
      the
      services have been provided and the earnings process is complete. For “walk-in”
retail customers, when an order is complete and ready for customer pick-up,
      the
      sale and related account receivable are recorded. For commercial customers,
      the
      sale is not recorded until the Company delivers the cleaned garments. Generally,
      the Company delivers the cleaned garments the same day they are dropped off
      (same-day service).





F-10


US
          DRY
          CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED SEPTEMBER 30, 2007 AND 2006





2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Advertising





The
      Company expenses the cost of advertising when incurred. Advertising costs of
      the
      Company approximated $125,000 and $136,000 for the years ended September 30,
      2007 and 2006, respectively.  Such costs are included in
      administrative expenses in the accompanying consolidated statements of
      operations.





Business
      Segments





The
      Company currently operates in one segment, that being the laundry and dry
      cleaning business. As noted earlier, the Company is geographically concentrated
      in Honolulu, Palm Springs, and Riverside, California. Honolulu revenues
      approximated 67% and 90% of consolidated revenues for the years ended September
      30, 2007 and 2006, respectively.





Derivative
      Financial Instruments





The
      Company records all derivative financial instruments in its consolidated
      financial statements at estimated fair value, regardless of the purpose or
      intent for holding the instrument. Changes in the estimated fair value of
      derivative financial instruments are either recognized periodically in the
      results of operations or in stockholders’ equity as a component of accumulated
      other comprehensive income, depending on whether the derivative instrument
      qualifies for hedge accounting as defined by SFAS No. 133, “ Accounting for Derivative
      Instruments and Hedging Activities” and related amendments and
      interpretations. As of September 30, 2007, the Company did not have any
      derivative financial instruments which were eligible for hedge accounting.
      Changes in the estimated fair value of derivatives not qualifying for hedge
      accounting are included in the results of operations as they occur.





Discount
      on Convertible Notes





Convertible
      instruments are evaluated to determine if they are within the scope of Emerging
      Issues Task Force ("EITF") Issue No. 00-19 "Accounting for Derivative
      Financial
      Instruments Indexed to, and Potentially Settled in, a Company's Own
      Stock” and SFAS No. 133. In the event that they are not, discounts on
      convertible notes are attributable to the relative fair value of the beneficial
      conversion feature that allows holders of the debenture to convert into shares
      of the Company's common stock at prices lower than the market value and the
      discount associated with the related equity instruments issued. These discounts
      are accounted for in accordance with EITF Issue No. 00-27, "Application of EITF No.
      98-5 To
      Certain Convertible Instruments" and EITF Issue No. 98-5, "Accounting For Convertible
      Securities with Beneficial Conversion Features or Contingently Adjustable
      Conversion Ratios."





Fair
      Value of Other Financial Instruments





SFAS
      No.
      107, "Disclosures about Fair
      Value of Financial Instruments," requires the disclosure of the fair
      value, if reasonably obtainable, of the Company’s financial instruments.
      Management believes that the carrying amounts of the Company’s significant
      financial instruments including cash, trade accounts receivable, trade accounts
      payable, accrued liabilities and notes payable approximate their estimated
      fair
      value at September 30, 2007 based on their relatively short term nature and/or
      the fact that notes payable bear market interest rates.





In
      the
      opinion of management, the fair value of payables to related parties cannot
      be
      estimated without incurring excessive costs; for that reason, the Company has
      not provided such disclosure. Other information about related-party liabilities
      (such as the carrying amount, the interest rate, and the maturity date) is
      provided elsewhere in these notes to the consolidated financial
      statements.




Risks
      and Uncertainties





The
      Company operates in an industry that is subject to intense competition. The
      Company faces risks and uncertainties relating to its ability to successfully
      implement its business strategy. Among other things, these risks include the
      ability to develop and sustain revenue growth; managing the expansion of its
      operations; competition; attracting and retaining qualified personnel;
      maintaining and developing new strategic relationships; and the ability to
      anticipate and adapt to the changing markets and any changes in government
      or
      environmental regulations. Therefore, the Company is subject to the risks of
      delays and potential business failure.




F-11


US
          DRY
          CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED SEPTEMBER 30, 2007 AND 2006





2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





The
      dry
      cleaning industry has been a target for environmental regulation during the
      past
      two decades due to the use of certain solvents in the cleaning process. For
      example, in 2002, air quality officials in Southern California approved a
      gradual phase out of Perchloroethylene (“Perc”), the most common dry cleaning
      solvent, by 2020. Under this regulation, which went into effect January 1,
      2003,
      any new dry cleaning business or facility that adds a machine must also add
      a
      non-Perc machine. While existing dry cleaners can continue to operate one Perc
      machine until 2020, by November 2007 all dry cleaners using Perc must utilize
      state-of-the-art pollution controls to reduce Perc emissions. The Company
      believes that it has successfully integrated the new dry cleaning
      processes.





Management
      feels that domestic media have generally sensationalized the perceived hazards
      of Perc to operators, clients and the environment in general. Perc is a
      volatile, yet non-flammable, substance that requires precautions and proper
      handling. However, it has proven safe, effective and completely manageable
      for
      years and the Company anticipates that its centralized operations and
      improvements in all facets of the business will further improve the safety
      for
      employees, clients and the environment. The Company will continue to utilize
      Perc where permitted on a limited interim basis to assure an orderly transition.
      To the extent that additional investment for environmental compliance may be
      necessary, the Company does not anticipate any significant financial impact.
      The
      Company believes that it complies in all material respects with all relevant
      rules and regulations pertaining to the use of chemical agents.





In
      the
      opinion of management, the Company complies in all material respects with all
      known federal, state, and local legislation pertaining to the use of all
      chemical agents and will endeavor to ensure that the entire organization
      proactively remains in compliance with all such statutes and regulations in
      the
      future.





Loss
      per Share





Under
        SFAS No. 128, "Earnings Per
        Share," basic loss per common share is computed by dividing the loss
        applicable to common stockholders by the weighted average number of common
        shares assumed to be outstanding during the period of computation. Diluted
        loss
        per common share is computed using the weighted average number of common
        shares
        and, if dilutive, potential common shares outstanding during the period.
        Potential common shares consist of the incremental common shares issuable
        upon
        the exercise of warrants (using the treasury stock method) and the conversion
        of
        the convertible preferred stock and convertible debt (using the if-converted
        method). For the year ended September 30, 2006, 1,240,000 and 2,911,765
        convertible securities and warrants to purchase common stock, respectively,
        were
        excluded from the calculation of diluted loss per share because they were
        anti-dilutive.  For the year ended September 30, 2007, 866,667 and
        3,500,836 convertible securities and warrants to purchase common stock,
        respectively, were excluded from the calculationof diluted loss per share
        beause
        they were anti-dilutive.





Income
      Taxes





Income
      taxes are accounted for using the asset and liability method. Deferred tax
      assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases and operating
      loss and tax credit carry forwards. Deferred tax assets and liabilities are
      measured using enacted tax rates expected to apply to the years in which those
      temporary differences are expected to be recovered or settled. The effect on
      deferred tax assets and liabilities of a change in tax rates is recognized
      in
      the period that includes the enactment date.





Stock-Based
      Compensation





SFAS
      No.
      123-R, “Share-Based
      Payment”, requires entities to recognize the cost of employee services
      received in exchange for awards of equity instruments based on the grant-date
      estimated fair value of those awards (with limited exceptions). The Company
      adopted SFAS No. 123-R on January 1, 2006.  For stock-based
      compensation issued to non-employees, the Company uses the fair value method
      of
      accounting under the provisions of SFAS No. 123-R and Emerging Issues Task
      Force
      (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments
      That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
      Selling, Goods or Services.”





At
      September 30, 2007, no stock options have been issued since the Board of
      Directors has not adopted a stock option plan.  Therefore, the Company
      has omitted all pertinent disclosure regarding stock options.





Reclassifications





Certain
      reclassifications have been
      made to the fiscal 2006 consolidated financial statements of the Company to
      conform to the fiscal 2007 presentation.




F-12


US
          DRY
          CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED SEPTEMBER 30, 2007 AND 2006


2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Significant
      Recent Accounting Pronouncements





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 157, "Fair Value Measurements,"
      which defines fair value, establishes a framework for measuring fair value
      in
      accordance with GAAP, and expands disclosures about fair value measurements.
      SFAS No. 157 simplifies and codifies related guidance within GAAP, but does
      not
      require any new fair value measurements. The guidance in SFAS No. 157 applies
      to
      derivatives and other financial instruments measured at estimated fair value
      under SFAS No. 133 and related pronouncements. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. Management does not expect the
      adoption of SFAS No. 157 to have a significant effect on the Company's
      consolidated financial position or results of operations.





On
        February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option
        for Financial
        Assets and Financial Liabilities - Including an Amendment of FASB Statement
        No.
        115.” This standard permits an entity to measure many financial
        instruments and certain other items at estimated fair value.  Most of
        the provisions of SFAS No. 159 are elective; however, the amendment to SFAS
        No.
        115 “Accounting for Certain
        Investments in Debt and Equity Securities” applies to all entities that
        own trading and available-for-sale securities. The fair value option created
        by
        SFAS No. 159 permits an entity to measure eligible items at fair value as
        of
        specified election dates. Among others, eligible items exclude (1) financial
        instruments classified (partially or in total) as permanent or temporary
        stockholders’ equity (such as a convertible debt security with a non-contingent
        beneficial conversion feature) and (2) investments in subsidiaries and interests
        in variable interest entities that must be consolidated. A for-profit business
        entity will be required to report unrealized gains and losses on items for
        which
        the fair value option has been elected in its statements of operations at
        each
        subsequent reporting date. The fair value option (a) may generally be applied
        instrument by instrument, (b) is irrevocable unless a new election date occurs,
        and (c) must be applied to the entire instrument and not to only a portion
        of
        the instrument. SFAS No. 159 is effective as of the beginning of the first
        fiscal year that begins after November 15, 2007. Early adoption is permitted
        as
        of the beginning of the previous fiscal year provided that the entity (i)
        makes
        that choice in the first 120 days of that year, (ii) has not yet issued
        financial statements for any interim period of such year, and (iii) elects
        to
        apply the provisions of SFAS No. 157 “Fair Value Measurements”.
        Management does not expect the adoption of SFAS No. 157 to have a significant
        effect on the Company's consolidated financial position or results of
        operations.
 
 In
        June
        2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty
        in Income
        Taxes, an interpretation of FASB Statement No. 109.”This interpretation
        clarifies the accounting for uncertainty in income taxes recognized in an
        enterprise’s financial statements in accordance with SFAS No. 109,”Accounting for Income
        Taxes.”
        FIN No. 48 prescribes a more-likely-than-not recognition threshold and a
        measurement attribute for the financial statement recognition and measurement
        of
        tax positions taken (or expected to be taken) in an income tax return. It
        also
        provides guidance on de-recognition, classification, interest and penalties,
        accounting in interim periods, disclosure and transition. The requirement
        to
        assess the need for a valuation allowance on net deferred tax assets is not
        affected by FIN No. 48. This pronouncement is effective for fiscal years
        beginning after December 31, 2006 (the fiscal year beginning October 1, 2007
        for
        the Company). Management is in the process of evaluating this guidance, and
        therefore has not yet determined the impact (if any) that FIN No.48 will
        have on
        the Company’s financial position or results of operation upon
        adoption.





On
      December 4, 2007, the FASB issued SFAS No. 141 (R), “Business
      Combinations.”  SFAS No. 141(R) will significantly change the
      accounting for business combinations such that an acquiring entity will be
      required to recognize all the assets acquired and liabilities assumed in a
      transaction at the acquisition-date fair value with limited exceptions. SFAS
      141(R) will change the accounting treatment for certain specific items,
      including:




·
            Acquisition
                costs will be generally expensed as
                incurred;


·
            Noncontrolling
                interests (formerly known as "minority interests" -- see SFAS No.
                160
                discussion below) will be valued at fair value at the acquisition
                date;


·
            Acquired
                contingent liabilities will be recorded at fair value at the acquisition
                date and subsequently measured at either the higher of such amount
                or the
                amount determined under existing guidance for non-acquired
                contingencies;


·
            In-process
                research and development will be recorded at fair value as an
                indefinite-lived intangible asset at the acquisition
                date;


·
            Restructuring
                costs associated with a business combination will be generally expensed
                subsequent to the acquisition date;
                and


·
            Changes
                in deferred tax asset valuation allowances and income tax uncertainties
                after the acquisition date generally will affect income tax
                expense.






F-13


US
          DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006




2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Significant
      Recent Accounting
      Pronouncements(continued)





FAS
      No.
      141(R) also includes a substantial number of new disclosure requirements and
      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. Earlier adoption is prohibited. Accordingly, the
      Company will be required to account for business combinations under SFAS No.
      141(R) beginning October 1, 2009 (fiscal year ending September 30,
      2010).  Management is evaluating what effect such statement will have
      on its future financial statements.





Also,
        on
        December 4, 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests
        in
        Consolidated Financial Statements - An Amendment of ARB No.
        51.”  SFAS No. 160 establishes new accounting and reporting
        standards for the noncontrolling interest in a subsidiary and for the
        deconsolidation of a subsidiary. Specifically, this statement requires the
        recognition of a noncontrolling interest (minority interest) as equity in
        the
        consolidated financial statements and separate from the parent's equity.
        The
        amount of net income attributable to the noncontrolling interest will be
        included in consolidated net income on the face of the income statement.
        SFAS
        No. 160 clarifies that changes in a parent's ownership interest in a subsidiary
        that do not result in deconsolidation are equity transactions if the parent
        retains its controlling financial interest. In addition, this statement requires
        that a parent recognize a gain or loss in net income when a subsidiary is
        deconsolidated. Such gain or loss will be measured using the fair value of
        the
        noncontrolling equity investment on the deconsolidation date. This statement
        also includes expanded disclosure requirements regarding the interests of
        the
        parent and its noncontrolling interest.  SFAS No. 160 is effective for
        fiscal years, and interim periods within those fiscal years, beginning on
        or
        after December 15, 2008, such that for the Company the effective date is
        October
        1, 2009. Like SFAS 141(R) discussed above, earlier adoption is
        prohibited.  Management is evaluating what effect such statement will
        have on its future financial statements.





Other
      recent accounting pronouncements issued by the FASB (including its Emerging
      Issues Task Force), the AICPA, and the SEC did not or are not believed by
      management to have a material impact on the Company's present or future
      consolidated financial statements.





3.
      STOCKHOLDER RECEIVABLE





During
      July 2007, the Company loaned Riaz Chauthani, the Company’s Director of Real
      Estate and Business Development and a former owner of CCI, $516,280 under the
      terms of a note receivable calling for annual interest at 6% with all principal
      and accrued interest due December 3, 2008.  The note is secured by Mr.
      Chauthani’s common stock of the Companyunder a
      stock pledge agreement.  Mr. Chauthani is not a Company officer or
      member of the Board of Directors.





During
        February 2007, in connection with a subscription agreement for the Series
        A
        Convertible Debentures (see Note 5), the Company loaned Mr. Chauthani $250,000
        under the terms of a note receivable calling for annual interest at 6% with
        all
        principal and accrued interest due December 3, 2008.  The note is
        partially secured by Mr. Chauthani’s common stock of the Company under a stock
        pledge agreement.


4.
      PROPERTY AND EQUIPMENT





Property
      and equipment consisted of the
      following at September 30, 2007:





Delivery
                equipment and other vehicles
            
            $
            398,121Office
                furniture and equipment
            
            
            120,532Store
                furniture and equipment
            
            
            1,016,217Uniforms
            
            
            413,724Machinery
                and equipment
            
            
            3,125,903Leasehold
                improvements
            
            
            602,9535,677,450Less
                accumulated depreciation and amortization
            
            
            (3,903,177
            )$
            1,774,273




F-14


US
            DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006




4.
      PROPERTY AND EQUIPMENT (continued)





Approximately
      $543,000 of gross property and equipment has been accounted for as capital
      leases. Amortization of property and equipment accounted for as capital leases
      totalled approximately $90,000 and $66,000 during the years ended September
      30,
      2007 and 2006. See Note 6 for additional information.





5.
      DEBT





Line
      of Credit





The
      Company has a line of credit with a financial institution in the maximum amount
      of $1,100,000, bearing interest at 7.15%, maturing on February 28, 2008,
      collateralized by a certain certificate of deposit.  Outstanding
      borrowings were $500,000 at September 30, 2007.




Notes
        Payable
 
 Notes
        payable approximated the following as of September 30, 2007:
  Various
                  notes payable to banks, collateralized by substantially all assets
                  of the
                  Company, payable in monthly instalments of principal and interest
                  approximating $21,000, bearing annual interest ranging from 5.9%
                  to 11.5%,
                  maturing through December 2007.
              
              $
              358,766Various
                  notes payable to individuals, collateralized by certain Company
                  equipment,
                  payable in monthly instalments of principal and interest approximating
                  $19,000 bearing interest ranging from 1.0% to 10.5%, maturing at
                  various
                  dates through 2009.
              
              
              326,045Notes
                  payable to Company officers and directors, collateralized by certain
                  assets of the Company, payable in monthly instalments approximating
                  $4,000, bearing annual interest ranging from 4.9% to 10%, maturing
                  through
                  March 2014.
              
              
              249,151Total
              
              
              933,962Less
                  current portion
              
              
              (581,403
              )Long-term
                  portion
              
              $
              352,559




Convertible
      Notes Payable





During
        fiscal year 2007,  the Company accepted subscriptions from accredited
        investors for $2,250,000 in total purchase price of its Series A Convertible
        Debentures. The debentures were sold with a built-in thirty percent (30%)
        rate
        of return. For each $100,000 paid to the Company, a total of $130,000 is
        due to
        the holder. Additionally, upon issuance, the Company issued 16,666 shares
        of
        common stock to the note holder for each $100,000 subscription. The debentures
        mature in one year from the date issued with no interest. The principal amount
        of the debentures may be converted into common stock of the Company at a
        fixed
        conversion rate of $3.00 per share at the holder’s option at any time. The
        principal amount of the debentures is secured by all of the Company’s assets and
        those of its operating subsidiaries, including an assignment of its leasehold
        interests in its retail facilities. Pursuant to a registration rights agreement,
        the Company is obligated to register or to file a registration statement
        for all
        of the common stock that may be issued upon conversion of the debentures,
        within
        270 days from closing on a “best efforts” basis. Broker or underwriting fees or
        commissions to be paid in connection with the offer and sale was a maximum
        of
        10% of cash received. The Company recorded $1,800,000 in cash proceeds; debt
        conversion of $200,000 and a stockholder note receivable of $250,000 (see
        Note
        3). Accordingly, 374,985 shares of common stock were issued. The offer and
        sale
        of the debentures and common stock were exempt from registration pursuant
        to
        Section 4(2) of the Securities Act of 1933 and Regulation D, Rule 506, as
        promulgated by the Securities and Exchange Commission.




F-15


US
            DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006





5.
      DEBT
      (continued)





Convertible
      Notes Payable
      (continued)





The
      Series A Convertible Debentures
      meet the definition of a conventional convertible debt instrument. Accordingly,
      the Company computed the relative fair values of the debt as if converted and
      the common stock, using a stock price of $1.85 per share, (the estimated fair
      value of the common stock at the commitment date) pursuant to Accounting
      Principles Board Opinion No. 14 (“APB 14”) and related interpretations and
      recorded debt discounts associated with the common stock and a beneficial
      conversion feature totaling $803,714 plus an additional discount of $675,000
      for
      the built-in 30% mark-up. Additionally, the built-in 30% rate of return
      described above, totaling $675,000, was included in the face amount of the
      notes, but was also recorded as debt discount against the face amount of the
      notes. These discounts are being accreted to interest expense over the one
      year
      term of the notes. For the year ended September 30, 2007, the Company accreted
      $1,197,982 of such debt discounts to interest expense. The total amount
      outstanding as of September 30, 2007 of $2,319,268 is included as convertible
      notes payable, net of discount, in the accompanying consolidated balance
      sheet.





Other
      Matters





In
      connection with certain senior secured convertible promissory notes
      (“convertible notes payable”) issued during the year ended September 30, 2006,
      the Company incurred approximately $1,117,000 of debt issuance costs which
      were
      capitalized as deferred financing costs.  Such notes converted to
      common stock during the year ended September 30, 2006 and deferred financing
      costs approximating $1,366,000 were expensed to interest during such
      year.





During
      November 2005 and May 2006, the Company issued 1,750,000 and 525,300 shares,
      respectively, of its restricted common stock to the holders of the convertible
      notes payable per agreement with the investors of the debt offerings. Since
      the
      convertible notes initially had a fixed conversion price, the embedded
      conversion option met the definition of a “conventional convertible debt
      instrument” in EITF Issue No. 05-2, “The Meaning of “Conventional
      Convertible Debt Instrument” in Issue 00-19” and EITF Issue No.
      00-19. Accordingly,
      bifurcation of the conversion option was not required by SFAS No. 133 on the
      commitment dates; therefore, management calculated the relative fair values
      of
      the conversion feature and the common stock pursuant to APB Opinion No. 14,
      “Accounting
      for Convertible Debt and
      Debt Issued with Stock Purchase Warrants” , EITF Issue No. 98-5 and EITF
      Issue No. 00-27. Using a common stock price of $0.34, the relative fair value
      of
      the proceeds attributable to the common stock was 33%, which resulted in total
      debt discounts associated with the common stock of approximately $2,918,000
      and
      no beneficial conversion feature at the commitment dates. The Company entirely
      expensed the debt discounts as interest during the year ended September 30,
      2006, since substantially all of the debt converted before year
      end.





Subsequent
      to the closing of the financing transactions described above, the Company’s
      Board of Directors amended the conversion price of the remaining outstanding
      convertible notes from $5.00 per share to the following: $2.50 per share if
      converted on or before May 15, 2006; $3.33 per share if converted after May
      15,
      2006 but on or before June 30, 2006; and $5.00 per share if converted after
      June
      30, 2006. In accordance with EITF Issue No. 05-7 “Accounting for Modifications
      to
      Conversion Options Embedded in Debt Instruments and Related Issues,”
      management estimated the fair value of the conversion option immediately before
      and after its modification and determined that the change in fair value was
      greater than ten percent resulting in debt extinguishment accounting. At the
      time of the extinguishment, the remaining unamortized debt discount approximated
      $1,751,000, which was recorded as loss on debt extinguishment in the
      accompanying financial statements for the year ended September 30,
      2006.





Due
      to
      the modification of the conversion price described above, the conversion option
      embedded in the convertible notes no longer met the definition of a
“conventional convertible debt instrument”. Therefore, management re-evaluated
      the convertible notes and embedded conversion feature during such period under
      the guidelines of SFAS No. 133 and EITF Issue No. 00-19, and concluded that
      the
      embedded conversion option did not meet the SFAS No. 133 paragraph 11(a) scope
      exception. Accordingly, management assessed the conversion feature against
      the
      additional criteria required for equity classification included in paragraphs
      12-32 of EITF Issue No. 00-19 and determined that net cash settlement could
      not
      be required; therefore, equity classification for the conversion feature was
      deemed to be appropriate. Consequently, the embedded conversion option was
      neither bifurcated from the host contract nor accounted for as a derivative
      liability under SFAS No. 133.




F-16


US
            DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006





5.
      DEBT (continued)





Future
      Minimum Principal Payments





Future
        minimum principal payments due on notes payable for the years ending on
        September 30 approximated the following:





2008
            
            $
            3,401,0002009
            
            
            77,0002010
            
            
            74,0002011
            
            
            73,0002012
            
            
            67,000Thereafter
            
            
            61,000$
            3,753,000








6.
      CAPITALIZED LEASE OBLIGATIONS





The
      Company leases various office and plant equipment accounted for as capital
      leases. The balance of these capital lease obligations at September 30, 2007
      was
      approximately $490,000. The future minimum payments under the capital lease
      obligations for the years ending September 30 approximated the
      following:





2008
            
            $
            242,0002009
            
            
            184,0002010
            
            
            95,0002011
            
            
            37,0002012
            
            
            16,000Less
                imputed interest
            
            
            (85,000
            )489,000Less
                current portion
            
            
            (222,000
            )$
            267,000





7.  ACQUISITION
      OF CLEANERS CLUB, INC.





On
      February 15, 2007, the Company completed the acquisition of all of the
      outstanding stock of Cleaners Club, Inc. ("CCI”) in a purchase business
      combination. The total purchase price of $2,028,000 is comprised of 780,000
      shares of the Company’s restricted common stock valued at $1,443,000 ($1.85 per
      share), fully vested stock options valued at approximately $203,000 (see Note
      10), cash totaling $100,000, and direct acquisition expenses approximating
      $282,000. The principal reason that the Company agreed to pay a purchase price
      for CCI in excess of its recorded net assets was to acquire an established
      revenue stream.





In
      order
      to measure and allocate the purchase price of the CCI business combination,
      the
      Company engaged an independent third-party valuation firm to estimate the fair
      value of CCI’s net assets. The purchase price allocation is summarized as
      follows:








Cash
                and other current assets
            
            $
            24,000Property
                and equipment
            
            
            427,000Deposits
            
            
            40,000Non-compete
                agreement
            
            
            226,000Goodwill
            
            
            2,318,000Liabilities
                assumed
            
            
            (1,007,000
            )Total
            
            $
            2,028,000




F-17


US
            DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006





7.  ACQUISITION
      OF CLEANERS CLUB, INC. (continued)





The
      valuation methodologies used were based on estimates which are inherently
      uncertain, and are dependent on future events and management's assumptions.
      Such
      estimates are subjective in nature.





Deferred
      tax liabilities related to the estimated tax effect of non-deductible
      amortization of identifiable intangible assets are not significant. Goodwill
      resulting from the acquisition is not deductible for income tax
      purposes.  The acquisition of CCI was not a taxable event to the
      Company.





Pro
      Forma
      Financial Information





Certain
      pro forma financial information of the Company is presented below, based on
      the
      assumption that the CCI acquisition occurred on October 1, 2005 (the beginning
      of the earliest year presented):


Unaudited
                  Consolidated
                Pro Forma
                Financial
                  Information2007
              
              
              2006Revenue
              
              $
              9,584,170
              
              
              $
              8,754,490Net
                  loss
              
              $
              (10,129,482
              )
              
              $
              (8,438,976
              )Basic
                  and diluted loss per common share
              
              $
              (0.54
              )
              
              $
              (.066
              )
 
  8.
      OTHER RELATED PARTY TRANSACTIONS





The
      Company rents office space located at 125 E. Tahquitz Canyon Way in Palm
      Springs, California on a month to month basis from Transactional Marketing
      Partners, a company owned by director Earl Greenburg. The rent is $2,200 per
      month all inclusive.





Anthony
      J. A. Bryan, a member of the Company’s Board of Directors (“BOD”) is the father
      of Mr. John Bryan, who is the Chief Executive Officer of The Watley Group
      (“Watley”). In connection with the Watley consulting agreement which expired in
      July 2007 and provided for commissions to Watley in exchange for fund raising
      activities, Watley received approximately $1,518,000 from the Company under
      such
      consulting agreement during the year ended September 30, 2006 and nothing during
      the year ended September 30, 2007.





Mr.
      Martin Brill, a Director and attorney for the Company, received 102,666 shares
      of the Company’s “founders” restricted common stock in connection with his
      services in introducing Watley to the Company. During the year ended September
      30, 2006, pursuant to his agreement with Watley, Mr. Brill received
      approximately $220,000 in fees from Watley in connection with certain fund
      raising activities of Watley and Mr. Brill on the Company’s
      behalf.  Mr. Brill received no such fees in the year ended September
      30, 2007.





On
      September 15, 2005, the BOD acknowledged an agreement between Watley and Robbie
      Lee, whereby Mr. Lee receives a fee from Watley in an amount equivalent to
      3% of
      the first $5.0 million of enterprise value (as defined) and .5% of the
      enterprise value in excess of $5.0 million in connection with acquisitions
      for
      which Watley receives an acquisition success fee from the Company. During the
      period from July 19, 2005 (inception) through September 30, 2005, Mr. Lee
      received fees from Watley of approximately $50,000. Additionally, Mr. Lee was
      paid approximately $69,000 by the Company for consulting fees during such
      period. During the year ended September 30, 2006, Mr. Lee received approximately
      $111,000 in fees from Watley in connection with certain merger and acquisition
      activities in addition to certain fund-raising activities of Watley and Mr.
      Lee
      on the Company’s behalf.  Mr. Lee received nothing during the year
      ended September 30, 2007.





Pursuant
      to his agreement with Watley, during the year ended September 30, 2006, Mr.
      Greenburg received approximately $150,000 in fees from Watley in connection
      with
      certain fund-raising activities of Watley and Mr. Greenburg on the Company’s
      behalf.




F-18


US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006




8.
      OTHER RELATED PARTY TRANSACTIONS (continued)





Pursuant
      to his agreement with Watley, during the year ended September 30, 2006, the
      Company’s then Chief Financial Officer, Mr. Libby, received approximately
      $220,000 in fees from Watley in connection with certain fund-raising activities
      of Watley and Mr. Libby on the Company’s behalf.





Other
      related party transactions are discussed elsewhere in these notes to the
      consolidated financial statements.








9.
      INCOME TAXES





The
        Company did not record any income tax expense or benefit for the years ended
        September 30, 2007 and 2006 due to its net losses and a 100% deferred tax
        asset
        valuation allowance. The Company’s net deferred income tax assets and
        liabilities result principally from net operating losses and depreciation
        and
        amortization. As of September 30, 2007, the Company had a net deferred income
        tax asset of approximately $6,800,000 which is net of 100% valuation
        allowance.  The valuation allowance increased by approximately
        $2,500,000 during the year ended September 30, 2007.





The
      income tax benefit differs from that which would result from applying the
      federal statutory tax rate to the pre-tax loss due principally to recording
      state income taxes and a 100% valuation allowance.





In
      assessing the realizability of deferred income tax assets, management considers
      whether it is more likely than not that some or all of such assets will not
      be
      realized. The ultimate realization of deferred tax assets is dependent upon
      generating future taxable income during the periods in which temporary
      differences become deductible. Management considers projected future taxable
      income (if any) and tax planning strategies in making this assessment. Based
      upon the historical results of operations and projections for future taxable
      income during the years in which the deferred tax assets are deductible,
      management has established a 100% valuation allowance on net deferred tax assets
      at September 30, 2007.





As
        of
        September 30, 2007, the Company had tax net operating loss carry forwards
        of
        approximately $15,000,000 , expiring at various dates through 2027. The
        utilization of some or all of the Company’s federal net operating losses could
        be restricted now or in the future by the significant change in ownership
        rules
        defined in Section 382 of the Internal Revenue Code of 1986, as
        amended.








10.
      EQUITY TRANSACTIONS





Voting
      Preferred Stock





The
      Company has authorized 20,000,000 shares of par value $0.001 convertible
      preferred stock and issued 1,200,000 shares to the former stockholder and
      certain creditors of Steam Press and Enivel. The rights and privileges
      associated with the Company's preferred stock provide for no dividends, a
      liquidation preference of $2.40 per share, voting rights equal to those of
      common stockholders, and conversion into Company common stock on a one-for-one
      basis. The outstanding preferred stock will automatically convert to common
      stock on the completion of a reverse merger with a publicly traded company
      and
      either (a) the listing of the post-merger entity's common stock on any stock
      exchange or (b) its inclusion on a national quotation system, such as the OTC
      Bulletin Board or the Pink Sheets.  The Company began trading on the
      OTC Bulletin Board during September 2007 and, accordingly, such 1,200,000
      preferred shares were converted to common stock.





Common
      Stock





The
      Company has authorized 100,000,000 shares of par value $0.001 common stock
      effective with the reverse merger, of which 50,000,000 shares are designated
      as
“Common Stock” and 50,000,000 shares are designated as “Series B Common Stock”.
      The Company’s Board of Directors has the authority to increase the number of
      authorized shares at any time at their discretion.




F-19


US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006





10.
      EQUITY TRANSACTIONS (continued)





Common
      Stock
      (continued)





During
        November 2005, the Company issued 1,750,000 shares of its restricted common
        stock to the holders of the Company’s senior secured convertible promissory
        notes as part of the units purchased with an estimated relative fair value
        of
        approximately $1,167,000. The value was determined through the calculation
        of
        the relative fair value under the guidelines of the APB Opinion No. 14 and
        related interpretations. The transaction described in this paragraph constituted
        an exempt offering under Section 4(2) of the Securities Act.
 
 During
          November 2005, the Company issued 100,000 shares of its restricted common
          stock
          for the purchase of a business route with an estimated fair value of $12,000
          based on the value of the consideration received  (the business route
          purchased)  This transaction described in this paragraph constituted
          an exempt offering under Section 4(2)of the Securities
          Act.





During
      January 2006, the Company issued 300,000 shares of its restricted common stock
      to the Company’s then Chief Financial Officer as required by his employment
      contract valued at approximately $102,000 based on the estimated fair value
      of
      the Company’s common stock. The transaction described in this paragraph
      constituted an exempt offering under Section 4(2) of the Securities
      Act.





During
      May 2006, the Company issued 525,300 shares of its restricted common stock
      to
      the holders of the Company’s senior secured convertible debentures as part of
      the units purchased with an estimated relative fair value of $1,751,000. The
      value was determined through the calculation of the relative fair value under
      the guidelines of APB No. 14 and related interpretations. The transaction
      described in this paragraph constituted an exempt offering under Section 4(2)
      of
      the Securities Act.




During
      May 2006, the Company issued 3,722,492 shares of its restricted common stock
      for
      conversion of $3,500,000 in senior notes payable plus $38,282 in accrued
      interest. The transaction described in this paragraph constituted an exempt
      offering under Section 4(2) of the Securities Act.





During
      May 2006, the Company issued 2,099,372 shares of its restricted common stock
      for
      conversion of $5,073,000 in senior debentures plus $72,652 in accrued interest.
      The transaction described in this paragraph constituted an exempt offering
      under
      Section 4(2) of the Securities Act.





In
      August
      2006, the Company, pursuant to a consultant agreement, issued 200,000 shares
      of
      its restricted common stock in exchange for certain consulting services to
      be
      provided to the Company, which was valued at $50,000 based on the value of
      the
      services provided. The transaction described in this paragraph constituted
      an
      exempt offering under Section 4(2) of the Securities Act.





During
      the three months ended December 31, 2006, the Company issued 125,000 shares
      of
      its restricted common stock to the Company’s then Chief Financial Officer as a
      bonus for past services valued at $231,250 based on the estimated fair market
      value of the Company’s common stock of $1.85 per share. Expenses related to this
      transaction have been included in administrative expenses in the accompanying
      consolidated statements of operations.





During
      the three months ended December 31, 2006, the Company issued 80,000 shares
      of
      restricted common stock to directors for past services valued at $148,000 based
      on the estimated fair market value of the Company’s common stock of $1.85 per
      share. Expenses related to this transaction have been included in administrative
      expenses in the accompanying consolidated statements of operations.





During
      the three months ended December 31, 2006, the Company, pursuant to a consultant
      agreement, issued 150,000 shares of its restricted common stock in exchange
      for
      consulting services provided to the Company, which was valued at $37,500 based
      on the value of the services.  Expenses related to this transaction
      have been included in administrative expenses in the accompanying consolidated
      statement of operations.





During
      the three months ended June 30, 2007, the Company issued 374,985 shares of
      restricted common stock pursuant to the terms of the Series A Convertible
      Debentures as disclosed in Note 5 above.






F-20


US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006




10.
        EQUITY TRANSACTIONS (continued)
 
 Common
        Stock
        (continued)
 
 During
        the three months ended June 30, 2007, the Company issued 40,000 shares of
        its
        restricted common stock for conversion of $100,000 in convertible debentures.
        The transaction described in this paragraph constituted an exempt offering
        under
        Section 4(2) of the Securities Act.
 
 On
        December 27, 2006, the Company filed a Registration Statement on Form SB-2
        with
        the SEC. The registration statement was declared effective on May 14, 2007.
        The
        offering consisted of up to 3,000,000 units. Each unit consisted of one share
        of
        common stock and one redeemable warrant to purchase one share of common stock.
        During the year ended September 30, 2007, the Company raised approximately
        $6,112,000 offset by approximately $1,553,000 of related fees associated
        with
        the issuance of units through a public offering resulting in net proceeds
        of
        approximately $4,559,000. The warrants are exercisable to purchase one share
        of
        common stock at an exercise price of $3.50. The warrants expire on the fifth
        anniversary of the effective date. The Company will have the right to redeem
        some or all of the warrants issued in this offering at a redemption price
        of
        $0.05 per warrant at any time after the date on which the closing price of
        the
        Company’s common stock has exceeded $5.00 for 20 consecutive trading
        days.





As
      discussed in Note 7, the Company issued 780,000 restricted common shares valued
      at $1,443,000 ($1.85 per share) for the acquisition of all of the outstanding
      stock of CCI.





During
      the three months ended September 30, 2007, the Company issued 36,000 shares
      of
      its common stock to the Company’s Director of Mergers and Acquisitions as a
      bonus for services valued at $68,400 based on the estimated fair market value
      of
      the Company’s common stock of $1.90 per share at the grant date. Expenses
      related to this transaction have been included in administrative expenses in
      the
      accompanying consolidated statements of operations.





Options
      and Warrants





In
      fiscal
      2005, the Company issued 1,500,000 warrants to purchase its common stock to
      each
      of the two founding shareholders. Such warrants were exercisable at $.01 per
      share should the Company achieve certain annualized revenues. The warrants
      expired and were cancelled on December 31, 2006.





During
      the quarter ended December 31, 2006, the Company issued 500,000 warrants to
      an
      investment banking firm for services directly related to an equity fund raising
      transaction. Such warrants have an exercise price of $0.25, are exercisable
      for
      five (5) years from the effective date, and contain net issuance, anti-dilution
      provisions for split adjustments and “piggyback” registration rights. The
      Company did not record any expense related to the fair value of the warrants
      since the issuance was payment for equity fund raising services.





During the quarter ended March 31, 2007, the Company issued 100,000 warrants
      to
      a consultant for professional services at an exercise price of $3.50.  The
      fair value of the transaction using Black-Scholes pricing model of $65,000
      was
      recorded as deferred consulting fees and presented as an offset to additional
      paid-in capital. Such amount is being amortized to expense over the two year
      term of the consulting agreement.




During
        the quarter ended March 31, 2007, the Company issued 50,000 warrants to a
        consultant for professional services in conjunction with the recent acquisition
        at an exercise price of $3.50. The Company included the fair value of the
        warrants using Black-Scholes pricing model in the amount of $32,250 as part
        of the purchase price consideration for Cleaners Club acquisition (See Note
        7).
 
 During
        December 2006, the Company granted 400,000 options (outside of a stock option
        plan) to seller of CCI in accordance with the related employment agreement
        with the Company at exercise prices ranging from $3.50 to $10.00 per
        share.  The Company included the fair value of the options using
        Black-Scholes pricing model in the amount of $171,000 as part of the
        purchase price consideration for the CCI acquisition (See Note 6).
 For
        transactions noted above where fair market value of options and warrants
        was
        calculated using the Black-Scholes pricing model, the following average
        assumptions were used for years ended September 30, 2007 and 2006: risk free
        interest rate of 4.5%, estimated volatility of 55%, expected life of 5 years
        unless otherwise stated, and no expected dividend yield.




F-21


US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006





10.
      EQUITY TRANSACTIONS (continued)





Options
        and Warrants
        (continued)
 
 With
        the
        exception of the 100,000 warrants noted above for professional services,
        all
        options and warrants issued during the years ended September 30, 2007 and
        2006
        were related to equity and debt financing activities or business
        acquisitions.  Accordingly, the disclosures required under SFAS No.
        123(R) are not required.
  A
          summary
          of option and warrant activity during the years ended September 30, 2007
          and
          2006 is presented below:




Weighted-AverageShares
              
              
              Exercise
                Price
              
              
              Remaining
                Contractual
                TermOutstanding,
                  October 1, 2005
              
              
              3,000,000
              
              
              $
              0.01Granted
              
              
              -
              
              
              
              -Cancelled/Forfeited
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Outstanding,
                  September 30, 2006
              
              
              3,000,000
              
              
              
              0.01Granted
              
              
              3,500,836
              
              
              
              3.38Exercised
              
              
              -
              
              
              
              -Cancelled/Forfeited
              
              
              (3,000,000
              )
              
              
              0.01Outstanding,
                  September 30, 2007
              
              
              3,500,836
              
              
              $
              3.38
              
              
              $
              4.6Options
                  and warrants exercisable, September 30, 2007
              
              
              3,500,836
              
              
              $
              3.38
              
              
              $
              4.6




The
        following table summarizes information concerning outstanding and exercisable
        warrants and options at September 30, 2007:
  Number
                
                Remaining
                
                ExercisableExercise
                
                Warrants/Options
                
                Life
                
                As
                    ofPrices
                
                Outstanding
                
                (Years)
                
                9/30/2007$
                0.25
                
                
                
                500,000
                
                
                
                4.25
                
                
                
                500,000$
                3.50
                
                
                
                2,700,836
                
                
                
                4.72
                
                
                
                2,700,836$
                5.00
                
                
                
                100,000
                
                
                
                4.25
                
                
                
                100,000$
                7.50
                
                
                
                100,000
                
                
                
                4.25
                
                
                
                100,000$
                10.00
                
                
                
                100,000
                
                
                
                4.25
                
                
                
                100,0003,500,836
                
                
                
                4.6
                
                
                
                3,500,836







F-22


US
          DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006





11.
      COMMITMENTS AND CONTINGENCIES





Operating
      Leases





The
      Company leases its Honolulu, Riverside, and Palm Springs plant and office
      facilities under non-cancellable operating leases extending through
      2017.





Future
      minimum payments under such operating leases for the years ending September
      30
      and thereafter are as follows:




2008
            
            $
            1,240,0002009
            
            
            1,095,0002010
            
            
            942,0002011
            
            
            606,0002012
            
            
            503,000Thereafter
            
            
            2,462,000$
            6,848,000





Rent
      expense for the years ended September 30, 2007 and 2006
      approximated $1,205,000 and $735,000, respectively.





Legal
      Matters





From
      time to time, the Company may be
      involved in various claims, lawsuits, and disputes with third parties, actions
      involving allegations of discrimination or breach of contract incidental to
      the
      ordinary operations of the business. The Company is not currently involved
      in
      any litigation which management believes could have a material adverse effect
      on
      the Company's financial position or results of operations.





From
      time
      to time, the Company may be involved in various claims, lawsuits, disputes
      with
      third parties, actions involving allegations of discrimination or breach of
      contract incidental to the ordinary operations of the business. The Company
      is
      not currently involved in any litigation which management believes could have
      a
      material adverse effect on the Company's financial position or results of
      operations.





Employment
        Agreements
 
 Effective
        on December 12, 2006, in connection with his appointment as the Company’s new
        Chief Executive Officer, the Company entered into an employment agreement
        with
        Robert Y. Lee for a three-year term and cancelled its previous July 2005
        two-year employment agreement with Mr. Lee. The employment agreement provides
        for a base salary at the rate of $20,000 per month, which increases to $25,000
        upon the Company achieving certain milestones in revenue and income. Mr.
        Lee is
        also entitled to a bonus, which will be represented by a promissory note
        issued
        by the Company bearing interest at eight percent per annum and in the principal
        amount of $200,000, of which $50,000 is payable at the earlier of the expiration
        of his employment term and the closing by the Company of a debt or equity
        financing of at least $1,500,000, and the balance of which payable upon the
        earlier of the expiration of his employment term and the closing by the Company
        of stock offering with proceeds of at least $3,000,000. In addition, upon
        the
        achievement of certain milestones by the Company, Mr. Lee will be entitled
        to
        additional bonuses ranging from $250,000 to $500,000. Furthermore, the Company
        agreed to issue to Mr. Lee fully vested options to purchase an aggregate
        of
        800,000 shares of the Company’s common stock, at exercise prices ranging from
        $3.50 to $10.00 per share, which options will be evidenced by a stock option
        agreement approved by the Board of Directors. The Company also agreed to
        pay an
        expense allowance for an automobile in an amount of $2,000 per month. The
        agreement also provides for non-competition covenant by Mr. Lee in favor
        of the
        Company and confidentiality provisions.  The stock options have not
        been issued as of September 30, 2007 since the Board of Directors has not
        adopted a stock option plan.
 
 Effective
        on December 21, 2006, the Company entered into an employment agreement with
        Riaz
        Chauthani as Director of Real Estate and Business Development for a three-year
        term. Mr. Chauthani is not an officer or director of the Company and was
        a
        former owner of CCI.  The employment agreement provides for a base
        salary at the rate of $150,000 per year. The Company also agreed to pay an
        expense allowance for an automobile in an amount of $1,000 per month and
        benefits and other compensation such as health, disability, dental, life
        and
        other insurance plans that the Company may have in effect from time to time.
        In
        addition, the Company shall provide Mr. Chauthani with one or more key man
        life
        insurance policies up to the maximum amount of $3,000,000. Furthermore, the
        Company agreed to issue as part of the purchase of CCI to Mr. Chauthani fully
        vested options to purchase an aggregate of 400,000 shares of the Company’s
        common stock, at exercise prices ranging from $3.50 to $10.00 per share valued
        at $171,000 based on the estimated fair market value of the Company’s common
        stock of $1.85 per share and was included as part of the purchase price
        consideration in the acquisition of CCI (See Note 7). Additionally, the Company
        is obligated to pay Mr. Chauthani all accrued but unpaid base salary as of
        the
        effective date of termination together with the base salary payable through
        the
        end of the term upon termination without cause.


F-23


US
        DRY CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006




11.
      COMMITMENTS AND CONTINGENCIES (continued)





Employment
        Agreements
        (continued)
 
 On
        July
        24, 2007, the Company filed a Form 8-K announcing that F. Kim Cox had been
        appointed to the position of Chief Financial Officer (“CFO”) and Treasurer. The
        Company also announced that Haddon B. Libby, the former CFO, resigned from
        the
        Company to pursue other business interests.
  The
        Company entered into an employment agreement with Mr. Cox for a period of
        three
        years, which may be extended for up to three additional years. Mr. Cox will
        initially be paid at the rate of $16,667 per month which increases to $20,850
        per month thereafter upon the Company achieving certain milestones in revenue
        and income. Mr. Cox will be eligible to earn a performance bonus at the
        discretion of the Board of Directors. Pursuant to his employment agreement,
        Mr.
        Cox was granted fully-vested stock options to purchase up to 300,000 shares
        of
        the Company’s common stock, at exercise prices of $3.50, $5.00 and $7.00 per
        share for each increment of 100,000 shares, respectively. In the event of
        the
        termination of Mr. Cox’s employment by the Company without cause (as defined
        within the employment agreement) or by Mr. Cox as a result of a material
        breach
        of the terms of the employment agreement by the Company, Mr. Cox will be
        entitled to receive his base salary through the remaining term of the agreement.
        Mr. Cox’s employment agreement also contains standard confidentiality and
        non-competition provisions. The stock options have not been issued as of
        September 30, 2007 since the Board of Directors has not adopted a stock option
        plan.


Investment
      Banking Agreement





During
      August 2006, the Company entered
      into a one year exclusive investment banking services agreement with Marino
      Capital Partners for approximately $45,000 in a cash upfront commitment fee;
      13%
      cash success and non-accountable expense fee; warrants equal to 10% of gross
      proceeds raised and up to 500,000 of performance-based warrants.  Such
      500,000 warrants were issued during the quarter ended December 31, 2006 for
      equity related fund raising activities.  See Note 9 above re Options
      and Warrants.





13.
        SUBSEQUENT EVENTS (UNAUDITED)
 
 On
        December 10, 2007, the Company
        completed the initial closing of a private placement of 10% senior secured
        convertible notes (the “Notes”) to accredited investors, receiving gross
        proceeds of approximately $3,325,000, of which approximately $1,876,000
        represented the aggregate principal amount of the outstandingSeries
        AConvertibleDebentures
        which were exchanged for an
        equal principal amount of Notes.  Each Note was issued at a price
        equal to 90% of its principal amount.  The Notes mature two years
        after the date of their issuance and bear interest at 10% per year, payable
        quarterly in arrears in cash.  Investors may convert their Notes into
        shares ofthe
        Company’scommon
        stock at any time and from time
        to time on or before the maturity date, at a conversion price of $2.50 per
        share, subject to adjustment under customary circumstances. The Notes will
        automatically convert into shares ofthe Company’scommon
        stock at the conversion price, if
        the closing bid price for the common stock has traded at more than $5.00
        per
        share for a period of 20 consecutive trading days, provided that, throughout
        this period, the common stock has been trading on a national securities exchange
        or Nasdaq and such conversion shares have been fully registered for resale
        and
        are not subject to any lock-up provisions.





F-24








Item
      8:  Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure





There
      have been no changes in, or
      disagreements with, our accountants since our formation that are required to
      be
      disclosed pursuant to Item 304 of Regulation S-B that have not been previously
      reported.





Item
      8A: Controls and Procedures





We
      carried out an evaluation of the effectiveness of the design and operation
      of
      our disclosure controls and procedures (as defined in Exchange Act Rules
      13a-15(e) and 15d-15(e)) as of September 30, 2007. This evaluation was carried
      out under the supervision and with the participation of the Company’s
      management, including the Company’s Chief Executive Officer and Chief Financial
      Officer.  Based upon that evaluation, our Chief Executive Officer and
      Chief Financial Officer concluded that, as of September 30, 2007, our disclosure
      controls and procedures are not effective.





The
      Company plans on remediating the material weaknesses by implementation of new
      financial reporting systems throughout its operations; adoption of uniform
      internal controls; and the addition of management personnel to monitor daily
      organizational activities which will ensure that information is being gathered,
      reviewed and disclosed at all levels of the Company and reported timely in
      various reports filed or submitted under the Exchange Act.  The items
      the Company intends to address include, but are not limited to, the
      following:





1.
            Establish
                effective controls over the period end closing and financial reporting
                processes.  This will require the addition of personnel and the
                creation of closing protocols for both the Company and its subsidiaries
                as
                well as the consolidation of those
                subsidiaries.


2.
            Establish
                systems to check the classification of accounting entries to ensure
                they
                are not improperly classified and are properly written off if events
                warrant such treatment.


3.
            Development
                of an accounting and finance department so as to decrease reliance
                on
                outside consultants for accounting functions normally conducted
                internally.


4.
            Development
                of internal expertise for transactions which, due to the nature of
                the
                Company’s business plan will be
                re-occurring.


5.
            Establishment
                of internal controls and procedures designed to assure that equity
                transactions are accurately and timely
                reported.


6.
            Centralizing
                the accounting functions of the entire Company so as to assure proper
                documentation for all transactions.  In addition procedures will
                be established to address documentation of all material financial
                functions.


7.
            Implementation
                of enhanced documentation procedures to support revenue
                recognition.


8.
            Human
                Resources functions will be enhanced to provide the necessary
                documentation and procedures to assure that employee information
                (i.e.
                home address, tax status, salary, etc.), is accurate and timely
                updated.





Disclosure
      controls and procedures are designed to ensure that information required to
      be
      disclosed in our reports filed or submitted under the Exchange Act are recorded,
      processed, summarized and reported, within the time periods specified in the
      SEC’s rules and forms.  Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed in our reports filed under the Exchange Act is
      accumulated and communicated to management, including our Chief Executive
      Officer and Chief Financial Officer, to allow timely decisions regarding
      required disclosure.





Limitations
      on the Effectiveness of Internal Controls





Our
      management does not expect that our disclosure controls and procedures or our
      internal control over financial reporting will necessarily prevent all fraud
      and
      material error.  An internal control system, no matter how well
      conceived and operated, can provide only reasonable, not absolute, assurance
      that the objectives of the control system are met.  Further, the
      design of a control system must reflect the fact that there are resource
      constraints, and the benefits of controls must be considered relative to their
      costs.  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, within the Company have been
      detected.  These inherent limitations include the realities that
      judgments in decision-making can be faulty, and that breakdowns can occur
      because of simple error or mistake.  Additionally, controls can be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people, or by management override of the internal control.  The design
      of any system of internal control also is based in part upon certain assumptions
      about the likelihood of future events, and there can be no assurance that any
      design will succeed in achieving its stated goals under all potential future
      conditions.  Over time, internal control may become inadequate because
      of changes in conditions, or the degree of compliance with the policies or
      procedures may deteriorate.





Item
      8B: Other Information




None




22


PART
      III




Item
      9:                      
Directors, Executive Officers, Promoters, Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the Exchange Act





Executive
      Officers and Directors





The
      following table sets forth
      information concerning our current executive officers and directors, as of
      September 30, 2007. Aside from Martin Brill, who became a director in July
      2006,
      each director has been a director of the Company since its July 19, 2005
      inception.





Name
            
            Age
            
            PositionRobert
                Y. Lee
            
            
            44
            
            
            Chief
                Executive Officer and Chairman of the BoardMichael
                E. Drace
            
            
            59
            
            
            President,
                Chief Operating Officer, Secretary and DirectorF.
                Kim Cox
            
            
            55
            
            
            Chief
                Financial OfficerAnthony
                J. A. Bryan
            
            
            83
            
            
            DirectorEarl
                Greenburg
            
            
            60
            
            
            DirectorMartin
                Brill
            
            
            61
            
            
            Director








Robert
      Y. Lee





Mr.
      Robert Y. Lee is the founder of the Company and Chairman of the Board from
      2005
      through present. Mr. Lee was an independent investor from 2001 through 2005.
      During Mr. Lee’s twenty-four year retail store career, he has opened, acquired,
      managed, and operated over five hundred video retail stores from 1990 through
      2001. He led the growth of Video City, Inc., a formerly California-based
      operator of video retail stores, from an eighteen-store regional chain to more
      than one hundred thirty video rental stores located in twelve states. As of
      March 2000 (following the sale of forty-nine stores located in Oregon and
      Washington to Blockbuster, Inc.), in conjunction with management of the
      operations of West Coast Entertainment Corporation, Video City owned or managed
      three hundred and seven corporate stores and an additional eighty franchised
      locations. In August 2000, Video City filed a petition under Chapter 11 of
      the
      United States Bankruptcy Code.





Michael
      E. Drace





Mr.
      Michael E. Drace is the President, Chief Executive Officer, Secretary and a
      Director. Mr. Drace has served as President and principal shareholder of Young
      Laundry and Dry Cleaners since 1995. Mr. Drace began his career in 1969 as
      a
      Maintenance Engineer for a large, commercial laundry company. Mr Drace has
      successfully overseen all phases of operations in an executive capacity for
      some
      of the nation’s largest laundry and dry cleaning companies.  Mr. Drace
      has meaningful experience in assimilation of purchased companies subsequent
      to
      acquisition, divestiture of operating divisions, and corporate
      restructuring.





F.
      Kim Cox





Mr.
      Cox
      has more than 25 years of experience in executive management, public company
      accounting and finance, corporate governance, and mergers and
      acquisitions.  Mr. Cox served in multiple executive leadership
      positions at Rentrak Corporation, a publicly-held information management
      company, from 1985 to March 2005, during which he acted as President and
      Secretary from June 2000 to March 2005, Executive Vice President, Secretary
      and
      Treasurer from 1999 to June 2000, and Executive Vice President, Chief Financial
      Officer, Secretary and Treasurer form 1995 to 1999.  Prior to joining
      Rentrak Corporation in 1985, Mr. Cox was an attorney in private practice in
      Oregon, and prior to that, he was a staff accountant with the former accounting
      firm of Arthur Andersen LLP.  Mr. Cox has most recently served as an
      independent consultant to Rentrak Corporation and other businesses from April
      2005 to July 17, 2007.  Mr. Cox received J.D. and M.B.A. degrees from
      Williamette University’s College of Law and Atkinson Graduate School of
      Management, respectively, and is a C.P.A. licensed in the State of
      Washington.




23





Anthony
      J. A. Bryan





Mr.
      Anthony J. A. Bryan currently serves as a member of our Board of Directors,
      a
      position that he has held since inception. He also serves as non-executive
      Vice-Chairman of the Board for Astrata Group Incorporated, a publicly traded
      company in the telematics and geomatics sectors of the GPS industry, which
      position he has held since June 2005, having initially served as its Chairman
      of
      the Board since January 2005. In addition, Mr. Bryan is the non-executive
      Chairman of the Board of 360 Global Wine Company, a publicly traded company
      that
      produces and sells wine, a position that he has held since November 2004. Mr.
      Bryan has been a member of the Board of Directors of 360 Global Wine since
      November 2003. Mr. Bryan is the former Chairman and CEO of Copperweld
      Corporation, a bimetallic wire and steel tubing company, and the former CEO
      of
      Cameron Iron Works, a company in the oil service business. He has also served
      on
      the Boards of Directors of Federal Express Corporation, between 1987 and 1996;
      Chrysler Corporation (now, DaimlerChrysler Corporation), between 1975 and 1991;
      The PNC Financial Services Group, Inc., between 1978 and 1989; ITT Corporation;
      Koppers Inc.; Hamilton Oil Company Ltd.; First City National Bank of Houston;
      and Imetal; and as Chairman of the Executive Committee of Hospital Corporation
      International (formerly the international division of Hospital Corporation
      of
      America), between 1991 and 1992. Mr. Bryan received his Masters Degree in
      Business Administration from the Harvard Business School.




Earl
      Greenburg





Mr.
      Earl
      Greenburg is a member of our Board of Directors, a position that he has held
      since inception. Mr. Greenburg is a former Deputy Attorney General for the
      state
      of Pennsylvania and is a founding partner of Transactional Marketing Partners
      (TMP), currently serving as its Chairman since 1990. TMP has offices in Santa
      Monica, Palm Springs, Florida and Oregon and does business development for
      companies in the direct response industry. Mr. Greenburg was the only three-term
      chairman of the Electronic Retailer Association and was the President of the
      Home Shopping Network (HSN). Mr. Greenburg was selected by Brandon Tartikoff
      to
      serve as vice president of NBC for daytime programming, and has produced
      hundreds of hours of programming for NBC, ABC, CBS, and Fox. Mr. Greenburg
      also
      serves as Chairman of the Board of the Palm Springs International Film Festival
      and serves as trustee for the Palm Springs Art Museum.





Martin
      Brill





Mr.
      Martin Brill is a member of our Board of Directors. Mr. Brill has been a senior
      partner at Levene, Neale, Bender, Rankin & Brill LLP, a law firm
      specializing in bankruptcy and insolvency matters, since 2000. Mr. Brill has
      special expertise in complex reorganizations of publicly held companies
      influenced by securities law. He has represented debtors, creditors’ committees,
      trustees in bankruptcy, and buyers of assets in numerous bankruptcy cases.
      Mr.
      Brill graduated from the University of California, Los Angeles and the UCLA
      School of Law, and he is a member of the State Bar of California and the
      American, Los Angeles County, Beverly Hills, and Century City Bar
      Associations.




There
      are
      no family relationships among any of our directors, executive officers or key
      employees.





Term
      of Office





Our
      directors are appointed for a
      one-year term to hold office until the next annual meeting of our shareholders
      or until removed from office in accordance with our bylaws.





Our
      executive officers are appointed by
      our board of directors and hold office until removed by the board.





Committees
      of the Board of Directors




All
      directors participate in the consideration of audit committee functions. The
      Company is currently in the process of developing a charter for an audit
      committee and will then seek to engage a qualified financial expert and appoint
      other committee members.





All
      directors participate in the consideration of director nominees. We do not
      have
      a policy with regard to consideration of nominations for director. We accept
      nominations for directors from our security holders. There is no minimum
      qualification for a director nominee to be considered by our board of directors.
      All of our directors will consider any nomination in accordance with his or
      her
      fiduciary responsibility to the Company and its stockholders.




Security
      holders may send communications to our Board of Directors by writing to US
      Dry
      Cleaning Corporation, 4040 MacArthur Blvd., Suite 305, Newport Beach, California
      92660 attention Board of Directors or any specified director. Any correspondence
      received at the foregoing address to the attention of one or more directors
      is
      promptly forwarded to such director or directors.




24





Section
      16(a) Beneficial Ownership Reporting Compliance





Section
      16(a) of the Exchange Act requires the Company’s directors and executive
      officers and person who beneficially own more than ten percent of a registered
      class of the Company’s equity securities to file with the SEC initial reports of
      ownership and reports of changes in ownership of common stock and other equity
      securities of the Company.  Officers, directors and greater than ten
      percent beneficial shareholders are required by SEC regulations to furnish
      the
      Company with copies of all Section 16(a) forms they file.  To the best
      of our knowledge based solely on a review of Forms 3, 4 and 5 (and any
      amendments thereof) received by the Company during or with respect to the year
      ended September 30, 2007; the identified reports required by Section 16(a)
      of
      the Exchange Act have been filed on a timely basis.





Code
      of Ethics Disclosure





As
      of
      September 30, 2007, we have not adopted a Code of Ethics for our principal
      executive, financial, and accounting officers or persons performing similar
      functions, as required for listed issuers by sections 406 and 407 of the
      Sarbanes-Oxley Act of 2002 (the “Act”). As of September 30, 2007, the Company is
      not a “listed issuer” as defined by the Act.





We
      have
      begun drafting a code of ethics that will be filed with the SEC upon its
      adoption by the board of directors.




25





Item
      10:  Executive Compensation





The
        following table sets forth certain information with respect to the compensation
        of our Chief Executive Officer and each of our other most highly compensated
        executive officers for the fiscal year ended September 30,
        2007.





Summary
      Compensation Table




Name
                  and
                Position
                  Held
              
              Year
              
              Salary
                ($)
              
              
              Bonus
                ($)
              
              
              Stock
                Awards
                ($)
              
              
              (5)
                Option
                Awards
                ($)
              
              
              All
                  Other
                Compensation
                ($)
              
              
              Total
                ($)Robert
                  Y. Lee
                  (1)
              
              2007
              
              
              178,000
              
              
              
              200,000
              
              
              
              -
              
              
              
              -
              
              
              
              149,740
              
              
              
              527,740Chief
                  Executive OfficerMichael
                  E. Drace
                  (2)
              
              2007
              
              
              183,600
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              31,120
              
              
              
              214,720President,
                  COO andSecretaryF.
                  Kim Cox(3)
              
              2007
              
              
              40,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9,249
              
              
              
              49,249Chief
                  Financial OfficerHaddon
                B. Libby (4)
              
              2007
              
              
              245,750
              
              
              
              31,250
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              277,000Chief
                Financial Officer




____________


(1)
              On
                    December 12, 2006 the Company entered into an employment agreement
                    with
                    Mr. Lee to serve as our Chief Executive Officer.  The terms of
                    the employment agreement are presented below.  Other
                    compensation consists of life insurance $37,077; wireless devices
                    $4,472;
                    housing allowance $28,499; membership fees and charges (including
                    fees and
                    charges incurred by Company executives) $53,647; health insurance
                    $6,045;
                    auto allowance $20,000.(2)
              Mr.
                  Drace began serving as our President, CEO and Secretary as of July
                  29,
                  2005 and resigned as CEO and became the Company’s COO as of December 12,
                  2006.  Mr. Drace’s employment agreement expired on July 28, 2007
                  with no replacement agreement.  Other compensation for the 2007
                  fiscal year consists of life insurance $9,700; wireless devices
                  $850;
                  health insurance $2,570; auto allowance $18,000.  For the 2006
                  fiscal year an auto allowance of $18,000 and for the 2005 fiscal
                  year an
                  auto allowance of $3,000.(3)
              On
                  July 24, 2007 the Company entered into an employment agreement
                  with Mr.
                  Cox to serve as our Chief Financial Officer.  The terms of the
                  employment agreement are presented below.  Other compensation
                  consists of a housing allowance of $5,249 and an auto allowance
                  of
                  $4,000.(4)
              Mr.
                  Libby began serving as our Chief Financial Officer as of October
                  19, 2005
                  and resigned effective July 23, 2007.  During 2006 the Company
                  issued 300,000 shares of its common stock valued at $36,240 as
                  a sign-on
                  bonus per the terms of Mr. Libby’s employment
                  agreement.(5)
              See
                    employment agreements below for pending options to Mr. Cox and
                    Mr.
                    Lee.




26




Compensation
      of Directors





Outside
        directors receive 50,000 shares of Company common stock upon accepting the
        appointment as a director of the Company and 10,000 shares annually thereafter
        on the anniversary date thereof.  Each outside director was issued
        during December 2006 20,000 shares valued at $1.85 per share.  In
        addition, outside directors receive $1,000 for each in-person meeting attended
        and $600 for each telephonic meeting attended. Committee members receive
        $400
        for each committee meeting attended. Inside directors do not receive any
        compensation for their service as directors. All directors are reimbursed
        for
        their travel and other out of pocket expenses as a result of attending
        meetings.




Name
              
              Fees
                  Earned
                or
                  Paid in Cash
                ($)
              
              
              Stock
                  Awards
                ($)
              
              
              Option
                Awards
                ($)
              
              
              Non-Equity
                Incentive
                  Plan
                Compensation
                ($)
              
              
              Change
                  in
                Pension
                  Value
                and
                Nonqualified
                Deferred
                Compensation
                Earnings
                ($)
              
              
              All
                  Other
                Compensation
                ($)
              
              
              Total
                ($)Martin
                  Brill
              
              $
              4,600
              
              
              $
              37,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              41,600Anthony
                  J. A. Bryan
              
              $
              6,000
              
              
              $
              37,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              43,000Michael
                  E. Drace
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Earl
                  Greenburg
              
              $
              5,000
              
              
              $
              37,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              42,000Robert
                  Y. Lee
              
              $
              3,000
              
              
              $
              37,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              40,000




The
      following table sets forth the
      individual grants of stock options; options exercised by our executive officers
      during the year ended September 30, 2007, and the value (market price less
      exercise price) of their unexercised in-the-money options at September 30,
      2007.







27


Employment
      Agreements





Effective
      on December 12, 2006, in connection with his appointment as the Company’s new
      Chief Executive Officer, the Company entered into an employment agreement with
      Robert Y. Lee for a three-year term. The employment agreement provides for
      a
      base salary at the rate of $20,000 per month, which increases to $25,000 upon
      the Company achieving certain milestones in revenue and income. Mr. Lee is
      also
      entitled to a bonus, which will be represented by a promissory note issued
      by
      the Company bearing interest at eight percent per annum and in the principal
      amount of $200,000, of which $50,000 is payable at the earlier of the expiration
      of his employment term and the closing by the Company of a debt or equity
      financing of at least $1,500,000, and the balance of which payable upon the
      earlier of the expiration of his employment term and the closing by the Company
      of stock offering with proceeds of at least $3,000,000. In addition, upon the
      achievement of certain milestones by the Company, Mr. Lee will be entitled
      to
      additional bonuses ranging from $250,000 to $500,000. Furthermore, the Company
      agreed to issue to Mr. Lee fully vested options to purchase an aggregate of
      800,000 shares of the Company’s common stock, at exercise prices ranging from
      $3.50 to $10.00 per share, which options will be evidenced by a stock option
      agreement approved by the Board of Directors. The Company also agreed to pay
      an
      expense allowance for an automobile in an amount of $2,000 per month and a
      housing allowance of up to $3,000 per month. Mr. Lee will be entitled to
      participate in all benefits that may be offered from time to time by the Board
      of Directors such as medical, dental, life and disability
      insurance.  The agreement also provides for non-competition covenant
      by Mr. Lee in favor of the Company and confidentiality provisions.





Effective
      on December 21, 2006, the Company entered into an employment agreement with
      Riaz
      Chauthani as Director of Real Estate and Business Development for a three-year
      term. The employment agreement provides for a base salary at the rate of
      $150,000 per year.  Mr. Chauthani is eligible to receive bonuses as
      may be authorized, declared, and paid by the Board of Directors of up to three
      times annual base salary.  The Company also agreed to pay an expense
      allowance for an automobile in an amount of $1,000 per month and a housing
      allowance of up to $2,000 per month.  Mr. Chauthani will be entitled
      to participate in all benefits that may be offered from time to time by the
      Board of Directors such as medical, dental, life and disability
      insurance.  Furthermore, the Company agreed to issue as part of the
      purchase of CCI to Mr. Chauthani fully vested options to purchase an aggregate
      of 400,000 shares of the Company’s common stock, at exercise prices ranging from
      $3.50 to $10.00 per share.  Additionally, the Company is obligated to
      pay Mr. Chauthani all accrued but unpaid base salary as of the effective date
      of
      termination together with the base salary payable through the end of the term
      upon termination without cause.





Effective
      on July 24, 2007, the Company entered into an employment agreement with F.
      Kim
      Cox for a period of three years, which may be extended for up to three
      additional years. Mr. Cox will initially be paid at the rate of $16,667 per
      month which increases to $20,850 per month thereafter upon the Company achieving
      certain milestones in revenue and income.  Mr. Cox is eligible to
      receive bonuses as may be authorized, declared, and paid by the Board of
      Directors.  Furthermore, the Company agreed to issue to Mr.
      Cox fully-vested stock options to purchase up to 300,000 shares of the
      Company’s common stock, at exercise prices of $3.50, $5.00 and $7.00 per share
      for each increment of 100,000 shares, respectively.  The Company also
      agreed to pay an expense allowance for an automobile in an amount of $1,500
      per
      month and a housing allowance of up to $4,000 per month.  Mr. Cox will
      be entitled to participate in all benefits that may be offered from time to
      time
      by the Board of Directors such as medical, dental, life and disability
      insurance.




28




Item
      11:   Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters





The
        following table sets forth certain information regarding the shares of common
        stock beneficially owned or deemed to be beneficially owned as of January
        11,
        2007, by: (i) each person whom we know beneficially owns more than 5% of
        our
        common stock, (ii) each of our directors, (iii) the executive officers named
        in
        the summary compensation table, and (iv) all such directors and executive
        officers as a group.
 Except
        as
        indicated by the footnotes below, we believe, based on the information furnished
        to us, that the persons and entities named in the table below have sole voting
        and investment power with respect to all shares of our common stock that
        they
        beneficially own, subject to applicable community property laws.
 In
        computing the number of shares of common stock beneficially owned by a person
        and the percentage ownership of that person, we included shares of common
        stock
        underlying options, warrants and convertible preferred stock held by that
        person
        that are currently exercisable or convertible or exercisable or convertible
        within 60 days of January 11, 2007. We did not deem these shares outstanding,
        however, for the purpose of computing the percentage ownership of any other
        person.


Name
                and Address
            Amount
                and Nature of Beneficial Ownership of Common Stock (1)
            Percent
                of Class (1)Executive
                Officers and Directors:Michael
                E. Drace
              1930
                Auiki Street
              Honolulu,
                HI 96819
            1,038,226
                (2)
            4.8%Robert
                Y. Lee
              125
                E. Tahquitz Canyon Way, Suite 203
              Palm
                Springs, CA 92262
            810,000
                (3)
            3.7%Earl
                Greenburg
              125
                E. Tahquitz Canyon Way, Suite 203
              Palm
                Springs, CA 92262
            416,826
                (4)
            1.9%Anthony
                J. A. Bryan
              2525
                North Ocean Blvd
              Gulfstream,
                FL 33483
            210,000
            1.0%Martin
                Brill
              10250
                Constellation Blvd. Ste. 1700
              Los
                Angeles, California 90067
            762,444(5)
            3.5%All
                Directors and Executive Officers (five persons)
            3,237,496
            14.9%


______________


(1)
            As
                used in this table, “beneficial ownership” means the sole or shared voting
                power to vote, or to direct the voting of, a security, or the sole
                or
                shared investment power with respect to a security (i.e., the power
                to
                dispose of, or to direct the disposition of, a security). In addition,
                for
                purposes of this table, a person is deemed, as of any date, to have
                “beneficial ownership” of any security that such person has the right to
                acquire within 60 days after such date. Applicable percentage ownership
                is
                based on 21,726,098 shares of common stock outstanding at January
                11,
                2008.





(2)
            Includes
                881,400 common shares held by Mr. Drace and 156,826 common shares
                held by
                his spouse. The shares are held in a trust for the benefit of Mr.
                Drace
                and his family members. Mr. Drace is the trustee.





(3)
            Does
                not include 240,000 shares of common stock held by Robert Y. Lee
                Charitable Foundation and 621,053 shares of common stock, which are
                held
                by the Rhoton Family Trust. Neither Mr. Lee nor his family members
                are
                beneficiaries of either the charitable foundation or the Rhoton Family
                Trust, and Mr. Lee does not have any voting, dispositive, or investment
                powers with respect to such shares.





(4)
            Includes
                366,826 common shares held individually and 50,000 shares held by
                Transactional Marketing Partners, of which Mr. Greenburg is a principal
                and chairman of the board.





(5)
            Includes
                395,998 originally issued common shares and 366,446 common shares
                from
                conversion of his senior convertible note and his convertible debenture
                including accrued interest.




29





Equity
      Compensation Plan Information




Equity
        Compensation Plan Information
 
 Plan
                  category
              
              Number of
                  outstanding options, warrants and rights
                (a)
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
                (b)
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))
                (c)Equity
                  compensation plansapproved
                  by security holders
              
              -
              
              -
              
              -Equity
                  compensation plansnot
                  approved by security holders
              
              1,200,000
              
              $ 
                  4.50
              
              -Total
              
              1,200,000
              
              $ 
                  4.50
              
              -


Warrants





Reference
      Note 10 to the consolidated
      financial statements included elsewhere within this report for information
      regarding warrants issuances.





Voting
      Preferred Stock




The
      Company authorized 20,000,000
      shares of par value $0.001 convertible preferred stock and issued 1,200,000
      shares to the former stockholder and certain creditors of Steam Press and
      Enivel. The rights and privileges associated with the Company's preferred stock
      provide for no dividends, a liquidation preference of $2.40 per share, voting
      rights equal to those of common stockholders, and conversion into Company common
      stock on a one-for-one basis. The outstanding preferred stock automatically
      converted to common stock during August 2007.





30




Item
      12:  Certain Relationships and Related Transactions, and Director
      Independence





The
      Company rents office space located at 125 E. Tahquitz Canyon Way in Palm
      Springs, California on a month to month basis from Transactional Marketing
      Partners, a company owned by director Earl Greenburg. The rent is $2,200 per
      month all inclusive.





Anthony
      J. A. Bryan, a member of the Company’s Board of Directors (“BOD”) is the father
      of Mr. John Bryan, who is the Chief Executive Officer of The Watley Group
      (“Watley”). In connection with the Watley consulting agreement which expired in
      July 2007 and provided for commissions to Watley in exchange for fund raising
      activities, Watley received approximately $1,518,000 from the Company under
      such
      consulting agreement during the year ended September 30, 2006 and nothing during
      the year ended September 30, 2007.





Mr.
      Martin Brill, a Director and attorney for the Company, received 102,666 shares
      of the Company’s “founders” restricted common stock in connection with his
      services in introducing Watley to the Company. During the year ended September
      30, 2006, pursuant to his agreement with Watley, Mr. Brill received
      approximately $220,000 in fees from Watley in connection with certain fund
      raising activities of Watley and Mr. Brill on the Company’s
      behalf.  Mr. Brill received no such fees in the year ended
      September





On
      September 15, 2005, the BOD acknowledged an agreement between Watley and Robbie
      Lee, whereby Mr. Lee receives a fee from Watley in an amount equivalent to
      3% of
      the first $5.0 million of enterprise value (as defined) and .5% of the
      enterprise value in excess of $5.0 million in connection with acquisitions
      for
      which Watley receives an acquisition success fee from the Company. During the
      period from July 19, 2005 (inception) through September 30, 2005, Mr. Lee
      received fees from Watley of approximately $50,000. Additionally, Mr. Lee was
      paid approximately $69,000 by the Company for consulting fees during such
      period. During the year ended September 30, 2006, Mr. Lee received approximately
      $111,000 in fees from Watley in connection with certain merger and acquisition
      activities in addition to certain fund-raising activities of Watley and Mr.
      Lee
      on the Company’s behalf.  Mr. Lee received nothing during the year
      ended September 30, 2007.





Pursuant
      to his agreement with Watley, during the year ended September 30, 2006 Mr.
      Greenburg received approximately $150,000 in fees from Watley in connection
      with
      certain fund-raising activities of Watley and Mr. Greenburg on the Company’s
      behalf.





Pursuant
      to his agreement with Watley, during the year ended September 30, 2006, the
      Company’s then Chief Financial Officer, Mr. Libby, received approximately
      $220,000 in fees from Watley in connection with certain fund-raising activities
      of Watley and Mr. Libby on the Company’s behalf.





During
      July 2007, the Company loaned Riaz Chauthani, the Company’s Director of Real
      Estate and Business Development and a former owner of CCI, $516,280 under the
      terms of a note receivable calling for annual interest at 6% with all principal
      and accrued interest due December 3, 2008.  The note is secured by Mr.
      Chauthani’s common stock of the Company under a stock pledge
      agreement.  Mr. Chauthani is not a Company officer or member of the
      Board of Directors.





During
      February 2007, in connection with a subscription agreement for the Series A
      Convertible Debentures (see Note 5), the Company loaned Mr. Chauthani $250,000
      under the terms of a note receivable calling for annual interest at 6% with
      all
      principal and accrued interest due December 3, 2008.  The note is
      secured by Mr. Chauthani’s common stock of the Company under a stock pledge
      agreement.




31






Item
      13: Exhibits





Exhibit
      No.                               
Description





3.1
            Certificate
                of Merger of US Dry Cleaning Corporation with and into First Virtual
                Communications, Inc. filed with the Delaware Secretary of State on
                December 30, 2005, attached as an Exhibit to Form 8-K filed with
                the SEC
                on October 26, 2006.




10.1
            Agreement
                and Plan of Merger between First Virtual Communications, Inc. (renamed
                US
                Dry Cleaning Corporation) and US Dry Cleaning Corporation dated September
                21, 2005, attached as an Exhibit to Form 8-K filed with the SEC on
                October
                26, 2006.




10.2
            Agreement
                and Plan of Merger between US Dry Cleaning Corporation and Steam
                Press
                Holdings, Inc. dated August 8, 2005, attached as an Exhibit to Form
                8-K
                filed with the SEC on October 26, 2006.




10.3
            Agreement
                and Plan of Merger between US Dry Cleaning Corporation and Coachella
                Valley Retail, LLC dated August 9, 2005, attached as an Exhibit to
                Form
                8-K filed with the SEC on October 26, 2006.




10.4
            Employment
                Agreement between US Dry Cleaning Corporation and Michael E. Drace
                dated
                July 29, 2005, attached as an Exhibit to Form 8-K filed with the
                SEC on
                October 26, 2006.




10.5
            Employment
                Agreement between US Dry Cleaning Corporation and Haddon B. Libby
                dated
                October 21, 2005, attached as an Exhibit to Form 8-K filed with the
                SEC on
                October 26, 2006.




10.6
            Consulting
                Agreement between US Dry Cleaning Corporation and The Watley Group
                LLC
                dated July 12, 2005, attached as an Exhibit to Form 8-K filed with
                the SEC
                on October 26, 2006.




10.7
            US
                Dry Cleaning Corporation Senior Secured Convertible Promissory Note
                for
                August 2005, attached as an Exhibit to Form 8-K filed with the SEC
                on
                October 26, 2006.




10.8
            US
                Dry Cleaning Corporation Senior Secured Convertible Promissory Note
                for
                February 2006, attached as an Exhibit to Form 8-K filed with the
                SEC on
                October 26, 2006.




10.9
            US
                Dry Cleaning Corporation Election to Convert Senior Secured Convertible
                Promissory Notes, attached as an Exhibit to Form 8-K filed with the
                SEC on
                October 26, 2006.




10.10
            Engagement
                Agreement for Investment Banking Services between Marino Capital
                Partners,
                Inc. and US Dry Cleaning Corporation dated August 24, 2006, attached
                as an
                Exhibit to Form 8-K filed with the SEC on October 26, 2006.




99.1
            Press
                release dated December 30, 2005, filed with the SEC on Form 8-K dated
                December 30 2005.




99.2
            Audited
                financial statements for Enivel, Inc. for the year ended September
                30,
                2004 and ten months ended July 31, 2005, attached as an Exhibit to
                Form
                8-K filed with the SEC on October 26, 2006.




99.3
            Unaudited
                financial statements for Enivel, Inc. for the year ended September
                30,
                2003, attached as an Exhibit to Form 8-K filed with the SEC on October
                26,
                2006.




31.1*
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.




31.2*
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.




32.1*
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.




32.2*
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.




*
      Filed
      herewith





32











Item
      14:  Principal Accountant Fees and Services




Squar,
        Milner, Peterson, Miranda & Williamson, LLP served as our independent
        auditors for the years ended September 30, 2007 and 2006.


Audit
      Fees





The
      aggregate fees billed by our auditors for professional services rendered in
      connection with a review of the consolidated financial statements included
      in
      our quarterly reports on Form 10-QSB and the audit of our annual consolidated
      financial statements for the fiscal years ended September 30, 2007 and 2006
      were
      approximately $305,000 and $225,000, respectively.





Audit-Related
      Fees





For
      the
      years ended September 30, 2007 and 2006, audit related fees billed by our
      auditors were approximately $438,000 and $63,000, respectively.  The
      2007 fees relate primarily to consent reviews for an SB-2 registration statement
      with related amendments and the audits for the acquisitions of Cleaners Club,
      Inc. and TEAM Enterprises.





Tax
      Fees





For
      the years ended September 30, 2007
      and 2006, there have been no tax fees billed by our auditors.





All
      Other Fees





For
      the years ended September 30, 2007
      and 2006, there have been no miscellaneous fees billed by our
      auditors.




33


SIGNATURES




In
      accordance with Section 13 or 15(d)
      of the Exchange Act, the registrant caused this report to be signed on its
      behalf by the undersigned, thereunto duly authorized.





US
      Dry Cleaning Corporation





By:
              /S/
                  ROBERT Y. LEE
              
              
              Date:  January
                  15, 2008Robert
                  Y. LeeChief
                  Executive Officer,Chairman
                  of the Board





In
      accordance with the Exchange Act,
      this report has been signed below by the following persons on behalf of the
      registrant and in the capacities and on the dates indicated.




Signature
              
              Title
              
              Date/S/
                  MICHAEL E. DRACE
              
              President,
                  Chief Operations Officer, Secretary and Director
              
              January
                  15, 2008Michael
                  E. Drace/S/
                  ANTHONY J.A. BRYAN
              
              Director
              
              January
                  15, 2008Anthony
                  J. A. Bryan/S/
                  EARL GREENBURG
              
              Director
              
              January
                  15, 2008Earl
                  Greenburg/S/
                  MARTIN BRILL
              
              Director
              
              January
                  15, 2008Martin
                  Brill






34


EXHIBIT
      INDEX









Exhibit
                31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.




Exhibit
                31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.




Exhibit
                32.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.




Exhibit
                32.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.