UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-KSB/A**




x
              ANNUAL
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934For
                  the fiscal year ended:**September
                  30, 2006**o
              TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT


For
      the
      transition period from __________ to ___________





Commission
      file number: **000-23305**





**U.S.
      DRY CLEANING CORPORATION**


(Name
      of
      small business issuer in its charter)




**Delaware**
              
              **77-0357037**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**125
                  E. Tahquitz Canyon Way, Suite 203, Palm Springs, CA**
              
              **92262**(Address
                  of principal executive offices)
              
              (Zip
                  Code)




Issuer’s
      telephone number: **(760)
      322-7447**





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 o  
No
x





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 o    No
x




State
                  issuer’s revenues for its most recent fiscal year:
              
              $
              6,082,103State
                the aggregate market value of the voting and non-voting common equity
                held
                bynon-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 November 15, 2006
              
              $
              NACheck
                  whether the issuer has filed all documents and reports required
                  tobe
                  filed by Section 12, 13 or 15(d) of the Exchange Act after the
                  distribution of securities under a plan confirmed by a
                  court     Yes x    Noo
  State
                      the number of shares outstanding of each of the issuer’s classesof
                      common equity, as of December 31, 2006:
              
              
              16,969,268


Transitional
      Small Business Disclosure Format (Check One): Yes o    No:
x







**TABLE
      OF CONTENTS**





PART
      I.




Item
                  1:
              Description
                  of Business
              1Item1A:
              Risk
                  Factors
              6Item
                  2:
              Description
                  of Property
              9Item
                  3:
              Legal
                  Proceedings
              9Item
                  4:
              Submission
                  of Matters to a Vote of Security Holders
              9PART
                  II.Item
                  5:
              Market
                  for Common Equity and Related Stockholder Matters
              10Item
                  6:
              Management’s
                  Discussion and Analysis or Plan of Operations
              12Item
                  7:
              Financial
                  Statements
              18Item
                  8:
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              20Item
                  8A:
              Controls
                  and Procedures
              20Item
                  8B:
              Other
                  Information
              20PART
                  III.Item
                  9:
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act
              22Item
                  10:
              Executive
                  Compensation
              25Item
                  11:
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              26Item
                  12:
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              29Item
                  13:
              Exhibits
              30Item
                  14:
              Principal
                  Accountant Fees and Services
              31




i
 
  **EXPLANATORY
          NOTE**
 
 
 This
          Annual Report on Form 10-KSB/A is being filed as Amendment No. 1 to the
          Annual
          Report on Form 10-KSB of U.S. Dry Cleaning Corporation and Subsidiaries
          (sometimes hereinafter collectively referred to as "the Company" or “USDC") for
          the fiscal year ended September 30, 2006, which was filed with the Securities
          and Exchange Commission (the "SEC") on November 30, 2006 (the "Original
          Form
          10-KSB"). Among other things, this Amendment is being filed in order to
          (a)
          restate valuation of stock issuances for 2005 and 2006, and (b) inclusion
          of
          predecessor ten month statement of operations to the financial statements.
 
 In
          response to comments from the SEC resulting from their review of the Company's
          Form SB-2 (filed on December 27, 2006), certain other disclosures were
          added or
          expanded in the amendments of the Company's Form SB-2 filed during the
          period
          described in the preceding paragraph. Accordingly, this Amendment also
          expands
          the disclosure in Management's Discussion and Analysis or Plan of Operations
          (for example, see the "Liquidity and Going Concern Considerations" and
          the
          "Identifying and Measuring Impairment of Long-Lived Assets"
          sections).
 
 Except
          as
          expressly stated in this Amendment No. 1, this amended annual report speaks
          only
          as of the filing date of the Original Form 10-KSB and generally does not
          reflect
          any events occurring after November 30, 2006. Minimal disclosures herein
          have
          been updated to reflect certain transactions which occurred subsequent
          to
          November 30, 2006 which includes information (such as subsequent events)
          that is
          more recent than the disclosure included in the Company’s aforementioned
          registration statement that was filed with the SEC on December 26, 2006.
          See the
          Company's Form 10-QSB's for the first quarter of fiscal 2007 and its Form
          8-K's
          filed with the SEC from mid-November 2006 to date for updated information
          about
          the Company's financial affairs.
   ii


**PART
      I**


**Item
      1:**  **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 Bankruptcy 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 U.S. 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 “U.S. 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.





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. 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.





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.




1




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 five 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**





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





On
      August
      8, 2005, USDC purchased 100% of the outstanding common stock of Steam Press
      and
      on August 9, 2005, USDC purchased 100% of the membership units in CVR in
      stock-for-stock type transactions. USDC, Steam Press, and CVR are hereinafter
      collectively referred to as the “Company.”





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. 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 the 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 five
      retail laundry and dry cleaning stores under several names in the Palm Springs,
      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.





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, the Company 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 acquisitions in Hawaii and California with annual
      revenues of approximately $6,100,000. USDC combines a management team with
      extensive experience in retail consolidations and dry cleaning operations,
      with
      a proven operating model.





We
      intend
      to acquire positive cash flow operations at accretive valuations. Since each
      acquisition target is expected to be self-sufficient prior to any synergies
      to
      be gained from consolidation of operations and economies of scale, we expect
      to
      limit downside risk.





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.




2




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.





***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 the Company’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.




3


***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 is successfully integrating 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.





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.





***Business
      Strategy***





The
      Company only seeks to acquire the leading operators in a geographic market
      with
      a track record of profitability. 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.





***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.




4


***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.





***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.




5




***Major
      Customers***





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





***Employees***





The
      Company has 146 employees, of which 137 are full-time. None of the Company’s
      employees are represented by a labor union. The Company currently contracts
      with
      three professional consultants.





**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.




6


***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.





***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,
      Chief Executive Officer and Secretary; and Haddon B. Libby, our Chief Financial
      Officer; which both are under two-year employment contracts. 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 Director has the authority to
      issue.***





We
      have
      available for issuance 20,000,000 shares of convertible 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.




7


***The
      fact that our directors, executive officers, and more than 5% stockholders
      beneficially own approximately 30% of our capital stock may decrease your
      influence on stockholder decisions.***





Our
      executive officers, directors, and more than 5% stockholders, in the aggregate,
      beneficially own 30% 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.





***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.




8


***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 administrative and sales offices located at 1930 Auiki
      Street, Honolulu, Hawaii 96819. The following is a list of our leased production
      and retail facilities.





·
            Main
                production plant, Honolulu, HI, approximately 23,000 square
                feet.·
            Nuuanu
                retail location, Honolulu, HI, approximately 700 square
                feet.·
            Bishop
                retail location, Honolulu, HI, approximately 450 square
                feet.·
            TOPA
                retail location, Honolulu, HI, approximately 300 square
                feet.·
            Pacific
                Guardian retail location, Honolulu, HI, approximately 600 square
                feet.·
            Hawaii
                Kai retail location, Honolulu, HI, approximately 1,200 square
                feet.·
            Manoa
                retail location, Honolulu, HI, approximately 400 square
                feet.·
            Kahala
                retail location, Honolulu, HI, approximately 600 square
                feet.·
            Windward
                City retail location, Kaneohe, HI, approximately 400 square
                feet.·
            Kailua
                retail location, Kailua, HI, approximately 780 square
                feet.·
            Mililani
                retail location, Mililani, HI, approximately 460 square
                feet.·
            Kapolei
                retail location, Kapolei, HI, approximately 960 square
                feet.·
            Waimalu
                retail location, Pearl City, HI, approximately 575 square
                feet.·
            Big
                Horn retail location, Rancho Mirage, CA, approximately 1,600 square
                feet.·
            Mission
                Plaza retail location, Cathedral City, CA, approximately 1,400 square
                feet.·
            NWC
                Highway 111 retail location, Indio, CA, approximately 1,000 square
                feet.·
            Sun
                City retail location, Palm Desert, CA, approximately 950 square
                feet.·
            Fred
                Waring & Jefferson, Indio, CA, approximately 1,000 square
                feet.·
            Crossroads
                at El Paseo, Palm Desert, CA, approximately 800 square
                feet.





It
      is the
      Company’s intent to lease additional production facilities within Palm
      Springs/Riverside, California in the foreseeable future to replace a facility
      lost to a fire in July 2005.





**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, 2006.




9




**PART
      II**




**Item
      5:**  **Market
      for Common Equity and Related Stockholder Matters**





***Market
      Information***





Prior
      to
      the events disclosed herein, FVC’s common stock had been quoted on the Pink
      Sheets® under the symbol FVCC. All shares of such common stock that were
      outstanding were cancelled pursuant to the Confirmation Order and the Amended
      Plan. No active public trading market in our securities has yet
      commenced.





***Penny
      Stock Rules***





The
      SEC has
      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 activity in our 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 263 stockholders of
      record.





***Dividends***





We
      have
      not paid any cash 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.




10


***Recent
      Sales of Unregistered Securities***




During
      September 2005, the Company issued 196,140 shares of its restricted common
      stock
      as employee awards with an estimated fair value of $66,688. In September 2006,
      the Company cancelled 4,000 shares of its restricted common stock as employee
      awards with an estimated fair value of $11,765. The transaction described in
      this paragraph constituted an exempt offering under Section 4(2) of the
      Securities Act.





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 fair value of
      approximately $1,167,000. The value was determined through the calculation
      of
      the relative fair value under the guidelines of Accounting Principles Board
      (“APB”) Opinion No. 14. Such amount is being amortized to interest expense over
      the maturity period in accordance with EITF Issue No. 00-27. 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
      with an estimated fair value of approximately $34,000, for the purchase of
      a
      business route. The 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 Chief Financial Officer as required by his employment contract
      with a value of $102,000. 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 fair value of approximately $1,751,000
      which was recorded as a discount against the face of the notes payable and
      is
      being accreted to interest expense over the terms of the notes. The value was
      determined through the calculation of the relative fair value under the
      guidelines of APB Opinion No. 14. 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 were valued at $50,000. The transaction described
      in this paragraph constituted an exempt offering under Section 4(2) of the
      Securities Act.




11


**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, 2006 and for the period July 19,
      2005 (inception) to September 30, 2005. 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 both CVR
      and
      Steam Press 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***





For
      the
      year ended September 30, 2006, we had revenues of approximately $6,082,000
      with
      a gross margin of 46.8%. Our revenues were derived from laundry, dry cleaning,
      hotel, uniform and industrial services.





***Operating
      Expenses***





For
      the
      year ended September 30, 2006, operating expenses were approximately $6,646,000.
      Delivery, store, and sales expenses totaled approximately $2,592,000 and related
      primarily to the operation of our retail stores. Administrative expenses were
      approximately $1,353,000 and consisted mainly of administrative payroll of
      $822,000, approximately $107,000 in insurance, approximately $107,000 in travel,
      and approximately $320,000 in general administrative expenses. Other operating
      expenses were approximately $2,429,000 and consisted primarily of legal,
      accounting and consulting services, of which approximately $1,518,000 were
      paid to related parties, incurred in conjunction with becoming a public company.
      Depreciation and amortization expenses were approximately $272,000.





***Operating
      Loss***




For
      the
      year ended September 30, 2006, we had an operating loss of approximately
      $3,744,000. The operating loss is partially due to a fire at the main CVR
      processing plant, which caused the Company to outsource its production work.
      The
      loss of the CVR plant caused us to incur additional overhead while the Company
      worked with the insurance company to settle its claims and look for new
      facilities.




12


***Other
      Expenses***





For
      the
      year ended September 30, 2006, other expenses were approximately 4,628,000
      which
      consisted primarily of debt issuance costs of approximately $1,838,000 and
      interest expense of approximately $3,548,000; which are offset by approximately
      $616,000 in other income for insurance proceeds from the Palm Springs fire.





***Net
      Loss***





For
      the
      year ended September 30, 2006, we had a net loss of approximately $8,426,000
      or
      $0.70 per common share.





**Liquidity
      and Going Concern Considerations**




***Liquidity***





During
      the year ended September 30, 2006, the Company raised net proceeds of
      approximately $5.8 million through the issuance of senior secured convertible
      notes and convertible debentures.





As
      of
      September 30, 2006, we had a working capital deficit of approximately $36,000.
      Our current assets were approximately $2,230,000, which consisted primarily
      of
      approximately $1,414,000 in cash, $602,000 in net trade and other receivables,
      and $214,000 in prepaid expenses and other current assets. Our current
      liabilities were approximately $2,265,000, which consisted primarily of
      approximately $1,573,000 in trade accounts payable and accrued expenses and
      approximately $526,000 in current portion of long-term debt.




Net
      cash
      used in operating activities during the year ended September 30, 2006 was
      approximately $2,941,000. The current period results were due primarily to
      the
      operating loss of approximately $3,798,000 along with an increase in accounts
      receivable and other current assets of approximately $130,000, which were offset
      by approximately $4,713,000 in non cash transactions made up primarily of
      depreciation and amortization, and amortization of debt discounts and deferred
      financing costs; and a decrease of approximately $786,000 in accounts
      payable.





Cash
      flow
      used in investing activities for the year ended September 30, 2006, was
      approximately $390,000 and consisted of capital expenditures.





For
      the
      year ended September 30, 2006, cash flow provided by financing activities
      totaled approximately $4,040,000 and consisted primarily of the net proceeds
      from the issuance of notes payable (including convertible notes) of
      approximately $5,806,000, offset by repayments on notes payable and capital
      leases of approximately $649,000.





***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, 2006, the Company had an
      accumulated deficit of approximately $(9,522,000), a working capital deficit
      of
      approximately $36,000, 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
      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,
      2007.





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.




13




Since
      inception, the Company has yet to generate any profits from operations.
      Accordingly, the Company has met its capital requirements primarily through
      the
      private sale of its convertible secured promissory notes payable and secured
      convertible debentures. The Company has raised approximately $8.1 million in
      net
      cash proceeds through such private sales. In May 2006, the majority of the
      holders of senior-secured convertible notes payable elected to convert them
      into
      the Company’s common stock.





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 2007.
      However, there can be no assurances that any debt and/or equity financing
      transactions now under consideration will be successful at acceptable terms.





**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. 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 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.




14


***Long-lived
      Assets***




The
        Company follows 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.
 
 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 reporting periods presented, management has determined that no impairment
        was necessary. There can be no assurance, however, that market conditions
        will
        not change which could result in impairment of long-lived assets in the
        future.





***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





Our
      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 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.





We
      believe the estimated fair values assigned to the assets acquired and
      liabilities assumed are based on reasonable assumptions. As part of that
      analysis, we also must determine whether an acquired entity is considered to
      be
      a “business” or a “set of net assets” because only if a business is acquired can
      any of the purchase prices be allocated to goodwill. We determined that the
      Steam Press and CVR acquisitions were acquisitions of businesses. See Note
      6 to
      our consolidated financial statements included elsewhere herein for additional
      information.




15




***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.
 
 We
        test
        our intangible assets for possible impairment using a present value technique,
        which is based on estimated future cash flows. These cash flows (which are
        generally derived from the most recent internal budget) and the related fair
        values are measured for impairment purposes as discussed below. Projections
        of
        future cash flows are dependent on certain assumptions, and are inherently
        uncertain; such projections invariably include (of necessity) some estimates
        that are subjective in nature. Thus, there is a risk that future events may
        differ from the assumptions underlying management's estimates. In a given
        fiscal
        period, such differences could have a material effect on our consolidated
        financial statements.
 
 ***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 described in Note 6 to 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 described in Note 6 to our annual consolidated financial statements
        included elsewhere herein. 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. The carrying amount of
        a
        long-lived asset is not recoverable if it exceeds the total undiscounted
        future
        cash flows estimated to result from the asset's use (based on its existing
        service potential) and eventual disposition. 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.
  16
  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.
 
 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.
 
 As
        of
        September 2006, management believes that the fiscal 2006-2007 budget for
        the
        Company was based on reasonable and current information, and are achievable.
        Based on the evaluation process summarized in the preceding paragraphs, it
        was
        determined that the reporting units' estimated fair value was above their
        carrying amounts.
  17


***Contractual
      Commitments***




On
      July
      29, 2005, the Company entered into a two-year employment agreement with Mr.
      Drace. Under the terms of such agreement, Mr. Drace shall be compensated
      $175,000 during the first 12-month period and $183,600 during the second
      12-month period. Mr. Drace also qualifies for certain other benefits and a
      discretionary bonus. Furthermore, Mr. Drace is entitled to participate in the
      Company’s stock option plan at a level commensurate with his position. This
      agreement may be extended for three additional years by mutual consent, and
      entitles Mr. Drace to severance pay equal to six months’ salary in the event his
      employment is terminated without cause.




On
      October 21, 2005, the Company entered into a term sheet with Haddon Libby.
      Under
      the terms of such agreement, Mr. Libby shall be compensated $150,000 annually.
      He will receive periodic performance bonuses that, on an annual basis, can
      be as
      high as three times his base salary. Mr. Libby also received 300,000 shares
      of
      restricted common stock as a start-up bonus with a value of $0.1208 per share.
      Furthermore, Mr. Libby is entitled to severance pay equal to six months’ salary
      in the event his employment is terminated without cause.




A
      summary
      of the Company’s contractual obligations and commitments as of September 30,
      2006 is as follows:





**Contractual
                Obligations****and
                Commitments**
            
            **Total**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **Beyond**Operating
                leases
            
            $
            2,978,000
            
            $
            774,000
            
            $
            687,000
            
            $
            570,000
            
            $
            416,000
            
            $
            531,000Capital
                lease obligations
            
            
            399,000
            
            
            160,000
            
            
            129,000
            
            
            93,000
            
            
            17,000
            
            
            —Long-term
                debt
            
            
            815,000
            
            
            488,000
            
            
            299,000
            
            
            15,000
            
            
            9,000
            
            
            4,000Total
                Contractual Obligations
              and
                Commitments
            
            $
            4,192,000
            
            $
            1,422,000
            
            $
            1,115,000
            
            $
            678,000
            
            $
            442,000
            
            $
            535,000





***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.




18


***Recent
      Accounting Pronouncements***





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
      Payment” (“SFAS 123(R)”). SFAS 123(R) addresses the accounting for transactions
      in which an enterprise exchanges its equity instruments for employee services.
      It also addresses transactions in which an enterprise incurs liabilities that
      are based on the fair value of the enterprise’s equity instruments or that may
      be settled by the issuance of those equity instruments in exchange for employee
      services. The cost of employee services received in exchange for equity
      instruments, including employee stock options, is to be measured at the
      grant-date fair value of those instruments. That cost will be recognized as
      compensation expense over the service period, which would normally be the
      vesting period. In April 2005, the SEC released Staff Accounting Bulletin No.
      107, which provided additional guidance on the adoption of SFAS 123(R) and
      amended its previously adopted rule to modify compliance dates for SFAS 123(R),
      requiring adoption for fiscal years beginning after June 15, 2005. The Company
      adopted FAS 123(R) on January 1, 2006. Management believes the adoption did
      not
      have a significant impact on the consolidated financial statements for the
      year
      ended September 30, 2006. We will continue to evaluate the impact of SFAS 123(R)
      on our financial position and results of operations.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
      replacement of APB No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No.
      154 requires retrospective application to prior periods’ financial statements of
      a voluntary change in accounting principles unless it is impracticable. APB
      Opinion No. 20, “Accounting Changes”, previously required that most voluntary
      changes in accounting principle be recognized by including in net income of
      the
      period of the change the cumulative effect of changing to the new accounting
      principle. This statement is effective for us as of October 1, 2005. We do
      not
      believe that the adoption of SFAS No. 154 had or will have a material impact
      on
      our financial statements.





In
      February 2006, the FASB issued SFAS No. 155, *"Accounting
      for Certain Hybrid Financial Instruments,"* an
      amendment of SFAS No. 133 *"Accounting
      for Derivative Instruments and Hedging Activities"* and SFAS
      No. 140 *"Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities.”* In this
      context, a hybrid financial instrument refers to certain derivatives embedded
      in
      other financial instruments. SFAS No. 155 permits fair value re-measurement
      of
      any hybrid financial instrument that contains an embedded derivative that
      otherwise would require bifurcation under SFAS No. 133. SFAS No. 155 also
      establishes a requirement to evaluate interests in securitized financial assets
      in order to identify interests that are either freestanding derivatives or
      "hybrids" which contain an embedded derivative requiring bifurcation. In
      addition, SFAS No. 155 clarifies which interest/principal strips are subject
      to
      SFAS No. 133, and provides that concentrations of credit risk in the form of
      subordination are not embedded derivatives. SFAS No. 155 amends SFAS No. 140
      to
      eliminate the prohibition on a qualifying special-purpose entity from holding
      a
      derivative financial instrument that pertains to a beneficial interest other
      than another derivative. When SFAS No. 155 is adopted, any difference between
      the total carrying amount of the components of a bifurcated hybrid financial
      instrument and the fair value of the combined "hybrid" must be recognized as
      a
      cumulative-effect adjustment of beginning deficit/retained earnings. SFAS No.
      155 is effective for all financial instruments acquired or issued after the
      beginning of an entity's first fiscal year that begins after September 15,
      2006.
      Earlier adoption is permitted only as of the beginning of a fiscal year,
      provided that the entity has not yet issued any annual or interim financial
      statements for such year. Restatement of prior periods is prohibited. The
      adoption of this pronouncement is not expected to have a material impact on
      the
      Company’s future consolidated financial statements.





In
      September 2006, the 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.




19


**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 of U.S. Dry Cleaning Corporation as of September
                  30, 2006
                  (As Restated)F-3
              Consolidated
                  Statements of Operations of U.S. Dry Cleaning Corporation for the
                  year
                  ended September 30, 2006 (As Restated) and for the period July
                  19, 2005
                  (Inception) to September 30, 2005 (As Restated), and Statement
                  of
                  Operations for the Company’s Predecessor for the ten month period ended
                  July 31, 2005F-4
              Consolidated
                  Statements of Stockholders’ Equity of U.S. Dry Cleaning Corporation for
                  the year ended September 30, 2006 (As Restated) and for the period
                  July
                  19, 2005 (Inception) to September 30, 2005 (As
                  Restated)F-5
              Consolidated
                  Statements of Cash Flows of U.S. Dry Cleaning Corporation for the
                  year
                  ended September 30, 2006 (As Restated) and for the period July
                  19, 2005
                  (Inception) to September 30, 2005 (As Restated)F-6
              Notes
                  to Consolidated Financial
                  Statements







20


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Board of Directors and Stockholders
 U.S.
        Dry
        Cleaning Corporation and Subsidiaries
 
 We
        have
        audited the accompanying consolidated balance sheet of U.S. Dry Cleaning
        Corporation and Subsidiaries (the "Company") as of September 30, 2006, and
        the
        related consolidated statements of operations, stockholders’ equity and cash
        flows for the year ended September 30, 2006 and for the period July 19, 2005
        (Inception) to September 30, 2005. We have also audited the accompanying
        statement of operations for Enivel, Inc. dba Young Laundry & Dry Cleaning
        (the Company’s Predecessor) for the ten month period ended July 31, 2005. 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. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. 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 U.S. Dry Cleaning Corporation
        and
        Subsidiaries as of September 30, 2006, and the results of their operations
        and
        their cash flows for the year ended September 30, 2006 and for the period
        July
        19, 2005 (Inception) to September 30, 2005, and the results of operations
        of
        Enivel, Inc. dba Young Laundry & Dry Cleaning for the ten month period ended
        July 31, 2005, in conformity with accounting principles generally accepted
        in
        the United States of America.
 
 On
        December 30, 2005, the Company completed a reverse merger with a publicly
        traded
“shell” company.
 
 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 $9,500,000
        at
        September 30, 2006. 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.
 
 As
        discussed in Note 12, the accompanying consolidated financial statements
        for the
        year ended September 30, 2006 have been restated to reflect the correction
        of
        errors in the accounting for certain debt financing transactions. As also
        discussed in Note 12, the accompanying consolidated financial statements
        for the
        year ended September 30, 2006 and for the period July 19, 2005 (Inception)
        to
        September 30, 2005 have been restated to reflect the correction of errors
        related to the accounting for stock based compensation. The effect of such
        restatements was an increase to net loss of approximately $2,524,000 and
        $144,000 for the year ended September 30, 2006 and for the period July 19,
        2005
        (Inception) to September 30, 2005, respectively, and an increase to basic
        and
        diluted loss per common share of $(0.21) and $(0.03) for the year ended
        September 30, 2006 and for the period July 19, 2005 (Inception) to September
        30,
        2005, respectively.
 
 /s/
        SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
 
 February
        12, 2007
 Newport
        Beach, California




F-1





**U.S.
        DRY CLEANING CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEET (AS RESTATED)**
 **SEPTEMBER
        30, 2006**


**ASSETS****Current
                  Assets**Cash
              
              $
              1,414,456Accounts
                  receivable, net
              
              
              602,158Prepaid
                  expenses and other current assets
              
              
              213,072Total
                  Current Assets
              
              
              2,229,686**Property
                  and Equipment, net**
              
              
              1,151,764**Other
                  Assets**Notes
                  receivable
              
              
              125,908Deposits
              
              
              93,398Goodwill
              
              
              5,004,699Intangible
                  assets, net
              
              
              380,068Total
                  Other Assets
              
              
              5,604,073**Total
                  Assets**
              
              $
              8,985,523**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  Liabilities**Accounts
                  payable and accrued liabilities
              
              $
              1,573,110Liquidated
                  damages
              
              
              106,875Capital
                  lease obligation
              
              
              117,197Notes
                  payable
              
              
              305,463Related
                  party notes payable
              
              
              162,634Total
                  Current Liabilities
              
              
              2,265,279**Long
                  Term Liabilities**Capital
                  lease obligation, net of current
              
              
              215,438Notes
                  payable, net of current
              
              
              99,391Related
                  party notes payable, net of current
              
              
              11,361Convertible
                  notes payable
              
              
              200,000Total
                  Long Term Liabilities
              
              
              526,190**Total
                  Liabilities**
              
              
              2,791,469**Commitments
                  and contingencies****Stockholders'
                  Equity**Convertible
                  preferred stock; par value $0.001 per share;20,000,000
                  authorized shares;1,200,000
                  shares issued and outstanding; liquidation preference of $2.40
                  per
                  share
              
              
              1,200Common
                  stock; par value $0.001 per share;50,000,000
                  Series B authorized shares;none
                  issued and outstanding
              
              
              -50,000,000
                  authorized shares;16,382,944
                  shares issued and outstanding
              
              
              16,383Additional
                  paid-in capital
              
              
              15,699,021Accumulated
                  deficit
              
              
              (9,522,550
              )Total
                  Stockholders' Equity
              
              
              6,194,054**Total
                  Liabilities and Stockholders' Equity**
              
              $
              8,985,523
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.


F-2




**U.S.
        DRY CLEANING CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **FOR
        THE YEAR ENDED SEPTEMBER 30, 2006 AND**
 **THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005,**
 **AND
        U.S. DRY CLEANING CORPORATION PREDECESSOR**
 **STATEMENT
        OF OPERATIONS**
 **FOR
        THE TEN MONTH PERIOD ENDED JULY 31, 2005**
 **The
                    Company**
                
                **The
                    Predecessor****Year
                    Ended September 30,**
                  **2006**
                  **(As
                    Restated)**
                
                **July
                    19, 2005 (Inception) to September 30,**
                  **2005**
                  **(As
                    Restated)**
                
                **Ten
                    Month**
                  **Period
                    Ended**
                  **July
                    31,**
                  **2005****Net
                    sales**
                
                $
                6,082,103
                
                $
                959,550
                
                $
                4,492,368**Cost
                    of sales**
                
                
                (3,233,763
                )
                
                (642,072
                )
                
                (2,164,745
                )**Gross
                    profit**
                
                
                2,848,340
                
                
                317,478
                
                
                2,327,623**Operating
                    expenses**Delivery
                
                
                566,145
                
                
                81,313
                
                
                364,080Store
                
                
                1,422,765
                
                
                204,946
                
                
                875,124Selling
                
                
                603,209
                
                
                97,065
                
                
                375,286Administrative
                
                
                1,353,310
                
                
                340,736
                
                
                303,192Related
                    party consulting
                
                
                1,518,000
                
                
                309,000
                
                
                -Other
                
                
                910,613
                
                
                235,655
                
                
                10,985Depreciation
                    and amortization
                
                
                272,314
                
                
                51,621
                
                
                120,080Total
                    Operating Expense
                
                
                6,646,356
                
                
                1,320,336
                
                
                2,048,747**Operating
                    income (loss)**
                
                
                (3,798,016
                )
                
                (1,002,858
                )
                
                278,876Insurance
                    funds
                
                
                566,174
                
                
                -
                
                
                -Other
                    income
                
                
                104,718
                
                
                15,803
                
                
                25,499Loss
                    on debt extinguishment
                
                
                (1,751,000
                )
                
                -
                
                
                -(Interest
                    expense)
                
                
                (3,547,562
                )
                
                (109,809
                )
                
                (124,024
                )**Total
                    other income (expense)**
                
                
                (4,627,670
                )
                
                (94,006
                )
                
                (98,525
                )**Income
                    (loss) before provision for income taxes**
                
                
                (8,425,686
                )
                
                (1,096,864
                )
                
                180,351**Provision
                    for income taxes**
                
                
                -
                
                
                -
                
                
                -**Net
                    income (loss)**
                
                $
                (8,425,686
                )
                $
                (1,096,864
                )
                $
                180,351**Basic
                    and diluted loss per common share**
                
                $
                (0.70
                )
                $
                (0.18
                )
                
                -**Basic
                    and diluted weighted average number****of
                    common shares outstanding**
                
                
                12,033,240
                
                
                6,221,890
                
                
                -
 The
        accompanying notes are an integral part of these consolidated financial
        statements.




F-3




**U.S.
        DRY CLEANING CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY**
 **FOR
        THE YEAR ENDED SEPTEMBER 30, 2006 AND**
 **THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005**
  Preferred
                  Stock
              
              Series
                  B
                Common
                  Stock
              
              Common
                  Stock
              
              Additional
                Paid-In
              
              AccumulatedShares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Deficit
              
              TotalBalance,
                  July 19, 2005 (Inception)
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Issuance
                  of founders shares
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,875,000
              
              
              388
              
              
              (388
              )
              
              -
              
              
              -Issuance
                  of common stock to creditorsrelated
                  with the reverse merger
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              678,640
              
              
              68
              
              
              (68
              )
              
              -
              
              
              -Issuance
                  of stock in connectionwith
                  the acquisition of CVR
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,490,000
              
              
              249
              
              
              862,751
              
              
              -
              
              
              863,000Issuance
                  of stock in connectionwith
                  the acquisition of SPHI
              
              
              1,200,000
              
              
              2,880,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,880,000Issuance
                  of common stock todirectors
                  for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              450,000
              
              
              45
              
              
              152,955
              
              
              -
              
              
              153,000Issuance
                  of common stock toemployees
                  for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              196,140
              
              
              19
              
              
              66,669
              
              
              -
              
              
              66,688Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,096,864
              )
              
              (1,096,864
              )Balance,
                  September 30, 2005 (As Restated)
              
              
              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 toholders
                  of senior notes payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,750,000
              
              
              1,750
              
              
              1,164,917
              
              
              -
              
              
              1,166,667Issuance
                  of common stock to anofficer
                  per employment contract
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              300,000
              
              
              300
              
              
              101,700
              
              
              -
              
              
              102,000Issuance
                  of common stock toconsultant
                  for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              300,000
              
              
              300
              
              
              61,780
              
              
              -
              
              
              62,080Issuance
                  of common stock toholders
                  of debentures
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              525,300
              
              
              525
              
              
              1,750,475
              
              
              -
              
              
              1,751,000Issuance
                  of common stock forconversion
                  of senior convertiblenotes
                  payable and interest
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,722,492
              
              
              3,722
              
              
              3,534,560
              
              
              -
              
              
              3,538,282Issuance
                  of common stock forconversion
                  of convertibledebentures
                  and interest
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,099,372
              
              
              2,100
              
              
              5,143,552
              
              
              -
              
              
              5,145,652Cancellation
                  of common stock issuedto
                  employees for services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,000
              )
              
              (4
              )
              
              (11,761
              )
              
              
              
              
              (11,765
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,425,686
              )
              
              (8,425,686
              )Balance,
                  September 30, 2006 (As Restated)
              
              
              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-4


**U.S.
        DRY CLEANING CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (AS RESTATED)**
 **FOR
        THE YEAR ENDED SEPTEMBER 30, 2006 AND**
 **THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005**
  **2006**
              
              **2005****CASH
                  FLOW FROM OPERATING ACTIVITIES:**Net
                  loss
              
              $
              (8,425,686
              )
              $
              (1,096,864
              )Adjustments
                  to reconcile net loss to netcash
                  used in operating activities:Depreciation and amortization
              
              
              272,314
              
              
              51,621Bad debt expense
              
              
              4,000
              
              
              -Amortization of deferred financing costs
              
              
              1,366,496
              
              
              50,058Equity instruments issued for compensation and services
              
              
              152,315
              
              
              219,688Loss on debt extinguishment
              
              
              1,751,000
              
              
              -Amortization of debt discounts
              
              
              1,166,667
              
              
              -Changes
                  in operating assets and liabilities:Accounts receivable
              
              
              (108,395
              )
              
              (60,282
              )Prepaid expenses and other current assets
              
              
              (21,528
              )
              
              155,214Other assets
              
              
              9,025
              
              
              -Accounts payable and accrued liabilities
              
              
              786,157
              
              
              (116,434
              )Liquidated damages
              
              
              106,875
              
              
              -**Net
                  cash used in operating activities**
              
              
              (2,940,760
              )
              
              (796,999
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Acquisition
                  of property and equipment
              
              
              (390,366
              )
              
              (93,464
              )Cash
                  of acquired companies
              
              
              -
              
              
              31,045**Net
                  cash used in investing activities**
              
              
              (390,366
              )
              
              (62,419
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                  from notes payable
              
              
              5,805,869
              
              
              2,311,645Deferred
                  financing costs
              
              
              (1,117,207
              )
              
              (299,347
              )Repayments
                  on capital lease obligations
              
              
              (118,513
              )
              
              (18,026
              )Repayments
                  on notes payable
              
              
              (530,280
              )
              
              (429,141
              )**Net
                  cash provided by financing activities**
              
              
              4,039,869
              
              
              1,565,131**Net
                  increase in cash**
              
              
              708,743
              
              
              705,713**Cash
                  at beginning of period**
              
              
              705,713
              
              
              -**Cash
                  at end of period**
              
              $
              1,414,456
              
              $
              705,713**Supplemental
                  Disclosure of Cash Flow Information:**Cash
                  paid during the period for:Interest
              
              $
              318,823
              
              $
              109,809Income
                  taxes
              
              $
              -
              
              $
              -**Supplemental
                  Disclosure of Non-Cash Investing and Financing
                  Activities:**Adjustment
                  of common and preferred stock par value
              
              $
              2,878,800
              
              $
              -Discount
                  on convertible notes payable
              
              $
              2,917,667
              
              $
              -Conversion
                  of debt and accrued interest to common stock
              
              $
              8,683,934
              
              $
              -Capital
                  lease additions
              
              $
              205,536
              
              $
              -Assumed
                  note payable with equipment purchase
              
              $
              85,000
              
              $
              -
  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-5


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 **1.
        ORGANIZATION AND NATURE OF OPERATIONS**





***Organization
      and Merger***





On
      January 20, 2005, First Virtual Communications, Inc., a Delaware corporation
      (“FVC”), and its wholly owned subsidiary, Bankruptcy CUseeMe Networks, Inc.
      (collectively with FVC, the “Debtors”), filed voluntary petitions for relief
      under Chapter 11 of Title 11 of the United States Bankruptcy 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 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.





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.




F-6


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 **1.** **ORGANIZATION
          AND NATURE OF OPERATION (continued)**
 ***Reverse
          Merger Accounting (continued)***
  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 five retail laundry and dry cleaning stores
          under
          several names in the Palm Springs, California, area. The Company considers
          Enivel to be its predecessor (the “Predecessor”), as defined under SEC rules and
          regulations. Accordingly, the audited statement of operations for the ten
          month
          period ended July 31, 2005 of the Predecessor has been included under a
          separate
          column in the accompanying statements of operations of the Company. The
          results
          of operations of the Predecessor for the period from August 1, 2005 to
          August 8,
          2005 were not significant in relation to the ten month period ended July
          31,
          2005.





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.





***Going
      Concern***





The accompanying consolidated financial statements of the Company 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
      $2,941,000 for the year ended September 30, 2006 and had an accumulated deficit
      of approximately $9,500,000 at September 30, 2006. 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, 2007. 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 Steam Press and CVR from August
      9,
      2005 through September 30, 2006. All
      significant intercompany balances and transactions have been eliminated in
      consolidation.





***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.





***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.




F-7


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**  **(continued)**





***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.





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, 2006, one customer accounted for approximately 16% of gross
      accounts receivable. No other single customer accounted for more than 10% of
      gross accounts receivable as of that date. For the year ended September 30,
      2006
      and for the period from July 19, 2005 (inception) through September 30, 2005,
      one customer accounted for approximately 10% and 15% of net sales, respectively.
      No other single customer accounted for more than 10% of net sales for such
      reporting periods.





***Trade
      Accounts Receivable***





The
      Company records trade accounts receivable when its customers are invoiced for
      products delivered and/or services provided. Other accounting policies governing
      accounts receivables are as follows:





·
            Trade
                accounts receivable are determined to be delinquent based on how
                recently
                payments have been received, the customer’s long-term payment history, the
                Company’s relationship with the customer, and similar
                factors.·
            Trade
                accounts receivable are written off as uncollectible based on management’s
                judgment, considering various factors such as those noted above and
                the
                results of recent collection
                efforts.





***Allowance
      for Doubtful Accounts Receivable***





The
      Company performs periodic reviews of collectability and provides an allowance
      for doubtful accounts receivable as management deems necessary. Management
      considers historical and industry trends in establishing such allowance.
      Management considers the allowance for doubtful accounts receivable at September
      30, 2006 of approximately $30,000 to be adequate to provide for losses, which
      could be sustained in the realization of these accounts. Although the Company
      expects to collect net amounts due, actual collections may differ from these
      estimated amounts.





***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.




F-8


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**


***Long-Lived
        Assets***
 
 The
        Company follows 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.
 
 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 reporting periods presented, management has determined that no impairment
        was necessary. There can be no assurance, however, that market conditions
        will
        not change which could result in impairment of long-lived assets in the
        future.
 
 ***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 described in Note 6 to 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 described in Note 6 to our annual consolidated financial statements
        included elsewhere herein. 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. The carrying amount of
        a
        long-lived asset is not recoverable if it exceeds the total undiscounted
        future
        cash flows estimated to result from the asset's use (based on its existing
        service potential) and eventual disposition. As with goodwill, the traditional
        marketplace definition of fair value applies.




F-9


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **2.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 ***Long-Lived
        Assets (continued)***
 
 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 reporting units' 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.
 
 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.
 
 As
        of
        September 2006, management believes that the fiscal 2006-2007 budget for
        the
        Company was based on reasonable and current information, and are achievable.
        Based on the evaluation process summarized in the preceding paragraphs, it
        was
        determined that the reporting units' estimated fair value was above their
        carrying amounts.
 
 ***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 business combinations during
        the period July 19, 2005 (inception) to September 30, 2005.






F-10


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **2.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 ***Revenue
        Recognition***
 
 The
        Company and the Predecessor recognize 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).
 
 ***Advertising***
 
 The
        Company and the Predecessor expense the cost of advertising when incurred.
        Advertising costs of the Company approximated $136,000 and $21,000 for the
        year
        ended September 30, 2006 and for the period from July 19, 2005 (inception)
        to
        September 30, 2005, respectively. Advertising costs of the Predecessor
        approximated $46,000 for the ten month period ended July 31, 2005.
 
 ***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 and Palm Springs. Honolulu revenues approximated 90% and 93%
        of
        consolidated revenues for the year ended September 30, 2006 and for the period
        from July 19, 2005 (inception) to September 30, 2005, 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, 2006, 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, notes receivable, trade accounts payable, accrued
        liabilities and notes payable approximate their estimated fair value at
        September 30, 2006 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.




F-11


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
  **2.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (continued)**





***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.





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 is successfully integrating 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
        period July 19, 2005 (inception) to September 30, 2005, 3,755,000 and 2,911,765
        convertible securities and warrants to purchase common stock, respectively,
        were
        excluded from the calculation because 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.




F-12


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**





***Stock-Based
      Compensation***





In
      December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS
      No. 123-R, *“Share-Based
      Payment”* ,
      which
      revised SFAS No. 123, *”Accounting
      for Stock-Based Compensation”* ,
      and
      superseded Accounting Principles Board Opinion (“APB”) No. 25, *”Accounting
      for Stock Issued to Employees”* .
      This
      Statement eliminates the alternative to use of APB No. 25’s intrinsic value
      method of accounting that was provided in SFAS No. 123 as originally issued.
      Under APB No. 25, issuing stock options to employees generally resulted in
      recognition of no compensation cost. SFAS No. 123-R 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 adoption of this pronouncement requires the
      Company to record compensation expense for (a) all share-based compensation
      arrangements granted after December 31, 2005 and for any such arrangements
      that
      are modified, cancelled, or repurchased after that date, and (b) the portion
      of
      previous share-based awards for which the requisite service has not been
      rendered as of that date, based on the grant date estimated fair value of those
      awards. The Company adopted SFAS No. 123-R on January 1, 2006. Prior to such
      adoption, the Company accounted for stock-based compensation issued to employees
      using APB No. 25; however, pro forma disclosures, as if the Company adopted
      the
      cost recognition requirement of SFAS No. 123, were required to be presented.
      Other than common stock issued to employees and directors for past services,
      which were recorded at fair value in the accompanying consolidated financial
      statements (see Note 9), the Company did not issue any stock-based compensation
      to its employees during the year ended September 30, 2006 or during the period
      from July 19, 2005 (inception ) to September 30, 2005. Therefore, the pro forma
      disclosures for the period from July 19, 2005 (inception) to December 31, 2005
      are not applicable to the accompanying financial statements. Additionally,
      since
      the Company has no stock option plans or any potential employee stock-based
      employee instruments outstanding, the disclosure requirements of SFAS No. 123-R
      are not applicable to the accompanying financial statements.





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* .”


***Reclassifications***
 
 Certain
        reclassifications have been made to the fiscal 2005 consolidated financial
        statements of the Company to conform to the fiscal 2006 presentation.
        Additionally, the accompanying statement of operations of the Predecessor
        has
        been reclassified from the statement of operations included in the previously
        filed financial statements of the Predecessor (which were included in the
        Company’s Form 8-K filed on October 26, 2006) to conform to the presentation of
        the Company’s statement of operations.




***Significant
      Recent Accounting Pronouncements***





In
      June
      2005, the FASB issued SFAS No. 154, *"Accounting
      Changes and Error Corrections, a Replacement of APB No. 20 and SFAS No.
      3”* .
      The
      statement applies to all voluntary changes in accounting principle, and changes
      the requirements for accounting for and reporting of a change in accounting
      principle. Management does not believe the adoption of SFAS No. 154 had or
      will
      have a material impact on the Company's consolidated financial
      statements.





In
      February 2006, the FASB issued SFAS No. 155, *"Accounting
      for Certain Hybrid Financial Instruments,"* an
      amendment of SFAS No. 133 *"Accounting
      for Derivative Instruments and Hedging Activities"* and SFAS
      No. 140 *"Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities.”* In this
      context, a hybrid financial instrument refers to certain derivatives embedded
      in
      other financial instruments. SFAS No. 155 permits fair value re-measurement
      of
      any hybrid financial instrument that contains an embedded derivative that
      otherwise would require bifurcation under SFAS No. 133. SFAS No. 155 also
      establishes a requirement to evaluate interests in securitized financial assets
      in order to identify interests that are either freestanding derivatives or
      "hybrids" which contain an embedded derivative requiring bifurcation. In
      addition, SFAS No. 155 clarifies which interest/principal strips are subject
      to
      SFAS No. 133, and provides that concentrations of credit risk in the form of
      subordination are not embedded derivatives. SFAS No. 155 amends SFAS No. 140
      to
      eliminate the prohibition on a qualifying special-purpose entity from holding
      a
      derivative financial instrument that pertains to a beneficial interest other
      than another derivative. When SFAS No. 155 is adopted, any difference between
      the total carrying amount of the components of a bifurcated hybrid financial
      instrument and the fair value of the combined "hybrid" must be recognized as
      a
      cumulative-effect adjustment of beginning deficit/retained earnings. SFAS No.
      155 is effective for all financial instruments acquired or issued after the
      beginning of an entity's first fiscal year that begins after September 15,
      2006.
      Earlier adoption is permitted only as of the beginning of a fiscal year,
      provided that the entity has not yet issued any annual or interim financial
      statements for such year. Restatement of prior periods is prohibited. The
      adoption of this pronouncement is not expected to have a material impact on
      the
      Company’s future consolidated financial statements.




F-13


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
  **2.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (continued)**





***Significant
      Recent Accounting Pronouncements*** **(continued)**





In
      September 2006, the 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.





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.
      NOTES RECEIVABLE**





As
      of
      September 30, 2005, Enivel had two notes receivable from an employee in the
      total amount of $15,000. The notes are unsecured, bear no interest and are
      payable upon demand. The outstanding balance of these notes was $8,600 as of
      September 30, 2006, which is included in other current assets.





In
      addition, CVR had two notes receivable from one of its customers for $125,000.
      The notes accrue interest at 7% per annum, are unsecured and had an original
      maturity date of October 1, 2009. On November 1, 2005, the two notes were
      replaced by one note that is unsecured, has an interest rate of 7% and is
      payable in equal monthly installments of interest and principal commencing
      on
      January 1, 2007 until the maturity date of December 31, 2009.





**4.** **PROPERTY
      AND EQUIPMENT**





Property
      and equipment consisted of the following at September 30, 2006:





Delivery
                equipment and other vehicles
            
            $
            348,000Office
                furniture and equipment
            
            
            112,000Store
                furniture and equipment
            
            
            956,000Uniforms
            
            
            356,000Machinery
                and equipment
            
            
            2,515,000Leasehold
                improvements
            
            
            515,0004,802,000Less
                accumulated depreciation and amortization
            
            
            (3,650,000
            )$
            1,152,000





Approximately
      $399,000 of gross property and equipment has been accounted for as capital
      leases. Amortization of property and equipment accounted for as capital leases
      totaled approximately $66,000 and $24,000 during the year ended September 30,
      2006 and during the period from July 19, 2005 (inception) to September 30,
      2005,
      respectively. See Note 10 for additional information.





F-14


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 **5.
        NOTES PAYABLE**





Notes payable, related party notes payable and convertible notes
      payable approximated the following as of September 30, 2006:




***Notes
                Payable:***
              
              Note
                payable to bank, collateralized by Young’s bank accounts, trade accounts
                receivables, certain equipment, contract rights, and insurance policies,
                payable in monthly installments of principal and interest of  $6,842,
                bearing annual interest at 10.5%, and maturing November 1,
                2007.
            
            $
            87,000Note
                payable to a bank, collateralized by substantially all assets of
                Young,
                payable in monthly installments of principal and interest of $8,502,
                bearing annual interest at 6.5%, maturing April 1, 2007.
            
            
            49,000Note
                payable to bank, collateralized by substantially all assets of Young,
                payable in monthly installments of principal and interest of $1,875,
                bearing annual interest at 8%, maturing December 20, 2007.
            
            
            29,000


Note
                payable to vendor, collateralized by substantially all assets of
                Young,
                payable in monthly installments of principal and interest of $5,088,
                bearing interest at 7.5%, maturing July 15, 2008.
            
            
            109,000Note
                payable to a third party, collateralized by purchased assets, payable
                in
                monthly installments of principal and interest of $8,102 beginning
                March,
                2007, bearing interest at 9.0%, maturing in February 2008.
            
            
            85,000Note
                payable to vendor, collateralized by a Company vehicle, payable in
                monthly
                installments of principal and interest of $801, bearing interest
                at 8% and
                maturing November 24, 2010.
            
            
            35,000Note
                payable to vendor, collateralized by a Company vehicle, payable in
                monthly
                installments of $381, bearing no interest and maturing September
                25,
                2009.
            
            
            11,000405,000***Related
                Party Notes Payable:***
              
              Note
                payable to an officer of the Company, collateralized by Young’s bank
                accounts, trade accounts receivables, certain equipment, contract
                rights,
                and insurance policies, payable in monthly installments of $3,759,
                bearing
                annual interest at 6.5%, and maturing September 9, 2009.
            
            
            120,000Note
                payable to a director for working capital advance, due on demand,
                bearing
                no interest.
            
            
            37,000





Note
                payable to an employee of the Company, collateralized by Young’s bank
                accounts, trade accounts receivables, certain equipment, contract
                rights,
                and insurance policies, payable in monthly installments of $513,
                bearing
                annual interest at 4.9%, and maturing August 24, 2009.
            
            
            17,000174,000***Convertible
                Notes Payable:***
              
              Convertible
                debentures, bearing annual interest at 10%, payable quarterly, due
                in
                January 2008, convertible into Company common stock at a fixed price
                of
                $5.00 per share, collateralized by substantially all assets of the
                Company.
            
            
            200,000779,000Less
                current portion
            
            
            (468,000
            )$
            311,000




F-15


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
  **5.
        NOTES PAYABLE (continued)**





In
      connection with the senior secured convertible promissory notes discussed above,
      the Company incurred approximately $1,117,000 and $299,000 of debt issuance
      costs during the year ended September 30, 2006 and for the period from July
      19,
      2005 (inception) to September 30, 2005, respectively, which were capitalized
      as
      deferred financing costs in the accompanying consolidated financial statements.
      Such costs were amortized to interest expense over the terms of the related
      notes using the interest method. The remaining deferred financing costs related
      to debt not converted was considered insignificant and expensed as of September
      30, 2006. Interest expense related to such amortization for the year ended
      September 30, 2006 and for the period from July 19, 2005 (inception) to
      September 30, 2005 approximated $1,366,000 and $50,000,
      respectively.





Future
      minimum principal payments due on notes payable for the years ending on
      September 30 were as follows:





2007
            
            $
            468,0002008
            
            
            286,0002009
            
            
            14,0002010
            
            
            8,0002011
            
            
            3,000$
            779,000




***Debt
        Discounts and Extinguishment***
 
 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 as agreed 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


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 **6.
        BUSINESS COMBINATIONS**





***Overview***





In
      order
      to measure and allocate the purchase price of the business combinations
      discussed below, management estimated the fair value of the acquirees' net
      assets and the non-cash portion of the purchase price using the valuation
      methodologies described in this Note. The purchase price allocations relating
      to
      such transactions are summarized as follows:





Cash
            
            $
            31,000Accounts
                receivable, net
            
            
            437,000Prepaid
                and other current assets
            
            
            210,000Property
                and equipment, net
            
            
            628,000Notes
                and other receivables
            
            
            466,000Customer
                relationship assets
            
            
            113,000Trade
                name/trademark
            
            
            340,000Goodwill
            
            
            4,649,000Less
                liabilities assumed
            
            
            (3,131,000
            )$
            3,743,000





The
      description in this Note of the methodologies used to estimate the fair value
      of
      goodwill and identifiable intangible assets generally applies to both of the
      business combinations discussed below. These valuation methodologies are based
      on estimates which are inherently uncertain, and are dependent on future events
      and management's assumptions. Such estimates are subjective in nature. The
      business combinations described in this Note were not taxable events to the
      Company.





***Goodwill***





A
      deferred tax liability of approximately $356,000, which increased the goodwill
      amount in the above table, was recorded to account for the estimated tax effect
      of non-deductible amortization of identifiable intangible assets acquired in
      the
      transactions. Though such liability arose in accounting for the acquisition
      of
      Steam Press Holdings, Inc. discussed below, it is not a liability that was
      assumed from the sellers in connection with that transaction. The deferred
      tax
      liability is relieved by reducing deferred income tax expense as the related
      assets are amortized for financial reporting purposes. Thus, the business
      combinations discussed in this Note resulted in total goodwill of approximately
      $5,005,000.




A
      summary
      of the September 30, 2006 balance of goodwill resulting from the business
      combinations described in this Note is presented below (both of which were
      recorded on the below acquisition dates during fiscal 2005):




Steam
                Press Holding, Inc
            
            $
            3,341,000Coachella
                Valley Retail
            
            
            1,308,000Sub-total
            
            
            4,649,000Impact
                of deferred tax liability
            
            
            355,699Total
                goodwill at September 30, 2005
            
            $
            5,004,699




Goodwill
      is not deductible for income tax purposes under the tax laws of the United
      States of America.




F-17


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **6.
      BUSINESS COMBINATIONS (continued)**





***Goodwill*** **(continued)**





In
      a
      business combination, GAAP requires that any excess of the purchase price over
      the estimated fair value of net assets acquired (including identifiable
      intangible assets) be recorded as goodwill.





***Customer
      Relationship Assets***





The
      estimated fair value of the customer relationship assets (“CRA”) is being
      amortized on a straight-line basis over an estimated useful life of
      approximately ten years. The caption "Intangible assets, net" in the
      accompanying consolidated balance sheet includes CRA of approximately $82,000
      net of accumulated amortization of $31,000 at September 30, 2006. Annual
      amortization of such assets is estimated at $14,000 for fiscal 2007; $9,000
      for
      fiscal 2008-2014; and approximately $7,000 for fiscal 2015. Management concluded
      that the straight-line method of amortization is appropriate for the Company's
      CRA, and that such method produces costs which reasonably correspond with the
      distribution of expected revenues in all material respects.





Steam
      Press provides dry cleaning services to commercial and retail customers that
      include clothing, linens, uniforms, mats and specialty items such as leather,
      silk and lace. Steam Press has been operating as “Young Laundry & Dry
      Cleaning” in the State of Hawaii (on the island of Oahu) for over 100 years, and
      is considered to have a loyal customer base; thus, it is management's opinion
      that sales to its customers are likely to continue.





The
      Steam
      Press CRA relate to three-year contracts and non-contractual “walk in”
customers. The likelihood of renewal is considered high because these customers
      have established a relationship structured around their needs, with the
      reputation of Young Laundry & Dry Cleaning expected to result in continual
      customer satisfaction.





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. Management
      estimated the fair value of the customer relationship assets and their useful
      lives based on a discounted cash flow analysis over eighteen months for
      contractual customers and ten years for non-contractual customers.





***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 $299,000 net of accumulated amortization of $41,000 at September
      30, 2006. Annual amortization of such assets is estimated at $34,000 for fiscal
      2007-2015. 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.





***Steam
      Press Holdings, Inc.***





On
      August
      9, 2005, USDC agreed to acquire Steam Press and its subsidiary Enivel, both
      of
      which are Hawaii corporations. The principal business of Steam Press is dry
      cleaning services for commercial and retail customers that include clothing,
      linens, uniforms, mats and specialty items such as leather, silk and lace.
      The
      primary operating area of Steam Press is the island of Oahu in the State of
      Hawaii. For financial reporting purposes, the Company recorded the acquisition
      as of August 1, 2005.





Under
      the
      terms of the acquisition agreement, USDC purchased substantially all of Steam
      Press's tangible and intangible assets associated with its dry cleaning business
      for a total price of $2,880,000 which was satisfied as follows:




F-18


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 **6.
        BUSINESS COMBINATIONS (continued)**





***Steam
      Press Holdings, Inc.*** **(continued)**





On
      the
      effective date, 5,000 shares of Steam Press issued and outstanding common stock
      were exchanged for the right to receive 1,200,000 shares of fully paid and
      non-assessable USDC voting preferred stock with a par value of $0.0001 per
      share
      and a liquidation preference of $2.40 per share. Each such share of USDC
      preferred stock is automatically convertible into one share of USDC common
      stock
      upon completion of a reverse merger with a publicly traded company and the
      subsequent listing of the post-merger entity’s common stock on a stock exchange,
      or quotation on a national quotation system (OTC Bulletin Board) or the “Pink
      Sheets”.





The
      fair
      value of the USDC preferred stock issued to the former Steam Press stockholders
      was estimated based on the liquidation value of $2.40 per share for a total
      value of $2,880,000.  The
      Registrant denominated part of the purchase price in the form of its senior
      equity securities in an attempt to retain within the Company the expertise
      of
      the selling stockholders in order to maximize the potential future value of
      the
      acquiree. As more fully explained in Note 9, the initial preferred shares also
      have a liquidation preference. Based on its liquidation preference, the Company
      concluded that the estimated fair value of the preferred stock approximated
      its
      face value. Based on the valuation methodologies described above, the purchase
      price was allocated to the acquired net assets of Steam Press as
      follows:





Cash
            
            $
            5,000Accounts
                receivable, net
            
            
            391,000Prepaid
                and other current assets
            
            
            202,000Property
                and equipment, net
            
            
            389,000Customer
                relationship assets
            
            
            113,000Trade
                name/trademarks
            
            
            340,000Goodwill
            
            
            3,341,000Less
                liabilities assumed
            
            
            (1,901,000
            )$
            2,880,000





The
      liabilities assumed and the goodwill in the table immediately above exclude
      the
      deferred tax liability arising in purchase accounting (see discussion of such
      liability in the "Goodwill" section of this Note).





The
      principal reason that USDC agreed to pay a purchase price for Steam Press in
      excess of its recorded net assets plus the estimated fair value of its
      identifiable intangible assets was to acquire an established revenue
      stream.





***Coachella
      Valley Retail, LLC***





On
      August
      9, 2005, USDC agreed to acquire Coachella Valley Retail, LLC ("CVR"), a
      California limited liability corporation. CVR’s principal business is providing
      dry cleaning services to commercial and retail customers that include clothing,
      linens, uniforms, mats and specialty items. The primary operating area of CVR
      is
      Southern California. For financial reporting purposes, the Company recorded
      the
      CVR acquisition as of August 1, 2005.





Under
      the
      terms of the Acquisition Agreement, the Company purchased substantially all
      of
      CVR's tangible and intangible assets associated with its dry cleaning business
      for a total price of $863,000, which was satisfied as follows:





On
      the
      effective date, the issued and outstanding equity interests in CVR were
      exchanged for the right to receive 2,490,000 shares of fully paid and non
      assessable USDC voting common stock with a par value of $0.001.





The
      fair
      value of the USDC common stock issued to the stockholders was based on the
      fair
      value of the net assets of CVR, which was estimated at $863,000.




F-19


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **6.
      BUSINESS COMBINATIONS** (continued)




***Coachella
      Valley Retail, LLC*** (continued)





Based
      on
      the valuation methodologies described above, the purchase price was allocated
      to
      the acquired net assets of CVR as follows:





Cash
            
            $
            26,000Accounts
                receivable, net
            
            
            46,000Prepaid
                and other current assets
            
            
            8,000Property
                and equipment, net
            
            
            239,000Notes
                and other receivables
            
            
            466,000Goodwill
            
            
            1,308,000Less
                liabilities assumed
            
            
            (1,230,000
            )$
            863,000





The
      principal reason that USDC agreed to pay a purchase price for CVR in excess
      of
      its recorded dry cleaning-related net assets was to acquire an established
      revenue stream.




***Pro
      Forma Financial Information***





Certain
      pro forma financial information of the Company is presented below, based on
      the
      assumption that the above acquisitions occurred at the beginning of the period
      July 19, 2005 (inception) to September 30, 2005.




Unaudited
                Consolidated
              Pro
                Forma
              Financial
                InformationRevenue
            
            $
            1,504,000Net
                loss
            
            $
            (1,111,000
            )Basic
                and diluted lossper
                common share
            
            $
            (0.18
            )




**7.
      OTHER RELATED PARTY TRANSACTIONS**





The
      Company rents office space located at 125 E. Tahquitz Canyon Way in Palm
      Springs, CA 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 described in Note
      10, Watley received consulting fees from the Company of approximately $240,000
      during the period from July 19, 2005 (inception) through September 30, 2005.
      Additionally, Watley received 924,002 shares of the Company’s “founders”
restricted common stock upon formation of the Company. Watley received
      approximately $1,518,000 from the Company under the aforementioned consulting
      agreement during the year ended September 30, 2006.





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.




F-20


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 **7.
        OTHER RELATED PARTY TRANSACTIONS (continued)**





On
      September 15, 2005 the BOD acknowledged an agreement between Watley and the
      Chairman of the Company’s BOD, Mr. 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.





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 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.





**8.
      INCOME TAXES**





The
      Company did not record any income tax expense or benefit for the year ended
      September 30, 2006 or for the period July 19, 2005 (inception) to September
      30,
      2005 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,
      2006, the Company had a net deferred income tax asset of approximately
      $4,284,000 which is net of 100% valuation allowance.





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, 2006.





As
      of
      September 30, 2006, the Company had net operating loss carry forwards for
      federal and state income to purposes of approximately $8,800,000 and $8,900,000,
      respectively, expiring at various dates through 2026 for both federal and
      state purposes. 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 (as defined in Section 382 of the Internal Revenue Code
      of
      1986, as amended) as a result of the reverse merger described in Note
      1.




F-21


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005


**9.
      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.





As
      discussed in Note 1, such merger was completed on December 30, 2005. The Company
      is obligated to register 693,750 shares of preferred stock (or related
      post-conversion common stock) such that it is freely tradable no later than
      December 31, 2005 or pay a penalty of approximately $12,000 per month until
      such
      time as the registration statement is declared effective. As of September 30,
      2006, the Company had not filed any registration statement. The Company has
      also
      agreed to indemnify the stockholders who own 600,000 shares of preferred stock
      in the event they incur income tax liabilities in excess of $250,000 as a result
      of their pre-acquisition exchange of debt for equity in Steam Press.




The
      convertible preferred stock meets the definition of a conventional convertible
      debt instrument. The Company has accounted for the convertible preferred stock
      and the related registration rights agreement in accordance with View C of
      EITF
      Issue No. 05-04 “ *The
      Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
      Subject to EITF Issue No. 00-19* .”
      Management believes the preferred stock and the registration rights agreement
      are separate freestanding agreements that should be accounted for separately
      because the two agreements relate to different risks - the convertible preferred
      stock agreement relates to the share price and the liquidated damages penalty
      relates to the filing of a registration statement and having it declared
      effective. Consequently, the Company believes it is appropriate to account
      for
      the two agreements separately. The registration rights agreement was evaluated
      under EITF Issue No. 00-19 and SFAS No. 133. The registration rights agreement
      is not indexed to the Company’s stock because (a) it is not based on an
      observable market or index and (b) when the contingent event occurs, it can
      be
      settled in cash. However, the liquidated damages included in the registration
      rights agreement are not explicitly limited. As a result, the separate
      registration rights agreement is required to be accounted for as a derivative
      liability in accordance with SFAS No. 133.





Management
      estimated the fair value of the separate registration rights agreement
      derivative liability to approximate the liquidated damages the Company will
      have
      to pay in cash. Pursuant to paragraph 5 of the EITF Issue No. 05-04 Abstract,
      task force members expressed a preference for evaluating a liquidated damages
      provision based on the probable amount that the issuer would pay rather than
      the
      maximum amount. The Company followed this approach and estimated the remaining
      cash settlement of the liquidated damages to approximate $107,000 at September
      30, 2006, which is included in current liabilities in the accompanying
      consolidated balance sheet.




***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.




During
        September 2005, the Company issued 196,140 shares of its restricted common
        stock
        as employee awards valued at approximately $67,000 based on the estimated
        fair
        market value of the Company’s common stock. In September 2006, the Company
        cancelled 4,000 of such shares with an estimated fair value of approximately
        $12,000 based on its original issuance value. The transactions described
        in this
        paragraph constituted an exempt offering under Section 4(2) of the Securities
        Act of 1933, as amended (the “Securities Act”).
 
 During
        the period from July 19, 2005 (inception) to September 30, 2005, the Company
        issued 450,000 shares of restricted common stock to directors, valued at
        approximately $153,000 based on the estimated fair market value of the Company’s
        common stock, in connection with their services as directors.




F-22


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
  **9.
      EQUITY TRANSACTIONS (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 also issued 100,000 shares of its restricted common
        stock for the purchase of a business route with an estimated fair value of
        approximately $12,000 based on the value of the consideration received (the
        business route purchased). The 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 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.





***Warrants***





The
      Company issued 1,500,000 warrants to purchase its common stock to each of the
      two founding shareholders. Such warrants are exercisable at $.01 per share
      should the Company achieve certain annualized revenues in any one month as
      follows: i) if the revenue growth exceeds $60 million, 60% of the potential
      warrants vest, ii) if the revenue growth exceeds $80 million, 80% of the
      potential warrants vest and iii) if revenue growth exceeds $100 million, all
      of
      the potential warrants vest. The warrants expire on December 31,
      2006.




F-23


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **9.
      EQUITY TRANSACTIONS (continued)**





***Warrants*** **(continued)**





A
      summary
      of warrants outstanding follows:




Number
                of
              Shares
            
            Weighted-
              Average
              Exercise
              PriceWarrants
                outstanding at July 19, 2005 (inception)
            
            **-**
            
            **-**Granted
            
            
            3,000,000
            
            $
            0.01Exercised
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Warrants
                outstanding at September 30, 2005
            
            
            3,000,000
            
            $
            0.01Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Warrants
                outstanding at September 30, 2006
            
            
            3,000,000
            
            $
            0.01





The
      number of outstanding and exercisable warrants as of September 30, 2006 is
      provided below:





Outstanding
            
            ExercisableRange
              of
              Exercise
              Prices
            
            Number
              of
                Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Remaining
              Life
              (Years)
            
            Number
              of
                Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Remaining
              Life
              (Years)$
            0.01
            
            
            3,000,000
            
            $
            0.01
            
            
            0.25
            
            
            -
            
            
            -
            
            
            -





Management
      believes the fair value of the warrants is more determinable than the fair
      value
      of the related services and estimated the fair value of the warrants on the
      date
      of grant to be $330,000. Since the warrants do not become exercisable until
      one
      of the contingent vesting events described above occur, the Company recorded
      such amount as deferred compensation, which has been offset in additional
      paid-in capital in the stockholders’ equity section of the accompanying
      consolidated balance sheet, and will not amortize any such amount to expense
      unless a vesting event occurs. If the warrants expire before any vesting occurs,
      management will reverse the accounting, which will have no net effect on
      additional paid-in capital or stockholders’ equity. If any vesting does occur,
      the Company may be required to adjust the fair value of the warrants to their
      then current estimated fair value and such amount would be immediately expensed.
      Management believes the likelihood of any of the vesting events occurring is
      remote.




F-24


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **9.
      EQUITY TRANSACTIONS (continued)**





***Fair
      Value Disclosure***





The
      fair
      value of warrants was estimated using the minimum value method, since the
      warrants were issued prior to the reverse merger (when the Company was a
      privately held company) on July 19, 2005. Such method excludes volatility in
      the
      calculation of estimated fair value. The following assumptions were used to
      determine the estimated fair value of the warrants:




Expected
                life (years)
            
            
            0.25Annual
                dividend per share
            
            $
            -Risk-free
                interest rate
            
            
            3.44
            %Volatility
            
            
            N/A








**10.
      COMMITMENTS AND CONTINGENCIES**





***Operating
      Leases***





The
      Company leases its Honolulu and Palm Springs plant and office facilities under
      non-cancellable operating leases extending through April 2016.





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


2007
            
            $
            774,0002008
            
            
            687,0002009
            
            
            570,0002010
            
            
            416,0002011
            
            
            198,000Thereafter
            
            
            333,000$
            2,978,000





Rent
      expense for the year ended September 30, 2006 approximated $735,000. For the
      period from July 19, 2005 (inception) to September 30, 2005, rent expense
      approximated $138,000.





***Capital
      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, 2006
      was
      approximately $333,000. The future minimum payments under the capital lease
      obligations for the years ending September 30 approximated the
      following:





2007
            
            $
            160,0002008
            
            
            129,0002009
            
            
            93,0002010
            
            
            17,000399,000Less
                imputed interest
            
            
            (66,000
            )$
            333,000




F-25


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **10.
      COMMITMENTS AND CONTINGENCIES (continued)**





***Legal
      Matters***





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
      Contracts***





During
      July 2005, the Company entered into a two-year employment contract with its
      President and Chief Executive Officer obligating the Company to pay six months’
salary and any accrued bonuses upon termination without cause.





During
      October 2005, the Company entered into a two-year employment contract with
      its
      Chief Financial Officer obligating the Company to pay six months’ salary upon
      termination without cause.





***Consulting
      Agreement***





The
      Watley Group, LLC (“Watley”), an entity owned by one of the Company’s
      stockholders, is entitled to a consulting fee equal to 10% of the first
      $10,000,000 of bridge capital in the form of senior secured convertible notes
      and other debt or equity financing which it raises for Company financing and
      7.5% of any amount aggregate gross proceeds of such financing in excess of
      $10,000,000. Watley is also entitled to 5% of the first $10,000,000 of any
      commercial debt, subordinated debt, mezzanine debt and other debt or leasing
      facility and 2.5% of any amount of borrowings or lease transactions in excess
      of
      $10,000,000. If warrants or other equity instruments are granted in connection
      with such a borrowing or lease transaction, the Company will pay a fee to Watley
      equivalent to 10% of the total amount of funds to be received by the Company
      upon exercise of the warrants or for other equity instruments on an as received
      by the Company basis. In addition, Watley is entitled to 6% of the first
      $5,000,000 of the value of any enterprise that it assists the Company acquire
      or
      merge into and 3% of the value of any such entity in excess of $5,000,000.
      The
      agreement expires in July 2007.





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.





***Stock
      Registration Rights***





As
      discussed in Note 9, the Company was obligated to register 693,750 shares of
      preferred stock (or related post-conversion common stock) such that it is freely
      tradable no later than December 31, 2005 or pay a penalty of approximately
      $12,000 per month until such time as the registration statement is declared
      effective. As of September 30, 2006, the Company had not filed any registration
      statement. The Company has also agreed to indemnify the stockholders who own
      600,000 shares of preferred stock in the event they incur income tax liabilities
      in excess of $250,000 as a result of their pre-acquisition exchange of debt
      for
      equity in Steam Press.





**11.
      EMPLOYEE BENEFIT PLAN**





The
      Company sponsors a 401(k) plan for all employees of Enivel with at least one
      year of service. The Company does not match any employee contributions, and
      made
      no discretionary contributions for the year ended September 30,
      2006.





F-26


U.S.
        DRY
        CLEANING CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEAR ENDED SEPTEMBER 30, 2006 AND
 THE
        PERIOD JULY 19, 2005 (INCEPTION) TO SEPTEMBER 30, 2005
 
 **12.
        RESTATEMENT**
 
 The
        accompanying consolidated balance sheet of the Company as of September 30,
        2006
        and the related consolidated statements of operations, stockholders’ equity and
        cash flows for the year ended September 30, 2006 and for the period July
        19,
        2005 (Inception) to September 30, 2005, previously filed with the SEC on
        Form
        10-KSB on November 30, 2006, have been restated to correct the accounting
        errors
        described below:
 
 ·
              In
                  February 2007, management determined that the Company should have
                  used
                  $0.34 per share as the fair market value of its common stock. Such
                  determination of fair value is based on the only common stock transaction
                  during the period from July 19, 2005 (Inception) through September
                  30,
                  2006 that involved an independent third party negotiation of the
                  common
                  stock value, as the Company’s common stock (of the post-merger entity) has
                  not yet been listed on a national exchange or quoted on a national
                  quotation system (OTC Bulletin Board). Using a common stock price
                  of $0.34
                  per share, the relative fair value of the proceeds attributable
                  to the
                  common stock issued with the convertible notes payable discussed
                  in Note 5
                  under the caption “Debt Discounts and Extinguishment” was recalculated to
                  be approximately $2,918,000 as compared to approximately $448,000
                  that was
                  previously reported.
 
 ·
              As
                  a result of the change of the fair value of the Company’s common stock
                  discussed above, management determined that the change in the conversion
                  price of the Company’s remaining outstanding notes discussed in Note 5
                  under the caption “Debt Discounts and Extinguishment” resulted in debt
                  extinguishment and, accordingly, expensed the entire remaining
                  unamortized
                  balance of debt discount approximating $1,751,000 as loss on
                  extinguishment of debt in the accompanying consolidated statements
                  of
                  operations.
 
 ·
              As
                  a result of the change of the fair value of the Company’s common stock
                  discussed above, the estimated value of certain of the Company’s common
                  stock that was issued to employees as employee awards was changed
                  to be
                  approximately $90,000 as compared to approximately $36,000 that
                  was
                  previously reported for the year ended September 30, 2006, and
                  was changed
                  to be approximately $220,000 as compared to approximately $76,000
                  that was
                  previously reported for the period from July 19, 2005 (Inception)
                  through
                  September 30, 2005.
 
 As
        of
        and for the year ended September 30, 2006
 
 As
                  Previously Reported
              
              As
                  Restated
              
              ChangeAdditional
                  paid-in capital
              
              $13,030,945
              
              $15,699,021
              
              $2,668,076Accumulated
                  deficit
              
              $(6,854,474)
              
              $(9,522,550)
              
              $(2,668,076)Stockholders’
                  equity
              
              $6,194,054
              
              $6,194,054
              
              $
                  -Operating
                  loss
              
              $(3,743,538)
              
              $(3,798,016)
              
              $(54,478)Other
                  income (expense)
              
              $(2,158,259)
              
              $(4,627,670)
              
              $(2,469,411)Net
                  loss
              
              $(5,901,797)
              
              $(8,425,686)
              
              $(2,523,889)Basic
                  and diluted net loss per common share
              
              $(0.49)
              
              $(0.70)
              
              $(0.21)
 
 As
        of
        and for the period July 19, 2005 (Inception) to September 30,
        2005
 
 As
                  Previously Reported
              
              As
                  Restated
              
              ChangeAdditional
                  paid-in capital
              
              $937,732
              
              $1,081,919
              
              $144,187Accumulated
                  deficit
              
              $(952,677)
              
              $(1,096,864)
              
              $(144,187)Stockholders’
                  equity
              
              $2,865,824
              
              $2,865,824
              
              $
                  -Operating
                  loss
              
              $(858,671)
              
              $(1,002,858)
              
              $(144,187)Other
                  income (expense)
              
              $(94,006)
              
              $(94,006)
              
              $
                  -Net
                  loss
              
              $(952,677)
              
              $(1,096,864)
              
              $(144,187)Basic
                  and diluted net loss per common share
              
              $(0.15)
              
              $(0.18)
              
              $(0.03)


F-27


**13.
        SUBSEQUENT EVENTS (UNAUDITED)**
 
 ***Debt
        Financing Arrangement***
  On
          December 26, 2006, the Company accepted subscriptions from accredited investors
          for $2,250,000 in total purchase price of its Series A Convertible Debenture.
          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 will be a
          maximum
          of 10% of cash received. As of December 31, 2006 the Company has deposited
          $1,400,000 in cash proceeds and expects to deposit an additional $850,000
          during
          January and February of 2007. Accordingly, 233,324 shares of common stock
          were
          issued during the quarter ended December 31, 2006. 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.
 
 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 (the estimated fair value of the common stock at the commitment date
          - See
          Note 5) pursuant to Accounting Principles Board Opinion No. 14 and related
          interpretations and recorded debt discounts associated with the common
          stock and
          a beneficial conversion feature totalling $500,089. Additionally, the built-in
          30% rate of return described above, totalling $420,000, 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 three months ended December 31,
          2006,
          the Company accreted approximately $38,337 of such debt discounts to interest
          expense.
  ***Material
        Definitive Agreement***
 
 During
        December 2006, U.S. Dry Cleaning Corporation, Delaware corporation (“USDC”),
        entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
        Cleaners Club Acquisition Sub, Inc., a California corporation and a wholly-owned
        subsidiary of USDC (“Merger Sub”), Cleaners Club, Inc., a California corporation
        (“Cleaners Club”), and the sole shareholder of Cleaners Club. The Merger
        Agreement contemplates that, subject to the terms and conditions of the Merger
        Agreement, Cleaners Club will be merged with and into Merger Sub, with Merger
        Sub continuing after the merger as the surviving corporation (the
“Merger”).
 
 During
        December 2006 the Merger Sub paid $150,000 as an advance payment toward the
        definitive agreement.
 
 Completion
        of the Merger is subject to customary closing conditions, including, among
        other
        things, (i) adoption of the Merger Agreement by the sole shareholder of Cleaners
        Club, (ii) absence of any order or injunction prohibiting the consummation
        of
        the Merger; (iii) the accuracy of the representations and warranties of each
        party; and (iv) compliance of each party with its covenants. The Merger
        Agreement also contains certain termination rights for both USDC and Cleaners
        Club. In addition, the Merger Agreement contemplates that USDC will provide
        the
        sole shareholder of Cleaners Club with “piggyback” registration rights to be set
        forth in a separate registration rights agreement in respect of the shares
        to be
        issued in the merger.
 
 F-28


**13.
        SUBSEQUENT EVENTS (UNAUDITED) (continued)**
 
 ***Filing
        of Form SB-2***
 
 On
        December 27, 2006 the Company filed a Form SB-2. The offering consists of
        2,500,000 units. Each unit consists of one share of common stock and one
        redeemable warrant to purchase one share of common stock.
 
 The
        warrants included in the units will be exercisable to purchase one share
        of
        common stock immediately after the effectiveness of this offering. Each warrant
        entitles its holder to purchase one share of common stock at an exercise
        price
        equal to $3.50. The warrants expire on the fifth anniversary of the effective
        date of this offering. There is a possibility that the warrants will never
        be
        exercised when in-the-money or otherwise, and that warrant holders will never
        receive shares or payment of cash in settlement of the warrants. We 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 our common stock has exceeded $5.00 for 20 consecutive trading
        days.




F-29




**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, 2006. 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, 2006, 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.





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




21




**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, 2006. Aside from Martin Brill, who became
      a
      director in July 2006, each director has been a director of the Company since
      inception (as U.S. Dry Cleaning, Inc.).





**Name**
            
            **Age**
            
            **Position**Robert
                Y. Lee
            
            
            43
            
            
            Chairman
                of the BoardMichael
                E. Drace
            
            
            58
            
            
            President,
                Chief Executive Officer,
              Secretary
                and DirectorHaddon
                B. Libby
            
            
            44
            
            
            Chief
                Financial OfficerAnthony
                J. A. Bryan
            
            
            82
            
            
            DirectorEarl
                Greenburg
            
            
            59
            
            
            DirectorMartin
                Brill
            
            
            60
            
            
            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.





***Haddon
      B. Libby***





Mr.
      Haddon B. Libby is the Chief Financial Officer. Mr. Libby previously worked
      for
      Bank of America as Senior Vice President in its Banc of America Securities
      and
      Private Bank/Banc of America Investment Services units from 1992 to 2005. While
      a senior officer for their Private Bank operations in Coachella Valley (2002
      to
      2005), he was responsible for a nine-figure investment portfolio. Mr. Libby
      serves as Chairman and President of the La Quinta Arts Foundation and serves
      on
      the Boards of The Living Desert Zoo and Botanical Gardens and the Palm Springs
      International Film Festival. He has spoken at the Milken Institute’s High Yield
      Debt Conference, California Broadcasters Association, and USC Graduate School
      of
      Business on various financing techniques and approaches. Mr. Libby received
      a
      B.S. in Business Administration-Finance from Northeastern University in 1985,
      graduating Magna Cum Laude, a four-year Travelli Scholar, and recipient of
      the
      Ford Humanitarian Award.




22


***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
      Greenbur*** *g*





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.




23


***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 our 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 U.S.
      Dry
      Cleaning Corporation, 125 E. Tahquitz Canyon Way, Suite 203, Palm Springs,
      California 92262, 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.





***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,
      2006; 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, 2006, 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, 2006, 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.




24




**Item
      10:**  **Executive
      Compensation**





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. 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.





On
      September 15, 2005, the Board ratified an agreement between our Chairman, Mr.
      Robert Y. Lee, and The Watley Group, LLC, whereby Mr. Lee shall receive a
      success fee equal to three percent of the first $5.0 million of enterprise
      value
      (as defined) and one and one-half percent of enterprise value in excess of
      $5.0
      million from The Watley Group, LLC, in connection with acquisitions for which
      The Watley Group receives an acquisition success fee from the Company. Mr.
      Lee
      does not receive a salary from the Company for his efforts on the Company’s
      behalf, but is reimbursed for his out of pocket expenses and for attending
      meetings of the Board and Committees. Mr. Lee is a non-executive Chairman of
      our
      Board of Directors and, as such, is compensated consistent with all other
      outside directors.





The
      following table sets forth certain annual and long-term compensation paid to
      our
      Chief Executive Officer and our executive officers.




**Summary
                  Compensation Table****Annual
                  Compensation**
              
              
              
              **Long-Term
                  Compensation****Other**
              
              **Restricted**
              
              **Securities****Annual**
              
              **Stock**
              
              **Underlying**
              
              **All
                  Other****Fiscal**
              
              **Salary**
              
              **Bonus**
              
              **Compensation**
              
              **Award(s)**
              
              **Options**
              
              **Compensation****Name
                  & Principal Position**
              
              **Year**
              
              **($)**
              
              **($)**
              
              **($)**
              
              **($)**
              
              **(#)**
              
              **($)**Michael
                  E. Drace,
              
              
              2006
              
              
              175,000
              
              
              -
              
              
              18,000*
              
              
              -
              
              
              -
              
              
              -President,
                  CEO ***
              
              
              2005
              
              
              29,170
              
              
              -
              
              
              3,000*
              
              
              -
              
              
              -
              
              
              -and
                  SecretaryHaddon
                  B. Libby, CFO ****
              
              
              2006
              
              
              137,500
              
              
              -
              
              
              -
              
              
              36,240**
              
              
              -
              
              
              -2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
  *
                  The Company provides Mr. Drace approximately $1,500 per month of
                  car
                  allowance.**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.***Mr.
                  Drace was employed on July 29, 2005.****Mr.
                  Libby started on October 19,
                  2005.


***Employment
      Agreements***





On
      July
      29, 2005, the Company entered into a two-year employment agreement with Mr.
      Drace. Under the terms of such agreement, Mr. Drace shall be compensated
      $175,000 during the first 12-month period and $183,600 during the second
      12-month period. Mr. Drace also qualifies for certain other benefits and a
      discretionary bonus. Furthermore, Mr. Drace is entitled to participate in the
      Company’s stock option plan at a level commensurate with his position. This
      agreement may be extended for three additional years by mutual consent, and
      entitles Mr. Drace to severance pay equal to six months’ salary in the event his
      employment is terminated without cause.




On
      October 21, 2005, the Company entered into a term sheet with Haddon Libby.
      Under
      the terms of such agreement, Mr. Libby shall be compensated $150,000 annually.
      He will receive periodic performance bonuses that, on an annual basis, can
      be as
      high as three times his base salary. Mr. Libby also received 300,000 shares
      of
      restricted common stock as a start-up bonus with a value of $0.1208 per share.
      Furthermore, Mr. Libby is entitled to severance pay equal to six months’ salary
      in the event his employment is terminated without cause.





Copies
      of
      the above employment agreements are included as Exhibits 10.2 and 10.3,
      respectively, to Form 8-K filed with the SEC on


October
      26, 2006.




25




**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 September
      30,
      2006, 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 September 30, 2006. 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
            531,826
                (2)
            3.2%Robert
                Y. Lee
              125
                E. Tahquitz Canyon Way, Suite 203
              Palm
                Springs, CA 92262
            800,000
                (3)
            4.9%Earl
                Greenburg
              125
                E. Tahquitz Canyon Way, Suite 203
              Palm
                Springs, CA 92262
            406,826
                (4)
            2.5%Haddon
                B. Libby
              125
                E. Tahquitz Canyon Way, Suite 203
              Palm
                Springs, CA 92262
            534,326
                (5)
            3.3%Anthony
                J. A. Bryan
              2525
                North Ocean Blvd
              Gulfstream,
                FL 33483
            200,000
            1.2%Martin
                Brill
              10250
                Constellation Blvd. Ste. 1700
              Los
                Angeles, California 90067
            669,112(6)
            4.1%**All
                Directors and Executive Officers (six persons)**
            3,142,091
            19.2%**More
              than 5% Beneficial Owners:**The
                Watley Group, LLC
              1801
                Century Park East, Suite 1830
              Los
                Angeles, CA 90067
            924,002
            5.6%Brian
                C. Walker
              44100
                Jefferson Street, Suite C-305
              Indio,
                CA 92201
            835,238
            5.1%





______________


(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 16,382,944 shares of common stock outstanding at September
                30,
                2006.




26




(2)
            Includes
                375,000 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 600,000 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
                356,826 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)
            Mr.
                Libby joined the Company on October 19, 2005. Mr. Libby received
                300,000
                common shares per the terms of his employment agreement and 234,326
                common
                shares from conversion of his senior convertible note and his convertible
                debenture including accrued interest.(6)
            Mr.
                Brill received 302,666 founding common shares and 366,446 common
                shares
                from conversion of his senior convertible note and his convertible
                debenture including accrued
                interest.





The
      following table sets forth certain information regarding the shares of preferred
      stock beneficially owned or deemed to be beneficially owned as of September
      30,
      2006, by: (i) each person whom we know beneficially owns more than 5% of our
      preferred 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.








**Name
                and Address**
            **Amount
                and Nature of Beneficial**
              **Ownership
                of Preferred Stock**
            **Percent
                of**
              **Class****Executive
                Officers and Directors:**Michael
                E. Drace
              1930
                Auiki Street
              Honolulu,
                HI 96819
            506,400
            42.2%**More
                than 5% Beneficial Owners:**David
                Applebaum Revocable Trust
              2340
                Green Mountain Court
              Las
                Vegas, NV 89135
            541,687
            45.1%




27




*Equity Compensation Plan
      Information*


Equity
                  Compensation Plan InformationPlan
                  Category
              Number
                  of Securities
                exercise
                  of
                oustanding
                  options,
                warrants
                  and rights
                (a)
              Weighted-average
                exercise
                  price of
                oustanding
                  options,
                warrants
                  and rights
                (b)
              Number
                  of securities
                remaining
                  available for
                future
                  issuance
                under
                  equity
                compensationplans
                (excluding
                  securities reflected
                in
                  column (a))
                (c)Equity
                  compensation plans
                approved
                  by security holders
              -
              -
              -Equity
                  compensation plans
                not
                  approved by security holders
              4,240,000
              4,240,000
              -Total
              4,240,000
              4,240,000
              -


Warrants





The
      Company issued 1,500,000 warrants to purchase its common stock to each of the
      two founding shareholders. Such warrants are exercisable at $.01 per share
      should the Company achieve certain annualized revenues in any one month as
      follows: i) if the revenue growth exceeds $60 million, 60% of the potential
      warrants vest, ii) if the revenue growth exceeds $80 million, 80% of the
      potential warrants vest and iii) if revenue growth exceeds $100 million, all
      of
      the potential warrants vest. The warrants expire on December 31,
      2006.





**** 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.





Convertible
      Notes Payable




Convertible
      debentures of $200,000 bearing annual interest at 10%,
      payable quarterly, due in January 2008, convertible into Company common stock
      at
      a fixed price of $5.00 per share.





28





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





On
      July
      19, 2005, we entered into a Consulting Agreement with The Watley Group, LLC
      (“Watley”), which was ratified by the Board of Directors on September 15, 2005,
      with regard to capital referral fees, merger and acquisitions, and other
      services. Under terms of the Agreement, Watley receives a success fee for
      identifying, coordinating, and otherwise facilitating the completion of
      acquisitions. In addition, Watley is to receive a success fee for identifying
      and facilitating fund raising. If requested by the Company, Watley may perform
      other consulting services for a two-year period and for such services was
      granted 1,026,668 shares of our restricted common stock. The 1,026,668 shares
      of
      restricted common stock were allocated by Watley between Mr. Martin Brill and
      The Watley Group consisting of 102,666 to Mr. Martin Brill and 924,002 remained
      with Watley for services each were to perform. Further, for the year ended
      September 30, 2006, Watley received fees from the Company of approximately
      $1,518,000. Anthony J. A. Bryan, a member of our board of directors, is the
      father of Mr. John Bryan, Chief Executive Officer of Watley.





On
      September 15, 2005, the Board ratified the issuance of warrants to purchase
      1,500,000 shares of our common stock for $.01 per share to Watley and warrants
      to purchase 1,500,000 shares of our common stock for $.01 per share to our
      Chairman, Mr. Robert Y. Lee. Such warrants are to vest if and when our sales
      equal or exceed $100 million on an annualized basis for a consecutive 90-day
      period and expire on December 31, 2006. On September 15, 2005, the Board also
      acknowledged an agreement between our Chairman and Watley, whereby Mr. Lee
      receives a success fee from Watley in an amount equivalent to 3% of the first
      $5.0 million of enterprise value (as defined) and .5% of enterprise value in
      excess of $5.0 million in connection with acquisitions for which Watley receives
      an acquisition success fee from the Company. A copy of the Watley agreement,
      which includes the agreement with Mr. Lee, is included as Exhibit 10.3 of Form
      8-K filed with the SEC on October 26, 2006.





During
      the period ended September 30, 2005, Mr. Lee received fees from Watley of
      approximately $111,000 in connection with certain merger
      and acquisition activities in addition to certain fund-raising
      activities on our behalf.





Pursuant
      to his agreement with Watley, during the year ended September 30, 2006, one
      of
      our directors, Mr. Earl Greenburg, received approximately $150,000 in referral
      fees from Watley for his assistance to the Company in obtaining debt or equity
      financing.





Pursuant
      to his agreement with Watley, during the year ended September 30, 2006, our
      Chief Financial Officer, Mr. Haddon Libby, received approximately $220,000
      in
      referral fees from Watley for his assistance to the Company in obtaining debt
      or
      equity financing.





Pursuant
      to his agreement with Watley, during the year ended September 30, 2006, Mr.
      Martin Brill, an attorney for us and, as of July 27, 2006, one of our directors,
      received approximately $220,000 in referral fees from Watley for his assistance
      to us in obtaining debt or equity financing. Previously, in connection with
      Mr.
      Brill’s services in introducing Watley to us, Watley had transferred to Mr.
      Brill 102,666 of the shares of our common stock that Watley had been
      issued.





29





**Item
      13: Exhibits**








**ExhibitNo.**
            **Description**3.1
            Certificate
                of Merger of U.S. 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
                U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S. 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
            U.S.
                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
            U.S.
                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
            U.S.
                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 U.S. 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




30





**Item
      14: Principal Accountant Fees and Services**





***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 year ended September 30, 2006 were
      approximately $225,000.





***Audit-Related
      Fees***





For
      the
      year ended September 30, 2006, audit related fees billed by our auditors were
      approximately $63,000.





***Tax
      Fees***





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





***All
      Other Fees***





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





31


**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.





**U.S.
      Dry Cleaning Corporation**




By:
            /S/
                ROBERT Y. LEE
            
            Date:
                February 14, 2007Robert
                Y. LeeChief
                Executive Officer








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/ ANTHONY
                J.A. BRYAN
            
            Chairman
                of the Board
            
            February
                14, 2007Anthony
                J.A. Bryan/S/
                HADDON B. LIBBY
            
            Chief
                Financial Officer
            
            February
                  14, 2007Haddon
                B. Libby/S/
                MICHAEL E. DRACE
            
            President,
                Chief Operations Officer,
            
            February
                  14, 2007Michael
                E. Drace
            
            Director/S/
                EARL GREENBURG
            
            Director
            
            February
                  14, 2007Earl
                Greenburg/S/
                MARTIN BRILL
            
            Director
            
            February
                  14, 2007Martin
                Brill









**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.