UNITED
      STATES
              SECURITIES
      AND EXCHANGE COMMISSION
              Washington,
      DC 20549
              
              FORM
      10-QSB
              
              QUARTERLY
      REPORT
              Pursuant
      to Section 13 or 15(d) of the Securities Exchange Act of
    1934




For the
quarterly period ended:   December
31, 2007




U.S. DRY CLEANING
CORPORATION


(Exact
name of registrant as specified in its chapter)






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





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




Issuer’s
telephone number, including area code: (949) 863-9669











(
      Former name or former address, if changed since last
    report)





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): o  Yes  x No





The
number of shares outstanding of the issuer’s common stock, as of January 31,
2008, was 21,968,406 shares.





Transitional
Small Business Disclosure Format (check one):  o Yes  x No

















TABLE OF
CONTENTS




Page




PART I - FINANCIAL
      INFORMATIONItem
      1:
            Financial
      Statements (Unaudited)
            1Item
      2:
            Management’s
      Discussion and Analysis
            2Item
      3:
            Controls
      and Procedures
            7PART II - OTHER
      INFORMATIONItem
      1:
            Legal
      Proceedings
            9Item
      2:
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            9Item
      3:
            Defaults
      Upon Senior Securities
            9Item
      4:
            Submission
      of Matters to a Vote of Security Holders
            9Item
      5:
            Other
      Information
            9Item
      6:
            Exhibits
            9















PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements





Our
unaudited condensed consolidated financial statements included in this Form
10-QSB are as follows:




(a)
            Unaudited
      Condensed Consolidated Balance Sheet as of December 31, 2007
            F-2(b)
            Unaudited
      Condensed Consolidated Statements of Operations for the three months ended
      December 31, 2007 and 2006
            F-3(c)
            Unaudited
      Condensed Consolidated Statements of Cash Flows for the three months ended
      December 31, 2007 and 2006
            F-4(d)
            Notes
      to Unaudited Condensed Consolidated Financial Statements
            F-5







F-1




US DRY CLEANING CORPORATION AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEET


December
31, 2007


(Unaudited)





ASSETS





Current
      AssetsCash
      and cash equivalents
            
            $
            1,721,811Accounts
      receivable, net
            
            
            495,609Deferred
      acquisition costs
            
            
            641,848Prepaid
      expenses and other current assets
            
            
            199,585Total
      Current Assets
            
            
            3,058,853Property
      and Equipment, net
            
            
            1,731,840Non-Current
      AssetsDeposits
            
            
            152,254Deferred
      financing costs
            
            
            70,000Intangible
      assets, net
            
            
            508,084Goodwill
            
            
            5,362,408Total
      Non-Current Assets
            
            
            6,092,746Total
      Assets
            
            $
            10,883,439LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
            
            $
            1,856,672Accrued
      liabilities
            
            
            1,307,250Capital
      lease obligations
            
            
            185,587Notes
      payable
            
            
            288,980Convertible
      notes payable
            
            
            525,000Line
      of credit
            
            
            1,050,000Total
      Current Liabilities
            
            
            5,213,489Long
      Term LiabilitiesCapital
      lease obligations, net of current portion
            
            
            245,202Notes
      payable, net of current portion
            
            
            342,044Convertible
      notes payable, net of current portion
            
            
            3,317,312Total
      Long Term Liabilities
            
            
            3,904,558Total
      Liabilities
            
            
            9,118,047Stockholders'
      EquityConvertible
      preferred stock; par value $0.001 per share;20,000,000
      authorized shares;1,200,000
      shares issued and none outstanding; liquidation preference of $2.40 per
      share
            
            
            –Common
      stock; par value $0.001 per share;50,000,000
      Series B authorized shares; none issued and outstanding
            
            
            –Common
      stock; par value $0.001 per share;50,000,000
      authorized shares; 21,968,406 shares issued and
outstanding
            
            
            21,968Additional
      paid-in capital
            
            
            23,725,809Stockholder
      receivable
            
            
            (766,280
            )Accumulated
      deficit
            
            
            (21,216,105
            )Total
      Stockholders' Equity
            
            
            1,765,392Total
      Liabilities and Stockholders' Equity
            
            $
            10,883,439


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


F-2





US
DRY CLEANING CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


FOR
THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006








2007
            
            
            
            2006Net
      Sales
            $
            2,370,823
            
            
            $
            1,601,411Cost
      of Sales
            
            (1,180,747
            )
            
            
            (848,543
            )Gross
      Profit
            
            1,190,076
            
            
            
            752,868Operating
      ExpensesDelivery
      expenses
            
            200,302
            
            
            
            164,362Store
      expenses
            
            777,033
            
            
            
            399,277Selling
      expenses
            
            161,321
            
            
            
            151,474Administrative
      expenses
            
            1,510,226
            
            
            
            1,375,880Depreciation
      and amortization
            
            96,225
            
            
            
            77,293Other
            
            9,930
            
            
            
            –Total
      operating expenses
            
            2,755,037
            
            
            
            2,168,286Operating
      Loss
            
            (1,564,961
            )
            
            
            (1,415,418
            )Other
      income (expenses)Gain
      on extinguishment of debt
            
            423,798
            
            
            
            –Interest
      expense
            
            (700,617
            )
            
            
            –Other
      income (loss)
            
            (17,953
            )
            
            
            (122,940
            )Total
      other expenses
            
            (294,772
            )
            
            
            (122,940
            )Loss
      before provision for income taxes
            
            (1,859,733
            )
            
            
            (1,538,358
            )Provision
      for income taxes
            
            -
            
            
            
            –Net
      Loss
            $
            (1,859,733
            )
            
            $
            (1,538,358
            )$
            (0.09
            )
            
            $
            (0.09
            )Basic
      and diluted weighted average numberof
      common shares outstanding
            
            21,812,252
            
            
            
            16,468,261





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




F-3





US
      DRY CLEANING CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
      THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006(UNAUDITED)2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (1,859,733
            )
            
            $
            (1,538,358
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            96,225
            
            
            
            77,293Amortization
      of deferred financing costs and consulting fees
            
            
            8,125
            
            
            
            –Bad
      debt expense
            
            
            959
            
            
            
            180Equity
      instruments issued for compensation and services
            
            
            –
            
            
            
            416,070Gain
      on debt extinguishment
            
            
            (423,798
            )
            
            
            –Amortization
      of debt discounts
            
            
            308,342
            
            
            
            38,337Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (16,772
            )
            
            
            123,449Prepaid
      expenses and other current assets
            
            
            (95,374
            )
            
            
            39,139Deposits
            
            
            (4,297
            )
            
            
            –Other
      assets
            
            
            –
            
            
            
            (216,947
            )Accounts
      payable and accrued expenses
            
            
            332,036
            
            
            
            (223,105
            )Net
      cash used in operating activities
            
            
            (1,654,287
            )
            
            
            (1,283,942
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
            
            
            (31,817
            )
            
            
            (40,282
            )Deferred
      acquisition costs
            
            
            (81,402
            )
            
            
            (123,284
            )Net
      cash used in investing activities
            
            
            (113,219
            )
            
            
            (163,566
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of convertible notes payable
            
            
            1,853,500
            
            
            
            1,400,000Proceeds
      from line of credit
            
            
            550,000
            
            
            
            –Repayments
      on notes payable
            
            
            (102,938
            )
            
            
            (76,427
            )Repayments
      on convertible notes payable
            
            
            (100,000
            )
            
            
            –Repayments
      on capital lease obligations
            
            
            (58,784
            )
            
            
            (20,673
            )Deferred
      financing costs
            
            
            (269,825
            )
            
            
            (70,444
            )Net
      cash provided by financing activities
            
            
            1,871,953
            
            
            
            1,232,456Net
      increase (decrease) in cash
            
            
            104,447
            
            
            
            (215,052
            )Cash
      at beginning of period
            
            
            1,617,364
            
            
            
            1,414,456Cash
      at end of period
            
            $
            1,721,811
            
            
            $
            1,199,404Cash
      paid during the period for:Interest
            
            $
            23,276
            
            
            $
            47,777Income
      taxes
            
            $
            -
            
            
            $
            -




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


F-4






US
      DRY CLEANING CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
      THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006(UNAUDITED)2007
            
            
            2006SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
      FINANCING ACTIVITIES:Debt
      discount on convertible notes issued with common stock
            
            $
            –
            
            
            $
            500,089Conversion
      of debt to common stock
            
            $
            315,000
            
            
            $
            -Conversion
      of note payable to convertible note
            
            $
            200,000
            
            
            $
            -











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






F-5
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
 (UNAUDITED)





1.
ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION





The
Company





U.S. Dry
Cleaning Corporation (“USDC”, the "Company," “we”, or “us”) is a retail service
provider of laundry and dry cleaning stores and operations with thirty-four
retail stores and two processing plants.  The Company’s operations are
located in Honolulu, Hawaii (seventeen retail stores and one processing plant),
Palm Springs, California (six retail stores), and Riverside, California (eleven
retail stores and one processing plant).




Basis
of Presentation





The
accompanying unaudited interim condensed consolidated financial statements have
been prepared by the Company, pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission (“SEC”). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) have been omitted pursuant to such SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements and the notes
hereto should be read in conjunction with the financial statements, accounting
policies and notes thereto included in the Company’s audited consolidated
financial statements on Form 10-KSB, for the fiscal year ended September 30,
2007 filed with the SEC. In the opinion of management, all adjustments necessary
to present fairly, in accordance with GAAP, the Company’s financial position as
of December 31, 2007, and the results of operations and cash flows for the
interim periods presented have been made. Such adjustments consist only of
normal recurring adjustments. The results of operations for the interim periods
presented are not necessarily indicative of the results for the full
year.





Going
Concern





The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has recurring losses from operations;
negative cash flow from operating activities of approximately $1,654,000 for the
three months ended December 31, 2007; and negative working capital of
approximately $2,155,000 and an accumulated deficit of approximately $21,216,000
at December 31, 2007. The Company’s business plan calls for various business
acquisitions, which will require substantial additional capital. These factors,
among others, raise substantial doubt about the Company’s ability to continue as
a going concern. The Company intends to fund operations through debt and equity
financing transactions.  In connection with such efforts, the Company
completed a debt financing during December 2007 (See Note 3) yielding net
cash proceeds of $1,853,000. In addition, subsequent to December 31, 2007,
the Company received gross proceeds of approximately $2,694,000 in various debt
issuances (see Note 7). However, such financing transactions may be insufficient
to fund our planned acquisitions, capital expenditures, working capital and
other cash requirements for the fiscal year ending September 30, 2008.
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
condensed 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.





F-6
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
 (UNAUDITED)




2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Principles
of Consolidation





The
accompanying condensed consolidated financial statements include the accounts of
USDC and its wholly-owned subsidiaries, Steam Press Holdings, Inc. (“Steam
Press”), Coachella Valley Retail, LLC (“CVR”) and Cleaners Club, Inc.
(“CCI”).  All significant intercompany balances and transactions have
been eliminated in consolidation.





Use
of Estimates





The
preparation of financial statements in conformity with 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.





Business
Segments





The
Company currently operates in one segment; the laundry and dry cleaning business
and is geographically concentrated in Hawaii and Southern
California.





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 had to 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.


Other
Concentrations
 
 The
financial instrument that potentially exposes the Company to a concentration of
credit risk principally consists of cash. The Company deposits its cash with
high credit financial institutions, principally in the United States. At
December 31, 2007, the Company’s cash balances in U.S. bank accounts totaled
approximately $1,722,000 which exceeds the Federal Deposit Insurance Corporation
limit of $100,000.
 
 The
Company’s credit risk with respect to the accounts receivable is limited due to
the credit worthiness of our customers. The Company also performs periodic
reviews of collectability and provides an allowance for doubtful accounts
receivable when necessary.  Management considers the allowance for
doubtful accounts receivable at December 31, 2007 of approximately $23,000 to be
adequate.


F-7
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
 (UNAUDITED)




2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)





Earnings
(Loss) Per Shares





Under
Statement of Financial Accounting Standards (“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 convertible preferred
stock and convertible debt (using the if-converted method). For the three months
ended December 31, 2007; 175,000 convertible securities and 3,500,836 warrants
to purchase common stock, were excluded from the calculation of diluted loss per
share because they were anti-dilutive.





Reclassification





Certain
reclassifications have been made to the prior year condensed consolidated
financial statements to conform to the current year
presentation.





Revenue
Recognition





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





Adoption
of FIN 48




In June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109,”Accounting for Income Taxes.” FIN No. 48 prescribes a more-likely-than-not
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken (or expected to be taken) in
an income tax return. It also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The requirement to assess the need for a valuation
allowance on net deferred tax assets is not affected by FIN No. 48. This
pronouncement was effective October 1, 2007 for the Company and the adoption of
FIN 48 did not have a significant impact on the Company’s consolidated financial
statements.





3.
NOTES PAYABLE





During December 2007, the Company completed the closing of a
private placement of 10% senior secured convertible notes (the “Notes”) to
accredited investors, receiving net cash of approximately
$1,853,000.  Each Note was issued at a price equal to 90% of its
principal amount.  The Notes mature two years after the date of their
issuance and bear interest at 10% per year, payable quarterly in arrears in
cash.  Investors may convert their Notes into shares of the
Company’s common stock at any time and from time to time on or before the
maturity date, at a conversion price of $2.50 per share, subject to adjustment
under customary circumstances. The Notes will automatically convert into shares
of the Company’s common stock at the conversion price, if the closing bid
price for the common stock has traded at more than $5.00 per share for a period
of 20 consecutive trading days, provided that, throughout this period, the
common stock has been trading on a national securities exchange or NASDAQ and
such conversion shares have been fully registered for resale and are not subject
to any lock-up provisions.  Approximately $1,660,000 of Series A
Convertible Debt holders converted their debt to the newly issued above
Notes.  The Series A debt matured on December 3, 2007 and
approximately $525,000 remains outstanding and in default at December 31,
2007.  The debt to debt conversion resulted in debt extinguishment
accounting under Accounting Principles Board ("APB") No. 26 and Emerging
Issues Task Force ("EITF") Issue No. 96-19 and, accordingly, the
Company recorded a gain on extinguishment of approximately $424,000 in the
accompanying statement of operations for the three months ended December 31,
2007.





F-8
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
 (UNAUDITED)





4.  RELATED
PARTY MATTERS





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




5. 
EQUITY TRANSACTIONS





During
the quarter ended December 31, 2007, the Company issued 242,308 shares of its
restricted common stock for conversion of $315,000 in Series A convertible
debentures.  The transaction described in this paragraph constituted
an exempt offering under Section 4(2) of the Securities Act.





Options and Warrants





During
the quarter ended December 31, 2007, there was no significant activity in
options and warrants.








6.  COMMITMENTS AND
CONTINGENCIES





Legal
Matters





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





7.  SUBSEQUENT
EVENTS




During
January 2008, the Company completed the closing of a private placement of 10%
senior secured convertible notes (the “Notes") to accredited investors,
receiving gross proceeds of approximately $694,000. Each Note was issued at
a price equal to 90% of its principal amount. The Notes mature two years after
the date of their issuance and bear interest at 10% per year, payable quarterly
in arrears in cash.  Investors may convert their Notes into shares of
the Company’s common stock at any time and from time to time on or before
the maturity date, at a conversion price of $2.50 per share, subject to
adjustment under customary circumstances. The Notes will automatically convert
into shares of the Company’s common stock at the conversion price, if the
closing bid price for the common stock has traded at more than $5.00 per share
for a period of 20 consecutive trading days, provided that, throughout this
period, the common stock has been trading on a national securities exchange or
Nasdaq and such conversion shares have been fully registered for resale and are
not subject to any lock-up provisions.


On
February 7, 2008, the Company filed a Form 8-K announcing that Earl
Greenburg, a founding director, passed away on February 1, 2008, at the age of
61. No new director has been named.





On
February 12, 2008, the Company completed a conventional convertible debt
instrument for $2,000,000. The Note matures two years after the date of issuance
and bears interest at 12% per year, payable in arrears in cash at maturity
date.  The Investor  may convert the Note into shares of the
Company’s common stock at any time and from time to time on or before the
maturity date, at a conversion price of $2.50 per share, subject to adjustment
under customary circumstances. The Note will automatically convert into
shares of the Company’s common stock at the conversion price, if the
closing bid price for the common stock has traded at more than $5.00 per share
for a period of 20 consecutive trading days, provided that, throughout this
period, the common stock has been trading on a national securities exchange or
NASDAQ and such conversion shares have been fully registered for resale and are
not subject to any lock-up provisions.


On
February 14, 2008, the Company completed the acquisition of a leading dry
cleaning chain in central California previously reported on Form 8-K filed with
the SEC on September 6, 2007. The August 30, 2007 original agreement was amended
on February 14, 2008 and calls for approximately $1,500,000 in cash and
$3,067,000 in common stock at $1.50 per share. The Company intends to file Form
8-K with more information shortly. The acquisition increases the Company’s
annualized revenues by over 60%.


F-9




Item
2. Management’s Discussion and Analysis





Forward-Looking
Statements




Certain statements made herein and
in other public filings and releases by us 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 dry cleaning 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 U.S. Securities and
Exchange Commission (the “SEC”), under the Securities Exchange Act of 1934 (the
“Exchange Act”) and the Securities Act of 1933 (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.





Description
of Business





Our
Company





US Dry
Cleaning Corporation (“USDC”) was formed on July 19, 2005, and on
December 30, 2005, completed a “reverse merger” with a public “Shell
Company.” On August 9, 2005, we purchased 100% of the outstanding common stock
and membership interest of Steam Press Holdings, Inc. (“Steam Press”), and
Coachella Valley Retail, LLC (“CVR”), respectively, in stock for stock type
transactions. USDC, Steam Press, and CVR are hereinafter collectively referred
to as the “Company.” On February 15, 2007, we acquired 100% of Cleaners Club,
Inc.’s (“CCI”) authorized, issued and outstanding common stock was acquired in a
merger with us.





Steam
Press owns 100% of Enivel, Inc. (“Enivel”), which does business as Young Laundry
& Dry Cleaning (“Young”) in Honolulu, Hawaii. Young was founded in 1902 and
operates thirteen retail laundry and dry cleaning stores, in addition to
providing hotel and other commercial laundry and dry cleaning services. CVR was
founded in 2004 and operates six retail laundry and dry cleaning stores under
several names in the Palm Springs, California area. CCI was founded in 1998 and
operates thirteen retail laundry and dry cleaning stores.





Competition





We
operate 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 our 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. We believe that our 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 will not
seek to acquire a significant number of dry cleaning operations in markets in
which we currently operate or will prospectively operate.





Other Risks and
Uncertainties





In
addition to operating in an industry that is subject to intense competition, we
face risks and uncertainties relating to our ability to successfully implement
our business strategy. Among other things, these risks include our ability to
develop and sustain revenue growth; manage the expansion of our operations;
attract and retain qualified personnel; maintain and develop new strategic
relationships; and anticipate and adapt to the changing markets and any changes
in government or environmental regulations. Therefore, we are subject to
numerous risks that could delay our expansion strategy and even potentially
cause our business to fail.





2


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. We believe that we
are successfully integrating the new dry cleaning processes.





Our
management believes 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. We anticipate that our centralized operations and
improvements in all facets of the business will further improve the safety for
our employees, our clients and the environment. We intend to 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, we do does not anticipate any significant financial impact. We
believe that we comply in all material respects with all relevant rules and
regulations pertaining to the use of chemical agents. In the opinion of our
management, we comply 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 our company proactively remains in compliance with all
such statutes and regulations in the future.





Major
Customers





At
December 31, 2007 and 2006, one customer accounted for approximately 21% and 14%
of gross accounts receivable, respectively. During the three months ended
December 31, 2007 and 2006, one customer accounted for approximately 12% and 15%
of net sales, respectively.





Results
of Operations for the Three Months Ended December 31, 2007 and 2006





Revenues





Net sales
were approximately $2,371,000 for the three months ended December 31, 2007, an
increase of approximately $770,000 compared to the three months ended December
31, 2006 of approximately $1,601,000. This reflects a 30% increase in revenues.
The increase consisted of approximately $730,000 from our acquisition in
Feburary 2007.





Cost
of Sales





Our cost
of sales was approximately $1,181,000 for the three months ended December 31,
2007, an increase of approximately $332,000 compared to the three months ended
December 31, 2006 of approximately $849,000. Cost of sales as a percentage to
revenues is approximately 50% and 53% for the three months ended December 31,
2007 and 2006, respectively. Our cost of sales consists of supplies, labor and
facilities to process laundry and dry cleaning services with the increase
primarily due to our Feburary 2007 acquisition.





Gross
Profit





Gross
profit increased approximately $437,000 to approximately $1,190,000 for the
three months ended December 31, 2007 compared to the three months ended December
31, 2006 of approximately $753,000. Gross profit as a percentage of revenue
increased 4% to 51% from 47% for the three months ended December 31, 2007 and
2006, respectively, with the increase primarily due to our Feburary 2007
acquisition.





Operating
Expenses





Operating
expenses for the three months ended December 31, 2007 are approximately
$2,755,000, an increase of approximately $664,000 compared to the three months
ended December 31, 2006 of approximately $2,091,000 with the increase primarily
due to our February 2007 acquisition.





Delivery,
store and selling expenses for the three months ended December 31, 2007 were
approximately $1,139,000, an increase of approximately $424,000 compared to the
three months ended December 31, 2006 of approximately $715,000. These expenses
are primarily related to store rents and delivery costs with the increase
primarily due to our Feburary 2007 acquisition.




3


Administrative
expenses and professional fees for the three months ended December 31, 2007 were
approximately $1,510,000, an increase of approximately $813,000 compared to the
three months ended December 31, 2006 of approximately $697,000. Our management
costs are directly related to supporting a public company.





Net
Results of Operations





Operating
loss was approximately $1,565,000 for the three months ended December 31, 2007
and approximately $1,415,000 for the three months ended December 31,
2006.





Other
Income (Expense)





Interest
expense for the three months ended December 31, 2007 was approximately $701,000
compared to $0 for the three months ended December 31, 2006. The increase is due
to our amortizing during the quarter ended December 31, 2007 of approximately
$308,000 of debt discounts to interest expense relating to Series A Convertible
Debentures (see Note 3) and financing fees of approximately
$335,000.





Net
Results





We are
reporting a net loss of approximately $1,860,000 or $(0.09) per common share for
the three months ended December 31, 2007 compared to a net loss of approximately
$1,538,000 or $(0.09) per common share for the three months ended December 31,
2006. The
result is due tolegal, audit, consulting and administrative expenses
directly related towards capitalization of our company.




Liquidity
and Capital Resources





Total
assets increased by approximately $1,902,000 from $8,981,000 as of December 31,
2006 to $10,883,000 as of December 31, 2007.





Total
liabilities increased by approximately $5,709,000 from approximately $3,410,000
as of December 31, 2006 to approximately $9,119,000 as of December 31, 2007.
This increase is primarily due to the issuance of approximately $3,200,000 of
the Company’s Series A Convertible Debentures (see Note 3); an increase in trade
accounts payable and accrued liability obligations of approximately $1,850,000
and other current liabilities of approximately $1,050,000.
  Our
operating activities used approximately $1,654,000 in cash during the three
months ended December 31, 2007. Our net loss of approximately $2,284,000 was the
primary component. This net loss was offset by a number of non-cash items
totaling approximately $10,000. These include depreciation, amortization, bad
debt expense,  debt discount amortization and gain on debt
extinguishment in addition to the growth in payables and accrued liabilities of
approximately $332,000.





Cash used
in investing activities during the three months ended December 31, 2007,
consisted of approximately $113,000 used for the purchase of property and
equipment and deferred acquisition costs as compared to approximately $164,000
for the three months ended December 31, 2006 for the purchase of property and
equipment and deferred acquisition costs.





Cash
flows from financing activities were approximately $1,872,000 for the three
months ended December 31, 2007 which primarily consisted of approximately
$1,853,000 in net proceeds from the issuance of convertible debentures and
approximately $550,000 in proceeds from line of credit, offset by repayments on
notes payable, capital leases and prepaid financing costs of approximately
$262,000.





We have a
negative working capital deficit of approximately $2,155,000 as of December 31,
2007. To meet our current working capital requirements, we raised approximately
$1,853,000 in private funds through convertible debt in December 2006 and
approximately $2,000,000 in net proceeds from additional convertible debt in
February 2008. However, there can be no assurances that any debt and/or equity
financing transactions now under consideration will be successful at acceptable
terms.


4


Going
Concern Considerations





The
condensed consolidated financial statements included elsewhere herein have been
prepared assuming we 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. For the three months ended December 31, 2007, we
had a net loss of approximately $1,860,000and negative cash flow from operating activities of approximately
$1,654,000. At December 31, 2007, we had an accumulated deficit of approximately
$21,216,000, working capital deficit of approximately $2,155,000 and have
suffered significant net losses since inception.





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




Since
inception, we have yet to generate any profits from operations. Accordingly, we
have met our capital requirements primarily through the private sale of our
convertible secured promissory notes payable, secured convertible debentures and
a public offering of our common stock. We have raised approximately $10,500,000
in net cash proceeds through the private debt sales offset by related fees
associated with the issuance of units through a public offering that closed on
July 19, 2007. In May 2006, the majority of the holders of approximately
$7,900,000 senior-secured convertible notes payable elected to convert into the
our common stock. It is anticipated that the holders of the recently raised $2
million will also convert their convertible debentures to equity upon
maturity.


Our
capital requirements depend on numerous factors, including the rate of market
acceptance of our services, the Company’s ability to service its customers, our
ability to maintain and expand its customer base, the level of resources
required to expand our marketing and sales organization, and other factors. We
are currently revising our business plan for funding our long-term operations to
include potential acquisitions which would allow us to maximize our current
processing facility capacities, thereby increasing our potential profitability.
We intend 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
not be sufficient to fund its planned acquisitions, capital expenditures,
working capital, and other cash requirements for the fiscal year ending
September 30, 2008.





As more
fully explained elsewhere herein, our management presently believes that cash
generated from operations (if any), combined with our current cash
positions and debt and/or equity financing proposals now under consideration may
not be sufficient to meet our anticipated liquidity requirements through
September 2008. There can be no assurance that any debt and/or equity
financing transactions now under consideration will be successful at acceptable
terms.





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 unfavourable 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.




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.





5


Revenue
Recognition




We
recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, “
Revenue Recognition ”
(“SAB 104”). SAB 104 requires that four basic criteria be met before revenue can
be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery
has occurred; (3) the selling price is fixed or determinable; and (4)
collectability is reasonably assured. The Company recognizes revenue on retail
laundry and dry cleaning services when the services are deemed to have been
provided and the earnings process is complete. For “walk-in and
pickup-and-delivery” type retail customers, the order is deemed to have been
completed when the work-order ticket is created and the sale and related account
receivable are recorded. For commercial customers, the sale is not recorded
until the Company delivers the cleaned garments to the commercial customer.
Generally, the Company delivers the cleaned garments to commercial customers the
same day they are dropped off (same-day service).





Returns
and Allowances





We
experience claims for items damaged during processing, adjustments in resolution
of customer disputes, and promotional discounts, all of which are recorded as
incurred. Such charges average about one percent of gross revenue. Sales are
reported in the accompanying consolidated financial statements net of “Returns
and Allowances”, which are reflected as a reduction of gross sales.





Accounts
Receivable





We
perform ongoing credit evaluations of our customers and adjust credit limits
based on payment history and the customers’ current buying habits. We monitor
collections and payments from our customers and maintain a provision for
estimated credit losses based on specific customer collection issues that have
been identified.





Long-lived
Assets





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





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





Deferred
Tax Assets





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





Purchase
Price Allocations for Acquisitions





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





6


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 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.




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





For
goodwill-impairment testing the Company engaged an independent third party
expert to conduct an impairment review at September 30, 2007 and make impairment
recommendations to management. No such review was conducted for the quarter
ended December 31, 2007.





Subsequent
Events





Departure
of Director or certain officers:





On
February 7, 2008, the Company filed a Form 8-K announcing that Earl
Greenburg, a founding director passed away on February 1, 2008, at the age of
61. No new director has been named.








Item 3.  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 December 31, 2007. This evaluation was carried
out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2007, our disclosure controls and procedures
are not effective.




The
ineffective disclosure controls and procedures the Company intends to address
include establishing effective controls over the period-end closing and
financial reporting processes. This will require the addition of personnel
and the creation of closing protocols for both the Company and its subsidiaries
as well as the consolidation of all subsidiaries.


We
plan on remediating the material weaknesses by implementation of new financial
reporting systems throughout our 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 our company and reported timely in
various reports filed or submitted under the Exchange Act.





7





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 our 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 our 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 we cannot assure you 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.







8




PART
II - OTHER INFORMATION





Item
1.    Legal Proceedings





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





Item
2.    Unregistered Sales of Equity Securities and Use of
Proceeds





None.





Item 3.
Defaults upon Senior
Securities





Our
Series A convertible debt matured on December 3, 2007.  Approximately
$1,660,000 of such debt converted to our December 2007 convertible debt
offering, however, approximately $525,000 of the Series A is still outstanding
and in default.





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





None





Item 5. Other Information





None





Item 6. Exhibits





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.








9










SIGNATURES





In
accordance with the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





US
      DRY CLEANING CORPORATIONDate:
      February 19, 2008
            By:
            /s/ ROBERT
      Y. LEERobert
      Y. LeeChief
      Executive OfficerBy:
            /s/
      F. KIM COXF.
      Kim CoxChief Financial
      Officer





10








EXHIBIT
INDEX







Exhibit
      31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.Exhibit
      31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.Exhibit
      32.1
            Certification
      of Chief Executive Office pursuant to Section 906 of the Sarbanes-Oxley
      Act.Exhibit
      32.2
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act.