**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, 2006**




**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)
            (Commission
              File
                Number)
            (IRS
                Employer
              Identification
                No.)





**125
                E. Tahquitz Canyon, Suite 203**
              **Palm
                Springs, CA 92262**(Address
                of principal executive offices) (Zip
                Code)




Registrant ’s
      telephone number, including area code: **(760)
      322-7447**








(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 issuer was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days: [ ]
      Yes
      [X] No





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





State
      the
      number of shares outstanding of each of the issuer’s classes of common stock, as
      of the latest practicable date: 16,969,268 common shares as of February 7,
      2007.





Transitional
      Small Business Disclosure Format (check one): [   ] Yes [X] No







**TABLE
                OF CONTENTS**
            Page**PART
                I - FINANCIAL INFORMATION**Item
                1:
            Financial
                Statements (Unaudited)
            1Item
                2:
            Management’s
                Discussion and Analysis
            2Item
                3:
            Controls
                and Procedures
            10**PART
                II - OTHER INFORMATION**Item
                1:
            Legal
                Proceedings
            11Item
                2:
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            11Item
                3:
            Defaults
                Upon Senior Securities
            11Item
                4:
            Submission
                of Matters to a Vote of Security Holders
            11Item
                5:
            Other
                Information
            11Item
                6:
            Exhibits
            12










**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,
                2006
            F-1(b)
            Unaudited
                Condensed Consolidated Statements of Operations for the three months
                ended
                December 31, 2006 and 2005
            F-2(c)
            Unaudited
                Condensed Consolidated Statements of Cash Flows for the three months
                ended
                December 31, 2006 and 2005
            F-3(d)
            Notes
                to Unaudited Condensed Consolidated Financial Statements
            F-4






*Page
          1*




**U.S.
      DRY CLEANING CORPORATION**


**CONDENSED
        CONSOLIDATED BALANCE SHEET**
 **DECEMBER
          31, 2006**
 **(UNAUDITED)**





**ASSETS**Current
                AssetsCash
            
            $
            1,199,404Accounts
                receivable, net
            
            
            478,529Deferred
                financing costs, net
            
            
            70,444Deferred
                acquistion costs
            
            
            123,284Prepaid
                expenses and other current assets
            
            
            173,933Total
                Current Assets
            
            
            2,045,594**Property
                and Equipment, net**
            
            
            1,129,761**Other
                Assets**Notes
                receivable
            
            
            233,803Deposits
            
            
            202,450Goodwill
            
            
            5,004,699Intangible
                assets
            
            
            365,060Total
                Other Assets
            
            
            5,806,012**Total
                Assets**
            
            $
            8,981,367**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities**Accounts
                payable and accrued expenses
            
            $
            1,385,630Liquidated
                damages
            
            
            71,250Capital
                lease obligation, current
            
            
            121,781Notes
                payable, current
            
            
            268,681Related
                party notes payable, current
            
            
            152,822Convertible
                notes payable, net of discount
            
            
            801,693Related
                party convertible notes payable, net of discount
            
            
            136,555Total
                Current Liabilities
            
            
            2,938,412**Long
                Term Liabilities**Capital
                lease obligation, net of current
            
            
            190,181Notes
                payable, net of current
            
            
            71,081Related
                party notes payable, net of current
            
            
            9,838Convertible
                notes payable, net of current
            
            
            200,000Total
                Long Term Liabilities
            
            
            471,100**Total
                Liabilities**
            
            
            3,409,512**Stockholders'
                Equity**Convertible
                preferred stock; par value $0.001 per share;20,000,000
                authorized shares;1,200,000
                shares issued and outstanding;with
                a liquidation preference of $2.40 per share
            
            
            1,200Common
                stock; par value $0.001 per share;100,000,000
                authorized shares; 16,969,268 shares issued and
                outstanding
            
            
            16,969Additional
                paid-in capital
            
            
            16,614,594Accumulated
                deficit
            
            
            (11,060,908
            )Total
                Stockholders' Equity
            
            
            5,571,855**Total
                Liabilities and Stockholders' Equity**
            
            $
            8,981,367






*See
          accompanying notes to condensed consolidated financial
          statements.*
 *Page
          F-1*


**U.S.
        DRY CLEANING CORPORATION**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF OPERATIONS**
 **FOR
            THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**
  **2006**
              
              **2005****(As
                  Restated)****Net
                  Sales**
              
              $
              1,601,411
              
              $
              1,440,741**Cost
                  of Sales**Supplies
              
              
              (67,431
              )
              
              (57,065
              )Direct
                  costs
              
              
              (781,112
              )
              
              (743,316
              )Total
                  cost of sales
              
              
              (848,543
              )
              
              (800,381
              )**Gross
                  Profit**
              
              
              752,868
              
              
              640,360**Operating
                  Expenses**Delivery
                  expenses
              
              
              164,362
              
              
              136,964Store
                  expenses
              
              
              399,277
              
              
              310,185Selling
                  expenses
              
              
              151,474
              
              
              135,377Administrative
                  expenses
              
              
              696,845
              
              
              327,040Related
                  party consulting
              
              
              -
              
              
              224,000Professional
                  fees
              
              
              679,035
              
              
              375,353Depreciation
                  and amortization expense
              
              
              77,293
              
              
              59,990Total
                  Operating Expenses
              
              
              2,168,286
              
              
              1,568,909**Operating
                  Loss**
              
              
              (1,415,418
              )
              
              (928,549
              )**Other
                  Income (Expense)**
              
              
              (122,940
              )
              
              (535,127
              )Loss
                  Before Taxes
              
              
              (1,538,358
              )
              
              (1,463,676
              )Provision
                  for income taxes
              
              
              -
              
              
              -**Net
                  Loss**
              
              $
              (1,538,358
              )
              $
              (1,463,676
              )**Basic
                  and diluted loss per common share**
              
              $
              (0.09
              )
              $
              (0.16
              )**Basic
                  and diluted weighted average number****of
                  common shares outstanding**
              
              
              16,468,261
              
              
              8,896,302


See
          accompanying notes to condensed consolidated financial
          statements.
 *Page
          F-2*




**U.S.
      DRY CLEANING CORPORATION**


**CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **FOR
          THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


**2006**
              
              **2005****(As
                  Restated)****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  (loss)
              
              $
              (1,538,358
              )
              $
              (1,463,676
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              77,293
              
              
              59,990Amortization
                  of deferred financing costs
              
              
              -
              
              
              75,087Bad
                  debt expense
              
              
              180
              
              
              6,000Common
                  stock issued for compensation and services
              
              
              416,070
              
              
              12,080Amortization
                  of debt discounts
              
              
              38,337
              
              
              194,444Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              123,449
              
              
              (151,429
              )Prepaid
                  expenses and other current assets
              
              
              39,139
              
              
              108,741Accounts
                  payable and accrued expenses
              
              
              (187,480
              )
              
              347,622Other
                  assets
              
              
              (216,947
              )
              
              -Liquidated
                  damages
              
              
              (35,625
              )
              
              213,750Net
                  cash used in operating activities
              
              
              (1,283,942
              )
              
              (597,391
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchases
                  of property and equipment
              
              
              (40,282
              )
              
              (65,652
              )Acquisition
                  projects in process
              
              
              (123,284
              )
              
              -Net
                  cash used in investing activities
              
              
              (163,566
              )
              
              (65,652
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                  from issuance of notes payable
              
              
              -
              
              
              39,869Repayments
                  on notes payable
              
              
              (65,092
              )
              
              (145,391
              )Repayments
                  on related party notes payable
              
              
              (11,335
              )
              
              (12,347
              )Proceeds
                  from issuance of convertible notes payable
              
              
              1,200,000
              
              
              858,000Deferred
                  financing costs
              
              
              (70,444
              )
              
              (199,998
              )Proceeds
                  from issuance of related party convertible notes payable
              
              
              200,000
              
              
              220,000Repayments
                  on capital lease obligation
              
              
              (20,673
              )
              
              (29,256
              )Net
                  cash provided by financing activities
              
              
              1,232,456
              
              
              730,877Net
                  increase (decrease) in cash
              
              
              (215,052
              )
              
              67,834Cash
                  at beginning of period
              
              
              1,414,456
              
              
              705,713Cash
                  at end of period
              
              $
              1,199,404
              
              $
              773,547Cash
                  paid during the period for:Interest
              
              $
              47,777
              
              $
              170,379Income
                  taxes
              
              $
              -
              
              $
              -**SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH INVESTING AND FINANCING
                  ACTIVITIES**Debt
                  discount on convertible notes issued with common stock
              
              $
              500,089
              
              $
              1,166,667Reclassification
                  for change in par value of common and preferred stock
              
              $
              -
              
              $
              2,871,879


*See
          accompanying notes to condensed consolidated financial
          statements.*
 *Page
          F-3*




**U.S.
      DRY CLEANING CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED DECEMBER 31, 2006**


**(UNAUDITED)**






**1.
      ORGANIZATION AND NATURE OF OPERATIONS**





***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
      Holdings, Inc. (“Steam Press”), and on August 9, 2005, USDC purchased 100% of
      the membership units in Coachella Valley Retail, LLC (“CVR”) in stock-for-stock
      type transactions. 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. CVR
      was
      founded in 2004 and operates five retail laundry and dry cleaning stores under
      several names in the Palm Springs, California area.




***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 financial
        statements on Form 10-KSB ,as amended,for the fiscal year ended September
        30,
        2006 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, 2006, 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.


*Page
          F-4*




**U.S.
      DRY CLEANING CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED DECEMBER 31, 2006**


**(UNAUDITED)**


**1.
      ORGANIZATION AND NATURE OF OPERATIONS** (continued)





***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 $1.3 million
      for
      the three months ended December 31, 2006; and negative working capital of
      approximately $0.9 million and an accumulated deficit of approximately $11
      million at December 31, 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 condensed consolidated financial statements include the accounts
      of
      USDC and its wholly-owned subsidiaries. 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.





***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
      December 31, 2006 and 2005, one customer accounted for approximately 14% and
      17%
      of gross accounts receivable respectively. For the three months ended December
      31, 2006 and 2005, one customer accounted for approximately 13% and 15% of
      net
      sales, respectively.





*Page
          F-5*




**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE MONTHS ENDED DECEMBER 31, 2006**
 **(UNAUDITED)**
  **2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***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.





***Goodwill
      and Other Intangible Assets***





Statement
      of Financial Accounting Standards (“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 in the financial statements upon their
      acquisition and after they have been initially recognized in the financial
      statements. SFAS No. 142 requires that goodwill and intangible assets that
      have
      indefinite useful 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. The Company’s identifiable intangible assets
      consist of customer relationships and the “Young Laundry & Dry Cleaning”
trademark in the respective net amounts of approximately $74,000 and $290,000
      at
      December 31, 2006. Customer relationships and the trademark are amortized using
      the straight-line method over the weighted average life of four years and ten
      years, respectively. Management considers the straight-line method to be
      appropriate for customer lists due to the longevity of the customer
      relationships.





***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).





***Advertising***





The
      Company expenses the cost of advertising when incurred. Advertising costs
      approximated $27,000 and $36,000 for the three months ended December 31, 2006
      and 2005, respectively.





***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.





***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."*





*Page
          F-6*


**U.S.
      DRY CLEANING CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED DECEMBER 31, 2006**


**(UNAUDITED)**




**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 endeavour 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 three months ended
      December 31, 2006, 1,846,667 and 432,432 convertible securities and warrants
      to
      purchase common stock, respectively, were excluded from the calculation of
      diluted loss per share because they were anti-dilutive.





***Stock-Based
      Compensation***





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 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* .”





*Page
          F-7*


**U.S.
      DRY CLEANING CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED DECEMBER 31, 2006**


**(UNAUDITED)**


**3.
      NOTES PAYABLE**




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.




**4.
      OTHER RELATED PARTY TRANSACTIONS**





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





**5.
      EQUITY TRANSACTIONS**





***Common
      Stock***





During
      the three months ended December 31, 2006, the Company issued 125,000 shares
      of
      its restricted common stock to the Company’s Chief Financial Officer as a bonus
      valued at $231,250 based on the estimated fair market value of the Company’s
      common stock of $1.85 per share. The transaction described in this paragraph
      constituted an exempt offering under Section 4(2) of (the “Securities
      Act”).





During
      the three months ended December 31, 2006, the Company issued 80,000 shares
      of
      restricted common stock to directors valued at $148,000 based on the estimated
      fair market value of the Company’s common stock of $1.85 per share. The
      transactions described in this paragraph constituted an exempt offering under
      Section 4(2) of (the “Securities Act”).





*Page
          F-8*


**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE MONTHS ENDED DECEMBER 31, 2006**
 **(UNAUDITED)**




**5.
      EQUITY TRANSACTIONS** (continued)





***Common
      Stock*** (continued)





During
      the three months ended December 31, 2006, the Company, pursuant to a consultant
      agreement, issued 150,000 shares of its restricted common stock in exchange
      for
      certain consulting services provided to the Company, which was valued at $37,500
      based on the value of the services provided. The transaction described in this
      paragraph constituted an exempt offering under Section 4(2) of (the “Securities
      Act”).





During
      the three months ended December 31, 2006, the Company, pursuant to the terms
      of
      the Series A Convertible Debentures as disclosed in Note 3 above, issued 233,324
      shares of restricted common stock (see Note 3). The transaction described in
      this paragraph constituted an exempt offering under Section 4(2) of (the
“Securities Act”).




***Warrants***





In
      fiscal
      2005, the Company issued 1,500,000 warrants to purchase its common stock to
      each
      of the two founding shareholders. Such warrants 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 expired and have been cancelled on
      December 31, 2006.




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




A
      summary
      of warrants outstanding are as follows:





Shares
            
            Weighted
                Average Exercise PriceWarrants
              outstanding at September 30, 2005
            
            
            3,000,000
            
            $
            0.01Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Warrants
              outstanding at September 30, 2006
            
            
            3,000,000
            
            $
            0.01Granted
            
            
            500,000
            
            $
            0.25Exercised
            
            
            -
            
            
            -Cancelled
            
            
            3,000,000
            
            $
            0.01Warrants
              outstanding at December 31, 2006
            
            
            500,000
            
            $
            0.25





*Page
          F-9*


**U.S.
      DRY CLEANING CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED DECEMBER 31, 2006**


**(UNAUDITED)**


**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.





***Stock
      Registration Rights***





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 or the Companies stock
      begins trading. As of December 31, 2006, the Company had not filed a
      registration statement registering these shares and has accrued liquidated
      damages of $71,250 at December 31, 2006.


The
          Company is required to use its “best efforts” to file, on or before two hundred
          seventy days (270) following the closing of the initial sale of the Series
          A
          Convertible Debentures (see Note 3), a registration statement under the
          Securities Act covering the registration of the sale of the Registrable
          Securities by the holders. The holders are required to cooperate fully
          with the
          Company in preparation of the registration statement and provide all necessary
          information regarding the holders, the underwriters, the manner of distribution
          and other material information reasonably requested by the Company.
 
 ***Employment
          Agreements***
 
 Effective
          on December 12, 2006, in connection with his appointment as the Company’s new
          Chief Executive Officer, the Company entered into an employment agreement
          with
          Robert Y. Lee for a three-year term. The employment agreement provides
          for a
          base salary at the rate of $20,000 per month, which increases to $25,000
          upon
          the Company achieving certain milestones in revenue and income. Mr. Lee
          is also
          entitled to a bonus, which will be represented by a promissory note issued
          by
          the Company bearing interest at eight percent per annum and in the principal
          amount of $200,000, of which $50,000 is payable at the earlier of the expiration
          of his employment term and the closing by the Company of a debt or equity
          financing of at least $1,500,000, and the balance of which payable upon
          the
          earlier of the expiration of his employment term and the closing by the
          Company
          of stock offering with proceeds of at least $3,000,000. In addition, upon
          the
          achievement of certain milestones by the Company, Mr. Lee will be entitled
          to
          additional bonuses ranging from $250,000 to $500,000. Furthermore, the
          Company
          agreed to issue to Mr. Lee fully vested options to purchase an aggregate
          of
          800,000 shares of the Company’s common stock, at exercise prices ranging from
          $3.50 to $10.00 per share, which options will be evidenced by a stock option
          agreement approved by the Board of Directors. The Company also agreed to
          pay an
          expense allowance for an automobile in an amount of $2,000 per month. The
          agreement also provides for non-competition covenant by Mr. Lee in favor
          of the
          Company and confidentiality provisions.
 
 ***Business
          Acquisition***
 
 During
          December 2006, the Company, entered into an Agreement and Plan of Merger
          to
          acquire, Cleaners Club, Inc., a California corporation (“Cleaners Club”). As of
          February 14, 2007, such transaction has not closed.
 
 During
          December 2006, the Company paid $150,000 as an advance payment toward the
          definitive agreement.


*Page
          F-10*


**U.S.
      DRY CLEANING CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED DECEMBER 31, 2006**


**(UNAUDITED)**


**6.
      COMMITMENTS AND CONTINGENCIES** (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 registration statement.
        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. The Company will have the right to redeem some or all of
        the
        warrants issued in this offering at a redemption price of $0.05 per warrant
        at
        any time after the date on which the closing price of the Company’s common stock
        has exceeded $5.00 for 20 consecutive trading days.
 
 
 **7.
        RESTATEMENT**
 
 The
        accompanying condensed consolidated statements of operations and cash flows
        for
        the three months ended December 31, 2005 were restated to reflect an increase
        to
        debt discount related to the recording of convertible debt issued with common
        stock, as well as the related amortization of such discount. See the Company’s
        Form 10-KSB/A for the year ended September 30, 2006 for additional information.
        The effect of the restatement for the quarter ended December 31, 2005 was
        an
        increase to interest expense of approximately $161,000 and an increase to
        basic
        and diluted loss per common share of $(0.01). The effect of the restatement
        is
        as follows:


As
                Reported
            
            As
                RestatedNet
              Loss
            
            $
            (1,302,432
            )
            $
            (1,463,676
            )Basic
              and diluted loss per common share
            
            $
            (0.15
            )
            $
            (0.16
            )





*Page
          F-11*


**Item
      2: Management’s Discussion and Analysis**





**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.*





**Description
      of Business**





***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
      Holdings, Inc. (“Steam Press”), and on August 9, 2005, USDC purchased 100% of
      the membership units in Coachella Valley Retail, LLC (“CVR”) in stock-for-stock
      type transactions. 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. CVR
      was
      founded in 2004 and operates five retail laundry and dry cleaning stores under
      several names in the Palm Springs, California area.





Over
      the
      last year, USDC has completed acquisitions in Hawaii and California with annual
      revenues of approximately $6.1 million. 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.





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.





*Page
          2*




***Competition***





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





***Other
      Risks and Uncertainties*** ****





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





***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.





***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 services. 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 within 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.





*Page
          3*


***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 possess some or all of the following desirable
      requirements:





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




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




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




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





***Districts***





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




***Major
      Customers***





At
      December 31, 2006 and 2005, one customer accounted for approximately 14% and
      17%
      of gross accounts receivable, respectively. For the three months ended December
      31, 2006 and 2005, one customer accounted for approximately 13% and 15% of
      net
      sales, respectively.





**Results
      of Operations for the Three Months Ended December 31, 2006 and
      2005**





***Revenues***





Net
      sales
      were approximately $1.6 million for the three months ended December 31, 2006
      an
      increase of approximately $0.2 million compared to the three months ended
      December 31, 2005 of approximately $1.4 million. This reflects a 11% increase
      in
      revenues.





***Cost
      of Sales***





Our
      cost
      of sales remained the same at approximately $0.8 million for the three months
      ended December 31, 2006 and 2005, respectively. However,
      cost of sales as a percentage to revenues is 53% and 56% for the three months
      ended December 31, 2006 and 2005, respectively .





*Page
          4*


***Gross
      Profit***




Gross
      profit increased approximately $0.1 million to approximately $0.8 million for
      the three months ended December 31, 2006 compared to the three months ended
      December 31, 2005 of approximately $0.6 million. Gross profit as a percentage
      of
      revenue increased 3% or 47% and 44% for the three months ended December 31,
      2006
      and 2005, respectively.




***Operating
      Expenses***





Operating
      expenses for the three months ended December 31, 2006 are approximately $2.2
      million, an increase of approximately $0.6 million compared to the three months
      ended December 31, 2005 of approximately $1.6 million.




Our
      delivery, store and selling expenses for the three months ended December 31,
      2006 were approximately $0.7 million compared to the three months ended December
      31, 2005 of approximately $0.6 million. These expenses are primarily related
      to
      store rents and advertising costs.




Our
      administrative expenses for the three months ending December 31, 2006 were
      approximately $1.5 million, an increase of approximately $0.5 million compared
      to the three months ended December 31, 2005 of approximately $1.0 million.
      These
      expenses are primarily related to management and professional fees.




***Net
      Results of Operations***




Our
      operating loss is approximately $1.4 million for the three months ended December
      31, 2006 and approximately $0.9 million for the three months ended December
      31,
      2005.




***Other
      income (expense)***




Interest
      expense for the three months ended December 31, 2006 was approximately $0.1
      million compared to approximately $0.5 million for the three months ended
      December 31, 2005.




***Net
      Results***




We
      are
      reporting a net loss of approximately $1.5 million or $0.09 per common share
      for
      the three months ended December 30, 2006 compared to a net loss of approximately
      $1.5 million or $0.16 per common share for the three months ended December
      30,
      2005. This
      includes legal, audit, consulting and administrative expenses directly related
      towards capitalization of the Company and being a public company.




**Liquidity
      and Capital Resources**





Total
      assets increased by approximately $0.8 million from $8.2 million as of December
      31, 2005 to $9.0 million as of December 31, 2006. The increase is primarily
      due
      to an increase in cash of approximately $0.4 million, property and equipment
      of
      approximately $0.4 million and notes receivables of approximately $0.1 million:
      other assets of approximately $0.3 million.





Total
      liabilities decreased by approximately $3.1 million from approximately $6.5
      million as of December 31, 2005 to approximately $3.4 million as of December
      31,
      2006. This is primarily due to a decrease in notes payable of approximately
      $2.9
      million, a decrease in deferred tax liability of approximately $0.2 million,
      and
      a decrease in liquated damages of approximately $0.1 million; offset by an
      increase in capital lease obligations of approximately $0.1
      million.




Our
      operating activities used approximately $1.3 million in cash during the three
      months ended December
      31 ,
      2006.
      Our net loss of approximately $1.5 million was the primary component of our
      negative operating cash flow. This net loss was offset by a number of non-cash
      items totalling approximately $0.5 million. These include depreciation,
      amortization, bad debt expense and the issuance of stock for compensation and
      interest. Growth in payables, liquidated damages and prepaid expenses and other
      current assets of approximately $0.5 million was offset by growth in receivables
      of approximately $0.1 million.





*Page
          5*


Cash
      used
      in investing activities during the three months ended December
      31, 2006
      consisted of approximately $0.2 million used for the purchase of property and
      equipment and acquisition projects in process compared to approximately $0.1
      million for the three months ended December 31, 2005.





Cash
      flows from financing activities were approximately $1.2 million for the three
      months ended December
      31 ,
      2006
      which primarily consisted of approximately $1.4 million in net proceeds from
      the
      issuance of convertible debentures; offset by repayments on notes payable,
      capital leases and prepaid financing costs of approximately $0.2
      million.




The
      Company has a working capital deficit of approximately $0.9 million as of December
      31 ,
      2006.
      The Company is seeking to increase working capital and fund operations through
      private and public debt and equity transactions.





**Liquidity
      and Going Concern Considerations**




The
      accompanying condensed consolidated financial statements have been prepared
      assuming we will continue in our present form, which contemplates, among other
      things, the realization of assets and satisfaction of liabilities in the
      ordinary course of business. For the quarter ended December 31, 2006, we had
      a
      net loss of approximately $1.5 million and negative cash flow from operating
      activities of approximately $1.3 million. In addition, we had a working capital
      deficit of approximately $0.9
      million as of
      December 31, 2006.





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 $10.5 million in net cash
      proceeds through such private sales. In May 2006, the majority of the holders
      of
      approximately $7.9 million senior-secured convertible notes payable elected
      to
      convert into the Company’s common stock. It is anticipated that the holders of
      the recently raised $1.4 million will also convert their convertible debentures
      to equity upon maturity.





***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 December 31, 2006, the Company had an
      accumulated deficit of approximately $11 million, working capital deficit of
      approximately $0.9 million and has suffered significant net losses since
      inception.





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.





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 $10.5 million
      in
      net cash proceeds through such private sales. In May 2006, the majority of
      the
      holders of approximately $7.9 million senior-secured convertible notes payable
      elected to convert into the Company’s common stock. It is anticipated that the
      holders of the recently raised $1.4 million will also convert their convertible
      debentures to equity upon maturity.





The
      Company’s capital requirements depend on numerous factors, including the rate of
      market acceptance of the Company’s 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. 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. 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.





*Page
          6*


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.





**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.




**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.





***Long-Lived
      Assets***





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 future undiscounted cash flows from the related operations,
      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 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
      we assess the ongoing expected cash flows 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.




***Goodwill
      and Intangible Assets***





Statement
      of Financial Accounting standard (“SFAS”) No. 142, *"Goodwill
      and Other Intangible Assets",* which
      is
      effective for fiscal years beginning after December 15, 2001, 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 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. Impairment losses for goodwill and indefinite-life intangible
      assets that arise due to the initial application of SFAS No. 142 are to be
      reported as a change in accounting principle.





*Page
          7*


***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.





***Deferred
      Tax Assets***





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





***Purchase
      Price Allocations for Acquisitions***





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





***Customer
      Relationship Assets***





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





Non-contractual
      customer relationships were valued pursuant to the guidance of 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.





*Page
          8*


***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
      the Company’s consolidated financial statements included elsewhere herein for
      additional information.





***Recently
      Issued Accounting Pronouncements***




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.





*Page
          9*




**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, 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 December 31, 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.




*Page
          10*




**PART
      II - OTHER INFORMATION**





**Item
      1:   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
      2:   Unregistered Sales of Equity Securities and Use of
      Proceeds**





During
      the three months ended December 31, 2006, the Company issued 125,000 shares
      of
      its restricted common stock to the Company’s Chief Financial Officer as a bonus
      valued at $231,250 based on the estimated fair market value of the Company’s
      common stock of $1.85 per share. The transaction described in this paragraph
      constituted an exempt offering under Section 4(2) of (the “Securities
      Act”).





During
      the three months ended December 31, 2006, the Company issued 80,000 shares
      of
      restricted common stock to directors valued at $148,000 based on the estimated
      fair market value of the Company’s common stock of $1.85 per share. The
      transactions described in this paragraph constituted an exempt offering under
      Section 4(2) of (the “Securities Act”).





During
      the three months ended December 31, 2006, the Company, pursuant to a consultant
      agreement, issued 150,000 shares of its restricted common stock in exchange
      for
      certain consulting services provided to the Company, which was valued at $37,500
      based on the value of the services provided. The transaction described in this
      paragraph constituted an exempt offering under Section 4(2) of (the “Securities
      Act”).





During
      the three months ended December 31, 2006, the Company, pursuant to the terms
      of
      the Series A Convertible Debentures as disclosed in Note 3 above, issued 233,324
      shares of restricted common stock (see Note 3). The transaction described in
      this paragraph constituted an exempt offering under Section 4(2) of (the
“Securities Act”).





The
      Company has estimated the fair market value of its restricted common stock
      to be
      $1.85 per share based on the convertible feature of the Company’s private
      offerings that have ranged between $1.00 and $3.00 per share.





**Item
      3:   Defaults upon Senior Securities**





None





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





None





**Item
      5:   Other Information**





None





*Page
          11*


**Item
      6:   Exhibits**




***Exhibit
              No.***
            ***Description***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.


_______________




*  Filed
      herewith




*Page
          12*


**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.





**U.S.
              DRY
              CLEANING CORPORATION**Date: 
              February 14, 2007
            By:
            /S/
              ROBERT Y.
              LEERobert
                Y. Lee
              Chief
                Executive OfficerBy:
            /S/ HADDON
              LIBBYHaddon
                Libby
              Chief
                Financial Officer









**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 Officer 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.