**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:  **June
      30, 2007**




**U.S.
      DRY CLEANING CORPORATION**


(Exact
      name of registrant as specified in its chapter)






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





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




Issuer’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 registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90
      days: x Yes
o No





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


o Yes x
      No





The
      number of shares outstanding of the issuer’s common stock, as of August 9, 2007,
      was 21,476,655 shares.





Transitional
      Small Business Disclosure Format (check one): o 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
            11







**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 June 30, 2007
            F-1(b)
            Unaudited Condensed Consolidated Statements
              of Operations for the three and nine months ended June 30, 2007 and
              2006
            F-2(c)
            Unaudited Condensed Consolidated Statements
              of Cash Flows for the nine months ended June 30, 2007 and 2006
            F-3(d)
            Notes to Unaudited Condensed Consolidated
              Financial Statements
            F-5







*Page
        1*




**U.S.
                  DRY CLEANING CORPORATION****CONDENSED
                  CONSOLIDATED BALANCE SHEET****JUNE
                  30, 2007****(UNAUDITED)****ASSETS****Current
                  Assets**Cash
              
              $
              3,443,974Accounts
                  receivable, net
              
              
              463,059Deferred
                  acquistion costs
              
              
              319,765Prepaid
                  expenses and other current assets
              
              
              143,219Total
                  Current Assets
              
              
              4,370,017**Property
                  and Equipment, net**
              
              
              1,760,347**Other
                  Assets**Notes
                  receivable
              
              
              125,000Deposits
              
              
              165,894Goodwill
              
              
              7,322,902Intangible
                  assets, net
              
              
              552,035Total
                  Other Assets
              
              
              8,165,831**Total
                  Assets**
              
              $
              14,296,195**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  Liabilities**Accounts
                  payable and accrued liabilities
              
              $
              3,370,328Liquidated
                  damages
              
              
              45,750Capital
                  lease obligation
              
              
              135,115Notes
                  payable
              
              
              480,559Convertible
                  notes payable, net of discount
              
              
              1,855,569Related
                  party convertible notes payable, net of discount
              
              
              337,377Related
                  party notes payable
              
              
              89,676Total
                  Current Liabilities
              
              
              6,314,374**Long
                  Term Liabilities**Capital
                  lease obligation
              
              
              405,602Notes
                  payable
              
              
              366,667Related
                  party notes payable
              
              
              174,072Convertible
                  notes payable
              
              
              100,000Total
                  Long Term Liabilities
              
              
              1,046,341**Total
                  Liabilities**
              
              
              7,360,715**Stockholders'
                  Equity**Convertible
                  preferred stock; par value $0.001 per share;20,000,000
                  authorized shares;1,200,000
                  shares issued and outstanding; liquidation preference of $2.40
                  per
                  share
              
              
              1,200Common
                  stock; par value $0.001 per share;50,000,000
                  Series B authorized shares; none issued and outstanding
              
              
              -Common
                  stock; par value $0.001 per share;100,000,000
                  authorized shares; 19,826,865 shares issued and
                  outstanding
              
              
              19,827Additional
                  paid-in capital
              
              
              22,343,803Stockholder
                  receivable
              
              
              (250,000
              )Deferred
                  consulting fees
              
              
              (52,813
              )Accumulated
                  deficit
              
              
              (15,126,537
              )Total
                  Stockholders' Equity
              
              
              6,935,480**Total
                  Liabilities and Stockholders' Equity**
              
              $
              14,296,195


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





**U.S.
                  DRY CLEANING CORPORATION****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS****FOR
                  THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND
                  2006****(UNAUDITED)****THREE
                  MONTHS**
              
              **NINE
                  MONTHS****2007**
              
              **2006**
                **As
                  Restated**
              
              **2007**
              
              **2006**
                **As
                  Restated****Net
                  Sales**
              
              
              
              
              $
              2,427,466
              
              $
              1,617,711
              
              $
              6,054,794
              
              $
              4,554,918**Cost
                  of Sales**Supplies
              
              
              
              
              
              (138,556
              )
              
              (63,488
              )
              
              (303,835
              )
              
              (223,550
              )Other
                  direct costs
              
              
              
              
              
              (1,113,705
              )
              
              (742,365
              )
              
              (2,811,066
              )
              
              (2,205,009
              )Total
                  cost of sales
              
              
              
              
              
              (1,252,261
              )
              
              (805,853
              )
              
              (3,114,901
              )
              
              (2,428,559
              )**Gross
                  Profit**
              
              
              
              
              
              1,175,205
              
              
              811,858
              
              
              2,939,893
              
              
              2,126,359**Operating
                  Expenses**Delivery
                  expenses
              
              
              
              
              
              205,744
              
              
              132,883
              
              
              538,089
              
              
              387,059Store
                  expenses
              
              
              
              
              
              720,423
              
              
              360,322
              
              
              1,623,176
              
              
              1,047,310Selling
                  expenses
              
              
              
              
              
              153,532
              
              
              178,609
              
              
              464,869
              
              
              489,682Administrative
                  expenses
              
              
              
              
              
              680,770
              
              
              347,456
              
              
              2,001,022
              
              
              1,105,268Professional
                  fees and other expenses
              
              
              
              
              
              526,727
              
              
              156,925
              
              
              2,129,696
              
              
              978,229Depreciation
                  and amortization expense
              
              
              
              
              
              96,112
              
              
              77,125
              
              
              245,968
              
              
              204,589Total
                  operating expenses
              
              
              
              
              
              2,383,308
              
              
              1,253,320
              
              
              7,002,820
              
              
              4,212,137**Operating
                  Loss**
              
              
              
              
              
              (1,208,103
              )
              
              (441,462
              )
              
              (4,062,927
              )
              
              (2,085,778
              )Loss
                  on extinguishment of debt
              
              
              
              
              
              -
              
              
              (1,751,000
              )
              
              -
              
              
              (1,751,000
              )Other expense
              
              
              
              
              
              (606,847
              )
              
              (1,880,463
              )
              
              (1,541,060
              )
              
              (2,861,270
              )**Net
                  Loss**
              
              
              
              
              $
              (1,814,950
              )
              $
              (4,072,925
              )
              $
              (5,603,987
              )
              $
              (6,698,048
              )**Basic
                  and diluted loss per common share**
              
              
              
              
              $
              (0.10
              )
              $
              (0.32
              )
              $
              (0.31
              )
              $
              (0.63
              )**Basic
                  and diluted weighted average number****of
                  common shares outstanding**
              
              
              
              
              
              17,313,060
              
              
              12,803,334
              
              
              17,972,608
              
              
              10,612,735






*Page F-2*
              *See
                  accompanying notes to condensed consolidated financial
                  statements.*
 
 **U.S.
                      DRY CLEANING CORPORATION****CONDENSED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS****FOR
                      THE NINE MONTHS ENDED JUNE 30, 2007 AND 2006****(UNAUDITED)****2007**
                  
                  **2006****As
                      Restated****CASH
                      FLOWS FROM OPERATING ACTIVITIES:**Net
                      (loss)
                  
                  $
                  (5,603,987
                  )
                  $
                  (6,698,048
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Depreciation
                      and amortization
                  
                  
                  245,968
                  
                  
                  204,589Amortization
                      of deferred financing costs & consulting fees
                  
                  
                  12,187
                  
                  
                  1,366,496Bad
                      debt expense
                  
                  
                  4,675
                  
                  
                  6,000Equity
                      instruments issued for compensation and services
                  
                  
                  416,070
                  
                  
                  114,380Amortization
                      of debt discounts
                  
                  
                  746,660
                  
                  
                  1,166,667Loss
                      on extinguishment of debt
                  
                  
                  -
                  
                  
                  1,751,000Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  135,309
                  
                  
                  (168,930
                  )Prepaid
                      expenses and other current assets
                  
                  
                  91,201
                  
                  
                  135,539Other
                      assets
                  
                  
                  (31,588
                  )
                  
                  -Accounts
                      payable and accrued expenses
                  
                  
                  1,667,863
                  
                  
                  172,784Liquidated
                      damages
                  
                  
                  (61,125
                  )
                  
                  142,500Net
                      cash used in operating activities
                  
                  
                  (2,376,767
                  )
                  
                  (1,807,023
                  )**CASH
                      FLOWS FROM INVESTING ACTIVITIES:**Purchases
                      of property and equipment
                  
                  
                  (285,833
                  )
                  
                  (330,739
                  )Deferred
                      acquisition costs
                  
                  
                  (601,765
                  )
                  
                  -Acquisition
                      of Cleaners Club, Inc.
                  
                  
                  (98,233
                  )
                  
                  -Net
                      cash used in investing activities
                  
                  
                  (985,831
                  )
                  
                  (330,739
                  )**CASH
                      FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                      from issuance of notes payable
                  
                  
                  475,768
                  
                  
                  39,869Proceeds
                      from issuance of convertible notes payable
                  
                  
                  1,800,000
                  
                  
                  5,396,000Proceeds
                      from issuance of common stock
                  
                  
                  3,617,192
                  
                  
                  -Proceeds
                      from issuance of related party notes payable
                  
                  
                  200,000
                  
                  
                  -Proceeds
                      from issuance of related party convertible notes payable
                  
                  
                  -
                  
                  
                  370,000Repayments
                      on notes payable
                  
                  
                  (244,490
                  )
                  
                  (268,318
                  )Repayments
                      on related party notes payable
                  
                  
                  (288,890
                  )
                  
                  (32,879
                  )Repayments
                      on convertible notes payable
                  
                  
                  -
                  
                  
                  (30,000
                  )Repayments
                      on capital lease obligation
                  
                  
                  (167,464
                  )
                  
                  (87,844
                  )Deferred
                      financing costs
                  
                  
                  -
                  
                  
                  (1,117,206
                  )Net
                      cash provided by financing activities
                  
                  
                  5,392,116
                  
                  
                  4,269,622Net
                      increase in cash
                  
                  
                  2,029,518
                  
                  
                  2,131,860Cash
                      at beginning of period
                  
                  
                  1,414,456
                  
                  
                  705,713Cash
                      at end of period
                  
                  $
                  3,443,974
                  
                  $
                  2,837,573Cash
                      paid during the period for:Interest
                  
                  $
                  87,337
                  
                  $
                  246,836Income
                      taxes
                  
                  $
                  -
                  
                  $
                  -
 *Page F-3*
                    *See
                        accompanying notes to condensed consolidated financial
                        statements.*
 
 **U.S.
                            DRY CLEANING CORPORATION****CONDENSED
                            CONSOLIDATED STATEMENTS OF CASH FLOWS****FOR
                            THE NINE MONTHS ENDED JUNE 30, 2007 AND 2006****(UNAUDITED)****2007**
                        
                        **2006****As
                            Restated****SUPPLEMENTAL
                            DISCLOSURE OF NON-CASH INVESTING AND FINANCING
                            ACTIVITIES**Debt
                            discount on convertible notes issued with common stock
                        
                        $
                        1,478,714
                        
                        $
                        2,917,668Reclassification
                            for change in par value of common and preferred stock
                        
                        $
                        -
                        
                        $
                        2,871,879Capital
                            lease additions
                        
                        $
                        87,036
                        
                        $
                        133,804Assumed
                            note payable with equipment purchase
                        
                        $
                        -
                        
                        $
                        85,000Conversion
                            of debt to common stock
                        
                        $
                        100,000
                        
                        $
                        8,662,780Convertible
                            note issued for stockholder receivable
                        
                        $
                        250,000
                        
                        $
                        -Reclassification
                            of accrued expenses to notes payable
                        
                        $
                        125,000
                        
                        $
                        -Conversion
                            of note payable to convertible note
                        
                        $
                        200,000
                        
                        $
                        -Acquisition
                            of Cleaners Club, Inc.
                        
                        $
                        2,028,000
                        
                        $
                        -
     *Page F-4*
                              *See
                                  accompanying notes to condensed consolidated financial
                                  statements.*
 
 **U.S.
                            DRY CLEANING CORPORATION**
 **NOTES
                            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
                            THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**


**1.
      ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF
      PRESENTATION**





***The
      Company***





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





On
      February 15, 2007, 100% of Cleaners Club, Inc.’s (“CCI”) outstanding common
      stock was acquired in a merger with USDC. The acquired shares were converted
      into 780,000 shares of $0.001 par value of USDC common stock (see Note 8
      for further information). CCI was founded in 1998 and operates ten retail
      laundry and dry cleaning stores.




***Basis
      of Presentation***





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





***Going
      Concern***





The
      accompanying condensed consolidated financial statements have been prepared
      assuming the Company will continue as a
      going
      concern, which contemplates, among other things, the realization of assets
      and
      satisfaction of liabilities in the ordinary course of business. The Company
      has
      recurring losses from operations; negative cash flow from operating activities
      of approximately $2.4 million for the nine months ended June 30, 2007; and
      negative working capital of approximately $1.9 million and an accumulated
      deficit of approximately $15.1 million at June 30, 2007. The Company’s business
      plan calls for various business acquisitions, which will require substantial
      additional capital. These factors, among others, raise substantial doubt about
      the Company’s ability to continue as
      a
      going concern. The Company intends to fund operations through debt and equity
      financing transactions .
      In
      conjunction with such efforts, on July 19, 2007, the Company closed an offering
      consisting of approximately 2,400,000 units at $2.50 per unit or approximately
      $6 million. Each unit consists of one share of common stock and one redeemable
      warrant to purchase one share of common stock. As of June 30, 2007, the Company
      received approximately $4.7 million in proceeds from the sale of approximately
      1,900,000 units. 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.




*Page
          F-5*




**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**




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




***Going
      Concern*** (continued)





The
      condensed consolidated financial statements do not include any adjustments
      related to recoverability and classification of asset carrying amounts or the
      amount and classification of liabilities that might result should the Company
      be
      unable to continue as a going concern.




**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




***Principles
      of Consolidation***





The
      accompanying condensed consolidated financial statements include the accounts
      of
      USDC and its wholly-owned subsidiaries, Steam Press, CVR and CCI. All
      significant intercompany balances and transactions have been eliminated in
      consolidation.




***Use
      of Estimates***





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





***Business
      Segments***





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





***Risks
      and Uncertainties***





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





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





*Page
          F-6*




**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**




**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (continued)




***Risks
      and Uncertainties*** (continued)





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.





***Earnings
      (Loss) Per Shares***





Under
      Statement of Financial Accounting Standards (“SFAS”) No. 128, “ *Earnings
      per Share”* ,
      basic
      loss per common share is computed by dividing the loss applicable to common
      stockholders by the weighted average number of common shares assumed to be
      outstanding during the period of computation. Diluted loss per common share
      is
      computed using the weighted average number of common shares and, if dilutive,
      potential common shares outstanding during the period. Potential common shares
      consist of the incremental common shares issuable upon the exercise of warrants
      (using the treasury stock method) and the conversion of convertible preferred
      stock and convertible debt (using the if-converted method). For the nine months
      ended June 30, 2007; 2,195,000 convertible securities and 432,432 options and
      warrants to purchase common stock, were excluded from the calculation of diluted
      loss per share because they were anti-dilutive.





***Reclassification***





Certain
      reclassifications have been made to the June 30, 2006 condensed consolidated
      financial statements of the Company to conform to the June 30, 2007
      presentations.





***Restatement
      of Prior Quarters***





As
      more
      fully discussed in the Company’s amended Form 10-KSB for the year ended
      September 30, 2006 filed with the SEC during February 2007, the Company restated
      its results for the year ended September 30, 2006 and the related fiscal 2006
      quarters. The June 30, 2006 interim periods results of operations and cash
      flows
      have been restated accordingly (See Note 7).





***Business
      Combinations***





SFAS
      No.
      141, “ *Business
      Combinations* ”
      eliminated the pooling of interest method of accounting for business
      combinations and requires that all business combinations be accounted for using
      the purchase method.





*Page
          F-7*




**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**





**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Goodwill
      and Other Intangible Assets***





SFAS
      No.
      142, *"Goodwill
      and Other Intangible Assets,"* addresses how intangible assets that are acquired individually or with a group
      of other assets should be accounted for 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 a non-compete agreement, customer relationships and the “Young
      Laundry & Dry Cleaning” trademark in the respective net amounts of
      approximately $209,000; $71,000 and $272,000 at June 30, 2007. 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 $119,000 and $107,000 for the nine months ended June 30, 2007
      and
      2006, respectively. Advertising costs approximated $54,000 and $48,000 for
      the
      three months ended June 30, 2007 and 2006, respectively. These costs have been
      included in selling expenses in the accompanying condensed consolidated
      statement of operations.





***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 associated with the related equity
      instruments issued and the effective intrinsic value resulting from 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 of the Company’s common stock. 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."*





***Stock-Based
      Compensation***





Since
      the
      Company has no stock option plans or any stock-based employee compensation
      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-8*


**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**




**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Registration
      Rights Payment Arrangements***





The
      Company has entered into registration rights agreements related to various
      equity arrangements (See Note 6). The Company accounts for registration rights
      payment arrangements in accordance with Financial Accounting Standards Board
      Staff Position No. EITF 00-19-2, “ *Accounting
      for Registration Payment Arrangements,”* whereas
      any contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      SFAS
      No. 5, “ *Accounting
      for Contingencies.”*





**3.
      NOTES PAYABLE**


During
        the nine months ended June 30, 2007, the Company accepted subscriptions from
        accredited investors for $2,250,000 in total purchase price of its Series
        A
        Convertible Debentures. The debentures were sold with a built-in thirty percent
        (30%) rate of return. For each $100,000 paid to the Company, a total of $130,000
        is due to the holder. Additionally, upon issuance, the Company issued 16,666
        shares of common stock to the note holder for each $100,000 subscription.
        The
        debentures mature in one year from the date issued with no interest. The
        principal amount of the debentures may be converted into common stock of
        the
        Company at a fixed conversion rate of $3.00 per share at the holder’s option at
        any time. The principal amount of the debentures is secured by all of the
        Company’s assets and those of its operating subsidiaries, including an
        assignment of its leasehold interests in its retail facilities. Pursuant
        to a
        registration rights agreement, the Company is obligated to register or to
        file a
        registration statement for all of the common stock that may be issued upon
        conversion of the debentures, within 270 days from closing on a “best efforts”
basis. Broker or underwriting fees or commissions to be paid in connection
        with
        the offer and sale was a maximum of 10% of cash received. As of June 30,
        2007,
        the Company had recorded $1,800,000 in cash proceeds; debt conversion of
        $200,000 and a stockholder note receivable of $250,000. Accordingly, 374,985
        shares of common stock were issued during the nine months ended June 30,
        2007.
        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 per share, (the estimated fair value of the common stock at the commitment
        date) pursuant to Accounting Principles Board Opinion No. 14 (“APB 14”) and
        related interpretations and recorded debt discounts associated with the common
        stock and a beneficial conversion feature totaling $803,714 plus an additional
        discount of $675,000 for the built-in 30% mark-up. Additionally, the built-in
        30% rate of return described above, totaling $675,000, was included in the
        face
        amount of the notes, but was also recorded as debt discount against the face
        amount of the notes. These discounts are being accreted to interest expense
        over
        the one year term of the notes. For the three months ended June 30, 2007,
        the
        Company accreted $416,231 of such debt discounts to interest expense. For
        the
        nine months ended June 30, 2007, the Company accreted $746,660 of such debt
        discounts to interest expense. Total amount outstanding as of June 30, 2007
        of
        $2,192,946 is included as convertible notes payable, net of discount, in
        the
        accompanying condensed consolidated balance sheet of which $337,377 is included
        as related party convertible notes payable, net of discount.
  During
        the quarter ended March 31, 2007, the Company assumed two promissory notes
        for
        $100,000 each and secured by equipment. The promissory notes are due in thirteen
        monthly interest payments of $850 starting on May 1, 2007 with principal
        amount
        due at maturity date. Such liability is included in notes payable in the
        accompanying condensed consolidated balance sheet.
  During
        the quarter ended June 30, 2007, the Company assumed a promissory note for
        $100,000 and secured by equipment. The promissory note is due in eighty-four
        monthly payments of $1,739 starting on May 18, 2007. Such liability is included
        in notes payable in the accompanying condensed consolidated balance
        sheet.
  During
        the quarter ended June 30, 2007, the Company assumed promissory note for
        $150,000 and secured by equipment. The promissory note is due in fifty-nine
        monthly payments of $2,433 starting on July 5, 2007 with a principal and
        interest amount due at maturity of $55,582. Such liability is included in
        notes
        payable in the accompanying condensed consolidated balance
        sheet.




*Page
          F-9*




**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**


**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
      for past services valued at $231,250 based on the estimated fair market value
      of
      the Company’s common stock of $1.85 per share. Expenses related to this
      transaction have been included in administrative expenses in the accompanying
      condensed consolidated statements of operations.





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





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





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





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





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


On
        December 27, 2006, the Company filed a Registration Statement on Form SB-2
        with
        the SEC. The registration statement was declared effective on May 14, 2007.
        The
        offering consists of up to 3,000,000 units. Each unit consists of one share
        of
        common stock and one redeemable warrant to purchase one share of common stock.
        During the quarter ended June 30, 2007, the Company raised approximately
        $4.7
        million offset by approximately $1.1 million of related fees associated with
        the
        issuance of units through a public offering. The warrants are exercisable
        to
        purchase one share of common stock at an exercise price of $3.50. The warrants
        expire on the fifth anniversary of the effective date. The Company will have
        the
        right to redeem some or all of the warrants issued in this offering at a
        redemption price of $0.05 per warrant at any time after the date on which
        the
        closing price of the Company’s common stock has exceeded $5.00 for 20
        consecutive trading days.





*Page
          F-10*


**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**




**5.
      EQUITY TRANSACTIONS** (continued)





***Options
      and Warrants***


In
        fiscal
        2005, the Company issued 1,500,000 warrants to purchase its common stock
        to each
        of the two founding shareholders. Such warrants 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 were cancelled on December
        31, 2006.
 
 During
        the quarter ended December 31, 2006, the Company issued 500,000 warrants
        to an
        investment banking firm for services directly related to an equity fund raising
        transaction. Such warrants have an exercise price of $0.25, are exercisable
        for
        five 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 and netted
        against additional paid in capital.
 
 During
        the quarter ended March 31, 2007, the Company issued 100,000 warrants to
        a
        consultant for professional services at an exercise price of $3.50. The fair
        value of the warrants, using the Black-Scholes pricing model, of $65,000
        was
        recorded as deferred consulting fees and presented as a contra equity item
        in
        stockholders’ equity. Such amount is being amortized to expense over the two
        year term of the consulting agreement.
 
 During
        the quarter ended March 31, 2007, the Company issued 50,000 warrants to a
        consultant for professional services in conjunction with the recent acquisition
        at an exercise price of $3.50. The Company included the fair value of the
        warrants, using the Black-Scholes pricing model, in the amount of $32,250
        as
        part of the purchase price consideration for the Cleaners Club acquisition
        (see
        Note 8).
 
 During
        the quarter ended March 31, 2007, the Company granted 400,000 (stock options
        outside of a stock option plan) to the seller of CCI in accordance with the
        related employment agreement with the Company at exercise prices ranging
        from
        $3.50 to $10.00 per share. The Company included the fair value of the options,
        calculated using the Black-Scholes pricing model, in the amount of $171,000
        as
        part of the purchase price consideration for the Cleaners Club acquisition
        (see
        Note 8).
 
 For
        transactions noted above where the fair market value of common stock options
        and
        warrants was calculated using the Black-Scholes pricing model, the following
        assumptions were used; risk free interest rate of 4.5%, estimated volatility
        of
        55%, expected life of five years unless otherwise stated, and no expected
        dividend yield.




**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.





*Page
          F-11*


**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**


**6.
      COMMITMENTS AND CONTINGENCIES** (continued)





***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 Company’s stock
        begins trading. As of June 30, 2007, the Company had not filed a registration
        statement registering these shares and has accrued liquidated damages of
        approximately $46,000. During nine months ended June 30, 2007, the Company
        paid
        $73,125 as a penalty that was recorded as other expenses in the accompanying
        condensed consolidated statements of operations.





The
      Company is required to use its “best efforts” to file, on or before 270 days
      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.


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





*Page
          F-12*


**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**




**7.
      RESTATEMENT OF PRIOR YEAR INTERIM PERIODS**





The
      accompanying 2006 condensed consolidated statements of operations and cash
      flows
      were restated to correct the accounting errors described below (see the
      Company’s Form 10-KSB/A for the year ended September 30, 2006 for additional
      information).





·
            In
                February 2007, management determined that the Company should have
                used
                $0.34 per share as the fair market value of its common stock. Using
                a
                common stock price of $0.34 per share, the relative fair value of
                the
                proceeds attributable to the common stock issued with convertible
                notes
                payable was recalculated to be approximately $2,918,000 as compared
                to
                approximately $448,000 that was previously
                reported.





·
            As
                a result of the change of the fair value of the Company’s common stock
                discussed above, management determined that the change in the conversion
                price of the Company’s remaining outstanding convertible notes resulted in
                debt extinguishment and, accordingly, expensed the entire remaining
                unamortized balance of debt discount approximating $1,751,000 as
                loss on
                extinguishment of debt.





·
            As
                a result of the change of the fair value of the Company’s common stock
                discussed above, the estimated fair value of the Company’s common stock
                that was issued to certain employees as compensation was changed
                to be
                approximately $90,000 as compared to approximately $36,000 that was
                previously reported.




**For
              the three months ended June 30, 2006**
            
            **As
                Previously Reported**
            
            **As
                Restated**
            
            **Change**Operating
              Loss
            
            $
            (441,462
            )
            $
            (441,462
            )
            $
            -Loss
              on extinguishment of debt
            
            $
            -
            
            $
            (1,751,000
            )
            $
            (1,751,000
            )Other
              income (expense)
            
            $
            (1,609,626
            )
            $
            (1,880,463
            )
            $
            (270,837
            )Net loss
            
            $
            (2,051,088
            )
            $
            (4,072,925
            )
            $
            (2,021,837
            )Basic
              and diluted net loss per common share
            
            $
            (0.16
            )
            $
            (0.32
            )
            $
            (0.16
            )




**For
              the nine months ended June 30, 2006**
            
            **As
                Previously Reported**
            
            **As
                Restated**
            
            **Change**Operating
              Loss
            
            $
            (2,019,718
            )
            $
            (2,085,778
            )
            $
            (66,060
            )Loss
              on extinguishment of debt
            
            $
            -
            
            $
            (1,751,000
            )
            $
            (1,751,000
            )Other
              income (expense)
            
            $
            (2,142,859
            )
            $
            (2,861,270
            )
            $
            (718,411
            )Net loss
            
            $
            (4,162,577
            )
            $
            (6,698,048
            )
            $
            (2,535,471
            )Basic
              and diluted net loss per common share
            
            $
            (0.39
            )
            $
            (0.63
            )
            $
            (0.24
            )




**8.
      ACQUISITION OF CLEANERS CLUB, INC.**





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





*Page
          F-13*
 
 **U.S.
          DRY CLEANING CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**


**8.
      ACQUISITION OF CLEANERS CLUB, INC.** (continued)





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





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





Deferred
      tax liabilities related to the estimated tax effect of non-deductible
      amortization of identifiable intangible assets is not significant. Goodwill
      resulting from the acquisition is not deductible for income tax
      purposes.





Certain
      pro forma financial information of the Company is presented below, based on
      the
      assumption that the acquisition occurred at the beginning of the earliest period
      presented.




**Consolidated
                Pro Forma Financial Information****Three
                Months Ended**
            
            **Nine
                Months Ended****June
                30, 2007**
            
            **June
                30, 2006**
            
            **June
                30, 2007**
            
            **June
                30, 2006**Net
              sales
            
            $
            2,427,466
            
            $
            2,331,914
            
            $
            7,207,231
            
            $
            6,536,447Net
              loss
            
            $
            (1,814,950
            )
            $
            (4,067,117
            )
            $
            (5,899,108
            )
            $
            (6,654,066
            )Basic
              and diluted loss per common share
            
            $
            (0.10
            )
            $
            (0.27
            )
            $
            (0.32
            )
            $
            (0.51
            )




**9.
      SUBSEQUENT EVENTS**





***Initial
      Public Offering***


On
        July
        19, 2007, the Company announced that it completed its initial public offering
        of
        approximately $6.1 million in total gross proceeds, consisting of the sale
        of
        2,450,836 units of which $1.4 million associated with the issuance of 554,900
        units were raised during July 2007. On December 27, 2006, the Company filed
        a
        Registration Statement on Form SB-2 with the SEC relating to the initial
        public
        offering. The registration statement was declared effective on May 14, 2007.
        The
        offering consists of up to 3,000,000 units. Each unit consists of one share
        of
        common stock and one redeemable warrant to purchase one share of common stock
        (see Note 5).





*Page
          F-14*


**U.S.
        DRY CLEANING CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE AND NINE MONTHS ENDED JUNE 30, 2007 AND 2006**
 **(UNAUDITED)**




**9.
      SUBSEQUENT EVENTS** (continued)





***Departure
      of Directors or Certain Officers; Election of Directors; Appointment of Certain
      Officers; Compensatory Arrangements of Certain
      Officers***





On
      July
      24, 2007, the Company filed a Form 8-K announcing that F. Kim Cox has been
      appointed to the position of Chief Financial Officer (“CFO”) and Treasurer. The
      Company also announced that Haddon B. Libby, the former CFO, resigned from
      the
      Company to pursue other business interests.





Mr.
      Cox,
      age 55, has more than 25 years of experience in executive management, public
      company accounting and finance, corporate governance, and mergers and
      acquisitions. Mr. Cox served in multiple executive leadership positions at
      Rentrak Corporation, a publicly-held information management company, from 1985
      to March 2005, during which he acted as President and Secretary from June 2000
      to March 2005, Executive Vice President, Secretary and Treasurer from 1999
      to
      June 2000, and Executive Vice President, Chief Financial Officer, Secretary
      and
      Treasurer from 1995 to 1999. Prior to joining Rentrak Corporation in 1985,
      Mr.
      Cox was an attorney in private practice in Oregon, and prior to that, he was
      a
      staff accountant with the former accounting firm of Arthur Andersen LLP. Mr.
      Cox
      has most recently served as an independent consultant to Rentrak Corporation
      and
      other businesses from April 2005 to the present. Mr. Cox received J.D. and
      M.B.A. degrees from Williamette University’s College of Law and Atkinson
      Graduate School of Management, respectively, and is a C.P.A. licensed in the
      State of Washington.




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




In
      the
      event of the termination of Mr. Cox’s employment by the Company without cause
      (as defined within the employment agreement) or by Mr. Cox as a result of a
      material breach of the terms of the employment agreement by the Company, Mr.
      Cox
      will be entitled to receive his base salary through the remaining term of the
      agreement. Mr. Cox’s employment agreement also contains standard confidentiality
      and non-competition provisions.




During
      the last two years, there have been no Company transactions or proposed
      transactions in which Mr. Cox has had or is to have a direct or indirect
      material interest, and there are no family relationships between Mr. Cox and
      any
      of the Company’s other executive officers or directors.





***Conversion
      of Convertible Preferred Stock***




During
      July 2007, several preferred shareholders converted 1,094,887 preferred shares
      into the Company’s common stock on a one for one basis for a total of 1,094,887
      common shares.





*Page
          F-15*





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





**Forward-Looking
      Statements**




*Certain
      statements made herein and in other public filings and releases by us contain
      “forward-looking” information (as defined in the Private Securities Litigation
      Reform Act of 1995) that involve risk and uncertainty. These forward-looking
      statements may include, but are not limited to, future capital expenditures,
      acquisitions (including the amount and nature thereof), future sales, earnings,
      margins, costs, number and costs of store openings, demand for clothing, market
      trends in the retail clothing business, inflation and various economic and
      business trends. Forward-looking statements may be made by management orally
      or
      in writing, including, but not limited to, Management's Discussion and Analysis
      or Plan of Operation section and other sections of our filings with the U.S.
      Securities and Exchange Commission (the “SEC”), under the Securities Exchange
      Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (the “Securities
      Act”).*





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





**Description
      of Business**





***Our
      Company***


U.S.
        Dry
        Cleaning Corporation (“USDC”) was formed on July 19, 2005, and on
        December 30, 2005, completed a “reverse merger” with a public “Shell
        Company” as that term is defined in Rule 12b-2 of the General Rules and
        Regulations promulgated by the SEC. On August 9, 2005, we purchased 100%
        of the
        outstanding common stock and membership interest of Steam Press Holdings,
        Inc.
        (“Steam Press”), and Coachella Valley Retail, LLC (“CVR”), respectively, in
        stock for stock type transactions. USDC, Steam Press, and CVR are hereinafter
        collectively referred to as the “Company.”
 
 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.
 
 On
        February 15, 2007, we acquired 100% of Cleaners Club, Inc.’s (“CCI”) authorized,
        issued and outstanding common stock was acquired in a merger with us. CCI
        was
        founded in 1998 and operates ten retail laundry and dry cleaning stores.
        The
        acquired shares were converted into 780,000 shares of our common stock. Our
        management has estimated the fair value of the 780,000 common shares issued
        in
        the acquisition at $1.85 per share (the estimated fair value of the Company’s
        common stock) for a stock purchase price consideration of
        $1,443,000.  Additionally, we issued fully vested stock options valued
        at approximately $203,000, cash of $100,000 and incurred approximately $282,000
        in acquisition related costs for a total purchase price consideration of
        approximately $2,028,000. (see Note 8 for further
        information).




***Competition***





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





*Page
          2*


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





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





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





Our
      management believes that domestic media have generally sensationalized the
      perceived hazards of Perc to operators, clients and the
      environment in general. Perc is a volatile, yet non-flammable, substance that
      requires precautions and proper handling. However, it
      has
      proven safe, effective and completely manageable for years. We anticipate that
      our centralized operations and improvements
      in all facets of the business will further improve the safety for our employees,
      our clients and the environment. We intend to continue
      to utilize Perc where permitted on a limited interim basis to assure an orderly
      transition. To the extent that additional investment for environmental
      compliance may be necessary, we do does not anticipate any significant financial
      impact. We believe believes
      that we comply in all material respects with all relevant rules and regulations
      pertaining to the use
      of
      chemical agents. In the opinion of our management, we comply in all material
      respects with all known federal, state, and local legislation pertaining to
      the
      use of all chemical agents and will endeavour to ensure that our company
      proactively remains in compliance with all such statutes and regulations in
      the
      future.





***Major
      Customers***





At
      June
      30, 2007 and 2006, one customer accounted for approximately 15% and 17% of
      gross
      accounts receivable, respectively. For the three months ended June 30, 2007
      and
      2006, one customer accounted for approximately 15% and 13% of net sales,
      respectively.





**Results
      of Operations for the Three Months Ended June 30, 2007 and
      2006**





***Revenues***





Net
      sales
      were approximately $2.4 million for the three months ended June 30, 2007 an
      increase of approximately $0.8 million compared to the three months ended June
      30, 2006 of approximately $1.6 million. This reflects a 50% increase in
      revenues. The increase consisted of approximately $0.8 million from our recent
      acquisition.





***Cost
      of Sales***





Our
      cost
      of sales was approximately $1.3 million for the three months ended June 30,
      2007
      an increase of approximately $0.5 million compared to the three months ended
      June 30, 2006 of approximately $0.8 million. Cost
      of
      sales as a percentage to revenues is approximately 52% and 50% for the three
      months ended June 30, 2007 and 2006, respectively .
      Our
      cost of sales consists of supplies, labor and facilities to process laundry
      and
      dry cleaning services with
      the
      increase primarily due to our recent acquisition.





***Gross
      Profit***





Gross
      profit increased approximately $0.4 million to approximately $1.2 million for
      the three months ended June 30, 2007 compared to the three months ended June
      30,
      2006 of approximately $0.8 million. Gross profit as a percentage of revenue
      decreased 2% to 48% from 51% for the three months ended June 30, 2007 and 2006,
      respectively with the increase primarily due to our recent
      acquisition.




*Page
          3*




***Operating
      Expenses***





Operating
      expenses for the three months ended June 30, 2007 are approximately $2.4
      million, an increase of approximately $1.1 million compared to the three months
      ended June 30, 2006 of approximately $1.3 million with the increase primarily
      due to our recent acquisition.





Delivery,
      store and selling expenses for the three months ended June 30, 2007 were
      approximately $1.1 million, an increase of approximately $0.4 million compared
      to the three months ended June 30, 2006 of approximately $0.7 million. These
      expenses are primarily related to store rents and delivery costs with the
      increase primarily due to our recent acquisition.




Administrative
      expenses and professional fees for the three months ended June 30, 2007 were
      approximately $1.2 million, an increase of approximately $0.7 million compared
      to the three months ended June 30, 2006 of approximately $0.5 million. Our
      management costs are directly related to supporting a public company; legal
      fees
      related to our recent acquisition; and the preparation of our registration
      statement on Form SB-2 relating to our best-efforts public offering of
      approximately $7.5 million of our shares of common stock and
      warrants.





***Net
      Results of Operations***





Operating
      loss was approximately $1.2 million for the three months ended June 30, 2007
      and
      approximately $0.4 million for the three months ended June 30, 2006.





***Other
      Income (Expense)***





Interest
      expense for the three months ended June 30, 2007 was approximately $0.6 million
      compared to approximately $1.9 million for the three months ended June 30,
      2006.
      The decrease is due to our accreting during the quarter ended June 30, 2006
      of
      approximately $0.4 million of debt discounts to interest expense relating to
      Series A Convertible Debentures (see Note 3) and financing fees of approximately
      $1.5 million compared to accreting approximately $0.4 million in debt discount
      and approximately $0.2 million in convertible debt interest during the quarter
      ended June 30, 2007.





***Net
      Results***





We
      are
      reporting a net loss of approximately $1.8 million or $(0.10) per common share
      for the three months ended June 30, 2007 compared to a net loss of approximately
      $4.1 million or $(0.32) per common share for the three months ended June 30,
      2006. This
      includes legal, audit, consulting and administrative expenses directly related
      towards capitalization of our company.




**Results
      of Operations for the Nine Months Ended June 30, 2007 and
      2006**





***Revenues***





Net
      sales
      were approximately $6.1 million for the nine months ended June 30, 2007 an
      increase of approximately $1.5 million compared to the nine months ended June
      30, 2006 of approximately $4.6 million. This reflects a 33% increase in
      revenues. The increase consisted of approximately $0.3 million from existing
      operations and approximately $1.2 million from our recent
      acquisition.





***Cost
      of Sales***





Cost
      of
      sales was approximately $3.1 million for the nine months ended June 30, 2007
      an
      increase of approximately $0.7 million compared to the nine months ended June
      30, 2006 of approximately $2.4 million. Cost
      of
      sales as a percentage to revenues was 51% and 53% for the nine months ended
      June
      30, 2007 and 2006, respectively .
      Our
      cost of sales consists of supplies, labor and facilities to process laundry
      and
      dry cleaning services with
      the
      increase primarily due to our recent acquisition.





*Page
          4*


***Gross
      Profit***





Gross
      profit increased approximately $0.8 million to approximately $2.9 million for
      the nine months ended June 30, 2007 compared to the nine months ended June
      30,
      2006 of approximately $2.1 million. Gross profit as a percentage of revenue
      increased 2% to 49% from 47% for the nine months ended June 30, 2007 and 2006,
      respectively with the increase primarily due to our recent
      acquisition.





***Operating
      Expenses***





Operating
      expenses for the nine months ended June 30, 2007 are approximately $7.0 million,
      an increase of approximately $2.8 million compared to the nine months ended
      June
      30, 2006 of approximately $4.2 million with the increase primarily due to our
      recent acquisition.





Delivery,
      store and selling expenses for the nine months ended June 30, 2007 were
      approximately $2.6 million compared to the nine months ended June 30, 2006
      of
      approximately $1.9 million. These expenses are primarily related to store rents
      and delivery costs with the increase primarily due to our recent
      acquisition.




Administrative
      expenses and professional fees for the nine months ended June 30, 2007 were
      approximately $4.1 million, an increase of approximately $2.0 million compared
      to the three months ended June 30, 2006 of approximately $2.1 million. Our
      management costs are directly related to supporting a public company; legal
      fees
      related to our recent acquisition; and the preparation of our registration
      statement on Form SB-2 relating to our best-efforts public offering of
      approximately $7.5 million of our shares of common stock and
      warrants.





***Net
      Results of Operations***




Operating
      loss was approximately $4.1 million for the nine months ended June 30, 2007
      and
      approximately $2.1 million for the nine months ended June 30, 2006.





***Other
      Income (Expense)***




Interest
      expense for the nine months ended June 30, 2007 was approximately $1.5 million
      compared to approximately $2.9 million for the nine months ended June 30, 2006.
      The decrease is due to our accreting during the nine months ended June 30,
      2006
      of approximately $1.1 million of debt discounts to interest expense relating
      to
      Series A Convertible Debentures (see Note 3) and financing fees of approximately
      $1.8 million compared to accreting approximately $0.8 million in debt discount,
      approximately $0.4 million in financing fees and $0.3 million in convertible
      debt interest during the nine months ended June 30, 2007.





***Net
      Results***





We
      are
      reporting a net loss of approximately $5.6 million or $(0.32) per common share
      for the nine months ended June 30, 2007 compared to a net loss of approximately
      $6.7 million or $(0.63) per common share for the nine months ended June 30,
      2006. This
      includes legal, audit, consulting and administrative expenses directly related
      towards capitalization of our company.





**Liquidity
      and Capital Resources**





Total
      assets increased by approximately $4.0 million from $10.3 million as of June
      30,
      2006 to $14.3 million as of June 30, 2007. The increase is primarily due to
      an
      increase in goodwill of approximately $2.3 million related to our recent
      acquisition; property and equipment of approximately $0.7 million; an increase
      in cash of approximately $0.6 million; and other assets of approximately $0.4
      million.





Total
      liabilities increased by approximately $5.0 million from approximately $2.4
      million as of June 30, 2006 to approximately $7.4 million as of June 30, 2007.
      This increase is primarily due to the issuance of approximately $2.2 million
      of
      the Company’s Series A Convertible Debentures (see Note 3); an increase in trade
      accounts payable and accrued liability obligations of approximately $2.4 million
      and other current liabilities of approximately $0.3 million.





*Page
          5*


Our
      operating activities used approximately $2.4 million in cash during the nine
      months ended June
      30 ,
      2007.
      Our net loss of approximately $5.6 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 $1.4 million. These include depreciation,
      amortization, bad debt expense and the issuance of stock for compensation and
      services and debt discount amortization in addition to the growth in payables
      of
      approximately $1.7 million. Operating activities used approximately $1.8 million
      in cash during the nine months ended June 30, 2006. Our net loss of
      approximately $6.7 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 $4.6 million. These include depreciation, amortization, bad debt
      expense, issuance of stock for compensation and services, debt discount
      amortization and loss on extinguishment of debt in addition to the growth in
      payables of approximately $0.2 million and liquidated damages of approximately
      $0.1 million.





Cash
      used
      in investing activities during the nine months ended June
      30, 2007,
      consisted of approximately $1.0 million used for the purchase of property and
      equipment; deferred acquisition costs and the cash of acquired company as
      compared to approximately $0.3 million for the nine months ended June 30, 2006
      for the purchase of property and equipment.





Cash
      flows from financing activities were approximately $5.4 million for the nine
      months ended June
      30 ,
      2007
      which primarily consisted of approximately $1.8 million in net proceeds from
      the
      issuance of convertible debentures, approximately $3.6 million in net proceeds
      from the issuance of common stock and approximately $0.7 million in proceeds
      from issuance of notes payable; offset by repayments on notes payable, capital
      leases and prepaid financing costs of approximately $0.7 million.





We
      have a
      working capital deficit of approximately $1.9 million as of June
      30 ,
      2007.
      To meet our current working capital requirements, we raised approximately $2
      million in private funds through convertible debt in December 2006 and
      approximately $3.6 million in net proceeds through a public offering of common
      stock during the
      three months ended June 30, 2007 (see Note 5).  However,
      there can be no assurances that any debt and/or equity financing transactions
      now under consideration will be successful at acceptable terms.





***Going
      Concern Considerations***





The
      condensed consolidated financial statements included elsewhere herein have
      been
      prepared assuming we will continue as a going concern, which contemplates,
      among
      other things, the realization of assets and satisfaction of liabilities in
      the
      ordinary course of business. For the nine months ended June 30, 2007, we had
      a
      net loss of approximately $5.6 million and negative cash flow from operating
      activities of approximately $2.4 million. At June 30, 2007, we had an
      accumulated deficit of approximately $15.1 million, working capital deficit
      of
      approximately $1.9 million and have suffered significant net losses since
      inception.





We
      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, we will have sufficient funds to
      execute its intended business plan or generate positive operating results.


Since
        inception, we have yet to generate any profits from operations. Accordingly,
        we
        have met its capital requirements primarily through the private sale of its
        convertible secured promissory notes payable, secured convertible debentures
        and
        a public offering of our common stock. We have raised approximately $12.5
        million in net cash proceeds through the private debt sales and approximately
        $4.7 million offset by approximately $1.1 million of related fees associated
        with the issuance of units through a public offering that closed on July
        19,
        2007 (see Note 5). In May 2006, the majority of the holders of approximately
        $7.9 million senior-secured convertible notes payable elected to convert
        into
        the our common stock. It is anticipated that the holders of the recently
        raised
        $2 million will also convert their convertible debentures to equity upon
        maturity.





Our
      capital requirements depend on numerous factors, including the rate of market
      acceptance of our services, the Company’s ability to service its customers, our
      ability to maintain and expand its customer base, the level of resources
      required to expand our marketing and sales organization, and other factors.
      We
      are currently revising our business plan for funding our long-term operations
      to
      include potential acquisitions which would allow us to maximize our current
      processing facility capacities, thereby increasing our potential profitability.
      We intend to fund operations through debt and/or equity financing transactions
      and facilitate such fund raising efforts by registering shares of its common
      stock with the SEC as a public company. However, such financing transactions
      may
      not be sufficient to fund its planned acquisitions, capital expenditures,
      working capital, and other cash requirements for the fiscal year ending
      September 30, 2007.





*Page
          6*


As
      more
      fully explained elsewhere herein, Our management presently believes that cash
      generated from operations (if any), combined with the our current cash positions
      and debt and/or equity financing proposals now under consideration will be
      sufficient to meet the our 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 unfavourable effect on the cost of products and services sold and
      other operating expenses. Accordingly, with the possible exception of the impact
      on interest rates, we believe that inflation will have no significant effect
      on
      our results of operations or financial condition.




**Critical
      Accounting Policies**





To
      prepare the financial statements in conformity with accounting principles
      generally accepted in the United States of America, our 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. We recognize 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 we deliver the cleaned garments to the commercial
      customer. Generally, we deliver 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 our 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**





We
      have
      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 our 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.





**Subsequent
      Events**





***Initial
      Public Offering***





On
      July
      19, 2007, the Company announced that it completed its initial public offering
      of
      approximately $6.1 million, in gross proceeds, consisting of the sale of
      2,450,836 units of which $1.4 million associated with the issuance of 554,900
      units were raised during July 2007. On December 27, 2006, the Company filed
      a
      Registration Statement on Form SB-2 with the SEC relating to the initial public
      offering. The registration statement was declared effective on May 14, 2007.
      The
      offering consists of up to 3,000,000 units. Each unit consists of one share
      of
      common stock and one redeemable warrant to purchase one share of common stock
      (see Note 5).





***Departure
      of Directors or Certain Officers; Election of Directors; Appointment of Certain
      Officers; Compensatory Arrangements of Certain
      Officers***





On
      July
      24, 2007, the Company filed a Form 8-K announcing that F. Kim Cox has been
      appointed to the position of Chief Financial Officer (“CFO”) and Treasurer. The
      Company also announced that Haddon B. Libby, the former CFO, resigned from
      the
      Company to pursue other business interests.





Mr.
      Cox,
      age 55, has more than 25 years of experience in executive management, public
      company accounting and finance, corporate governance, and mergers and
      acquisitions. Mr. Cox served in multiple executive leadership positions at
      Rentrak Corporation, a publicly-held information management company, from 1985
      to March 2005, during which he acted as President and Secretary from June 2000
      to March 2005, Executive Vice President, Secretary and Treasurer from 1999
      to
      June 2000, and Executive Vice President, Chief Financial Officer, Secretary
      and
      Treasurer from 1995 to 1999. Prior to joining Rentrak Corporation in 1985,
      Mr.
      Cox was an attorney in private practice in Oregon, and prior to that, he was
      a
      staff accountant with the former accounting firm of Arthur Andersen LLP. Mr.
      Cox
      has most recently served as an independent consultant to Rentrak Corporation
      and
      other businesses from April 2005 to the present. Mr. Cox received J.D. and
      M.B.A. degrees from Williamette University’s College of Law and Atkinson
      Graduate School of Management, respectively, and is a C.P.A. licensed in the
      State of Washington.




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





*Page
          9*
 
  In
        the
        event of the termination of Mr. Cox’s employment by the Company without cause
        (as defined within the employment agreement) or by Mr. Cox as a result of
        a
        material breach of the terms of the employment agreement by the Company,
        Mr. Cox
        will be entitled to receive his base salary through the remaining term of
        the
        agreement. Mr. Cox’s employment agreement also contains standard confidentiality
        and non-competition provisions.




During
      the last two years, there have been no Company transactions or proposed
      transactions in which Mr. Cox has had or is to have a direct or indirect
      material interest, and there are no family relationships between Mr. Cox and
      any
      of the Company’s other executive officers or directors.





***Conversion
      of Convertible Preferred Stock***





During
      July 2007, several preferred shareholders converted 1,094,887 preferred shares
      into the Company’s common stock on a one for one basis for a total of 1,094,887
      common shares.




**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 June 30, 2007. This evaluation was carried out
      under the supervision and with the participation of our management, including
      our Chief Executive Officer and Chief Financial Officer. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that, as of June 30, 2007, our disclosure controls and procedures are not
      effective.





We
      plan
      on remediating the material weaknesses by implementation of new financial
      reporting systems throughout our operations; adoption of uniform internal
      controls; and the addition of management personnel to monitor daily
      organizational activities which will ensure that information is being gathered,
      reviewed and disclosed at all levels of our company and reported timely in
      various reports filed or submitted under the Exchange Act.





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





**Limitations
      on the Effectiveness of Internal Controls**





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




*Page
          10*


**PART
        II - OTHER INFORMATION**





**Item
      1.Legal
      Proceedings**





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





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





During
      the nine months ended June 30, 2007, our company, pursuant to the terms of
      the
      Series A Convertible Debentures as disclosed in Note 3 above, issued 374,985
      shares of restricted common stock valued at $803,714 using Black-Scholes pricing
      model.





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





On
        December 27, 2006, we filed a Registration Statement on Form SB-2 with the
        SEC.
        The registration statement was declared effective on May 14, 2007. The offering
        consists of up to 3,000,000 units. Each unit consists of one share of common
        stock and one redeemable warrant to purchase one share of common stock. During
        the quarter ended June 30, 2007, we raised approximately $4.7 million offset
        by
        approximately $1.1 million of related fees associated with the issuance of
        units
        through a public offering that closed on July 19, 2007 (see Note 6). The
        warrants included in the units will be exercisable to purchase one share
        of
        common stock immediately after the effectiveness of a 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. We have the right to redeem some or all of the warrants
        issued in this offering at a redemption price of $0.05 per warrant at any
        time
        after the date on which the closing price of our common stock has exceeded
        $5.00
        for 20 consecutive trading days.




**Item
      3.** **Defaults
      upon Senior Securities**





None





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





None





**Item
      5.** **Other
      Information**





None





**Item
      6.** **Exhibits**




Exhibit
                  10.1
              Secured
                  Promissory Note between Riaz Chauthani, an individual and U.S.
                  Dry
                  Cleaning Corporation dated February 20, 2007 and included by reference
                  to
                  Form 10-QSB dated March 31, 2007 and filed with the SEC on May
                  15,
                  2007.Exhibit
                  31.1
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.Exhibit
                  31.2
              Certification
                  of Principal Accounting 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 Principal Accounting Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.




*Page
          11*





**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:
              August 14, 2007
            By:
            /s/ ROBERT
              Y.
              LEERobert
              Y. LeeChief
                Executive Officer and Principal AccountingOfficer










**EXHIBIT
      INDEX**




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