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,
2008





US DRY CLEANING
CORPORATION


(Exact
name of registrant as specified in its chapter)








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





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





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











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





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





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





State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date: 29,751,577 common shares as of August 13,
2008.





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














TABLE OF
CONTENTS


PagePART I - FINANCIAL
      INFORMATIONItem
      1:
            Financial
      Statements (Unaudited)
            1Item
      2:
            Management’s
      Discussion and Analysis
            2Item
      3:
            Controls
      and Procedures
            9PART II - OTHER
      INFORMATIONItem
      1:
            Legal
      Proceedings
            10Item
      2:
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            10Item
      3:
            Defaults
      Upon Senior Securities
            10Item
      4:
            Submission
      of Matters to a Vote of Security Holders
            10Item
      5:
            Other
      Information
            10Item
      6:
            Exhibits
            10






















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,
      2008
            F-1(b)
            Unaudited
      Condensed Consolidated Statements of Operations for the three and nine
      months ended June 30, 2008 and 2007
            F-2(c)
            Unaudited
      Condensed Consolidated Statements of Cash Flows for the nine months ended
      June 30, 2008 and 2007
            F-3(d)
            Notes
      to Unaudited Condensed Consolidated Financial Statements
            F-4








Page
1











US DRY CLEANING
CORPORATION
 CONDENSED
CONSOLIDATED BALANCE SHEET
 JUNE
30, 2008
 (UNAUDITED)
  ASSETS
 Current
      AssetsCash
              
              $
              4,127,852Accounts
      receivable, net
              
              
              443,407Deferred
      acquisition costs
              
              
              164,309Prepaid
      expenses and other current assets
              
              
              350,374Deferred
      financing costs
              
              
              993,524Total
      Current Assets
              
              
              6,079,466Property
      and Equipment, net
              
              
              4,852,123Non-Current
      AssetsDeposits
              
              
              349,650Goodwill
              
              
              9,846,665Intangible
      assets, net
              
              
              1,793,884Total
      Non-Current Assets
              
              
              11,990,199Total
              
              $
              22,921,788LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              2,099,039Accrued
      liabilities
              
              
              1,225,195Capital
      lease obligations
              
              
              222,393Notes
      payable
              
              
              1,320,064Convertible
      notes payable
              
              
              280,000Total
      Current Liabilities
              
              
              5,146,691Long
      Term LiabilitiesCapital
      lease obligations, net of current portion
              
              
              209,736Notes
      payable, net of current portion
              
              
              1,101,701Convertible
      notes payable, net of current portion
              
              
              13,719,663Total
      Long Term Liabilities
              
              
              15,031,100Total
      Liabilities
              
              
              20,177,791Stockholders'
      EquityConvertible
      preferred stock; par value $0.001 per share;20,000,000
      authorized shares;1,200,000
      shares issued and  none outstanding; liquidation preference of
      $2.40 per share
              
              
              -Common
      stock; par value $0.001 per share;50,000,000
      Series B authorized shares; none issued and outstanding
              
              
              -Common
      stock; par value $0.001 per share;100,000,000
      authorized shares; 29,366,577 shares issued and
outstanding
              
              
              29,366Additional
      paid-in capital
              
              
              29,405,078Stockholder
      receivable
              
              
              (766,280)Accumulated
      deficit
              
              
              (25,924,167)Total
      Stockholders' Equity
              
              
              2,753,997Total
      Liabilities and Stockholders' Equity
              
              $
              22,921,788
  See
accompanying notes to condensed consolidated financial
statements.
 Page
F-1
  US
DRY CLEANING CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 
 THREE
      MONTHS
              
              
              NINE
      MONTHS2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      Sales
              
              $
              5,131,563
              
              
              $
              2,427,466
              
              
              $
              10,377,895
              
              
              $
              6,054,794Cost
      of Sales
              
              
              (1,879,021
              )
              
              
              (1,252,261
              )
              
              
              (4,388,731)
              
              
              
              (3,114,901
              )Gross
      Profit
              
              
              3,252,542
              
              
              
              1,175,205
              
              
              
              5,989,164
              
              
              
              2,939,893Operating
      ExpensesDelivery
      expenses
              
              
              415,066
              
              
              
              205,744
              
              
              
              810,526
              
              
              
              538,089Store
      expenses
              
              
              1,915,502
              
              
              
              720,423
              
              
              
              3,771,810
              
              
              
              1,623,176Selling
      expenses
              
              
              238,400
              
              
              
              153,532
              
              
              
              588,746
              
              
              
              464,869Administrative
      expenses
              
              
              1,412,721
              
              
              
              1,207,497
              
              
              
              5,275,878
              
              
              
              4,130,718Depreciation
      and amortization expenses
              
              
              241,701
              
              
              
              96,112
              
              
              
              449,068
              
              
              
              245,968Other
              
              
              57,379
              
              
              
              -
              
              
              
              74,412
              
              
              
              -Total
      Operating Expenses
              
              
              4,280,769
              
              
              
              2,383,308
              
              
              
              10,970,440
              
              
              
              7,002,820Operating
      Loss
              
              
              (1,028,227)
              
              
              
              (1,208,103
              )
              
              
              (4,981,276)
              
              
              
              (4,062,927
              )Other
      Income (Expense)Gain
      on extinguishment of debt
              
              
              -
              
              
              
              -
              
              
              
              423,798
              
              
              
              -Interest expense
              
              
              (896,161)
              
              
              
              (744,777)
              
              
              
              (1,471,638)
              
              
              
              (1,355,920)Other
      expenses (income)
              
              
              (104,623)
              
              
              
              137,930
              
              
              
              (538,679)
              
              
              
              (185,140)Total  Other Expenses
              
              
              (1,000,784)
              
              
              
              (606,847
              )
              
              
              (1,586,579)
              
              
              
              (1,541,060
              )Loss
      before provisions for income taxes
              
              
              (2,029,011)
              
              
              
              (1,814,950
              )
              
              
              (6,567,795)
              
              
              
              (5,603,987
              )Provision
      for income taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Loss
              
              $
              (2,029,011)
              
              
              $
              (1,814,950
              )
              
              $
              (6,567,795)
              
              
              $
              (5,603,987
              )Basic
      and diluted loss per common share
              
              $
              (0.11)
              
              
              $
              (0.10
              )
              
              $
              (0.33)
              
              
              $
              (0.31
              )Basic
      and diluted weighted average numberof
      common shares outstanding
              
              
              18,525,997
              
              
              
              17,313,060
              
              
              
              19,999,511
              
              
              
              17,972,608
  
 See
accompanying notes to condensed consolidated financial statements.
 Page
F-2
  US
DRY CLEANING CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
  2008
              
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (6,567,795)
              
              
              $
              (5,603,987
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              449,068
              
              
              
              245,968Amortization
      of deferred financing costs and consulting fees
              
              
              24,375
              
              
              
              12,187Bad
      debt expense
              
              
              22,543
              
              
              
              4,675Equity
      instruments issued for compensation and services
              
              
              650,508
              
              
              
              416,070Gain
      on debt extinguishment
              
              
              (423,798)
              
              
              
              -Loss
      on disposal of assets
              
              
              4,015Amortization
      of debt discounts
              
              
              969,489
              
              
              
              746,660Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              13,846
              
              
              
              135,309Prepaid
      expenses and other current assets
              
              
              (246,163)
              
              
              
              91,201Other
      assets
              
              
              -
              
              
              
              (31,588
              )Deposits
              
              
              (201,693)
              
              
              
              -Accounts
      payable and accrued expenses
              
              
              492,348
              
              
              
              1,667,863Liquidated
      damages
              
              
              -
              
              
              
              (61,125
              )Net
      cash used in operating activities
              
              
              (4,813,257)
              
              
              
              (2,376,767
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
              
              
              (2,335,581)
              
              
              
              (285,833
              )Deferred
      acquisition costs
              
              
              396,137
              
              
              
              (601,765
              )Acquired
      goodwill and intangibles
              
              
              (2,284,360)
              
              
              
              -Acquisition
      of business
              
              
              -
              
              
              
              (98,233
              )Net
      cash used in investing activities
              
              
              (4,223,804)
              
              
              
              (985,831
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of notes payable
              
              
              937,141
              
              
              
              475,768Proceeds
      from issuance of convertible notes payable
              
              
              11,457,600
              
              
              
              1,800,000Proceeds
      from issuance of related party notes payable
              
              
              -
              
              
              
              200,000Repayments
      on notes payable
              
              
              (201,319)
              
              
              
              (244,490
              )Repayments
      on related party notes payable
              
              
              (23,019)
              
              
              
              (288,890
              )Repayments
      on convertible notes payable
              
              
              (295,000)
              
              
              
              -Deferred
      financing costs
              
              
              (1,577,284)
              
              
              
              -Repayments
      on capital lease obligation
              
              
              (176,621)
              
              
              
              (167,464
              )Proceeds
      from issuance of common stock
              
              
              1,436,051
              
              
              
              3,617,192Proceeds
      from exercise of warrants
              
              
              490,000
              
              
              
              -Repayment
      on line of credit
              
              
              (500,000)
              
              
              
              -Net
      cash provided by financing activities
              
              
              11,547,549
              
              
              
              5,392,116Net
      increase in cash
              
              
              2,510,488
              
              
              
              2,029,518Cash
      at beginning of period
              
              
              1,617,364
              
              
              
              1,414,456Cash
      at end of period
              
              $
              4,127,852
              
              
              $
              3,443,974Cash
      paid during the period for:Interest
              
              $
              91,079
              
              
              $
              87,337
 See
accompanying notes to condensed consolidated financial statements.
  Page
F-3
  US
DRY CLEANING CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 FOR
THE NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
  2008
              
              
              
              2007SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
      AND FINANCING ACTIVITIESDebt
      discount on convertible notes issued with common stock
              
              $
              -
              
              
              $
              1,478,714Capital  lease
      additions
              
              $
              119,177
              
              
              $
              87,036Acquisition
      of businesses with notes payable
              
              $
              2,447,000
              
              
              $
              -Shares
      issued in conjunction with business acquisition
              
              $
              2,030,374
              
              
              $
              -Acquisition
      of business
              
              $
              -
              
              
              $
              2,028,000Conversion
      of note payable to convertible note
              
              $
              200,000
              
              
              $
              200,000Conversion
      of debt to common stock
              
              $
              365,000
              
              
              $
              100,000Convertible
      note issued for stockholder receivable
              
              $
              -
              
              
              $
              250,000Reclassification
      of accrued expenses to notes payable
              
              $
              -
              
              
              $
              125,000Debt
      discount on convertible notes issued with warrants
              
              $
              1,334,896
              
              
              $
              -Shares
      issued as collateral in conjunction with debt issuance
              
              $
              500
              
              
              $
              -Shares
      issued in conjunction with cashless warrants
              
              $
              467
              
              
              $
              -
 
  
 
  See
accompanying notes to condensed consolidated financial statements.
 Page
F-4
  US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
  1.
   ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF
PRESENTATION
 
 The
Company
 
 US Dry
Cleaning Corporation (“USDC”, “we”, or “us”) is a retail service provider of
laundry and dry cleaning services consisting of sixty retail locations
(“stores”) and three processing plants.  The Company’s operations are
located in Honolulu, Hawaii, Southern California, Central California, and
the mid-east coast.
 
 On June
21, 2008, the Company completed the acquisition of all assets and liabilities of
Caesar’s Cleaners, in Honolulu, Hawaii (“Caesar’s”) (see Note 8).
  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 condensed consolidated financial
statements and the notes hereto should be read in conjunction with the financial
statements, accounting policies and notes thereto included in the Company’s
audited consolidated financial statements on Form 10-KSB for the fiscal year
ended September 30, 2007 filed with the SEC. In the opinion of management, all
adjustments necessary to present fairly, in accordance with GAAP, the Company’s
financial position as of June 30, 2008, 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 $4,813,000 for the
nine months ended June 30, 2008; working capital of approximately $933,000
and an accumulated deficit of approximately $25,924,000 at June 30, 2008. 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 acquisitions and operations assimilation through
debt and equity financing transactions.  In connection with such
efforts, the Company completed approximately $14,000,000, net of discount and
issuance costs, of debt and equity financing during the nine months ended June
30, 2008 (see Notes 3, 4, and 6) and the Company plans to complete similar debt
and equity transactions in the future.  However, such financing
transactions may be insufficient to fund planned acquisitions, capital
expenditures, working capital and other cash requirements for the next year.
Therefore, the Company will be required to seek additional funds to finance its
long-term operations. The successful outcome of future financing 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 growth plans
or generate positive operating results.
 
 The
accompanying 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.
  Page
F-5
  US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 2.
   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles
of Consolidation
 
 The
accompanying condensed consolidated financial statements include the accounts of
USDC and its wholly-owned subsidiaries, Steam Press Holdings, Inc. (“Steam
Press”), Coachella Valley Retail, LLC (“CVR”), Cleaners Club, Inc. (“CCI”), USDC
Fresno, Inc., formerly Team Enterprises, Inc., (“Team”), USDC Portsmouth, Inc.
(“Zoots”), formerly Zoots Corporation, and Caesar’s.  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, the allowance for doubtful accounts receivable, and the purchase price
allocations for business acquisitions. Actual results could differ from those
estimates.
 
 Business
Segments
 
 The
Company currently operates in one segment, that being the consumer dry cleaning
(Specialty Consumer Services) business and is geographically concentrated in
Hawaii, Virginia, and 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 growth 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. In 2002,
air quality officials in Southern California approved a gradual phase out of
Perchloroethylene (“Perc”), the most common dry cleaning solvent, by 2020. Under
this regulation, which went into effect January 1, 2003, any new dry cleaning
business or facility that adds a machine must also add a non-Perc machine. While
existing dry cleaners can continue to operate one Perc machine until 2020, by
November 2007 all dry cleaners using Perc had to utilize state-of-the-art
pollution controls to reduce Perc emissions. The Company believes that it has
successfully integrated the new dry cleaning processes.
  
  Page
F-6
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (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 to
operations. The Company believes that it complies in all material respects with
all relevant rules and regulations pertaining to the use of chemical agents. In
the opinion of management, the Company complies in all material respects with
all known federal, state, and local legislation pertaining to the use of all
chemical agents and will endeavor to ensure that the entire organization
proactively remains in compliance with all such statutes and regulations in the
future.
 
 Other
Concentrations
 
 The
financial instrument that potentially exposes the Company to a concentration of
credit risk principally consists of cash. The Company deposits its cash with
high credit financial institutions in the United States of America. At June 30,
2008, the Company’s cash balances were in excess of the Federal Deposit
Insurance Corporation limit by approximately $3,751,000.
 
 The
Company’s credit risk with respect to the accounts receivable is limited due to
the credit worthiness of customers and the fact that most of accounts receivable
consists of large commercial customers. The Company also performs periodic
reviews of collectability and provides an allowance for doubtful accounts
receivable when necessary.  Management considers the allowance for
doubtful accounts receivable at June 30, 2008 of approximately $23,000 to be
adequate.
  Cash
Restriction
 
 Approximately
$3,500,000 of the Company’s cash balance at June 30, 2008 is restricted per the
terms of lending agreements for business acquisition use.
  Loss
per Share
 
 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
the convertible preferred stock and convertible debt (using the if-converted
method). At June 30, 2008, 17,342,953 convertible securities and 7,023,978
options and warrants to purchase common stock were excluded from the
calculation of diluted loss per share because they were anti-dilutive. At 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, 2007 condensed consolidated
financial statements to conform to the June 30, 2008 presentations.
 
 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.
 
 Page
F-7
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 
 3.  
CONVERTIBLE NOTES PAYABLE
 
 During
fiscal year 2007, the Company accepted subscriptions from accredited investors
for $2,250,000 of its Series A Convertible Debentures. The debentures were
sold with a built-in thirty percent (30%) rate of return. For each $100,000 paid
to the Company, a total of $130,000 is due to the holder. Additionally, upon
issuance, the Company issued 16,666 shares of common stock to the note holder
for each $100,000 subscription. The debentures mature in one year from the date
issued with no interest. The principal amount of the debentures may be converted
into common stock of the Company at a fixed conversion rate of $3.00 per share
at the holder’s option at any time. The principal amount of the debentures is
secured by all of the Company’s assets and those of its operating subsidiaries,
including an assignment of its leasehold interests in its retail facilities.
Pursuant to a registration rights agreement, the Company is obligated to
register or to file a registration statement for all of the common stock that
may be issued upon conversion of the debentures, within 270 days from closing on
a “best efforts” basis. Broker or underwriting fees or commissions to be paid in
connection with the offer and sale was a maximum of 10% of cash received. The
Company recorded $1,800,000 in cash proceeds; debt conversion of $200,000 and a
stockholder note receivable of $250,000. Accordingly, 374,985 shares of common
stock were issued. During the nine months ended June 30, 2008, approximately
$50,000 of Series A Convertible Debenture holder converted their debt to common
stock and approximately $1,660,000 of Series A Convertible Debenture holders
converted their debt to the newly issued below Notes.  The debt to
debt conversion resulted in debt extinguishment accounting under Accounting
Principles Board ("APB") No. 26, “Early Extinguishment of
Debt,” and Emerging Issues Task Force ("EITF") Issue No. 96-19,
“Debtor’s Accounting for a
modification or Exchange of Debt Instruments,” and accordingly, the
Company recorded a gain on extinguishment of approximately $424,000 in the
accompanying condensed consolidated statement of operations for the nine months
ended June 30, 2008. During the three months ended June 30, 2008, a cash payment
of $195,000 was made to three investors. At June 30, 2008, balance outstanding
on the Series A Convertible Debentures was $280,000. The maturity date of all
outstanding notes has been subsequently extended through December 2008. Such
amount was included in the convertible notes payable in the accompanying
condensed consolidated balance sheet.
 
 During
the nine months ended June 30, 2008, the Company completed the closing of a
private placement of 10% senior secured convertible notes (the “Notes”) to
accredited investors, receiving net cash of approximately
$2,740,000.  Each Note was issued at a price equal to 90% of its
principal amount.  The Notes mature two years after the date of their
issuance and bear interest at 10% per annum, payable quarterly in arrears in
cash.  Investors may convert their Notes into shares of the
Company’s common stock at any time and from time to time on or before the
maturity date, at a conversion price of $2.50 per share, subject to adjustment
under customary circumstances. The Notes will automatically convert into shares
of the Company’s common stock at the conversion price, if the closing bid
price for the common stock has traded at more than $5.00 per share for a period
of 20 consecutive trading days, provided that, throughout this period, the
common stock has been trading on a national securities exchange or National
Association of Securities Dealers Automated Quotation System ("NASDAQ") and such
conversion shares have been fully registered for resale and are not subject to
any lock-up provisions.  At June 30, 2008, the balance outstanding on
the notes was $4,450,050, net of discount of $727,259, and was included in
convertible notes payable in the accompanying condensed consolidated balance
sheet.
  Page
F-8
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 
 3.  
CONVERTIBLE NOTES PAYABLE (Continued)
 On
February 12, 2008, the Company issued a conventional convertible debt instrument
in connection with the Team acquisition (see Note 8) for $1,728,360 which is
secured by certain assets of the company and includes first year interest of
$144,000. The debt instrument matures two years after the date of issuance and
bears interest at 12% per annum, payable in arrears in cash at maturity
date.  The holder may convert the debt instrument into shares of
the Company’s common stock at any time and from time to time on or before
the maturity date, at a conversion price of $0.75 per share, subject to
adjustment under customary circumstances. The debt instrument will
automatically convert into shares of the Company’s common stock at the
conversion price, if the closing bid price for the common stock has traded at
more than $5.00 per share for a period of 20 consecutive trading days, provided
that, throughout this period, the common stock has been trading on a national
securities exchange or NASDAQ and such conversion shares have been fully
registered for resale and are not subject to any lock-up
provisions.  In connection with this agreement, the Company signed a
warrant agreement as disclosed in the options and warrants section below. At
June 30, 2008, the balance outstanding was $999,691, net of discount of
$728,669, and was included in convertible notes payable in the accompanying
condensed consolidated balance sheet.
 
 On
February 14, 2008, the Company issued a conventional convertible debt instrument
in connection with the Team acquisition (see Note 8), for $1,635,540 which is
secured by certain assets of the Company. The debt instrument matures two years
after the date of issuance and bears interest at 10% per annum, payable in
arrears in cash at maturity date.  The holder may convert the
debt instrument into shares of the Company’s common stock at any time and
from time to time on or before the maturity date, at a conversion price of $2.50
per share, subject to adjustment under customary circumstances. The debt
instrument will automatically convert into shares of the
Company’s common stock at the conversion price, if the closing bid price
for the common stock has traded at more than $5.00 per share for a period of 20
consecutive trading days, provided that, throughout this period, the common
stock has been trading on a national securities exchange or NASDAQ and such
conversion shares have been fully registered for resale and are not subject to
any lock-up provisions. At June 30, 2008, the balance outstanding was
$1,499,483, net of discounts of $136,057, and was included in convertible notes
payable in the accompanying condensed consolidated balance sheet.
 
 On March
12, 2008, the Company issued a conventional convertible debt instrument in
connection with the Zoots acquisition (see Note 8), for $1,725,000 which is
secured by certain assets of the Company. The debt instrument matures eighteen
months after the date of issuance and bears interest at 12% per annum with
interest only payments of $17,250.  The holder may convert the debt
instrument into shares of the Company’s common stock at any time and from
time to time on or before the maturity date, at a conversion price of $0.75 per
share, subject to adjustment under customary circumstances. The debt
instrument will automatically convert into shares of the
Company’s common stock at the conversion price, if the closing bid price
for the common stock has traded at more than $5.00 per share for a period of 20
consecutive trading days, provided that, throughout this period, the common
stock has been trading on a national securities exchange or NASDAQ and such
conversion shares have been fully registered for resale and are not subject to
any lock-up provisions.  In connection with this agreement, the
Company signed a warrant agreement as disclosed in the options and warrants
section below. At June 30, 2008, the balance outstanding was $1,143,938, net of
discount of $581,062, and was included in convertible notes payable in the
accompanying condensed consolidated balance sheet.
 
 On May
28, 2008, the Company issued a conventional convertible debt instrument in
connection with the Caesar’s acquisition (see Note 8) for $3,175,000 which is
secured by certain assets of the Company and includes first year interest of
$300,000. The debt instrument matures two years after the date of issuance and
bears interest at 12% per annum with interest only payments of $31,750
commencing on June 28, 2009.  The holder may convert the debt
instrument into shares of the Company’s common stock at any time and from
time to time on or before the maturity date, at a fixed conversion price of
$0.75 per share, subject to adjustment under customary circumstances. In
connection with this agreement, the Company signed a warrant agreement as
disclosed in the options and warrants section below. At June 30, 2008, the
balance outstanding was $2,544,687, net of discount of $630,313, and was
included in convertible notes payable in the accompanying condensed consolidated
balance sheet.
 
 On June
26, 2008, the Company issued a conventional convertible debt instrument in
connection with a specified future acquisition for $1,725,000 which is secured
by certain assets of the Company. The debt instrument matures two years after
the date of issuance and bears interest at 12% per annum. First month interest
of $19,518 is due August 1, 2008 with interest only payments of $17,250
commencing on September 1, 2008. The holder shall have the right to demand
payment of the instrument and accrued interest on December 30, 2009 with a
thirty day written notice and the right to demand full payment of the instrument
if Robert Y. Lee is no longer serving as Chief Executive Officer and board
member.  The holder may convert the debt instrument into shares of the
Company’s common stock at any time and from time to time on or before the
maturity date, at a fixed conversion price of $0.75 per share, subject to
adjustment under customary circumstances. In connection with this
agreement, the Company signed a warrant agreement as disclosed in the options
and warrants section below. At June 30, 2008, the balance outstanding was
$1,303,527, net of discount of $421,473, and was included in convertible notes
payable in the accompanying condensed consolidated balance sheet.
 
 On June
26, 2008, the Company issued a conventional convertible debt instrument in
connection with a specified future acquisition for $2,540,000 which is secured
by certain assets of the Company and includes the first year interest of
$240,000. The debt instrument matures two years after the date of issuance and
bears interest at 12% per annum with interest only payments of $25,400
commencing on July 26, 2009. The holder shall have the right to demand payment
of the instrument and accrued interest on December 30, 2009 with a thirty day
written notice and the right to demand full payment of the instrument if Robert
Y. Lee is no longer serving as Chief Executive Officer and board
member.   The holder may convert the debt instrument into
shares of the Company’s common stock at any time and from time to time on
or before the maturity date, at a fixed conversion price of $0.75 per share,
subject to adjustment under customary circumstances. In connection with
this agreement, the Company signed a warrant agreement as disclosed in the
options and warrants section below. At June 30, 2008, the balance outstanding
was $1,778,287, net of discount of $761,713, and was included in convertible
notes payable in the accompanying condensed consolidated balance
sheet.
 
 Page
F-9
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 3.  
CONVERTIBLE NOTES PAYABLE (continued)
 
 During
the nine months ended June 30, 2008, the Company recorded approximately $969,000
of debt discount amortization expense related to convertible notes payable and
was included in interest expense in the accompanying condensed consolidated
statements of operations.
 
 4.  NOTES
PAYABLE
  During
February 2008, the Company entered into an eighteen month financing agreement
with an unrelated party in the amount of $800,000 that bears interest at 14% per
annum. The first monthly payment of approximately $25,000 is due on March 12,
2009 and a final payment of $781,894 is due at the end of the
term.  The obligation of the Company under this financing agreement is
secured by certain equipment of the Company.  As of June 30, 2008, no
payments have been made.  Therefore, the balance outstanding is
$800,000.
 
 On March
24, 2008, the Company entered into a debt agreement in connection with the
acquisition of Zoots Corporation (see Note 8) for $975,000 at interest rate
of 10% per annum, which matures on September 24, 2008 and is secured by certain
assets of the Company. Interest payments shall be payable in arrears at the end
of each two-month period from the issuance date of the note.  As of June
30, 2008, no payments have been made.  Therefore, the balance outstanding
is $975,000.
  The
Company has a line of credit with a financial institution in the maximum amount
of $1,100,000 and bearing interest at 7.15%. All outstanding borrowings were
fully paid off during the quarter ended March 31, 2008.
 
 On June
21, 2008, the Company entered into a secured promissory note in connection with
the acquisition of Caesar’s Cleaners (see Note 8) in the amount of $77,142 that
bears interest of 15% payable monthly.  As of June 30, 2008, no payments
have been made.  Therefore, the balance outstanding is
$77,142.
 
 Various
other debt obligation totaling approximately $570,000, which consisted of
approximately $190,000 to related parties was outstanding at June 30, 2008 and
was included in notes payable in the accompanying condensed consolidated balance
sheet.
 
 5.  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 former director Earl Greenburg. The rent is $3,700
per month all inclusive.
  
 Page
F-10
 
 
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 6. 
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 statement 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 statement 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 statement 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 in connection with the acquisition of
Cleaners Club Inc.
 
 During
the nine months ended June 30, 2007, the 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, 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.
 
 During
the quarter ended December 31, 2007, the Company issued 242,308 shares of its
restricted common stock for conversion of $315,000 in Series A convertible
debentures.
 
 During
the three months ended March 31, 2008, the Company, pursuant to a warrant
agreement, issued 434,210 shares of its restricted common stock upon exercise of
cashless warrants.
 
 During
the three months ended March 31, 2008, the Company issued 500,000 shares of its
restricted common stock and is currently being held in escrow as collateral to a
certain note payable (see Note 3).
 
 In
connection with the acquisition of Team as discussed in Note 8, the Company
issued 2,044,667 shares of its restricted common stock in exchange for certain
assets and liabilities of Team valued at $0.86 per share (stock price at closing
date) less an 8% marketability discount having total net value of
approximately $1,613,000.
 
 During
the three months ended March 31, 2008, the Company issued 792,376 shares of its
restricted common stock at prices ranging from $0.60 and $0.75 per share to
various investors for cash proceeds totaling $570,650.
  Page
F-11
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 6.  EQUITY TRANSACTIONS(continued)
 
 Common Stock(continued)
 During
the three months ended March 31, 2008, the Company issued 71,429 shares of its
restricted common stock as part a $50,000 conversion of the Series A Convertible
Note at a modified conversion rate of $0.70 per share. The initial conversion
price was $3.00 per share as discussed in Note 3 above. The change in terms
was considered to be not significant.
 
 During
the three months ended March 31, 2008, the Company issued 24,331 shares of its
restricted common stock in exchange for certain professional services provided
to the Company which were valued at $19,224 based on the value of
the services provided. Expenses related to this transaction have been
included in professional services in the accompanying condensed consolidated
statements of operations.
 
 During
the three months ended June 30, 2008, the Company issued 10,000 shares of its
restricted common stock in exchange for certain professional services provided
to the Company which were valued at $7,200. Expenses related to this transaction
have been included in administrative expenses in the accompanying condensed
consolidated statements of operations.
 
 During
the three months ended June 30, 2008, the Company issued 500,000 shares of its
restricted common stock in exchange for certain professional services provided
to the Company which were valued at $330,000 based on the value of
the services provided.
 
 In
connection with the acquisition of Caesar’s Cleaners as discussed in Note 8, the
Company issued 466,667 shares of restricted common stock in exchange for all
assets and liabilities of Caesar’s Cleaners valued at $0.80 per share (stock
price at closing) having total value of approximately $373,000.
 
 During
the three months ended June 30, 2008, the Company received $865,400 in cash from
various investors in exchange for 1,236,286 shares of the Company’s common stock
and 618,143 warrants with exercise price of $0.70 per share expiring 5 years
from issuance.
 
 During
the three months ended June 30, 2008, the Company issued 367,605 shares of the
Company’s common stock at $0.80 per share in exchange for professional services
provided to the Company which were valued at $294,084.
 
 During
the three months ended June 30, 2008, five investors exercised their warrants to
purchase 140,000 shares of the Company’s common stock at $3.50 per share for
total cash proceeds of $490,000. The company issued 810,600 shares of its common
stock to these investors as an incentive to exercise early.
 
 The
transactions described above constituted an exempt offering under Section 4(2)
of the Securities Act.
  Page
F-12
 
 
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
 
 6. 
EQUITY TRANSACTIONS (Continued)
  Options
and Warrants
 
 During
the quarter ended December 31, 2006, the Company issued 500,000 warrants to an
investment banking firm for services directly related to an equity fund raising
transaction. Such warrants have an exercise price of $0.25, are exercisable for
five (5) years from the effective date, and contain net issuance, anti-dilution
provisions for split adjustments and “piggyback” registration rights. The
Company did not record any expense related to the fair value of the warrants
since the issuance was payment for equity fund raising services.
 
 During
the quarter ended March 31, 2007, the Company issued 100,000 warrants to a
consultant for professional services at an exercise price of $3.50 per share.
The fair value of the transaction using the Black-Scholes pricing model of
$65,000 was recorded as deferred consulting fees and presented as an offset to
additional paid-in capital. Such amount is being amortized to expense over the
two year term of the consulting agreement.
 
 During
the quarter ended March 31, 2007, the Company issued 50,000 warrants to a
consultant for professional services in conjunction with the recent acquisition
at an exercise price of $3.50 per share. 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 Cleaners Club
acquisition.
 
 During
the quarter ended March 31, 2007, the Company granted 400,000 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 using the
Black-Scholes pricing model in the amount of $171,000 as part of the purchase
price consideration for Cleaners Club acquisition.
  For the
transaction noted above where the fair market value of 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 5 years, and no expected dividend yield.
  During
the quarter ended December 31, 2007, there was no significant activity in
options and warrants.
 
 During
the quarter ended March 31, 2008, the Company issued 1,545,000 warrants to
investors of conventional convertible debt instruments as discussed in Note 3 in
accordance with warrant agreements at an exercise price of $0.75 per share. The
Company included the fair value of the warrants using the Black-Scholes pricing
model as part of the debt discount netted against the face value of the debt
instrument.  The following assumptions were used to calculate the fair
value of such warrants:  risk free interest rate 1.82%, estimated
volatility of 55%, expected life of 5 years, and no expected dividend
yield.
 
 During
the quarter ended March 31, 2008, there were no options granted.
 
 During
the quarter ended June 30, 2008, the Company issued 618,143 warrants to
investors in connection with the sale of the Company's common stock as discussed
above and in accordance with warrant agreements at an exercise price of $0.70
per share. The following assumptions were used to calculate the fair value of
such warrants:  risk free interest rate 1.47%, volatility of 337%, expected
life of 5 years, and no expected dividend yield.
 
 During
the quarter ended June 30, 2008, the Company issued 2,000,000 warrants in
connection with the issuance of convertible notes payable as discussed in Note 3
to investors in accordance with warrant agreements at an exercise price of $0.75
per share. The following assumptions were used to calculate the fair value of
such warrants: risk free interest rate 2.11%, volatility of 337%, expected life
of 5 years, and no expected dividend yield.
 
 During
the quarter ended June 30, 2008, there were no options granted.
    WeightedWeighted
                  
                  
                  AverageAverage
                  
                  
                  RemainingNumber
      of
                  
                  
                  Exercise
                  
                  
                  ContractualWarrants/Options
                  
                  
                  Price
                  
                  
                  Life
      in YearsOustanding,
      September 30, 2007
                  
                  
                  3,500,836
                  
                  
                  
                  3.38Granted
                  
                  
                  4,163,145
                  
                  
                  
                  0.75Exercised
                  
                  
                  (640,000
                  )
                  
                  
                  -Cancelled/Forfeited
                  
                  
                  -
                  
                  
                  
                  -Oustanding,
      June 30, 2008
                  
                  
                  7,023,981
                  
                  
                  $
                  2.10
                  
                  
                  
                  4.25Option
      and warrants exercisable, June 30, 2008
                  
                  
                  7,023,981
                  
                  
                  $
                  2.10
                  
                  
                  
                  4.25
  Page
F-13
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
   7. 
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.
 
 Subsequent
to June 30, 2008, the Company became involved in lawsuits and disputes with two
parties, actions involving allegations of breach of contract which are
incidental to the ordinary operations of the business. Management believes that
the ultimate outcome of these proceedings would not have a material adverse
effect on the Company's financial position or results of
operations.
 
 Leases
 
 The
Company leases corporate office space in Newport Beach, California for
approximately $7,400 per month expiring in November 2009. Additionally, the
Company assumed various operating leases as a result of the acquisitions of
Team, Zoots and Caesar's (see Note 8).
  8.
   ACQUISITIONS
 
 Team
Enterprises, Inc. and Affiliates
 
 On
February 14, 2008, the Company completed the acquisition of certain assets
and liabilities of Team in a purchase business combination by issuing 2,044,667
shares of its restricted common stock, paying cash of $1,572,000, issuing senior
debt of $1,472,000, and the assumption of $44,000 in
liabilities.  Team consisted of four corporations made up of nineteen
retail store locations.  All such entities were under common control
and ownership prior to the purchase. The
Company also assumed various operating leases with minimum payments as follows
for the fiscal years ending September 30.
  2008 (3 months)
              
              $
              129,0002009
              
              
              222,5002010
              
              
              159,0002011
              
              
              102,0002012
              
              
              66,500Thereafter
              
              
              41,000$
              720,000
 
 In order
to measure and allocate the purchase price of the Team business acquisition, the
Company engaged a third-party valuation firm to estimate the fair value of the
assets acquired and liabilities assumed. The purchase price and purchase price
allocation are summarized as follows:
  Cash
              
              $
              1,572,000Restricted
      common stock issued ($0.86 per share less 8% marketability
      discount)
              
              
              1,613,00010%
      Senior Convertible Debt
              
              
              1,472,000Acquisition
      costs incurred by the Company
              
              
              605,000Liabilities
      assumed by the Company
              
              
              44,000Total
      purchase consideration
              
              
              5,306,000Allocated
      to:Property
      and equipment
              
              
              700,000Prepaid
      expenses and deposits
              
              
              101,000Noncompete
      agreement
              
              
              470,000Trademark
      portfolio
              
              
              60,000Liabilities
      assumed
              
              
              (44,000
              )Excess
      of purchase price over allocation to identifiable assets and liabilities
      (goodwill)
              
              $
              4,019,000
  The
principal reason that the Company agreed to pay a purchase price for Team in
excess of its recorded net assets was to acquire an established revenue
stream.
 
 Page
F-14
 
  US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
  8.
   ACQUISITIONS (continued)
 
 Zoots
Corporation
 
 On March
24, 2008, the Company completed the acquisition of certain assets of Zoots
Corporation (“Zoots”) in a purchase business combination with the payment of
cash of $764,949 and the issuance of a short-term note payable for
$975,000.  The assets acquired consist of eleven retail store
locations and a centralized processing plant. As discussed above in Note 3,
in order to finance the acquisition,  the Company issued a secured
convertible note in the initial principal amount of $1,725,000 to Setal 2, LLC,
which is secured by a first priority lien over all of Zoots assets acquired. The
Company also assumed various non-cancellable operating leases with minimum
payments as follows for the fiscal years ending September 30.
  2008
      (3 months)
              
              $
              194,5002009
              
              
              389,0002010
              
              
              264,0002011
              
              
              165,0002012
              
              
              97,500Thereafter
              
              
              75,000$
              1,185,000
  
 During
the three months ended June 30, 2008,the Company completed
its purchase price allocation based in part on a third-party valuation analysis
performed and re-allocated the Zoots purchase price. The purchase price and
purchase price allocation are:
 
 Cash
              
              $
              764,949Security
      deposits and other
              
              
              187,471Acquisition
      costs incurred by the Company
              
              
              101,285Short-term
      note payable
              
              
              975,000Liabilities
      assumed by the Company
              
              
              145,374Total
      purchase consideration
              
              
              2,174,079Allocated
      to:Property
      and equipment
              
              
              1,684,453Intangible
      assets (principally trade name)
              
              
              635,000Liabilities
      assumed
              
              
              (145,374
              )Excess
      of purchase price over allocation to identifiable assets and liabilities
      (goodwill)
              
              $
              -
 
 The
primary effect of the re-allocation was to increase property and equipment by
$498,453 , increase intangible assets by $635,000, and reduce goodwill by
$642,000.
 Page
F-15
 US
DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
  8.    ACQUISITIONS(continued)
  Caesar’s
Cleaners
 
 On June
21, 2008, the Company completed the acquisition of all assets and
liabilities of Caesar’s Cleaners in a purchase business combination by issuing
466,667 shares of its restricted common stock, paying cash of $984,113, and
issuing a secured promissory note of $77,142.  Caesar’s stores made up
of four retail store locations.   The Company also assumed various
operating leases with minimum payments as follows for the fiscal years ending
September 30.
  2008
      (3 months)
              
              $
              89,5002009
              
              
              182,5002010
              
              
              136,0002011
              
              
              133,0002012
              
              
              114,500Thereafter
              
              
              114,500$
              720,000
 
 The
purchase price and purchase price allocation are summarized as
follows:
  Cash
              
              $
              984,113Restricted
      common stock issued at $0.80 per share
              
              
              373,334Acquisition
      costs incurred by the Company
              
              
              74,230Secured
      Promissory Note
              
              
              77,142Liabilities
      assumed by the Company
              
              
              56,333Total
      purchase consideration
              
              
              1,565,152Allocated
      to:Property
      and equipment
              
              
              956,333Intangible
      assets (primarily licenses and non-compete agreements)
              
              
              200,000Liabilities
      assumed
              
              
              (56,333
              )Excess
      of purchase price over allocation to identifiable assets and liabilities
      (goodwill)
              
              $
              465,152
  The
principal reason that the Company agreed to pay a purchase price for Caesar’s in
excess of its recorded net assets was to acquire an established revenue stream
and a larger market share in Hawaii.
 
 
 Page
F-16
 
 
 US DRY CLEANING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007
 (UNAUDITED)
  8.
   ACQUISITIONS (Continued)
 
 Certain
pro forma financial information of the Company is presented below, based on the
assumption that the three acquisitions above occurred at the beginning of the
earliest period presented.
 
 Consolidated
      Pro Forma Financial Information
                (unaudited)
                (in
      thousands)Three
      Months Ended
              
              
              Nine
      Months EndedJune
      30, 2008
              
              
              June
      30, 2007
              
              
              June
      30, 2008
              
              
              June
      30, 2007Net
      Sales
              
              $
              7,515
              
              
              $
              6,381
              
              
              $
              17,619
              
              
              $
              17,989Net
      Loss
              
              $
              (2,718
              )
              
              $
              (2,258
              )
              
              $
              (8,444
              )
              
              $
              (7,533
              )Basic
      and diluted loss per common share
              
              $
              (0.13
              )
              
              $
              (0.12
              )
              
              $
              (0.38
              )
              
              $
              (0.37
              )
   
  
 Page
F-17
 
 
 Item 2:    Management’s Discussion and
Analysis
 
 Forward-Looking
Statements
  Certain
statements made herein and in other public filings and releases by the Company
contain “forward-looking” information (as defined in the Private Securities
Litigation Reform Act of 1995) that involve risk and uncertainty. These
forward-looking statements may include, but are not limited to, future capital
expenditures, acquisitions (including the amount and nature thereof), future
sales, earnings, margins, costs, number and costs of store openings, demand for
clothing, market trends in the retail clothing business, inflation and various
economic and business trends. Forward-looking statements may be made by
management orally or in writing, including, but not limited to, Management's
Discussion and Analysis or Plan of Operation section and other sections of our
filings with the SEC under the Exchange Act and the Securities Act.
 
 Actual
results and trends in the future may differ materially depending on a variety of
factors including, but not limited to, domestic economic activity and inflation,
our successful execution of internal operating plans and new store and new
market expansion plans, performance issues with key suppliers, severe weather,
and legal proceedings. Future results will also be dependent upon our ability to
continue to identify and complete successful expansions and penetrations into
existing and new markets and our ability to integrate such expansions with our
existing operations.
 
 Description
of Business
 
 The
Company
 
 US Dry
Cleaning Corporation (“USDC”) was formed in July 2005 and completed a “reverse
merger” with a public shell company in December 2005. In August 2005, USDC
purchased Steam Press Holdings, Inc. (“Steam Press”), and Coachella Valley
Retail, LLC (“CVR”), respectively, in stock-for-stock type transactions. The
Company subsequently completed acquisitions of Cleaners Club, Inc. (“CCI”) in
February 2007, Team Enterprises, Inc. and Affiliates (“USDC Fresno”) in February
2008, and certain assets of Zoots Corporation (“USDC Portsmouth”) in March
2008.  In June 2008, Steam Press expanded its operations by completing
the acquisition of all assets and liabilities of Caesar’s Cleaners ("Caesar's").
USDC, Steam Press, CVR, CCI, USDC Fresno, USDC Portsmouth and Caesar's are
hereinafter collectively referred to as the “Company.”
 
 Steam
Press 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 two retail
laundry and dry cleaning stores under several names in the Palm Springs,
California area.  CCI owns and operates eleven retail stores and
a centralized processing plant in the Riverside, California area. USDC Fresno
owns and operates nineteen retail stores in the Fresno, California area and
USDC Portsmouth owns and operates eleven retail stores and a centralized
processing plant in the Portsmouth, Virginia area, and Caesar's operates four
stores in the Honolulu, Hawaii area.
  Competition
 
 The
Company operates in an industry that is subject to intense competition. A
handful of markets are dominated by large, well-capitalized operators who have
implemented a model similar to USDC’s vision: serving multiple locations with
centralized, large capacity production facilities. Smaller players are finding
it more difficult to retain market share due to higher overall operating costs
and constraints. The Company believes that its strategy of centralized
operations, consolidation, and public corporate structure is unique in the dry
cleaning industry. However, there can be no assurance that other
enterprises will not seek to acquire a significant number of dry cleaning
operations in markets in which the Company currently operates or will
prospectively operate.
 
 
 Page
1
 
 Other Risks and
Uncertainties
 
 The
Company operates in an industry that is subject to intense competition. The
Company faces risks and uncertainties relating to its ability to successfully
implement its business strategy. Among other things, these risks include the
ability to develop and sustain revenue growth; managing the expansion of its
operations; competition; attracting and retaining qualified personnel;
maintaining and developing new strategic relationships; and the ability to
anticipate and adapt to the changing markets and any changes in government or
environmental regulations. Therefore, the Company is subject to the risks of
delays and potential business failure.
 
 The dry
cleaning industry has been a target for environmental regulation during the past
two decades due to the use of certain solvents in the cleaning process. For
example, in 2002, air quality officials in Southern California approved a
gradual phase out of Perchloroethylene (“Perc”), the most common dry cleaning
solvent, by 2020. Under this regulation, which went into effect January 1, 2003,
any new dry cleaning business or facility that adds a machine must also add a
non-Perc machine. While existing dry cleaners can continue to operate one Perc
machine until 2020, by November 2007 all dry cleaners using Perc had to utilize
state-of-the-art pollution controls to reduce Perc emissions. The Company
believes that it has successfully integrated the new dry cleaning
processes.
 
 Management
feels that domestic media have generally sensationalized the perceived hazards
of Perc to operators, clients and the environment in general. Perc is a
volatile, yet non-flammable, substance that requires precautions and proper
handling. However, it has proven safe, effective and completely manageable for
years and the Company anticipates that its centralized operations and
improvements in all facets of the business will further improve the safety for
employees, clients and the environment. The Company will continue to utilize
Perc where permitted on a limited interim basis to assure an orderly transition.
To the extent that additional investment for environmental compliance may be
necessary, the Company does not anticipate any significant financial impact. The
Company believes that it complies in all material respects with all relevant
rules and regulations pertaining to the use of chemical agents. In the opinion
of management, the Company complies in all material respects with all known
federal, state, and local legislation pertaining to the use of all chemical
agents and will endeavor to ensure that the entire organization proactively
remains in compliance with all such statutes and regulations in the
future.
 
 Major
Customers
 
 At June
30, 2008 and 2007, one customer accounted for approximately 14% and 15% of gross
accounts receivable, respectively. For the three months ended June 30, 2007, one
customer accounted for approximately 15% of net sales. For the three and nine
months ended June 30, 2008 no customer accounted for more than 10% of net
sales.
 
 Business
Acquisitions
 
 On
February 15, 2007, 100% of CCI’s authorized; issued and outstanding
common stock was acquired in a merger with USDC. The acquired shares were
converted into 780,000 shares of $0.001 par value common stock of USDC
immediately prior to the merger. The Company’s management has estimated the fair
value of the 780,000 common shares given 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, the Company 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.
 
 On
February 14, 2008, the Company completed the acquisition of certain assets
and liabilities of Team in a purchase business combination by issuing 2,044,667
shares of its restricted common stock valued at $1,613,000 ($0.86 per share less
8% marketability discount), paying cash of $1,572,000, issuing senior debt of
$1,472,000, and the assumption of $44,000 in liabilities.  Team
consists of four corporations made up of nineteen retail store
locations.  All such entities were under common control and ownership
prior to the purchase.
 
 On March
24, 2008, the Company completed the acquisition of certain assets of Zoots
in a purchase business combination with the payment of cash of $764,949, payment
in cash for security deposits of $187,471, the issuance of a short-term
note payable for $975,000 and assumption of $145,374 in
liabilities.  The assets acquired consist of eleven retail store
locations and a centralized processing plant.  As discussed above in
Note 3, in order to finance the acquisition, the Company issued a secured
convertible note in the initial principal amount of $1,725,000 to Setal 2, LLC,
which is secured by a first priority lien over all of Zoots assets
acquired.
 
 On June
21, 2008, the Company completed the acquisition of assets and liabilities of
Caesar’s Cleaners in a purchase business combination by issuing 466,667 shares
of restricted common stock valued at $373,334, paying cash of $984,113, the
issuance of a secured promissory note of $77,142 and assumption of $56,333 in
liabilities. The assets acquired consist of four retail store
locations.
 
  Page
2
 
 Results
of Operations for the Three Months Ended June 30, 2008 and 2007
 
 Revenues
 
 Net sales
were approximately $5,132,000 for the three months ended June 30, 2008 compared
to the three months ended June 30, 2007 of approximately $2,427,000. This
reflects an increase of approximately $2,705,000 or 112% increase in
revenues. The increase consisted primarily of additional revenues generated
from recent acquisitions.
  Cost
of Sales
 
 Our cost
of sales is approximately $1,879,000 for the three months ended June 30, 2008
compared to the three months ended June 30, 2007 of approximately $1,252,000, an
increase of approximately $627,000. Cost of sales as a percentage to revenues is
37% and 52% for the three months ended June 30, 2008 and 2007, respectively.
Our cost of sales
consists of supplies, labor and facilities to process laundry and dry cleaning
products. The improvement was due to increased efficiencies at our processing
plants, economies of scale due to our recent acquisitions and better bargaining
power with our suppliers.
 
 Gross
Profit
 
 Gross
profit increased approximately $2,078,000 to approximately $3,253,000 for the
three months ended June 30, 2008 compared to the three months ended June 30,
2007 of approximately $1,175,000. Gross profit as a percentage of revenue
increased by 15% from 48% for the three months ended June 30, 2007 to
63% for the three months ended June 30, 2008. The improvement can be
attributed to the preceding paragraph
  Operating
Expenses
 
 Operating
expenses for the three months ended June 30, 2008 are approximately $4,281,000
compared to the three months ended June 30, 2007 of approximately $2,383,000, an
increase of approximately $1,898,000.
 
 Our
delivery, store and selling expenses for the three months ended June 30, 2008
were approximately $2,569,000 compared to the three months ended June 30, 2007
of approximately $1,080,000. These expenses are primarily related to store rents
and delivery costs.  The increase of $1,489,000 is primarily attributable
to additional stores acquired.
  Our
administrative expenses for the three months ended June 30, 2008 were
approximately $1,413,000 compared to the three months ended June 30, 2007 of
approximately $1,207,000, an increase of approximately $206,000. These expenses
are primarily related to management, legal and professional fees related to our
recent acquisition. Our administrative
expenses decreased as a percentage of sales from 50% in 2007 to 28% in
2008
 
 Net Results
of Operations
 
 Our
operating loss was approximately $1,028,000 for the three months ended June
30, 2008 and approximately $1,208,000 for the three months ended June 30,
2007.
 
 Other Expenses
 
 Interest
expense for the three months ended June 30, 2008 was approximately $896,000
compared to approximately $745,000 for the three months ended June 30, 2007, an
increase of approximately $151,000. This is related to the amortization of debt
discounts against convertible notes payable issued in December 2006 through June
30, 2008.
 
 Net
Results
 
 We
are reporting a net loss of approximately $2,029,000 or $0.11 per common share
for the three months ended June 30, 2008 compared to a net loss of approximately
$1,815,000 or $0.10 per common share for the three months ended June 30, 2007.
This includes legal,
audit, consulting and administrative expenses directly related to the
integration of our recent acquisitions.
 
 Page
3
 
 Results
of Operations for the Nine Months Ended June 30, 2008 and 2007
 
 Revenues
 
 Net
sales were approximately $10,378,000 for the nine months ended June 30, 2008
compared to the nine months ended June 30, 2007 of approximately $6,055,000, an
increase of approximately $4,323,000. This reflects a 71% increase in revenues.
The increase consisted of approximately $693,000 from existing operations and
approximately $630,000 from our recent acquisitions.
  Cost
of Sales
 
 Our
cost of sales is approximately $4,389,000 for the nine months ended June 30,
2008 an increase of approximately $1,274,000 compared to the nine months ended
June 30, 2007 of approximately $3,115,000. Cost of sales as a percentage to
revenues is 42% and 51% for the nine months ended June 30, 2008 and 2007,
respectively. Our cost of sales consists of supplies, labor and facilities to
process laundry and dry cleaning products.  The increase in cost of sales
was a result from our recent acquisitions but an overall improvement due to
increased efficiencies at our processing plants and economies of
scale.
 
 Gross
Profit
 
 Gross
profit increased approximately $3,049,000 to approximately $5,989,000 for the
nine months ended June 30, 2008 compared to the nine months ended June 30, 2007
of approximately $2,940,000. Gross profit as a percentage of revenue increased
9% from 49% for the nine months ended June 30, 2007 to 58% for the nine months
ended June 30, 2008.
  Operating
Expenses
 
 Operating
expenses for the nine months ended June 30, 2008 are approximately $10,970,000
compared to the nine months ended June 30, 2007 of approximately $7,003,000, an
increase of approximately $3,967,000.
 
 Our
delivery, store and selling expenses for the nine months ended June 30, 2008
were approximately $5,171,000 compared to the nine months ended June 30, 2007 of
approximately $2,626,000. These expenses are primarily related to store rents
and delivery costs.  The increase of approximately $2,545,000 is primarily
attributable to additional stores acquired through our recent
acquisitions.
  Our
administrative expenses for the nine months ended June 30, 2008 were
approximately $5,276,000 compared to the nine months ended June 30, 2007 of
approximately $4,131,000, an increase of approximately $1,145,000. These
expenses are primarily related to management and professional fees. Our
management costs are directly related to integrating acquisitions and the cost
of being a public company, legal fees related to our recent acquisition and
financing fees.
 
 Net
Results of Operations
  Our
operating loss is approximately $4,981,000 for the nine months ended June 30,
2008 and approximately $4,063,000 for the nine months ended June 30,
2007.
 
 Other Expenses
 
 Interest
expense for the nine months ended June 30, 2008 was approximately $1,472,000
compared to approximately $1,356,000 for the nine months ended June 30,
2007.  This is related to the amortization of debt discounts against
convertible notes payable issued in December 2007 through June 30,
2008.
 
 Net
Results
 
 We are
reporting a net loss of approximately $6,568,000 or ($0.33)  per
common share for the nine months ended June 30, 2008 compared to a net loss of
approximately $5,604,000 or ($0.31) per common share for the nine months ended
June 30, 2007. This includes legal, audit, consulting and administrative
expenses directly related to our recent acquisitions.
 
 Page
4
 
 Liquidity and Capital
Resources
 
 Total
assets increased by approximately $12,310,000 from $10,612,000 as of September
30, 2007 to $22,922,000 as of June 30, 2008. The increase is primarily due to an
increase in goodwill of approximately $4,484,000; property and equipment of
approximately $3,078,000; intangible assets of approximately $1,264,000 and
current assets of approximately $3,318,000.  These increases primarily
relate to our fiscal 2008 acquisitions.
 
 Total
liabilities increased by approximately $13,103,000 from approximately $7,075,000
as of September 30, 2007 to approximately $20,178,000 as of June 30, 2008. This
is primarily due to an increase in convertible notes payable of approximately
$11,680,000; increase in notes payable of approximately $1,488,000.
  Our
operating activities used approximately $4,813,000 in cash during the nine
months ended June 30, 2008. Our net loss of approximately $6,568,000 was the
primary component of our negative operating cash flow. This net loss was offset
by a number of non-cash items totaling approximately $1,696,000. These include
depreciation, amortization, bad debt expense and the issuance of stock for
compensation and services and debt discount amortization.
  Cash used
in investing activities during the nine months ended June 30, 2008 consisted of
approximately $4,224,000 used primarily for the recent acquisitions totaling
approximately $4,620,000, offset by a decrease in deferred acquisition cost of
$396,000 as compared to approximately $1,835,000 for the year ended September
30, 2007 primarily for the deferred acquisition cost for the projects in
process.
 
 Cash
flows from financing activities were approximately $11,548,000 for the nine
months ended June 30, 2008 which primarily consisted of approximately
$11,458,000 in net proceeds from the issuance of convertible debentures;
$1,926,000 in proceeds from issuance of common stock; and issuance of notes
payable of approximately $937,000; offset by repayments on notes payable,
capital leases and prepaid financing costs of approximately
$2,773,000.
  We have a
working capital of approximately $993,000 as of June 30, 2008. To meet our
current working capital requirements, the Company completed approximately
$17,195,000 debt and equity financing during the nine months ended June 30,
2008. However, such financing transactions may be insufficient to fund planned
acquisitions, capital expenditures and other cash requirements.
  Going
Concern Considerations
 
 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 $4,813,000 for the
nine months ended June 30, 2008; working capital of approximately $993,000
and an accumulated deficit of approximately $25,924,000 at June 30, 2008. 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 acquisitions and operations assimilations through
debt and equity financing transactions. In connection with such efforts,
the Company completed approximately $14,000,000, net of discounts and issuance
cost, of debt and equity financing during the nine months ended June 30, 2008
(see Notes 3, 4 and 6) and the Company plans to complete similar debt and
equity transactions in the future.  However, such financing
transactions may be insufficient to fund planned acquisitions, capital
expenditures, working capital and other cash requirements for the next year.
Therefore, the Company will be required to seek additional funds to finance its
long-term operations. The successful outcome of future financing 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 growth plans or
generate positive operating results.
 
 The
Company’s capital requirements depend on numerous factors, including the rate of
market acceptance of the Company’s services, the Company’s ability to service
its customers, the Company’s ability to maintain and expand its customer base,
the level of resources required to expand the Company’s marketing and sales
organization, and other factors. The Company intends to fund operations through
debt and/or equity financing transactions. However, such financing transactions
may not be sufficient to fund its planned acquisitions, capital expenditures,
working capital, and other cash requirements for the next twelve
months.
 
 Page
5
 
 Off
Balance Sheet Arrangements
 
 We are
not a party to any off-balance sheet arrangements, do not engage in trading
activities involving non-exchange traded contracts, and are not a party to any
transaction with persons or entities that derive benefits, except as disclosed
herein, from their non-independent relationships with us.
 
 Inflation
 
 We
believe that inflation generally causes an increase in sales prices with an
offsetting unfavorable effect on the cost of products and services sold and
other operating expenses. Accordingly, with the possible exception of the impact
on interest rates, we believe that inflation will have no significant effect on
our results of operations or financial condition.
  Critical
Accounting Policies
 
 To
prepare the financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make significant estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. In particular, we provide for estimates
regarding the collectability of accounts receivable, the recoverability of
long-lived assets, as well as our deferred tax asset valuation allowance. On an
ongoing basis, we evaluate our estimates based on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. Future financial results could
differ materially from current financial results.
 
 Long-Lived
Assets
  We assess
the impairment of long-lived assets, including goodwill, annually or whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held for use is based on
expectations of future undiscounted cash flows from the related operations, and
when circumstances dictate, we adjust the asset to the extent that the carrying
value exceeds the estimated fair value of the asset. Our judgments related to
the expected useful lives of long-lived assets and our ability to realize
undiscounted cash flows in excess of the carrying amounts of such assets are
affected by factors such as the ongoing maintenance and improvements of the
assets, changes in economic conditions, and changes in operating performance. As
we assess the ongoing expected cash flows and carrying amounts of our long-lived
assets, these factors could cause us to realize a material impairment charge,
which would result in decreased net income (or increased net loss) and reduce
the carrying value of these assets.
  Goodwill
and Intangible Assets
 
 Statement
of Financial Accounting standard (“SFAS”) No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after December 15,
2001, addresses how intangible assets that are acquired individually or with a
group of other assets should be accounted for upon their acquisition and after
they have been initially recognized in the financial statements. SFAS No. 142
requires that goodwill and identifiable intangible assets that have indefinite
lives not be amortized but rather be tested at least annually for impairment,
and intangible assets that have finite useful lives be amortized over their
estimated useful lives.
 
 SFAS No.
142 provides specific guidance for testing goodwill and intangible assets that
will not be amortized for impairment. In addition, SFAS No. 142 expands the
disclosure requirements about intangible assets in the years subsequent to their
acquisition. Impairment losses for goodwill and indefinite-life intangible
assets that arise due to the initial application of SFAS No. 142 are to be
reported as a change in accounting principle.
 
 
 Page
6
 
 Revenue
Recognition
 
 We
recognize revenue in accordance with SEC Staff Accounting Bulletin No 104,
“Revenue Recognition”
(“SAB 104”). SAB 104 requires that four basic criteria be met before revenue can
be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery
has occurred; (3) the selling price is fixed or determinable; and (4)
collectability is reasonably assured. The Company recognizes revenue on retail
laundry and dry cleaning services when the services are deemed to have been
provided. For “walk-in and pickup-and-delivery” type retail customers, the order
is deemed to have been completed when the work-order ticket is created and the
sale and related account receivable are recorded. For commercial customers, the
sale is not recorded until the Company delivers the cleaned garments to the
commercial customer. Generally, the Company delivers the cleaned garments to
commercial customers the same day they are dropped off (same-day
service).
 
 Deferred
Tax Assets
 
 Deferred
tax assets are recorded net of a valuation allowance. The valuation allowance
reduces the carrying amount of deferred tax assets to an amount the Company’s
management believes is more likely than not realizable. In making the
determination, projections of taxable income (if any), past operating results,
and tax planning strategies are considered.
 
 Purchase
Price Allocations for Acquisitions
 
 The
allocation of the purchase price for acquisitions requires extensive use of
accounting estimates and judgments to allocate the purchase price to the
identifiable tangible and intangible assets acquired and liabilities assumed
based upon their respective estimated fair values. We reached our conclusions
regarding the estimated fair values assigned to such assets based upon the
assistance from third-party valuation firm for significant
acquisitions.
  Page
7
  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, 2008. This evaluation was carried out
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of June 30, 2008, our disclosure controls and
procedures are not effective.
 
 The
ineffective disclosure controls and procedures are a material weakness. The
Company intends to address these matters by establishing effective controls over
the period-end closing and financial reporting processes. This will require the
addition of personnel and the creation of closing protocols for the Company and
its subsidiaries as well as the consolidation of all subsidiaries.
 
 As
funding becomes available, 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 Securities Exchange
Act.
 
 Limitations
on the Effectiveness of Internal Controls
 
 Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud and
material error. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the internal control. The design of
any system of internal control also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions. Over time, internal control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate.
  Page
8
 
 
 PART
II - OTHER INFORMATION
 
 Item
1:    Legal Proceedings
 
 From time
to time, the Company may be involved in various claims, lawsuits, or disputes
with third-parties incidental to the normal operations of the business. The
Company is not currently involved in any such litigation. Furthermore, the
Company is not aware of any proceeding that a governmental authority is
contemplating.
 
 Item
2:    Unregistered Sales of Equity Securities and Use of
Proceeds
  In
connection with the acquisition of Caesar’s Cleaners as discussed in Note 8, the
Company issued 466,667 shares of restricted common stock in exchange for all
assets and liabilities of Caesar’s Cleaners valued at $0.80 per share (stock
price at closing) having total value of approximately $373,000.
  During
the three months ended June 30, 2008, the Company received $865,400 in cash from
various investors in exchange for 1,236,286 shares of the Company’s common stock
and 618,143 warrants with exercise price of $0.70 per share expiring 5 years
from issuance.
  During
the three months ended June 30, 2008, five investors exercised their warrants to
purchase 140,000 shares of the Company’s common stock at $3.50 per share for
total cash proceeds of $490,000. The company issued 810,600 shares of its common
stock to these investors as an incentive to exercise early.


Item
3:    Defaults upon Senior Securities
 
 None
 
 Item
4:    Submission of Matters to a Vote of Security Holders
 
 None
 
 Item
5:    Other Information
 
 None
 
 
 Page
9
  
 Item
6:    Exhibits
  Exhibit No.
              DescriptionExhibit
      31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      31.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      32.1
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      32.2
              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
   Page
10
 
 
   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 CORPORATIONDate:
      August 14, 2008
              By:
      /S/ ROBERT Y. LEERobert
      Y. Lee
                Chief
      Executive OfficerBy:
      /S/ F. KIM COXF.
      Kim Cox
                Chief
      Financial Officer
 
  Page
11
 
 
 
 
   EXHIBIT
INDEX
  Exhibit
      31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      31.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      32.1
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      32.2
              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
      Page
12