UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2006

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14757

Issuer’s telephone number, including area code:     305-754-4551

Securities registered under Section 12(b) of the Exchange Act: Common Stock, $.025 par value

Securities registered under Section 12(g) of the Exchange Act: None

        Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  

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

        Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.

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

        The Company’s revenues from continuing operations for its fiscal year ended June 30, 2006 were $20,414,890.

        The aggregate market value as at September 22, 2006 of the Common Stock of the issuer, its only class of voting stock, held by non-affiliates was approximately $3,807,000 based on the closing price of the Company’s Common Stock on the American Stock Exchange on that date. Such market value excludes shares owned by all executive officers and directors (and their spouses). This should not be construed as indicating that all such persons are affiliates.

        The number of shares outstanding of the issuer’s Common Stock as at September 22, 2006 was 7,034,450.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the issuer’s Proxy Statement relating to its 2006 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12 and 14 in Part III of this Report.

Transitional Small Business Disclosure Format Yes      No

FORWARD LOOKING STATEMENTS

        Certain statements in this Report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report, words such as “may,” “should,” “seek,” “believe,” “expect,” anticipate,” “estimate,” “project,” “intend,” “strategy” and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect the Company’s future plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that may cause actual results, trends, performance or achievements of the Company, or industry trends and results, to differ materially from the future results, trends, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others: general economic and business conditions in the United States and other countries in which the Company’s customers and suppliers are located; industry conditions and trends; technology changes; competition and other factors which may affect prices which the Company may charge for its products and its profit margins; the availability and cost of the inventory purchased by the Company; relative values of the United States currency to currencies in the countries in which the Company’s customers, suppliers and competitors are located; changes in, or the failure to comply with, government regulation, principally environmental regulations; and the Company’s ability to successfully introduce, market and sell at acceptable profit margins its Green-Jet® dry-wetcleaning machine and Multi-Jet® dry cleaning machine; the Company’s ability to implement changes in its business strategies and development plans; and the availability, terms and deployment of debt and equity capital if needed for expansion. These and certain other factors are discussed in this Report and from time to time in other Company reports filed with the Securities and Exchange Commission. The Company does not assume an obligation to update the factors discussed in this Report or such other reports.

PART I

General

        The Company was incorporated under the laws of the State of Delaware on June 30, 1963 under the name Metro-Tel Corp. and changed its name to DRYCLEAN USA, Inc. on November 7, 1999. Since November 1, 1998, when Steiner-Atlantic Corp. (“Steiner”) was merged with and into, and therefore became, a wholly-owned subsidiary of the Company, the Company’s principal business has been as a supplier of commercial and industrial dry cleaning equipment, laundry equipment and steam boilers and related activities.

        Unless the context otherwise requires, as used in this Report, the “Company” includes DRYCLEAN USA, Inc. and its subsidiaries.

        The Company, through Steiner, supplies commercial and industrial dry cleaning equipment, laundry equipment and steam boilers in the United States, the Caribbean and Latin American markets. This aspect of the Company’s business services includes:

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        The Company’s wholly-owned indirect subsidiary, Steiner-Atlantic Brokerage Corp. (“Steiner Brokerage”), acts as a business broker to assist others seeking to buy or sell existing dry cleaning stores and coin laundry businesses. Some of the Company’s existing customers have become Steiner Brokerage clients, utilizing the Company’s staff and ability to assist them in the sale of their businesses and associated real property.

        The Company, through its DRYCLEAN USA LICENSE CORP. wholly-owned indirect subsidiary, owns the worldwide rights to the name DRYCLEAN USA, along with existing franchise and license agreements. DRYCLEAN USA is one of the largest franchise and license operations in the dry cleaning industry, currently consisting of over 400 franchised and licensed locations in the United States, the Caribbean and Latin America.

        Through DRYCLEAN USA Development Corp. (“DRYCLEAN USA Development”), a wholly-owned indirect subsidiary, the Company also develops new turn-key dry cleaning establishments for resale to third parties.

Available Information

        The Company files Annual Reports on Form 10-KSB and Quarterly Reports on Form 10-QSB, files or furnishes Current Reports on Form 8-K, files or furnishes amendments to those reports, and files proxy and information statements with the Securities and Exchange Commission (the “SEC”). These reports and statements may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These reports and statements, as well as beneficial ownership reports filed by the Company’s officers, directors and beneficial owners of more than 10% of the Company’s common stock, may be obtained without charge through the Company’s Internet site http://www.drycleanusa.com as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC.

Product Lines

        The Company sells a broad line of commercial and industrial laundry and dry cleaning equipment and steam boilers, as well as parts and accessories therefor.

        The commercial and industrial laundry equipment distributed by the Company features washers and dryers, including coin-operated machines, boilers, water reuse and heat reclamation systems, flatwork ironers, automatic folders and feeders. The Company’s dry cleaning equipment includes commercial dry cleaning machines sold primarily under the Aero-Tech®, Multi-Jet® and Green-Jet® names, as well as garment presses, finishing equipment, sorting and storage conveyors and accessories distributed for others.

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        The Company’s proprietary environmentally friendly Green-Jet® dry-wetcleaning machine not only cleans garments efficiently, but also eliminates the use of perchloroethylene (Perc) in the dry cleaning process, thereby eliminating the health and environmental concerns that Perc poses to customers and their landlords. It also alleviates flammability, odor and cost issues inherent in alternative solvents and cleaning processes. In May 2005, patents were granted to the Company from the United States to protect this innovative approach to garment cleaning. Patents from other countries are still pending. In August 2003, the Company introduced its Multi-Jet® dry cleaning machine which can use a number of environmentally safe solvents and will replace certain existing products.

        The products sold by the Company are positioned and priced to appeal to customers in each of the high-end, mid-range and value priced markets. These products are offered under a wide range of price points to address the needs of a diverse customer base. Suggested prices for most of the Company’s products range from approximately $5,000 to $100,000. The products supplied by the Company afford the Company’s customers a “one-stop shop” for commercial and industrial laundry and dry cleaning machines, boilers and accessories. By providing “one-stop” shopping, the Company believes it is better able to attract and support potential customers who can choose from the Company’s broad product line. Product sales accounted for approximately 96% of revenues in each of fiscal 2006 and 2005.

        The Company seeks to establish customer satisfaction by offering:

        In addition, the Company, under the name DRYCLEAN USA, currently franchises and licenses over 400 retail drycleaning stores in the United States, the Caribbean and Latin America, making it one of the largest retail drycleaning license and franchise operations in the dry cleaning industry. During fiscal 2006 and 2005, the Company’s license and franchise segment contributed approximately 1.7% and 2.0%, respectively, of the Company’s revenues.

        Through its Steiner Brokerage subsidiary, the Company acts as a business broker to assist others seeking to buy or sell existing dry cleaning and laundry businesses. Some of the Company’s existing customers have become Steiner Brokerage clients, utilizing the Company’s staff and ability to assist them in the sale of their businesses and associated real property. This business contributed less than 1% of the Company’s revenues during fiscal 2006 and 2005, respectively.

        The Company, through its DRYCLEAN USA Development subsidiary, develops new turn-key dry cleaning establishments for resale to third parties. During fiscal 2006, DRYCLEAN USA Development did not contribute to the Company’s revenues and contributed less than 1% in fiscal 2005.

Sales, Marketing and Customer Support

        The laundry and dry cleaning equipment products marketed by the Company are sold by it to its customers in the United States, the Caribbean and Latin America, as well as customers of its

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DRYCLEAN USA licensing subsidiary. The Company employs sales executives to market its proprietary and distributed products, including its Aero-Tech®, Multi-Jet® and Green-Jet® products, in the United States and in international markets. The Company supports product sales by advertising in trade publications, participating in trade shows and engaging in regional promotions and sales incentive programs. A substantial portion of equipment and parts sales orders are obtained by telephone, e-mail and fax inquiries originated by the customer or by representatives of the Company, and significant repeat sales are derived from existing customers.

        Additionally, the Company’s Aero-Tech®, Green-Jet® and Multi-Jet® machines are sold through distributors and dealers throughout the United States, the Caribbean and Latin America. The Company continues to develop distributor relationships in North America for its dry cleaning machines.

        The Company trains its sales and service employees to provide service and customer support. The Company uses specialized classroom training, instructional videos and vendor sponsored seminars to educate employees about product information. In addition, the Company’s technical staff has prepared comprehensive training manuals, written in English and Spanish, relating to specific training procedures. The Company’s technical personnel are continuously retrained as new technology is developed. The Company monitors service technicians’ continued educational experience and fulfillment of requirements in order to evaluate their competence. All of the Company’s service technicians receive service bulletins, service technicians’ tips and continued training seminars.

Customers and Markets

        The Company’s customer base consists of approximately 750 customers in the United States, the Caribbean and Latin America, including independent and franchise dry cleaning stores and chains, hotels, motels, cruise lines, hospitals, nursing homes, government institutions and distributors. In June 2004, as another distributor ceased operations, the Company obtained an expansion of the territory in which it acts as a distributor for certain laundry products manufactured by certain manufacturers from southern Florida to encompass most of Florida, the Company’s principal domestic market. One customer accounted for approximately 17% of the Company’s revenues during the year ended June 30, 2006. No customer accounted for more than 10% of the Company’s revenues during the year ended June 30, 2005.

Foreign Sales

        Export sales of laundry and dry cleaning equipment were approximately $2,533,000 and $2,833,000 during the years ended June 30, 2006 and June 30, 2005, respectively, and were made principally to Latin America and the Caribbean. See “Customers and Markets”.

        All of the Company’s export sales require the customer to make payment in United States dollars. Accordingly, foreign sales may be affected by the strength of the United States dollar relative to the currencies of the countries in which their customers and competitors are located, as well as the strength of the economies of the countries in which the Company’s customers are located.

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Sources of Supply

        The Company purchases laundry and dry cleaning machines, boilers and the other products supplied by it from a number of manufacturers. One of our suppliers accounted for approximately 23% of the Company’s purchases for the year ended June 30, 2006. During the year ended June 30, 2005, no suppliers accounted for more than 20% of the Company’s purchases. The Company’s major suppliers are Pellerin Milnor Corporation, Chicago Dryer Company and Unipress Corporation. Historically, the Company has not experienced difficulty in purchasing products it distributes for others and believes it has good working relationships with its suppliers.

        The supplier of a significant portion of the Company’s laundry equipment and spare parts for their laundry equipment is located near New Orleans. While its plant was only slightly damaged by Hurricane Katrina, its power and employee availability were disrupted, causing shipment delays during fiscal 2006. These problems have been resolved. The Company has shipped its backlog and is now current with new orders.

        The Company’s proprietary Green-Jet® dry-wetcleaning machines are currently manufactured exclusively for the Company by one manufacturer in the United States. Substantially all of the Company’s dry cleaning equipment sold under the Aero-Tech® and Multi-Jet® labels is currently manufactured exclusively for the Company by two manufacturers in Italy.

        The Company has established long-standing relationships with these manufacturers. The Company’s management believes its supplier relationships for the products it distributes for others and its proprietary products provide the Company with a substantial competitive advantage, including exclusivity for certain products and certain areas and favorable prices and terms. Therefore, the loss of certain of these vendor relationships could adversely affect the Company’s business.

        The Company has a formal contract with only a few of its equipment suppliers and manufacturers and relies on its long-standing relationship with its other suppliers and manufacturers. The Company collaborates in the design and closely monitors the quality of its manufactured product. The Company must place its orders with its United States manufacturer of the Green-Jet® dry-wetcleaning machine and with its Italian manufacturers of its Aero-Tech® and Multi-Jet® dry cleaning machines prior to the time the Company has received all of its orders and, in certain instances, places orders for products it distributes in advance of its receipt of sales orders. However, because of the Company’s close working relationship with its suppliers and manufacturers, the Company can usually adjust orders rapidly and efficiently to reflect a change in customer demands. The Company believes that if, for any reason, its arrangements with the manufacturers of its proprietary products were to cease, or in the event the cost of these products were to be adversely affected, it will be able to have these products manufactured by other suppliers.

        The Company’s current bank revolving credit facility includes a $250,000 foreign exchange subfacility for the purpose of enabling the Company to mitigate its currency exposure in connection with its import activities through spot foreign exchange and forward exchange contracts. There were no open foreign exchange contracts at either June 30, 2006 or 2005.

        Imports into the United States are also affected by the cost of transportation, the imposition of import duties and increased competition from greater production demands abroad. The United States, Italy and the European Union may, from time to time, impose quotas, duties, tariffs or other restrictions or adjust prevailing quotas, duties or tariff levels, which could affect the Company’s margins on its Aero-Tech® and Multi-Jet® machines. Customs duties, imposed by the United States, were less than 1% of invoice cost for the Company’s imported dry cleaning machines during each of fiscal 2006 and 2005.

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Competition

        The commercial and industrial laundry and dry cleaning equipment distribution business is highly competitive and fragmented with over 100 full-line or partial-line equipment distributors in the United States. The Company’s management believes that no one distributor has a major share of the market and that substantially all distributors are independently owned and, with the exception of several regional distributors, operate primarily in local markets. Competition is based primarily on price, product quality, delivery and support services provided to the customer. In Florida, the Company’s principal domestic market, the Company’s primary competition is derived from a number of full line distributors, which operate throughout Florida. In the export market, the Company competes with several distributors and anticipates increased competition as the export market grows. The Company’s proprietary dry cleaning equipment competes with over a dozen manufacturers of dry cleaning equipment whose products are distributed nationally. In all geographic areas, the Company competes by offering an extensive product selection, value-added services, such as product inspection and quality assurance, a toll-free customer support line, reliability, warehouse location, price, competitive special features and, with respect to certain products, as to which the Company acts as distributor, exclusivity.

        As a franchisor/licensor of retail dry cleaning stores, DRYCLEAN USA competes with several other franchisors and turn-key suppliers of dry cleaning stores primarily on the basis of trademark recognition and reputation. As a broker in the purchase and sale of retail dry cleaning stores and coin laundry businesses, Steiner Brokerage competes with business brokers generally, as well as with other professionals with contacts in the retail dry cleaning and coin laundry business. Competition in this latter area is primarily based on reputation, advertising and, to a lesser degree, on the level of fees charged.

Research and Development

        The Company has designed and introduced its new Green-Jet® dry-wetcleaning and Multi-Jet® drycleaning machines and continues to improve these products. The amounts of research and development expenses for the years ended June 30, 2006 and 2005 were $27,805 and $44,825, respectively.

Patents and Trademarks

        The Company is the owner of United States service mark registrations for the names Aero-Tech®, Multi-Jet® and Green-Jet®, which are used in connection with its laundry and dry cleaning equipment, and of DRYCLEAN USA®, which is licensed by it to retail dry cleaning establishments. The Company intends to use and protect these or related service marks, as necessary. The Company believes its trademarks and service marks have significant value and are an important factor in the marketing of its products. Patents were granted in May 2005 for the protection of the Company’s new Green-Jet® dry-wetcleaning machine in the United States which will expire in May 2021 and patents have been applied for in certain foreign countries.

        On January 3, 2005, the Company entered into a Patent License Agreement with Whirlpool Corporation (“Whirlpool”) in which the Company granted Whirlpool an exclusive license until December 31, 2008 and thereafter a non-exclusive license to make and sell laundry appliances incorporating the Company’s patent applications and other intellectual property related to fabric treatment technology for improving the drying and refreshing of garments in home clothes dryers. In consideration for the grant of the exclusive license through December 31, 2008, Whirlpool paid the Company $350,000, of which $331,100 was for the exclusive license fee. In addition, Whirlpool is to pay the Company a per unit royalty for dryers using the licensed technology that are sold during the three year period following the first sale following commercial production of dryers using the license technology.

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Compliance with Environmental and Other Government Laws and Regulations

        Over the past several decades in the United States, federal, state and local governments have enacted environmental protection laws in response to public concerns about the environment, including with respect to perchloroethylene (Perc), the primary cleaning agent historically used in the commercial and industrial dry cleaning process. A number of industries, including the commercial and industrial dry cleaning and laundry equipment industries, are subject to these evolving laws and implementing regulations. As a supplier to the industry, the Company serves customers who are primarily responsible for compliance with environmental regulations. Among the federal laws that the Company believes are applicable to the industry are the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), which provides for the investigation and remediation of hazardous waste sites; the Resource Conservation and Recovery Act of 1976, as amended (“RCRA”), which regulates the generation and transportation of hazardous waste as well as its treatment, storage and disposal; and the Occupational Safety and Health Administration Act (“OSHA”), which regulates exposure to toxic substances and other health and safety hazards in the workplace. Most states and a number of localities have laws that regulate the environment which are at least as stringent as the federal laws. In Florida, for example, in which a significant amount of the Company’s dry cleaning and laundry equipment sales are made, environmental matters are regulated by the Florida Department of Environmental Protection which generally follows the United States government’s Environmental Protection Agency’s (“EPA”) policy in the EPA’s implementation of CERCLA and RCRA and closely adheres to OSHA’s standards.

        The Company believes its Aero-Tech®, Multi-Jet® and Green-Jet® dry-wetcleaning machines exceed environmental regulation standards set by safety and environmental regulatory agencies.

        The Company does not believe that compliance with Federal, state and local environmental and other laws and regulations which have been adopted have had, or will have, a material effect on its capital expenditures, earnings or competitive position.

        The Company is also subject to Federal Trade Commission (the “FTC”) regulations and various state laws regulating the offer and sale of franchises. The FTC and various state laws require the Company to, among other things, furnish to prospective franchisees a franchise offering circular containing prescribed information. Certain states in the United States require separate filings in order to offer and sell franchises in those states. The Company believes that it is in compliance in all material respects with these laws.

Employees

        The Company currently employs 35 employees on a full-time basis, of whom 4 serve in executive management capacities, 10 are engaged in sales and marketing, 13 are administrative and clerical personnel, and 8 serve as warehouse support. None of the Company’s employees are subject to a collective bargaining agreement, nor has the Company experienced any work stoppages. The Company believes that its relations with employees are satisfactory.

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        The Company’s executive offices and the main distribution center for its products are housed in three leased adjacent facilities totaling approximately 45,000 square feet in Miami, Florida. The Company believes its facilities are adequate for its present and anticipated future needs. The following table sets forth certain information concerning the leases at these facilities:

_________________

        The Company is not a party to any material pending legal proceedings.

        Not applicable.

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PART II

        The Company’s Common Stock is traded on the American Stock Exchange (the “Amex”) and on the Chicago Stock Exchange, each under the symbol “DCU.” The following table sets forth, for the Company’s Common Stock, the high and low sales prices on the Amex, as reported by Amex, for the periods reflected below.

        As of September 22, 2006, there were approximately 488 holders of record of the Company’s Common Stock.

        The following table sets forth information concerning the cash dividends declared by the Company’s Board of Directors during the periods covered by this Report.

        Beginning with the dividend declared on March 23, 2005, the Company changed from an annual to a semi-annual dividend schedule.

        The Company is a party to a Loan and Security Agreement with a commercial bank, which, among other things, provides that the Company may declare or pay dividends only to the extent that the dividend payment would not reasonably likely result in a failure by the Company to maintain specified consolidated debt service or short-term debt to equity ratios.

        The Company did not sell any equity securities during the year ended June 30, 2006 that were not registered under the Securities Act of 1933, as amended.

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General

        The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto which appear in Item 7 of this Report.

Overview

        The early quarters of fiscal 2006 were affected by Hurricane Katrina in the first quarter of the year that caused shipping delays from one of the Company’s largest laundry and spare parts suppliers located near New Orleans and by Hurricane Wilma in the second quarter of the year that affected southern Florida, which is a large part of the Company’s selling area, and also caused a shutdown of the Company’s Miami facilities and corporate headquarters for a week due to power outages. As the year progressed the Company was able to catch up with its shipments and, by year end, the Company was making timely deliveries. Despite these factors, revenues for the year ended June 30, 2006 were a record $20,414,890, or 9.9% higher than in fiscal 2005, and net earnings increased 13.8% over fiscal 2005 to $803,981 or $0.11 per share on a fully diluted basis.

        Revenues for the year ended June 30, 2006 increased by $1,839,641 or 9.9% over 2005, primarily as a result of a 13.8% increase in industrial laundry equipment sales and higher commission income earned on shipments made by certain of the Company’s manufacturers directly to certain of the Company’s large national customers that have special national account terms and arrangements with some manufacturers. However, in these cases, the manufacturer awards the Company a commission. Therefore, while the amount of the Company’s revenues was affected because it recognized the amount of the commission instead of the full sales price of the equipment sold, the Company’s earnings were not materially impacted. The Company expects this trend to continue in the future but on a lower scale as the Company solidifies the expanded territory it acquired in June 2004 in which it acts as a distributor for certain laundry products manufactured by certain manufacturers from southern Florida to encompass most of Florida.

        The increase in sales offset a .8 percentage point decrease in gross margins caused by the increased size of certain orders which carry smaller margins in order to remain competitive. In addition, although lower as a percentage of revenues in fiscal 2006, higher employee compensation expense caused selling, general and administration expenses to increase in dollar amount by 9.7%. The Company’s property insurance will increase by approximately $93,000 (79.6%), with large deductibles, in fiscal 2007, as premiums are increasing due to the three hurricanes that hit Florida during fiscal 2006. As a result, the Company has elected to self-insure for wind damage coverage in order to substantially reduce the premiums. The Company believes its facilities are well protected from wind damage.

        Inventory levels at June 30, 2006 were slightly lower than at June 30, 2005 due to heavy shipments in June 2006; however, inventory levels are expected to increase as fiscal 2007 progresses.

        Cash on hand increased substantially due to a number of factors discussed below, most notably, an approximate $520,000 increase in customer’s deposits reflecting a higher level of business and backlog. The entire backlog on hand at June 30, 2006 is expected to ship during fiscal 2007.

        As a result of the solid financial condition of the Company, the Company’s Board of Directors increased the semi-annual dividend to $.04 per share during fiscal 2006.

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Liquidity and Capital Resources

        For the twelve month period ended June 30, 2006, cash increased by $1,524,587 compared to a decrease of $160,135 during fiscal 2005.

        The following table summarizes the Company’s Consolidated Statement of Cash Flows:

        For the twelve month period ended June 30, 2006, operating activities provided cash of $2,082,462 compared to $460,462 for the twelve month period ended June 30, 2005. The improvement of $1,622,000 was caused primarily by the improvement in net earnings of $97,718 (partially offset by a $62,408 reduction in non-cash expenses), coupled with changes in operating assets and liabilities that produced additional cash improvement of $1,160,603. The primary reason for the increase in cash contributed by changes in operating assets and liabilities in fiscal 2006 was an increase of $521,542 in customer deposits (compared to an increase of $27,398 in fiscal 2005). The increase in customer deposits reflect an increased level of business and backlog. In addition, cash was provided by a decrease in accounts, trade notes and lease receivables of $193,943 in fiscal 2006 compared to an increase of $369,333 in fiscal 2005. Accounts, trade notes and lease receivables at fiscal 2005 year end were higher due to heavy shipments at year end. Further cash in fiscal 2006 was provided by a decrease in inventory of $98,852 compared to an increase of $118,214 in fiscal 2005. These fluctuations in inventory from year to year are caused by the normal course of business activity. Higher accounts payable and accrued expenses and accrued employee expense levels at the end of fiscal 2006 contributed an aggregate of $488,302 of cash in fiscal 2006, compared to a decrease of $254,988 in fiscal 2005, mostly due to employee bonuses which are to be paid in September 2006. Income taxes payable increased by $74,884 in fiscal 2006 over fiscal 2005 due to increased profitability.

        Investing activities used cash of $4,582 for the twelve month period ended June 30, 2006, as the final payments received through November 2005 on a note from the sale of the Company’s telecommunications segment ($67,857) did not offset the purchase of capital equipment ($71,131) and patent and trademark expenditures ($1,308). During the comparable period of fiscal 2005, investing activities provided cash of $36,727, as proceeds from the note ($157,143) offset capital expenditures for equipment of $88,461 and patent and trademark expenses of $31,955.

        Financing activities used cash of $553,293 in fiscal 2006 to pay dividends of $562,356, partially offset by $9,063 received from the exercise of a stock option to purchase 10,000 shares of the Company’s common stock. In fiscal 2005, financing activities used cash of $657,324 to pay dividends of $667,324, offset partially by $10,000 received from the exercise of a stock option to purchase 10,000 shares of the Company’s common stock.

        On October 30, 2005, the Company received an extension until October 30, 2006 of its existing $2,250,000 revolving line of credit facility. In addition, the Loan Agreement was amended to eliminate the requirement that 51% of the stock of the Company be owned by the Steiner family or any Steiner trust. On October 28, 2004, the Loan Agreement, was amended, to eliminate the borrowing base restriction on borrowings under the revolving credit facility, thereby enabling the Company to borrow up to the full $2,250,000 amount available under that facility regardless of the Company’s levels of accounts

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receivable and inventories. The Company’s obligations under the facility continue to be guaranteed by the Company’s subsidiaries and collateralized by substantially all of the Company’s and its subsidiaries’ assets. The Company intends to renew, and believes the bank will agree to renew, this line for another year.

        During fiscal 2006 and 2005, the Board of Directors declared various dividends, aggregating $562,356 and $667,324, respectively. Information concerning these dividends is contained in a table shown on page 10 of this report. On September 26, 2006, the Board of Directors declared a $.04 per share semi-annual dividend (or an aggregate of $281,378) payable on November 1, 2006 to shareholders of record on October 13, 2006.

        The Company believes that its present cash position, the cash it expects to generate from operations and cash borrowings available under its line of credit will be sufficient to meet its presently contemplated operational needs.

Off-Balance Sheet Financing

        The Company has no off-balance sheet financing arrangements within the meaning of item 303(c) of Regulation S-B.

Results of Operations

        Revenues for the year ended June 30, 2006 increased by $1,839,641 (9.9%) over fiscal 2005. The commercial laundry and dry cleaning segment increased its revenue by 10.2% due primarily to its sales staff becoming established in the territory into which the Company has expanded since June 2004 and generating an increase in industrial laundry equipment sales and higher commission income. However, the Company’s license and franchise segment experienced a decrease of 7.2% in revenues, primarily due to a reduction in royalties and new dry cleaning franchises. For the twelve month period ended June 30, 2006, sales of commercial laundry increased by 13.8%, sales of dry cleaning equipment increased by 2.3% and sales of spare parts increased by 5.1%. These increases were partially offset by a 23.8% decrease in boiler sales. Brokerage revenues, which are included in the commercial laundry and dry cleaning segment, increased by 109.7%; however, they represent less than 1% of Company revenue.

        Overall expenses of the Company, including costs of sales, were 94.4% of total revenues in fiscal 2006, compared to 93.9% in fiscal 2005. The slight increase, as a percentage of revenues, reflects lower gross margins.

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        Cost of goods sold, expressed as a percentage of sales, increased to 75.9% in fiscal 2006 compared to 75.2% in fiscal 2005 as the Company had larger contract sales which generally carry a smaller margin, increase in the Company’s provision for slow-moving inventory of approximately $70,000 and a change in product mix.

        Selling, general and administrative expenses increased by $392,829 (9.7%), but improved as a percentage of revenues to 21.8% in fiscal 2006 from 21.9% in fiscal 2005. Most of the dollar increase was due to an approximate 23.0% increase in payroll expenses, including increased sales commissions. Other accounts in this category of expenses were generally in line with the increased level of sales.

        Research and development expenses are a small part of the Company’s total operating expenses. These expenses relate to the on-going research on the Company’s Green-Jet® and Multi-Jet® technologies and the application of these technologies to smaller machines for the dry cleaning and hotel industry.

        Interest income increased by $64,751 (605.6%) as a result of interest earned on higher outstanding bank balances and higher prevailing rates.

        The Company’s effective income tax rate decreased to 34.5% in fiscal 2006 compared to the income tax rate of 37.7% in fiscal 2005 mostly due to an increase in the benefit derived from the exclusion of foreign sales.

Inflation

        Inflation has not had a significant effect on the Company’s operations during any of the reported periods.

Transactions with Related Parties

        The Company leases 27,000 square feet of warehouse and office space from William K. Steiner, a principal shareholder, Chairman of the Board of Directors and a director of the Company. The Company and Mr. Steiner entered into a new lease for this facility on September 9, 2005 for a three-year period beginning November 1, 2005 at an annual rental of $94,500, with annual increases commencing November 1, 2006 of 3% over the rent in the prior year. The Company is to bear real estate taxes, utilities, maintenance, non-structural repairs and insurance. The new lease contains two three-year renewal options in favor of the Company. The Company believes that the terms of the lease are comparable to terms that would be obtained from an unaffiliated third party for similar property in a similar locale.

        In fiscal 2006, the Company paid a law firm, in which a director is of counsel, $45,300 for legal services performed. In fiscal 2005, the Company paid that law firm and another law firm, in which the director at the time was of counsel, an aggregate of $81,500 for legal services performed.

Critical Accounting Policies

        Securities and Exchange Commission Financial Reporting Release No. 60 encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the Company’s financial statements:

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         Use of Estimates

        The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable, the carrying value of inventories and long-lived assets, the timing of revenue recognition for initial license and franchise fees from sales of franchise arrangements and continuing license and franchise service fees, as well as sales returns. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the recognition of revenues and expenses and the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

         Revenue Recognition and Accounts and Notes Receivable

        Equipment and replacement parts are generally shipped FOB from the Company’s warehouse or drop shipped FOB factory at which time risk of loss and title passes to the purchaser and the sale is recorded. Commissions and development fees are recorded when earned, generally when the services are performed or the transaction is closed. Individual franchise arrangements include a license and provide for payment of initial fees, as well as continuing royalties. Initial franchise fees are generally recorded upon the opening of the franchised store, which is evidenced by a certificate from the franchisee, indicating that the store has opened, and collectibility is reasonably assured. Continuing royalties represent regular contractual payments received for the use of the “Dryclean USA” marks, which are recognized as revenue when earned, generally on a straight line basis.

        Accounts and trade notes receivable are customer obligations due under normal trade terms. The Company sells its products primarily to independent dryclean and laundry plants. The Company performs continuing credit evaluations of its customers’ financial condition and depending on the term of credit, the amount of the credit granted and management’s past history with a customer, the Company may require the debtor to pledge the purchased equipment as collateral for the receivable. Senior management reviews accounts and notes receivable on a regular basis to determine if any such amounts will potentially be uncollectible. The Company includes any balances that are determined to be uncollectible, along with a general reserve based on older aged amounts, in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. Based on the information available to management, it believes the Company’s allowance for doubtful accounts as of June 30, 2006 is adequate. However, actual write-offs might exceed the recorded allowance.

         Franchise License Trademark and Other Intangible Assets

        The franchise license, trademark, patents and trade name are stated at cost less accumulated amortization. Those assets are amortized on a straight-line basis over the estimated future periods to be benefited (10-15 years). The patents are amortized over the shorter of the patents’ useful life or legal life from the date such patents are granted. The Company reviews the recoverability of intangible assets based primarily upon an analysis of undiscounted cash flows from the intangible assets. In the event the expected future net cash flows should become less than the carrying amount of the assets, an impairment loss will be recorded in the period such determination is made, based on the fair value of the related assets.

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New Accounting Pronouncements

        In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) (SFAS 123(R)) “Share-based payment”. SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS 123(R) replaces FASB 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This guidance is effective as of the first interim or annual reporting period beginning after December 15, 2005 for Small Business filers such as the Company. SFAS 123(R) does not affect the Company at the present time but may effect the Company if it issues share-based compensation in the future.

        In December 2004, the FASB issued FASB Statement No.151, “Inventory Costs,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Under this Statement, such items will be recognized as current-period charges. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and must be applied prospectively. Adoption of this statement did not affect the Company’s financial position or results of operations because the Company does not manufacture inventory.

        In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” which amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Adoption of this pronouncement did not affect the Company’s financial position or results of operations.

        In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – A Replacement of APB No. 20 and FASB Statement No. 3.” Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. Adoption of this pronouncement did not affect the Company.

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DRYCLEAN USA, Inc. and Subsidiaries

Index to Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm 

Board of Directors and Shareholders
DRYCLEAN USA, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of DRYCLEAN USA, Inc. and subsidiaries as of June 30, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DRYCLEAN USA, Inc. and subsidiaries as of June 30, 2006 and 2005 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

MORRISON, BROWN, ARGIZ & FARRA LLP

Miami, Florida
September 8, 2006, except
for the third paragraph
of Note 11 as to which
the date is
September 26, 2006

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DRYCLEAN USA, Inc. and Subsidiaries

Consolidated Balance Sheets

See accompanying summary of accounting policies and notes to consolidated financial statements.

19

DRYCLEAN USA, Inc. and Subsidiaries

Consolidated Statements of Operations

See accompanying summary of accounting policies and notes to consolidated financial statements.

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DRYCLEAN USA, Inc. and Subsidiaries

Consolidated Statements of Shareholders' Equity

See accompanying summary of accounting policies and notes to consolidated financial statements.

21

DRYCLEAN USA, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

See accompanying summary of accounting policies and notes to consolidated financial statements.

22

DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies

23

DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies

24

DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies

25

DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies

26

DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies

27

DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

28

DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

29

DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

30

DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

31

DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

32

DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

33

DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

34

DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

35

        Not applicable.

        As of the end of the period covered by this report, management of the Company, with the participation of the Company’s principal executive officer and the Company’s principal financial officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, these officers concluded that, as of the date of their evaluation, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including those officers, to allow timely decisions regarding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the company to disclose material information otherwise required to be set forth in the company’s periodic reports.

        During the period covered by this Report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

        None.

PART III

        The following information is presented with respect to the background of each of the directors and executive officers of the Company:

        Michael S. Steiner, 50, has been President, Chief Executive Officer and a director of the Company since November 1998 and of Steiner since 1988.

        William K. Steiner, 76, has been a director of the Company since November 1998 and Chairman of the Board of Steiner since he founded Steiner in 1960.

        Venerando J. Indelicato, 73, was President of the Company from December 1967 until November 1998 and has been Treasurer and Chief Financial Officer of the Company since December 1969.

        Alan I. Greenstein, 50, has been Executive Vice President and Chief Operating Officer of Steiner since May 2004. From October 1995 until it was sold in 2000, he was President and principal stockholder of Professional Cleaners, Inc., an operator of a south Florida chain of drycleaning and laundry stores. From February 2001 to September 2004, Mr. Greenstein was Vice President and a principal shareholder of South Florida Transport, Inc., a south Florida thrifty Car rental franchise. In October 2004, South Florida Transport, Inc. filed for Chapter 11 Bankruptcy, which subsequently converted to Chapter 7 liquidation. Mr. Greenstein believes the heavy losses from the hurricanes that hit Florida in the summer

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of 2004 were the cause for South Florida Transport, Inc.‘s financial problems. Since he joined Steiner, Mr. Greenstein has been a full time employee of Steiner.

        Lloyd Frank, 81, has been a director of the Company since 1977. Mr. Frank has been of counsel to the law firm of Troutman Sanders LLP since April 2005. Prior thereto, Mr. Frank was a member of the law firm of Jenkens & Gilchrist Parker Chapin LLP and its predecessor from 1977 until the end of 2003 and of counsel to that firm from January 2004 until March 2005. The Company retained Troutman Sanders LLP during the Company’s last fiscal year and is retaining that firm during the Company’s current fiscal year. Mr. Frank is also a director of Park Electrochemical Corp. and Volt Information Sciences, Inc.

        David Blyer, 46, has served as a director of the Company since November 1998. Mr. Blyer was Chief Executive Officer and President of Vento Software, a developer of software for specialized business applications, from 1994, when he co-founded that company, until mid-2002. Since that time, Mr. Blyer has been an independent consultant.

        Alan M. Grunspan, 46, has served as a director of the Company since May 1999. Since 2004, Mr. Grunspan has been a member of the law firm of Carlton Fields, PA. Prior thereto, Mr. Grunspan was a member of the law firm of Kaufman Dickstein & Grunspan P. A. from 1991 until 2004.

        Stuart Wagner, 74, has served as a director of the Company since November 1998. Mr. Wagner has been retired since 1999. From 1975 to 1997, Mr. Wagner served as President of Wagner Products Corp., a manufacturer and distributor of products in the HVAC industry, a company which he founded, and served as a consultant to Diversified Corp., which acquired Wagner Products Corp., from 1997 until 1999 .

        Mr. Michael S. Steiner is the son of Mr. William K. Steiner. There are no other family relationships among any of the directors and executive officers of the Company. All directors serve until the next annual meeting of stockholders and until the election and qualification of their respective successors. All officers serve at the pleasure of the Board of Directors.

        The balance of the information called for by this Item will be contained in the Company’s definitive Proxy Statement with respect to the Company’s 2006 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is incorporated herein by reference to such information.

        The information called for by this Item will be contained in the Company’s definitive Proxy Statement with respect to the Company’s 2006 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is incorporated herein by reference to such information.

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        The following table sets forth certain information, as at June 30, 2006, with respect to the Company’s equity compensation plans:

        The balance of the information called for by this Item will be contained in the Company’s definitive Proxy Statement with respect to the Company’s 2006 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is incorporated herein by reference to such information.

        The information called for by this Item will be contained in the Company’s definitive Proxy Statement with respect to the Company’s 2006 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is incorporated herein by reference to such information.

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39

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_________________

        The information called for by this Item will be contained in the Company’s definitive Proxy Statement with respect to the Company’s 2006 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is incorporated herein by reference to such information.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: September 26, 2006

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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EXHIBIT INDEX

43

44

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