Edgar Filing: RICKS CABARET INTERNATIONAL INC

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-127799

Prospectus

RICK'S CABARET INTERNATIONAL, INC.
552,100 SHARES OF COMMON STOCK

This prospectus relates to the offering for resale of up to 222,100 shares of
our common stock, $0.01 par value ("Common Stock") currently held by certain
selling stockholders, 220,000 shares of Common Stock issuable upon the
conversion of a Debenture currently held by a selling stockholder, 60,000 shares
of Common Stock issuable upon the conversion of a Convertible Note currently
held by a selling stockholder, and 50,000 shares of Common Stock issuable upon
the conversion of warrants. For a list of the selling stockholders, please see
"Selling Stockholders." We are not selling any shares of our Common Stock in
this offering and therefore will not receive any proceeds from the sale thereof.
We may, however, receive the benefit of proceeds upon the conversion of the
Debenture and/or the Convertible Note held by certain selling stockholders for
which we are registering the underlying shares of Common Stock. Upon
conversion of any portion of the Debenture and/or the Convertible Note, we will
apply the proceeds received directly to the debt for which the Debenture and/or
Convertible Note was issued and the principal amount(s) of the Note and/or the
Debenture will be reduced accordingly. Additionally, we may receive proceeds of
approximately $300,000 upon the exercise of warrants, which we would apply
toward general operating expenses. We will bear all expenses, other than
selling commissions and fees of the selling stockholders, in connection with the
registration and sale of the shares being offered by this prospectus.

These shares may be sold by the selling stockholders from time to time in the
over-the-counter market or other national securities exchange or automated
interdealer quotation system on which our Common Stock is then listed or quoted,
through negotiated transactions or otherwise at market prices prevailing at the
time of sale or at negotiated prices.

Our common stock is quoted on the NASDAQ SmallCap Market under the symbol
"RICK." On May 11, 2006, the last reported sales price of our Common Stock was
$7.33 per share.

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISKS. PLEASE REFER TO
THE "RISK FACTORS" BEGINNING ON PAGE 2.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS MAY 26, 2006.

TABLE OF CONTENTS
-----------------

PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . 2
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS . 8
THE BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 9
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION . . . . . . . . . . . . 20
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . 31
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 32
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . 32
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 33
SECURITY OWNERSHIP OF CERTAIN
BENEFICAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . 39
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS . . . . 40
SELLING STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . 41
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . 43
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . 45
INTEREST OF NAMED EXPERTS AND COUNSEL. . . . . . . . . . . . 47
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 47
COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES . . . . . . . . . . . . . . . . 48
WHERE YOU CAN FIND MORE INFORMATION. . . . . . . . . . . . . 48
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . F-1

PROSPECTUS SUMMARY

The following summary highlights selected information contained in this
prospectus. This summary does not contain all of the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the risk
factors section, the financial statements and the notes to the financial
statements. You should also review the other available information referred to
in the section entitled ""Where you can find more information" on page 48 in
this prospectus and any amendment or supplement hereto. Unless otherwise
indicated, the terms the "Company," "we," "us," and "our" refer and relate to
Rick's Cabaret International, Inc. and its consolidated subsidiaries.

THE COMPANY

Our name is Rick's Cabaret International, Inc. We currently own and operate a
total of ten adult nightclubs that offer live adult entertainment, restaurant
and bar operations. Five of our clubs operate under the name "Rick's Cabaret"
and four of the clubs operate under the name "XTC". Our nightclubs are in
Houston, Austin and San Antonio, Texas; Charlotte, North Carolina; Minneapolis,
Minnesota; and New York, New York. In January 2005, we acquired a club in New
York, New York which opened in September 2005. In June 2004, we converted our
original Rick's Cabaret nightclub in Houston's Galleria District into "Club
Onyx", an upscale venue that welcomes all customers but cater especially to
urban professionals, businessmen and professional athletes. We also own or
operate premiere adult entertainment Internet websites.

Our online entertainment sites are xxxPassword.com, CouplesTouch.com,
CouplesClick.net, and NaughtyBids.com. The site xxxPassword.com features adult
content licensed through Voice Media, Inc. CouplesTouch.com and CouplesClick.net
are personals sites for those in the swinging lifestyle. Naughtybids.com is our
online adult auction site. It contains consumer-initiated auctions for items
such as adult videos, apparel, photo sets, adult paraphernalia and other
erotica. There are typically approximately 10,000 active auctions at this site
at any given time. We charge the seller a fee for each successful auction. All
of our sites use proprietary software platforms written by us to deliver the
best experience to the user without being constrained by off-the-shelf software
solutions.

THE OFFERING

Outstanding 4,901,148 shares (as of May 11, 2006).
Common Stock

Common Stock Up to 222,100 shares of Common Stock held by certain selling
Offered stockholders, 220,000 shares of Common Stock issuable upon the
conversion of a Convertible Debenture, 60,000 shares of common
stock issuable upon the exercise of a Convertible Note (with
conversion prices ranging from $7.00 to $7.50 per share), and
50,000 shares of Common Stock issuable upon the exercise of
warrants.

Offering Price Determined at the time of sale by the selling stockholders.

Page 1

Proceeds We are not selling any shares of our Common Stock in this
offering and therefore will not receive any proceeds from the
sale thereof. We may, however, receive the benefit of proceeds
upon the conversion of the Debenture and/or the Convertible Note
held by certain selling stockholders for which we are registering
the underlying shares of Common Stock. Upon conversion of any
portion of the Debenture and/or the Convertible Note, we will
apply the proceeds received directly to the debt for which the
Debenture and/or Convertible Note was issued and the principal
amount(s) of the Note and/or the Debenture will be reduced
accordingly. Additionally, we may receive proceeds of
approximately $300,000 upon the exercise of warrants, which we
would apply toward general operating expenses.

The selling shareholders will pay any underwriting discounts
and commissions and expenses incurred by the selling shareholders
for brokerage, accounting, tax or legal services or any other
expenses incurred by the selling shareholders in disposing of the
shares. We will bear all other costs, fees and expenses incurred
in effecting the registration of the shares covered by this
prospectus, including, without limitation, all registration and
filing fees, Nasdaq Small Cap Market listing fees, blue sky
registration and filing fees, and fees and expenses of our
counsel and our accountants.

Risk Factors The securities offered hereby involve a high degree of risk.
See "Risk Factors" herein.

RISK FACTORS

An investment in our Common Stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to purchase shares
of our Common Stock. If any of the events, contingencies, circumstances or
conditions described in the risks below actually occurs, our business, financial
condition or results of operations could be seriously harmed. The trading price
of our Common Stock could, in turn, decline and you could lose all or part of
your investment.

RISKS RELATED TO THE COMPANY AND THE OFFERING

OUR BUSINESS OPERATIONS ARE SUBJECT TO REGULATORY UNCERTAINTIES WHICH MAY AFFECT
OUR ABILITY TO CONTINUE OPERATIONS OF EXISTING NIGHTCLUBS ACQUIRE ADDITIONAL
NIGHTCLUBS OR BE PROFITABLE.

Adult entertainment nightclubs are subject to local, state and federal
regulations. Our business is regulated by local zoning, local and state liquor
licensing, local ordinances and state and federal time place and manner
restrictions. The adult entertainment provided by our nightclubs has elements of
speech and expression and, therefore, enjoys some protection under the First
Amendment to the United States Constitution. However, the protection is limited
to the expression, and not the conduct of an entertainer. While our nightclubs
are generally well established in their respective markets, there can be no
assurance that local, state and/or federal licensing and other regulations will
permit our nightclubs to remain in operation or profitable in the future.

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WE MAY NEED ADDITIONAL FINANCING OR OUR BUSINESS EXPANSION PLANS MAY BE
SIGNIFICANTLY LIMITED.

If cash generated from our operations is insufficient to satisfy our working
capital and capital expenditure requirements, we will need to raise additional
funds through the public or private sale of our equity or debt securities. The
timing and amount of our capital requirements will depend on a number of
factors, including cash flow and cash requirements for nightclub acquisitions.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our then-existing shareholders will
be reduced. We cannot assure you that additional financing will be available on
terms favorable to us, if at all. Any future equity financing, if available, may
result in dilution to existing shareholders, and debt financing, if available,
may include restrictive covenants. Any failure by us to procure timely
additional financing will have material adverse consequences on our business
operations.

THERE IS SUBSTANTIAL COMPETITION IN THE NIGHTCLUB ENTERTAINMENT INDUSTRY WHICH
MAY AFFECT OUR ABILITY TO OPERATE PROFITABLY OR ACQUIRE ADDITIONAL CLUBS.

Our nightclubs face competition. Some of these competitors may have greater
financial and management resources than us. Additionally, the industry is
subject to unpredictable competitive trends and competition for general
entertainment dollars. There can be no assurance that we will be able to remain
profitable in this competitive industry.

RISK OF ADULT NIGHTCLUB OPERATIONS

Historically, the adult entertainment, restaurant and bar industry has been an
extremely volatile industry. The industry tends to be extremely sensitive to
the general local economy, in that when economic conditions are prosperous,
entertainment industry revenues increase, and when economic conditions are
unfavorable, entertainment industry revenues decline. Coupled with this
economic sensitivity are the trendy personal preferences of the customers who
frequent adult cabarets. We continuously monitor trends in our customers'
tastes and entertainment preferences so that, if necessary, we can make
appropriate changes which will allow us to remain one of the premiere adult
cabarets. However, any significant decline in general corporate conditions or
uncertainties regarding future economic prospects that affect consumer spending
could have a material adverse effect on our business. In addition, we have
historically catered to a clientele base from the upper end of the market.
Accordingly, further reductions in the amounts of entertainment expenses allowed
as deductions from income under the Internal Revenue Code of 1954, as amended,
could adversely affect sales to customers dependent upon corporate expense
accounts.

PERMITS RELATING TO THE SALE OF ALCOHOL

We derive a significant portion of our revenues from the sale of alcoholic
beverages. In Texas, the authority to issue a permit to sell alcoholic
beverages is governed by the Texas Alcoholic Beverage Commission (the "TABC"),
which has the authority, in its discretion, to issue the appropriate permits.
Rick's presently holds a Mixed Beverage Permit and a Late Hours Permit (the
"Permits"). These Permits are subject to annual renewal, provided we have
complied with all rules and regulations governing the permits. Renewal of a
permit is subject to protest, which may be made by a law enforcement agency or
by a member of the general public. In the event of a protest, the TABC may hold
a hearing at which time the views of interested parties are expressed. The TABC
has the authority after such hearing not to issue a renewal of the protested

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alcoholic beverage permit. While we have never been subject to a protest
hearing against the renewal of our Permits, there can be no assurance that such
a protest could not be made in the future, nor can there be any assurance that
the Permits would be granted in the event such a protest was made. Other states
may have similar laws which may limit the availability of a permit to sell
alcoholic beverages or which may provide for suspension or revocation of a
permit to sell alcoholic beverages in certain circumstances. The temporary or
permanent suspension or revocations of either of the Permits or the inability to
obtain permits in areas of expansion would have a material adverse effect on the
revenues, financial condition and results of operations of the Company.

WE MUST CONTINUE TO MEET THE NASDAQ SMALL CAP MARKET CONTINUED LISTING
REQUIREMENTS OR WE RISK DELISTING.

Our securities are currently listed for trading on the Nasdaq Small Cap Market.
We must continue to satisfy Nasdaq's continued listing requirements or risk
delisting which would have an adverse effect on our business. If our securities
are ever de-listed from the Nasdaq, it may trade on the over-the-counter market,
which may be a less liquid market. In such case, our shareholders' ability to
trade or obtain quotations of the market value of shares of our common stock
would be severely limited because of lower trading volumes and transaction
delays. These factors could contribute to lower prices and larger spreads in the
bid and ask prices for our securities. There is no assurance that we will be
able to maintain compliance with the Nasdaq continued listing requirements.

IN THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF
OPERATING AS A PUBLIC COMPANY, AND OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE
SUBSTANTIAL TIME TO NEW COMPLIANCE INITIATIVES.

In the future, we will incur significant legal, accounting and other expenses.
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), as well as new rules
subsequently implemented by the SEC, have imposed various new requirements on
public companies, including requiring changes in corporate governance practices.
Our management and other personnel will need to devote a substantial amount of
time to these new compliance initiatives. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will make some
activities more time-consuming and costly. For example, we expect these new
rules and regulations to make it more difficult and more expensive for us to
obtain director and officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage.

In addition, the Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls for financial reporting and disclosure
controls and procedures. In particular, commencing in fiscal 2007, we must
perform system and process evaluation and testing of our internal controls over
financial reporting to allow management and our independent registered public
accounting firm to report on the effectiveness of our internal controls over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our
testing, or the subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses. Our compliance with Section
404 will require that we incur substantial accounting expense and expend
significant management efforts. We currently do not have an internal audit
group, and we will need to hire additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge.
Moreover, if we are not able to comply with the

Page 4

requirements of Section 404 in a timely manner, or if we or our independent
registered public accounting firm identifies deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, the
market price of our stock could decline, and we could be subject to sanctions or
investigations by the SEC or other regulatory authorities, which would require
additional financial and management resources.

UNINSURED RISKS

We maintain insurance in amounts we considers adequate for personal injury and
property damage to which the business of the Company may be subject. However,
there can be no assurance that uninsured liabilities in excess of the coverage
provided by insurance, which liabilities may be imposed pursuant to the Texas
"Dram Shop" statute or similar "Dram Shop" statutes or common law theories of
liability in other states where we operate or expand. The Texas "Dram Shop"
statute provides a person injured by an intoxicated person the right to recover
damages from an establishment that wrongfully served alcoholic beverages to such
person if it was apparent to the server that the individual being sold, served
or provided with an alcoholic beverage was obviously intoxicated to the extent
that he presented a clear danger to himself and others. An employer is not
liable for the actions of its employee who overserves if (i) the employer
requires its employees to attend a seller training program approved by the TABC;
(ii) the employee has actually attended such a training program; and (iii) the
employer has not directly or indirectly encouraged the employee to violate the
law. It is our policy to require that all servers of alcohol working at our
clubs be certified as servers under a training program approved by the TABC,
which certification gives statutory immunity to the sellers of alcohol from
damage caused to third parties by those who have consumed alcoholic beverages at
such establishment pursuant to the Texas Alcoholic Beverage Code. There can be
no assurance, however, that uninsured liabilities may not arise which could have
a material adverse effect on the Company.

LIMITATIONS ON PROTECTION OF SERVICE MARKS

Our rights to the tradenames "Rick's" and "Rick's Cabaret" are established under
the common law based upon our substantial and continuous use of these trademarks
in interstate commerce since at least as early as 1987. "RICK'S AND STARS
DESIGN" and "RICK'S CABARET" logos are registered through service mark
registrations issued by the United States Patent and Trademark Office ("PTO").
There can be no assurance that these steps taken by the Company to protect its
Service Marks will be adequate to deter misappropriation of its protected
intellectual property rights. Litigation may be necessary in the future to
protect our rights from infringement, which may be costly and time consuming.
The loss of the intellectual property rights owned or claimed by us could have a
material adverse affect on our business.

ANTI-TAKEOVER EFFECTS OF ISSUANCE OF PREFERRED STOCK

The Board of Directors has the authority to issue up to 1,000,000 shares of
Preferred Stock in one or more series, to fix the number of shares constituting
any such series, and to fix the rights and preferences of the shares
constituting any series, without any further vote or action by the stockholders.
The issuance of Preferred Stock by the Board of Directors could adversely affect
the rights of the holders of Common Stock. For example, such issuance could
result in a class of securities outstanding that would have preferences with
respect to voting rights and dividends and in liquidation over the Common Stock,
and could (upon conversion or otherwise) enjoy all of the rights appurtenant to
Common Stock. The Board's authority to issue Preferred Stock could discourage
potential takeover attempts and could delay or prevent a change in control of
the Company through merger, tender offer, proxy contest or otherwise by making
such attempts more difficult to achieve or more costly. There are no issued and
outstanding shares of Preferred

Page 5

Stock; there are no agreements or understandings for the issuance of Preferred
Stock, and the Board of Directors has no present intention to issue Preferred
Stock.

WE DO NOT ANTICIPATE PAYING DIVIDENDS ON COMMON SHARES IN THE FORESEEABLE
FUTURE.

Since our inception we have not paid any dividends on our common stock and we do
not anticipate paying any dividends in the foreseeable future. We expect that
future earnings, if any, will be used for working capital and to finance growth.

FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.

The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or as a result of
the perception that these sales could occur. In addition, these factors could
make it more difficult for us to raise funds through future offerings of common
stock.

THERE IS A LIMITED PUBLIC TRADING MARKET FOR OUR COMMON STOCK.

Our stock is currently traded on the Nasdaq Small Cap Market under the trading
symbol "RICK". There is a limited public trading market for our common stock.
Without an active trading market, there can be no assurance of any liquidity or
resale value of our common stock, and stockholders may be required to hold
shares of our common stock for an indefinite period of time.

OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.

The trading price of our securities may fluctuate significantly. This price may
be influenced by many factors, including:

- our performance and prospects;
- the depth and liquidity of the market for our securities;
- sales by selling shareholders of shares issued or issuable in
connection with the Debenture and/or Convertible Note;
- investor perception of us and the industry in which we operate;
- changes in earnings estimates or buy/sell recommendations by analysts;
- general financial and other market conditions; and
- domestic economic conditions.

Public stock markets have experienced, and may experience, extreme price and
trading volume volatility. These broad market fluctuations may adversely affect
the market price of our securities.

Page 6

OUR MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR CURRENT OUTSTANDING
COMMON STOCK AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR SHAREHOLDERS.

As of May 11, 2006, our Directors and executive officers and their respective
affiliates collectively and beneficially owned approximately 23.6% of our
outstanding common stock, including all warrants exercisable within 60 days.
This concentration of voting control gives our Directors and executive officers
and their respective affiliates substantial influence over any matters which
require a shareholder vote, including, without limitation, the election of
Directors, even if their interests may conflict with those of other
shareholders. It could also have the effect of delaying or preventing a change
in control of or otherwise discouraging a potential acquirer from attempting to
obtain control of us. This could have a material adverse effect on the market
price of our common stock or prevent our shareholders from realizing a premium
over the then prevailing market prices for their shares of common stock.

WE ARE DEPENDENT ON KEY PERSONNEL.

Our future success is dependent, in a large part, on retaining the services of
Mr. Eric Langan, our President and Chief Executive Officer. Mr. Langan
possesses a unique and comprehensive knowledge of our industry. While Mr.
Langan has no present plans to leave or retire in the near future, his loss
could have a negative effect on our operating, marketing and financial
performance if we are unable to find an adequate replacement with similar
knowledge and experience within our industry. We maintain key-man life
insurance with respect to Mr. Langan. Although Mr. Langan is under an
employment agreement (as described herein), there can be no assurance that Mr.
Langan will continue to be employed by us. The loss of Mr. Langan could have
a negative effect on our operating, marketing, and financing performance.

CUMULATIVE VOTING IS NOT AVAILABLE TO STOCKHOLDERS.

Cumulative voting in the election of Directors is expressly denied in our
Articles of Incorporation. Accordingly, the holder or holders of a majority of
the outstanding shares of our common stock may elect all of our Directors.
Management's large percentage ownership of our outstanding common stock helps
enable them to maintain their positions as such and thus control of our business
and affairs.

OUR DIRECTORS AND OFFICERS HAVE LIMITED LIABILITY AND HAVE RIGHTS TO
INDEMNIFICATION.

Our Articles of Incorporation and Bylaws provide, as permitted by governing
Texas law, that our Directors and officers shall not be personally liable to us
or any of our stockholders for monetary damages for breach of fiduciary duty as
a Director or officer, with certain exceptions. The Articles further provide
that we will indemnify our Directors and officers against expenses and
liabilities they incur to defend, settle, or satisfy any civil litigation or
criminal action brought against them on account of their being or having been
its Directors or officers unless, in such action, they are adjudged to have
acted with gross negligence or willful misconduct.

The inclusion of these provisions in the Articles may have the effect of
reducing the likelihood of derivative litigation against Directors and officers,
and may discourage or deter stockholders or management from bringing a lawsuit
against Directors and officers for breach of their duty of

Page 7

care, even though such an action, if successful, might otherwise have benefited
us and our stockholders.

The Articles provide for the indemnification of our officers and Directors, and
the advancement to them of expenses in connection with any proceedings and
claims, to the fullest extent permitted by Texas law. The Articles include
related provisions meant to facilitate the indemnitee's receipt of such
benefits. These provisions cover, among other things: (i) specification of the
method of determining entitlement to indemnification and the selection of
independent counsel that will in some cases make such determination, (ii)
specification of certain time periods by which certain payments or
determinations must be made and actions must be taken, and (iii) the
establishment of certain presumptions in favor of an indemnitee.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, we have been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.

CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS

We are including the following cautionary statement in this Form SB-2 to make
applicable and take advantage of the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by us or on behalf of us. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements, which are other than statements
of historical facts. Certain statements in this Form SB-2 are forward-looking
statements. These statements are subject to risks and uncertainties and are
based on the beliefs and assumptions of management and information currently
available to management. The use of words such as "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "should," "likely" or similar
expressions, indicates a forward-looking statement. Such statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties are set forth below. Our
expectations, beliefs and projections are expressed in good faith and we believe
that they have a reasonable basis, including without limitation, our examination
of historical operating trends, data contained in our records and other data
available from third parties. There can be no assurance that our expectations,
beliefs or projections will result, be achieved, or be accomplished. In
addition to other factors and matters discussed elsewhere in this Form SB-2, the
following are important factors that in our view could cause material adverse
affects on our financial condition and results of operations: the risks and
uncertainties related to our future operational and financial results, the risks
and uncertainties relating to our Internet operations, competitive factors, the
timing of the openings of other clubs, the availability of acceptable financing
to fund corporate expansion efforts, our dependence on key personnel, the
ability to manage operations and the future operational strength of management,
and the laws governing the operation of adult entertainment businesses. We have
no obligation to update or revise these forward-looking statements to reflect
the occurrence of future events or circumstances.

Page 8

For a discussion of some additional factors that may cause actual results to
differ materially from those suggested by the forward-looking statements, please
read carefully the information under "Risk Factors" beginning on page 2. The
identification in this document of factors that may affect future performance
and the accuracy of forward-looking statements is meant to be illustrative and
by no means exhaustive. All forward-looking statements should be evaluated with
the understanding of their inherent uncertainty.

We operate in a very competitive and rapidly changing environment. New risks
emerge from time to time and it is not possible for our management to predict
all risks, nor can we assess the impact of all risks on our business or the
extent to which any risk, or combination of risks, may cause actual results to
differ from those contained in any forward-looking statements. All
forward-looking statements included in this prospectus are based on information
available to us on the date of the prospectus. Except to the extent required by
applicable laws or rules, we undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this prospectus.

You may rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of Common Stock
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or solicitation of an
offer to buy these securities in any circumstances under which the offer or
solicitation is unlawful.

THE BUSINESS

Our online entertainment sites are xxxPassword.com, CouplesTouch.com, and
NaughtyBids.com. The site xxxPassword.com features adult content licensed
through Voice Media, Inc. CouplesTouch.com is a personals site for those in the
swinging lifestyle. Naughtybids.com is our online adult auction site. It
contains consumer-initiated auctions for items such as adult videos, apparel,
photo sets, adult paraphernalia and other erotica. There are typically
approximately 10,000 active auctions at this site at any given time. We charge
the seller a fee for each successful auction. All of our sites use proprietary
software platforms written by us to deliver the best experience to the user
without being constrained by off-the-shelf software solutions.

Page 9

Our website address is www.ricks.com. We make available free of charge our
-------------
Annual Report on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports
on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the SEC under
Securities Exchange Act of 1934, as amended. Information contained in the
website shall not be construed as part of this prospectus.

References to us include our 100%-owned, 85%-owned and 51%-owned consolidated
subsidiaries.

BUSINESS ACTIVITIES--NIGHTCLUBS

Prior to the opening of the first Rick's Cabaret in 1983 in Houston, Texas, the
topless nightclub business was characterized by small establishments generally
managed by their owner. Operating policies of these establishments were often
lax, the sites were generally dimly lit, standards for performers' personal
appearance and personality were not maintained and it was customary for
performers to alternate between dancing and waiting tables. The quantity and
quality of bar service was low and food was not frequently offered. Music was
usually "hard" rock and roll, played at a loud level by a disc jockey. Usually,
only cash was accepted. Many businessmen felt uncomfortable in such
environments. Recognizing a void in the market for a first-class adult
nightclub, we designed Rick's Cabaret to target the more affluent customer by
providing a unique quality entertainment environment. The following summarizes
our areas of operation that distinguish us:

Female Entertainment. Our policy is to maintain high standards for both
---------------------
personal appearance and personality for the topless entertainers and
waitresses. Of equal importance is a performer's ability to present herself
attractively and to talk with customers. We prefer that the performers we
hire be experienced dancers. We make a determination as to whether a
particular applicant is suitable based on such factors of appearance,
attitude, dress, communication skills and demeanor. At all clubs, except
for our Minnesota location, the entertainers are independent contractors.
We do not schedule their work hours.

Management. We often recruit staff from inside the topless industry, as
----------
well as from large restaurant and club chains, in the belief that
management with experience in the sector adds to our ability to grow and
attract quality entertainers. Management with experience is able to train
new recruits from outside the industry.

Compliance Policies/Employees. We have a policy of ensuring that our
------------------------------
business is carried on in conformity with local, state and federal
laws. In particular, we have a "no tolerance" policy as to illegal drug use
in or around the premises. Posters placed throughout the nightclubs
reinforce this policy, as do periodic unannounced searches of the
entertainers' lockers. Entertainers and waitresses who arrive for work are
not allowed to leave the premises without the permission of management. If
an entertainer does leave the premises, she is not allowed to return to
work until the next day. We continually monitor the behavior of
entertainers, waitresses and customers to ensure that proper standards of
behavior are observed.

Page 10

Compliance Policies/Credit Cards. We review all credit card charges made
----------------------------------
by our customers. We have in place a formal policy requiring that all
credit card charges must be approved, in writing, by management before any
charges are accepted. Management is trained to review credit card charges
to ensure that the only charges approved for payment are for food, drink
and entertainment.

Food and Drink. We believe that a key to the success of our branded adult
---------------
nightclubs is a quality, first-class bar and restaurant operation to
compliment our adult entertainment. We employ service managers who recruit
and train professional waitstaff and ensure that each customer receives
prompt and courteous service. We employ chefs with restaurant experience.
Our bar managers order inventory and schedule bar staff. We believe that
the operation of a first class restaurant is a necessary component to the
operation of a premiere adult cabaret, as is the provision of premium wine,
liquor and beer in order to ensure that the customer perceives and obtains
good value. Our restaurant operations provide business lunch buffets and
full lunch and dinner menu service with hot and cold appetizers, salads,
seafood, steak, and lobster. An extensive selection of quality wines is
available.

Controls. Operational and accounting controls are essential to the
--------
successful operation of a cash intensive nightclub and bar business.
We have designed and implemented internal procedures and controls designed
to ensure the integrity of our operational and accounting records. Wherever
practicable, we separate management personnel from all cash handling so
that management is isolated from and does not handle any cash. We use a
combination of accounting and physical inventory control mechanisms to
maintain a high level of integrity in our accounting practices. Information
technology plays a significant role in capturing and analyzing a variety of
information to provide management with the information necessary to
efficiently manage and control the nightclub. Deposits of cash and credit
card receipts are reconciled each day to a daily income report. In
addition, we review on a daily basis (i) cash and credit card summaries
which tie together all cash and credit card transactions occurring at the
front door, the bars in the club and the cashier station, (ii) a summary of
the daily bartenders' check-out reports, and (iii) a daily cash
requirements analysis which reconciles the previous day's cash on hand to
the requirements for the next day's operations. These daily computer
reports alert management of any variances from expected financial results
based on historical norms. We conduct a monthly independent overview of our
financial condition and operating results.

Atmosphere. We maintain a high design standard in our facilities and
----------
decor. The furniture and furnishings in the nightclubs are designed to
create the feeling of an upscale restaurant. The sound system is designed
to provide quality sound at levels where conversations can still take
place. The environment is carefully monitored for music selection,
entertainer and waitress appearance and all aspects of customer service on
a continuous basis.

VIP Room. In keeping with our emphasis on serving the upper-end of the
---------
businessmen's market, some of our nightclubs include a VIP room, which
is open to individuals who purchase memberships. A VIP room provides a
higher level of service and luxury.

Page 11

Advertising and Promotion. Our consumer marketing strategy is to position
--------------------------
Rick's Cabarets as premiere entertainment facilities that provide
exceptional topless entertainment in a fun, yet discreet, environment. We
use a variety of highly targeted methods to reach our customers: hotel
publications, local radio, cable television, newspapers, billboards,
taxi-cab reader boards, and the Internet, as well as a variety of
promotional campaigns. These campaigns ensure that the Rick's Cabaret name
is kept before the public.

Rick's Cabaret has received a significant amount of media exposure
over the years in national magazines such as Playboy, Penthouse, Glamour
Magazine, The Ladies Home Journal, Time Magazine, and Texas Monthly
Magazine. Segments about Rick's have aired on national and local television
programs such as "Extra" and "Inside Edition", and we have provided
entertainers for Pay-Per-View features as well. Business stories about
Rick's Cabaret have appeared in The Wall Street Journal, Los Angeles Times,
Houston Business Journal, and numerous other regional publications.

NIGHTCLUB LOCATIONS

We currently operate clubs under the name "Rick's Cabaret" in Houston, Texas,
Minneapolis, Minnesota; Charlotte, North Carolina, and New York, New York. We
also operate a nightclub in Houston's Galleria District as "Club Onyx", an
upscale venue that welcomes all customers but caters especially to urban
professionals, businessmen and professional athletes. Additionally, we own four
nightclubs in San Antonio, Austin, and Houston, Texas that operate under the
name XTC. We also own and operate a sports bar called "Rick's Sports Cabaret".
We sold our New Orleans nightclub in March 1999, but it continues to use the
name "Rick's Cabaret" under a licensing agreement.

RECENT NIGHTCLUB TRANSACTIONS

1. On May 9, 2006, the Company purchased Joint Ventures, Inc., an operator of
an adult nightclub in South Houston, Texas, formerly known as Dreamers
Cabaret & Sports Bar located at 802 Houston Blvd. The purchase price was
for $840,000 paid in cash. The club, located in Houston suburbs, has been
converted to an XTC Cabaret.

2. On April 5, 2006, the Company's wholly owned subsidiary, RCI Holdings, Inc.
completed the acquisition of real property located at 9009 Airport Blvd.,
Houston, Texas where the Company currently operates Rick's Sports Cabaret
(previously Hummers Sports Bar and XTC South clubs). Pursuant to the terms
of the Agreement, the Company paid a total sales price of $1,300,000 which
consisted of $500,000 in cash and 160,000 shares of the Company's
restricted common stock. As part of the transaction, the Company has agreed
to file a registration statement for the resale of such restricted common
stock. Additionally, nine months after the filing of the Registration
Statement, the Seller shall have the right, but not the obligation, to have
the Company buy the shares at a price of $5.00 per share at a rate of no
more than 10,000 shares per month until such time as the Seller receives a
total of $800,000 from the sale of such shares. Alternatively, the
Seller shall have the option to sell such shares in the open market upon
the effectiveness of the Registration Statement. The transaction was the
result of arms-length

Page 12

negotiations between the parties.

3. On June 10, 2005, our wholly owned subsidiary, RCI Entertainment (North
Carolina), Inc., a North Carolina corporation entered into a Purchase
Agreement with Top Shelf, LLC, a North Carolina limited liability company
and Tony Hege, the holder of Top Shelf's membership interests, to purchase
all of the issued and outstanding membership interests of Top Shelf which
owned a nightclub known as "The Manhattan Club" located in Charlotte, North
Carolina. RCI North Carolina has been managing the Club under the name
"Rick's Cabaret" since February 2005.

The Purchase Agreement provides for a purchase price of $1,000,000
which is payable with 180,000 shares of our common stock (the "Shares")
valued at $3.75 per share (the "Value of the Shares") and a seven year
promissory note (the "Note") in the amount of $325,000 bearing interest at
the rate of 7% per annum. The Note is payable with an initial payment due
November 1, 2005, of interest only for the period of time from the date of
Closing until October 31, 2005, plus a principal reduction payment in the
amount of $3,009.29. Thereafter, RCI North Carolina will make eighty-three
(83) successive equal monthly payments commencing December 1, 2005, of
principal and interest in the amount of $4,905.12 until paid in full. The
Note is secured by the assets of RCI North Carolina.

The results of operations of the club are included in our consolidated
statement of operations from February 1, 2005, when we assumed risk of loss
for the club's operations under a management agreement.

4. On March 31, 2005, we entered an Stock Purchase Agreement with MBG
Acquisition, LLC, a Delaware limited liability company to sell all of the
issued and outstanding shares of RCI Entertainment (Houston), Inc., our
wholly owned subsidiary, which owned and operated an adult entertainment
cabaret known as Rick's Cabaret - South located at 15301 Gulf Freeway,
Houston, Texas. The Agreement provided for a sales price of $550,000, which
was paid in cash upon closing. We recorded a gain of $291,987.

The club's business was accounted for as discontinued operations under
accounting principles generally accepted in the United States of America
and therefore, the club's results of operations and cash flows have been
removed from the Company's consolidated results of continuing operations
and cash flows for all periods presented in this document and such assets
and liabilities as of September 30, 2004 have been netted in one line item
on the balance sheet.

5. On September 15, 2004, our wholly-owned subsidiary, RCI Entertainment (New
York), Inc., a New York corporation, entered into a definitive Stock
Purchase Agreement with Peregrine Enterprises, Inc., a New York corporation
and its shareholders, pursuant to which RCI New York agreed to purchase all
of the shares of common stock of Peregrine. Peregrine owned and operated an
adult entertainment cabaret located in midtown Manhattan. The cabaret club
is located near the Empire State Building and Madison Square Garden, and is
less than 10 blocks from Times Square. We completed this transaction on
January 18, 2005.

Page 13

Under the terms of the Stock Purchase Agreement, the purchase price of
the transaction was $7,625,000, payable $2,500,000 in cash at closing and
$5,125,000 payable in a promissory note bearing simple interest at the rate
of 4.0% per annum. The Promissory Note is payable commencing 120 days after
Closing as follows: (a) the payment of $58,333.33 per month for twenty-four
(24) consecutive months; (b) the payment of $63,333.33 for twenty-four (24)
consecutive months; (c) the payment of $68,333.33 for twelve (12)
consecutive months; and (d) a lump sum payment of the remaining balance to
be paid on the sixty-first (61st) month. $2,000,000 of the principal amount
of the Promissory Note is convertible into shares of our restricted common
stock at prices ranging from $4.00 to $7.50 per share. As of May 11, 2006,
the Holder of the Note had converted a total of $1,575,000 of the debt into
shares of our restricted common stock. The parties also entered a Stock
Pledge Agreement and Security Agreement to secure the Promissory Note.

Upon closing of the transaction, the owners of Peregrine entered into
a five-year covenant not to compete with Peregrine, RCI New York or the
Company. After an extensive renovation, we opened the club in September
2005 as "Rick's Cabaret", which occupies 10,000 square feet on three
levels, with an additional 4,000 square feet available for office space.

The results of operations of the club are included in our consolidated
statement of operations from January 18, 2005.

6. On March 3, 2004, we acquired the assets and business of a 7,000 square
foot gentlemen's club in North Houston, which became our fourth XTC
Cabaret. As a part of the transaction, we entered into a new five-year
lease with an option for five additional years. The $265,000 all-cash
purchase transaction generated goodwill of $20,000 and property and
equipment at $245,000.

The results of operations of this new venue are included in the
accompanying consolidated financial statements from the date of
acquisition.

7. In April 2003, we organized RCI Ventures, Inc. to acquire Nocturnal
Concepts, Inc., which operates as an addition to our XTC Cabaret group,
called "XTC Galleria". As part of this transaction, we transferred our
ownership of Tantric Enterprises, Inc. (our subsidiary that operates Club
Encounters) to RCI Ventures, Inc. As a result of these transactions we
owned a 51% interest in RCI Ventures, Inc. On September 30, 2004, we sold
our shares in RCI Ventures, Inc. to unrelated third parties for $15,000
cash and a $235,000 note receivable with an annual interest rate of 6% over
five years. As a part of the transaction, the Purchaser entered into a
five-year lease for Club Encounters with an option for five additional
years. We recorded a $163,739 deferred gain related to this transaction for
the year ended September 30, 2004. The gain will be recognized upon
collection of the note receivable.

Page 14

BUSINESS ACTIVITIES--INTERNET ADULT ENTERTAINMENT WEB SITES

In 1999, we began adult Internet Web site operations. Our xxxPassword.com
website features adult content licensed through Voice Media, Inc. We added
CouplesTouch.com in 2002 as a dating site catering to those in the swinging
lifestyle. We recently purchased CouplesClick.net, a competing site of our
CouplesTouch.com site, in order to broaden our membership throughout the United
States. As part of this transaction, we organized RCI Dating Services, Inc.,
which operates as an addition to our internet operations, to acquire
CouplesClick.net from ClickMatch, LLC. We transferred our ownership in
CouplesTouch.com to RCI Dating and, as a result of the transaction, we obtained
an 85% interest in RCI Dating, with the remaining 15% owned by ClickMatch.

Our Internet traffic is generated through the purchase of traffic from
third-party adult sites or Internet domain owners and the purchase of banner
advertisements or "key word" searches from Internet search engines. In
addition, the bulk of our traffic now comes from search engines on which we
don't pay for preferential listings. There are numerous adult entertainment
sites on the Internet that compete with our sites.

BUSINESS ACTIVITIES--INTERNET ADULT AUCTION WEB SITES

Our adult auction site features erotica and other adult materials that are
purchased in a bid-ask method. We charge the seller a fee for each successful
auction. Where previously we operated six individual auctions sites, now we
have combined these into one main site, NaughtyBids.com, to maximize our brand
name recognition of this site. The site contains new and used adult oriented
consumer initiated auctions for items such as adult videos, apparel, photo sets
and adult paraphernalia. NaughtyBids has approximately 10,000 items for sale at
any given time. NaughtyBids.com offers third party webmasters an opportunity to
create residual income from web surfers through the NaughtyBids Affiliate
Program, which pays third party webmasters a percentage of every closing auction
sale in which the buyer originally came from the affiliate webmaster's site.
There are numerous auction sites on the Internet that offer adult products and
erotica.

TRANSACTION WITH VOICE MEDIA

In May 2002, we purchased 700,000 shares of our own common stock from Voice
Media, Inc. for an aggregate price of $918,700 (or $795,302 adjusted for imputed
interest) that equals approximately $1.32 per share. That purchase price was
below market value on the date of the purchase. Voice Media, Inc. presently
owns none of our shares of common stock. These shares are presently held as
treasury shares. We may cancel these shares at a later date. The control person
of Voice Media, Inc. is Ron Levi, who was a Director until June 2002. The
terms of this transaction were the result of arms-length negotiations between
Voice Media, Inc. and us. We believe the transaction was favorable to us in
view of the market value of our common stock and the payment terms, although no
appraisal or fairness opinion was done. All management contracts previously
signed relating to the management of xxxPassword.com will remain in effect.
Pursuant to the transaction, the payment schedule is as follows:

Page 15

(a) The amount of $229,675 due on January 10, 2003;

(b) The amount of $229,675 due on January 10, 2004;

(d) A final payment in the amount of $229,675 due on January 10, 2006.

We have made all payments due under this transaction.

TRANSACTION WITH TAURUS ENTERTAINMENT

On June 12, 2003, we entered into an Asset Purchase Agreement with Taurus
Entertainment Companies, Inc., whereby we acquired all the assets and
liabilities of Taurus in exchange for 3,752,008 shares of Taurus out of the
4,002,008 that we owned plus $20,000 in cash. We also executed an
Indemnification and Transaction Fee Agreement with Taurus for which we received
$270,000 in cash, with $140,000 payable at closing, $60,000 due on July 15, 2003
and $70,000 due on August 15, 2003. We have received the $60,000 payment and
have restructured the remaining balance originally due August 15, 2003, with a
note receivable bearing 12% annual interest over a five year term. Taurus is
not current in its payment obligation and we have initiated steps to collect the
amount owing.

COMPETITION

The adult topless club entertainment business is highly competitive with respect
to price, service and location. All of our nightclubs compete with a number of
locally owned adult clubs, some of whose names may have name recognition that
equals that of Rick's Cabaret or XTC. While there may be restrictions on the
location of a so-called "sexually oriented business", there are no barriers to
entry into the adult cabaret entertainment market. For example, there are
approximately 50 adult nightclubs located in the Houston area, all of which are
in direct competition with our Houston cabarets. In Minneapolis, Rick's Cabaret
is favorably located downtown and is a short walk from the Metrodome Stadium and
the Target Center. There are two adult nightclubs in Minneapolis in direct
competition with us. In Charlotte, there are 5 main competitors. We are
centrally located with easy access to our location from the airport and the
sports stadium. There are approx 16 adult clubs in Manhattan of which 7 compete
with Rick's. Only one of those competitors' is located in Mid-town. Rick's
location is one block from the Empire State Building and one block from Madison
Square Garden. All the local trains have station stops with one block of Rick's
location and we are located just 9 blocks from Times Square.

The names "Rick's" and "Rick's Cabaret" and "XTC Cabaret" are proprietary. We
believe that the combination of our existing brand name recognition and the
distinctive entertainment environment that we have created will allow us to
compete effectively in the industry and within the cities where we operate.
Although we believe that we are well positioned to compete successfully, there
can be no assurance that we will be able to maintain our high level of name
recognition and prestige within the marketplace.

Page 16

We are subject to various federal, state and local laws affecting our business
activities. In particular, in Texas the authority to issue a permit to sell
alcoholic beverages is governed by the Texas Alcoholic Beverage Commission,
which has the authority, in its discretion, to issue the appropriate permits.
We presently hold a Mixed Beverage Permit and a Late Hour Permit. These Permits
are subject to annual renewal, provided we have complied with all rules and
regulations governing the permits. Renewal of a permit is subject to protest,
which may be made by a law enforcement agency or by the public. In the event of
a protest, the TABC may hold a hearing at which time the views of interested
parties are expressed. The TABC has the authority after such hearing not to
issue a renewal of the protested alcoholic beverage permit. Rick's has never
been the subject of a protest hearing against the renewal of Permits.
Minnesota, North Carolina, and New York have similar laws that may limit the
availability of a permit to sell alcoholic beverages or that may provide for
suspension or revocation of a permit to sell alcoholic beverages in certain
circumstances. It is our policy, prior to expanding into any new market, to
take steps to ensure compliance with all licensing and regulatory requirements
for the sale of alcoholic beverages as well as the sale of food.

In addition to various regulatory requirements affecting the sale of alcoholic
beverages, in Houston, and in many other cities, the location of a topless
cabaret is subject to restriction by city ordinance. Topless nightclubs in
Houston, Texas are subject to "The Sexually Oriented Business Ordinance", which
contains prohibitions on the location of an adult cabaret. The prohibitions deal
generally with distance from schools, churches, and other sexually oriented
businesses and contain restrictions based on the percentage of residences within
the immediate vicinity of the sexually oriented business. The granting of a
Sexually Oriented Business Permit is not subject to discretion; the Business
Permit must be granted if the proposed operation satisfies the requirements of
the Ordinance. (See "Legal Proceedings" herein.)

In Minneapolis, we are required to be in compliance with state and city liquor
licensing laws. Our location in Minneapolis is presently zoned to enable the
operation of a topless cabaret. We were a plaintiff in civil litigation against
the defendant City of Minneapolis. On September 16, 2003, the suit was settled
mainly on the basis that the City of Minneapolis will enact a late hour's
operation ordinance and allows qualifying liquor establishments, including us at
our current location, to operate until 3:00 a.m. We believe that, in the long
run, the restoration of late hours operation on a permanent basis is preferable
to going forward with the litigation and in our best interest.

In San Antonio and Austin, Texas, we are required to be in compliance with city
or county sexually oriented business ordinances. In New York, we are required
to be in compliance with all state and local laws governing the sale of liquor
and zoning for adult oriented businesses. We feel we are in compliance with
these laws at this time. In Charlotte we are required to be in compliance with
city or county sexually oriented business ordinances.

TRADEMARKS

Our rights to the trademarks "Rick's" and "Rick's Cabaret" are established under
common law, based upon our substantial and continuous use of these trademarks in
interstate commerce since at least as early as 1987. We have registered our
service mark, 'RICK'S AND STARS DESIGN", with the United States Patent and
Trademark Office. We have also obtained service mark registrations from the
Patent and Trademark Office for the "RICK'S CABARET" service

Page 17

mark. There can be no assurance that the steps we have taken to protect our
service marks will be adequate to deter misappropriation.

EMPLOYEES AND INDEPENDENT CONTRACTORS

As of September 30, 2005, we had approximately 443 employees, of which 64 are in
management positions, including corporate and administrative operation and
approximately 379 of which are engaged in entertainment, food and beverage
service, including bartenders, waitresses, and entertainers. None of our
employees are represented by a union and we consider our employee relations to
be good. Additionally, we have independent contractor relationships with more
than 600 entertainers, who are self-employed and perform at our locations on a
non-exclusive basis as independent contractors. Our entertainers in
Minneapolis, Minnesota act as commissioned employees.

SHARE REPURCHASES

As of May 11, 2006, we owned 908,530 treasury shares of our common stock that we
acquired in open market purchases and from investors who originally acquired the
shares from us in private transactions. At this time, we do not have any plan
to use these shares to acquire any assets.

On September 16, 2003, our board of directors authorized us to repurchase up to
$500,000 worth of our common stock. No shares have been purchased under this
program.

LEGAL PROCEEDINGS
-----------------

SEXUALLY ORIENTED BUSINESS ORDINANCE OF HOUSTON, TEXAS

In January 1997, the City Council of the City of Houston passed a comprehensive
new Ordinance regulating the location of and the conduct within Sexually
Oriented Businesses (the "Ordinance"). The Ordinance established new minimum
distances that Sexually Oriented Businesses may be located from schools,
churches, playgrounds and other sexually oriented businesses. There were no
provisions in the Ordinance exempting previously permitted sexually oriented
businesses from the effect of the new Ordinance. In 1997, we were informed that
one of our Houston locations at 3113 Bering Drive failed to meet the
requirements of the Ordinance and accordingly the renewal of our Business
License at that location was denied.

The Ordinance provided that a business which was denied a renewal of its
operating permit due to changes in distance requirements under the Ordinance
would be entitled to continue in operation for a period of time (the
"Amortization Period") if the owner were unable to recoup, by the effective date
of the Ordinance, its investment in the business that was incurred through the
date of the passage and approval of the Ordinance.

We filed a request with the City of Houston requesting an extension of time
during which operations at our north Houston facility could continue under the
Amortization Period provisions of the Ordinance since we were unable to recoup
our investment prior to the effective date of the Ordinance. An administrative
hearing was held by the City of Houston to determine the appropriate
Amortization Period to be granted to us. At the Hearing, we were granted an

Page 18

amortization period that has since been reached. We have the right to appeal
any decision of the Hearing official to the district court in the State of
Texas.

In May 1997, the City of Houston agreed to defer implementation of the Ordinance
until the constitutionality of the entire Ordinance was decided by court trial.
In February 1998, the U.S. District Court for the Southern District of Texas,
Houston Division, struck down certain provisions of the Ordinance, including the
provision mandating a 1,500 foot distance between a club and schools, churches
and other sexually oriented business, leaving intact the provision of the 750
foot distance as it existed prior to the Ordinance.

The City of Houston has appealed the District Court's rulings with the Fifth
Circuit Court of Appeals. In the event that the City of Houston is successful
in the appeal, we could be out of compliance and such an outcome could have an
adverse impact on our future. Our nightclub in our south Houston location has a
valid permit/license that will expire in December 2005. The permits for our
north Houston location and our Bering Drive location have expired.

There are other provisions in the Houston, Texas Ordinance, such as provisions
governing the level of lighting in a sexually oriented business, the distance
between a customer and dancer while the dancer is performing in a state of
undress and provisions regarding the licensing of dancers and club managers that
were upheld by the court which may be detrimental to our business. We, in
concert with other sexually oriented businesses, are appealing these aspects of
the Ordinance.

In November, 2003, a three judge panel from the Fifth Circuit Court of Appeals
published their Opinion which affirmed the Trial Court's ruling regarding
lighting levels, customer and dancer separation distances and licensing of
dancers and staff. The Court of Appeals, however, did not follow the Trial
Court's ruling regarding the distance from which a club may be located from a
church or school. The Court of Appeals held that a distance measurement of
1,500 feet would be upheld upon a showing by the City of Houston that its claims
that there were alternative sites available for relocating the clubs could be
substantiated. The case was remanded for trial on the issue of the alternative
sites.

There are other technical issues, which could additionally bear upon the
location of the clubs, which were not decided at the trial level during the
initial phase of the case. It is anticipated that these technical issues will
be joined in the Trial Court. The City has not sought to modify any of the
terms of the injunction against enforcement of any location provision of the
Ordinance.

The appeals process as it relates to the Court's rulings in 1998 has been
exhausted. The Trial Court has entered a new scheduling order which places
trial on the remaining issues for June 2006. Under the holding of the Fifth
Circuit Court of Appeals, the City of Houston has the burden of proof to show
that, under the distance measurements contained in the 1997 ordinance, there are
over 2,000 alternate sites available for relocation. If the City of Houston can
meet this initial burden, then the Trial Court will consider the remaining
location issues which were not decided during the initial summary phase of the
case. In the event the City of Houston can meet its burden and the Trial Court
moves forward with the case, an appeal is anticipated. A ruling on the
remaining issues in favor of the City of Houston could have an adverse impact on
the Rick's locations in Houston, Texas.

Page 19

OTHER LEGAL MATTERS

On May 2, 2003, a lawsuit was filed in the United States District Court for the
Western District of Texas, San Antonio division, on behalf of XTC Cabaret, and
others, as a result of the City of San Antonio having adopted a new ordinance,
which, among other things, banned nude dancing. This suit asked the Court to
declare the ordinance unconstitutional and enjoin the City from enforcing it.
Prior to a resolution of this litigation, XTC Cabaret withdrew as a party to the
lawsuit. Although a settlement was reached with the remaining parties in June
2005, it did not include nude dancing. XTC has elected to address the
constitutionality of the ordinance by appealing any conviction obtained by the
City through the state courts.

On April 7, 2004, a lawsuit was filed in the 80th Judicial District Court of
Harris County, Texas, styled Cause No. 2004-18510, Charity Renee Stevens, et al.
vs. Lazaro Ernesto Alfonso, et al. This is a wrongful death and personal
injury action against two individuals based on negligence theories and five
entertainment establishments including Rick's based on alleged "dram shop"
violations arising from a two-car collision. Plaintiffs have also sued Ford
Motor Company under a theory of products liability. Plaintiffs include the
children of the decedents, a minor passenger and the mothers of the decedents.
Plaintiffs are seeking unspecified damages including physical pain and
suffering, mental anguish, pecuniary loss, past and future loss of companionship
and consortium, loss of mental and intellectual function, past and future
physical impairment, reduction in earning capacity, increased education costs
and expenses including funeral and medical costs.

Management believes that we are not liable for any of the damages and that we
are covered by the safe harbor provisions of the Dram Shop Act, which render
certain compliant establishments not liable for the acts of their patrons. We
are not aware of any insurance coverage for this claim. We deny that we have
any liability for the accident and are vigorously defending the matter.
Discovery is ongoing and we have filed a Motion for Summary Judgment on behalf
of Rick's which is currently pending.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------

The following discussion should be read in conjunction with our audited
consolidated financial statements and the related notes to the financial
statements included in this registration statement.

FORWARD LOOKING STATEMENT AND INFORMATION

We are including the following cautionary statement in this Form SB-2
registration statement to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statements made by us or on behalf of us. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements,
which are other than statements of historical facts. Certain statements in this
prospectus are forward-looking statements. Words such as "expects," "believes,"
"anticipates," "may," and "estimates" and similar expressions are intended to
identify forward-looking statements. Such statements are

Page 20

subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties are set forth
below. Our expectations, beliefs and projections are expressed in good faith
and we believe that they have a reasonable basis, including without limitation,
our examination of historical operating trends, data contained in our records
and other data available from third parties. There can be no assurance that our
expectations, beliefs or projections will result, be achieved, or be
accomplished. In addition to other factors and matters discussed elsewhere in
this prospectus, the following are important factors that in our view could
cause material adverse affects on our financial condition and results of
operations: the risks and uncertainties related to our future operational and
financial results, the risks and uncertainties relating to our Internet
operations, competitive factors, the timing of the openings of other clubs, the
availability of acceptable financing to fund corporate expansion efforts, our
dependence on key personnel, the ability to manage operations and the future
operational strength of management, and the laws governing the operation of
adult entertainment businesses. We have no obligation to update or revise these
forward-looking statements to reflect the occurrence of future events or
circumstances.

GENERAL

We operate in two businesses in the adult entertainment industry:

1. We own and operate upscale adult nightclubs serving primarily businessmen
and professionals. Our nightclubs offer live adult entertainment,
restaurant and bar operations. We own and operate eight adult nightclubs
under the name "Rick's Cabaret" and "XTC" in Houston, Austin and San
Antonio, Texas, Charlotte, North Carolina, Minneapolis, Minnesota, and New
York, New York. We also own and operate a sports bar called "Rick's Sports
Cabaret" and an upscale venue that caters especially to urban
professionals, businessmen and professional athletes called "Club Onyx" in
Houston. No sexual contact is permitted at any of our locations.

2. We have extensive Internet activities.

a) We currently own two adult Internet membership Web sites at
www.CoupleTouch.com and www.xxxpassword.com. We acquire
xxxpassword.com site content from wholesalers.

b) We operate an online auction site www.NaughtyBids.com. This site
provides our customers with the opportunity to purchase adult products
and services in an auction format. We earn revenues by charging fees
for each transaction conducted on the automated site.

Our nightclub revenues are derived from the sale of liquor, beer, wine, food,
merchandise, cover charges, membership fees, independent contractors' fees,
commissions from vending and ATM machines, valet parking and other products and
services. Our Internet revenues are derived from subscriptions to adult content
Internet websites, traffic/referral revenues, and commissions earned on the sale
of products and services through Internet auction sites, and other activities.
Our fiscal year end is September 30.

Page 21

Beginning in fiscal 2002 and continuing through fiscal 2005, we greatly reduced
our usage of promotional pricing for membership fees for our adult entertainment
web sites. This reduced our revenues from these web sites.

We performed our annual evaluation on goodwill impairment as of September 30,
2005. No impairment losses were identified as a result of this evaluation.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts in the financial
statements and accompanying notes. Estimates and assumptions are based on
historical experience, forecasted future events and various other assumptions
that we believe to be reasonable under the circumstances. Estimates and
assumptions may vary under different assumptions or conditions. We evaluate our
estimates and assumptions on an ongoing basis. We believe the accounting
policies below are critical in the portrayal of our financial condition and
results of operations.

Accounts and Notes Receivable

Accounts receivable trade is primarily comprised of credit card charges, which
are generally converted to cash in two to five days after a purchase is made.
The Company's accounts receivable other is comprised of employee advances and
other miscellaneous receivables. The long-term portion of notes receivable are
included in other assets in the accompanying consolidated balance sheets. The
Company recognizes interest income on notes receivable based on the terms of the
agreement and based upon management's evaluation that the notes receivable and
interest income will be collected. The Company recognizes allowances for
doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected. There is no
allowance for doubtful accounts or notes receivable as of September 30, 2005 and
2004.

Inventories

Inventories include alcoholic beverages, food, and Company merchandise.
Inventories are carried at the lower of cost, average cost, which approximates
actual cost determined on a first-in, first-out ("FIFO") basis, or market.

Marketable Securities

Marketable securities at September 30, 2005 and 2004 consist of common stock.
As of September 30, 2005 and 2004, the Company's marketable securities were
classified as available-for-sale, which are carried at fair value, with
unrealized gains and losses reported as other comprehensive income within the
stockholders' equity section of the accompanying consolidated balance sheets.
The cost of marketable equity securities sold is determined on a specific
identification basis. The fair value of marketable equity securities is based
on quoted market prices.

Page 22

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets for financial
reporting purposes. Buildings have estimated useful lives ranging from 31 to 40
years. Furniture, equipment and leasehold improvements have estimated useful
lives between five and ten years. Expenditures for major renewals and
betterments that extend the useful lives are capitalized. Expenditures for
normal maintenance and repairs are expensed as incurred. The cost of assets
sold or abandoned and the related accumulated depreciation are eliminated from
the accounts and any gains or losses are charged or credited in the accompanying
statement of operations of the respective period.

Goodwill and Intangible Assets

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles
Assets, which addresses the accounting for goodwill and other intangible assets.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized, but reviewed on an annual basis for impairment. The Company
adopted SFAS effective October 1, 2001. The Company's annual evaluation was
performed as of September 30, 2005. No impairment losses were identified as a
result of this evaluation. All of the Company's goodwill and intangible assets
relate to the nightclub segment. Definite lived intangible assets are amortized
on a straight-line basis over their estimated lives. Fully amortized assets are
written off against accumulated amortization.

Revenue Recognition

Except for VIP Memberships, we recognize revenue at the point-of-sale upon
receipt of cash, check, or credit card charge. Membership revenue is deferred
and recognized over the estimated membership usage period, which is estimated to
be 12 and 24 months for annual and lifetime memberships, respectively. We
recognize Internet revenue from monthly subscriptions to its online
entertainment sites when notification of a new subscription is received from the
third party hosting company or from the credit card company, usually two to
three days after the transaction has occurred. We recognize Internet auction
revenue when payment is received from the credit card as revenues are not deemed
estimable nor collection deemed probable prior to that point.

Advertising and Marketing

Advertising and marketing expenses is primarily comprised of costs related to
public advertisements and giveaways, which are used for promotional purposes.
Advertising and marketing expenses are expensed as incurred and are included in
operating expenses.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change

Page 23

in tax rates is recognized in income in the period that includes the enactment
date. In addition, a valuation allowance is established to reduce any deferred
tax asset for which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized.

Stock Options

At September 30, 2005, the Company has stock options outstanding. The Company
accounts for its stock options under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.

The following presents pro forma net income and per share data as if a fair
value accounting method had been used to account for stock-based compensation:

YEAR ENDED SEPTEMBER 30,
2005 2004
------------ ---------------

Net income (loss), as reported $ (215,148) $ 775,253
Less total stock-based employee compensation
expense determined under the fair value
based method for all awards (549,165) (216,616)
------------ ---------------
Pro forma net income (loss) $ (764,313) $ 558,637
============ ===============
Earnings (loss) per share:
Basic and diluted - as reported $ (0.05) $ 0.21
============ ===============

Basic and diluted - pro forma $ (0.19) $ 0.15
============ ===============

Common Stock

In January 2005, 20,000 stock options were exercised by the Company's employees
and directors for $39,625. In March 2005, the Company issued 150,000 shares of
common stock to an unrelated investor and received proceeds of $375,000, 12,000
shares of restricted common stock were issued at a value of $2.26 per share
pursuant to a consulting agreement, and 25,000 stock options were exercised by
the Company's employees for $60,025. On June 10, 2005, the Company issued
180,000 shares of common stock pursuant to the purchase of a club in Charlotte,
North Carolina. See Note N. In July 2005, we sold 200,000 shares of our common
stock in a private transaction to 13 persons at $2.00 per share for a total
consideration of $400,000. In August and September 2005, 25,000 stock options
were exercised by the Company's employees and directors for $54,113.

Impact of Recently Issued Accounting Standards

In December 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation 46R ("FIN 46R"), a revision to interpretation 46 ("FIN 46"),
Consolidation of Variable Interest

Page 24

Entities. FIN 46R clarifies some of the provisions of FIN 46 and exempts
certain entities from its requirements. FIN 46R was effective at the end of the
first interim period ending after March 15, 2004. The adoption of FIN 46 and
FIN 46R did not have a material impact on the Company's consolidated financial
statements.

In December 2004, the FASB issued SFAS 123R, Share-Based Payment, which is a
revision of SFAS 123, Accounting for Stock-Based Compensation, and supersedes
APB Opinion 25, Accounting for Stock Issued to Employees. SFAS 123R focuses
primarily on share-based payments for employee services, requiring these
payments to be recorded using a fair-value-based method. The use of APB 25's
intrinsic value method of accounting for employee stock options has been
eliminated. As a result, the fair value of stock options granted to employees in
the future will be required to be expensed. The impact on the results of
operations of the Company will be dependent on the number of options granted and
the fair value of those options. For the Company, SFAS 123R will be effective
beginning October 1, 2006.

RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005 AS COMPARED
TO THE FISCAL YEAR ENDED SEPTEMBER 30, 2004

For the fiscal year ended September 30, 2005, we had consolidated total revenues
of $14,824,407, compared to consolidated total revenues of $13,858,434 for the
year ended September 30, 2004. The consolidated total revenues for period
ending September 30, 2004 did not include revenues from discontinued operations
in the amount of $2,101,250. This was an increase of $965,973 or 6.97%. The
increase in total revenues was primarily due to revenues from our new nightclubs
operations. Revenues from nightclub operations for same-location same-period
decreased by 0.74% and for Internet businesses by 0.98%.

Our loss from continuing operations before minority interest for the year ended
September 30, 2005 was $368,313 compared to income of $1,129,079 for the year
ended September 30, 2004. The decrease in income from continuing operations was
primarily due to the increase in expenses related to opening new operations.
Our net income from continuing operations for nightclub operations was
$1,723,491 for the year ended September 30, 2005 compared with $2,684,552 for
the year ended September 30, 2004. Our net income from operations for our
Internet businesses was $114,500 for the year ended September 30, 2005 compared
with $88,958 for the year ended September 30, 2004. Our income from continuing
operations for our nightclub operations for the same-location-same-period
increased by 3.78%. Our net income for our Internet operations for the
same-web-site-same-period increased by 28.71%.

Our cost of goods sold for the year ended September 30, 2005 was 12.58% of total
revenues compared to 11.72 % of related revenues for the year ended September
30, 2004. The increase was due primarily to the addition of Rick's clubs, which
have higher cost of goods sold. Our cost of goods sold for the nightclub
operations for the year ended September 30, 2005 was 12.88% of our total
revenues from club operations compared to 11.86% for the year ended September
30, 2004. We continued our efforts to achieve reductions in cost of goods sold
of the club operations through improved inventory management. We are continuing
a program to improve margins from liquor and food sales and food service
efficiency. Our cost of sales from our Internet operations for the year ended
September 30, 2005 was 7.55% compared to 8.77% of

Page 25

related revenues for the year ended September 30, 2004. We have implemented
measures to reduce expenses in our Internet operations.

Our payroll and related costs for the year ended September 30, 2005 were
$5,200,976 compared to $4,803,515 for the year ended September 30, 2004. The
increase was primarily due to the increase in payroll in opening new clubs. Our
payroll for our nightclub operations for same-location-same-period decreased by
4.86%. Our payroll for same-site-same-period Internet operations decreased by
1.67%. We believe that our labor and management staff levels are at appropriate
levels.

Our other general and administrative expenses for the year ended September 30,
2005 were $7,458,721 compared to $6,036,401 for the year ended September 30,
2004. The increase was primarily due to the increase in taxes & permit, rent,
legal & professional, utilities, and advertising & marketing expenses from
opening new locations. Other selling, general and administrative expenses for
same-location-same-period for the nightclub operations decreased by 13.69%,
while the same expenses for same-site same-period for Internet operations
increased by 2.01%.

Our interest expense for the year ended September 30, 2005 was $699,678 compared
to $324,411 for the year ended September 30, 2004. The increase was primarily
due to the increase in debt in relation to the purchase and renovation of New
York club. We have increased our long term debt to $13,246,836 as of September
30, 2005 compared to debt of $3,693,560 as of September 30, 2004.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2005, we had a deficit in working capital of $2,047,725
compared to working capital of $558,797 as of September 30, 2004. Because of
the large volume of cash we handle, stringent cash controls have been
implemented. At September 30, 2005, our cash and cash equivalents were $480,330
compared to $275,243 at September 30, 2004. The increase was primarily due to
the additional debt.

Our depreciation for the year ended September 30, 2005 was $573,706 compared to
$479,791 for the year ended September 30, 2004. Our amortization for the year
ended September 30, 2005 was $16,760 compared to no amortization for the period
ended September 30, 2004.

Net cash provided by operating activities in the year ended September 30, 2005
was $2,090,030 compared to $736,308 for the year ended September 30, 2004. The
increase in cash provided by operating activities was primarily due to the
increase in accounts payable and accrued expenses and decreases in prepaid
expenses and other current assets.

We used $6,307,508 of cash in investing activities for the year ended September
30, 2005 compared to $867,206 for the year ended September 30, 2004. $4,801,197
of cash was provided in financing activities for the year ended in September 30,
2005 compared to $153,749 used for the year ended September 30, 2004.

Page 26

Historically, our need for capital was a result of construction or acquisition
of new clubs, renovation of older clubs, and investments in technology.
Historically, we have also utilized capital to repurchase its common stock as
part of our share repurchase program.

On September 16, 2003, the Company was authorized by its board of directors to
repurchase up to an additional $500,000 worth of our common stock. No shares
have been purchased under this plan.

On November 15 and 17, 2004, we borrowed $590,000 and $1,042,000, respectively,
from a financial institution at an annual interest rate of 10% over a 10 year
term. The monthly payments of principal and interest are $5,694 and $10,056,
respectively. The note is secured by our properties located at 2023 Sable Lane,
San Antonio and at 410 N. Sam Houston Pkwy. E., Houston, Texas. On November 30,
2004, we borrowed $900,000 from an unrelated individual at the rate of 11% per
annum for a 10 year term. The monthly payment of principal and interest is
$9,290. The note is secured by our properties located at 3501 Andtree, Austin
and at 5718 Fairdale, Houston, Texas. On December 30, 2004, we borrowed
$1,270,000 from a financial institution at an annual interest rate of 10% over a
10 year term. The monthly payment of principal and interest is $12,256. The note
is secured by our property located at 3113 Bering Drive, Houston, Texas. The
money received from this financing was used for the acquisition and renovation
of the New York club.

We entered into a promissory note on January 18, 2005, for $5,125,000 bearing
simple interest at the rate of 4.0% per annum with a balloon payment at the end
of five years, part of which is convertible to restricted shares of our common
stock at prices ranging from $4.00 to $7.50 per share.

On June 10, 2005, we entered into a promissory note for $325,000 bearing
interest at a rate of 7% per annum for a seven year term. The note is secured
by liens upon the assets of and hereafter acquired assets of RCI
Entertainment (North Carolina), Inc.

On June 17, 2005, the Company borrowed $160,000 from a shareholder and $100,000
from an unrelated individual at an annual interest rate of 12% and 11% over 3
and 10 year terms, respectively.

On July 22, 2005, we entered into a secured convertible debenture with one of
our shareholders for a principal sum of $660,000, which includes the loan on
June 17, 2005, in the amount of $160,000. The term is for three years and the
interest rate is 12% per annum. The debenture matures on August 1, 2008. The
Company also issued 50,000 warrants at $3.00 per share in relation to this
debenture. The debenture is secured by our ownership in Citation Land, LLC and
RCI Holdings, Inc., both of which are wholly owned subsidiaries.

In July 2005, we received additional borrowings in the amount of $100,000 from
the same unrelated individual who advanced $100,000 in June 2005, and with whom
we had two existing notes. The term is for 10 years and the interest rate is 11%
per annum. On August 15, 2005, the notes were amended and the amounts from June
and July ($200,000) were included in one of the notes, for a combined total of
$1,341,520.34 payable to this individual.

Page 27

In our opinion, working capital is not a true indicator of our financial status.
Typically, businesses in our industry carry current liabilities in excess of
current assets because businesses in our industry receive substantially
immediate payment for sales, with nominal receivables, while inventories and
other current liabilities normally carry longer payment terms. Vendors and
purveyors often remain flexible with payment terms, providing businesses in our
industry with opportunities to adjust to short-term business down turns. We
consider the primary indicators of financial status to be the long-term trend of
revenue growth, the mix of sales revenues, overall cash flow, and profitability
from operations and the level of long-term debt.

We have not established lines of credit or financing other than the above
mentioned notes payable and our existing debt. There can be no assurance that
we will be able to obtain additional financing on reasonable terms in the
future, if at all, should the need arise.

We believe that the adult entertainment industry standard of treating
entertainers as independent contractors provides us with safe harbor protection
to preclude payroll tax assessment for prior years. We have prepared plans that
we believe will protect our profitability in the event that sexually oriented
business industry is required in all states to convert dancers who are now
independent contractors into employees.

The sexually oriented business industry is highly competitive with respect to
price, service and location, as well as the professionalism of the
entertainment. Although we believe that we are well-positioned to compete
successfully in the future, there can be no assurance that we will be able to
maintain our high level of name recognition and prestige within the marketplace.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2006 AS COMPARED TO THE
SIX MONTHS ENDED MARCH 31, 2005

For the six months ended March 31, 2006, we had consolidated total revenues of
$11,899,253 compared to consolidated total revenues of $6,775,600 for the six
months ended March 31, 2005, an increase of $5,123,653 or 75.62%. The increase
in total revenues was primarily attributable to the increase in revenues
generated by our new clubs in Charlotte, North Carolina, and New York, New York,
in the amount of $3,264,866; by the increase in revenues generated by our
existing clubs in the amount of $1,811,791, a 28.81% increase; and by the
increase in internet operations in the amount of $46,996, a 12.77% increase from
a year ago. Our club operations in Houston benefited from the NBA All-Star
weekend. Total revenues for same-location-same-period of club operations
increased to $8,788,016 for the six months ended March 31, 2006 from $5,945,885
for same period ended March 31, 2005. The increase was primarily attributable
to the overall increase in revenues in our club operations.

The cost of goods sold for the six months ended March 31, 2006 was 12.22% of
total revenues compared to 12.48% for the six months ended March 31, 2005. The
decrease was due primarily to the reduction of cost of goods sold in alcoholic
beverages and food at Rick's clubs and reduction in costs of maintaining our
internet operations. The cost of goods sold for the club operations for the six
months ended March 31, 2006 was 12.51% compared to 12.93% for the three months
ended March 31, 2005. We continue a program to improve margins from liquor and
food sales and food service efficiency. The cost of goods sold from our
internet operations for the six months ended March 31, 2006 was 4.32% compared
to 4.68% for the six months

Page 28

ended March 31, 2005. The cost of goods sold for same-location-same-period of
club operations for the six months ended March 31, 2006 was 13.39%, compared to
13.03% for the same period ended March 31, 2005.

Payroll and related costs for the six months ended March 31, 2006 were
$3,348,524 compared to $2,411,544 for the six months ended March 31, 2005.
Payroll for same-location-same-period of club operations increased to $2,185,588
for the six months ended March 31, 2006 from $1,710,976 for the same period
ended March 31, 2005. The increase was primarily due to an increase in
entertainers payroll in our club in Minnesota and the addition of new clubs.
Management currently believes that its labor and management staff levels are
appropriate.

Other general and administrative expenses for the six months ended March 31,
2006 were $5,348,545 compared to $3,362,868 for the six months ended March 31,
2005. The increase was due primarily to increase in taxes and permits, credit
card fees, rent, advertising and marketing, indirect operating expenses,
insurance, and utilities from adding new locations in New York, New York and
Charlotte, North Carolina.

Interest expense for the six months ended March 31, 2006 was $534,521 compared
to $256,949 for the six months ended March 31, 2005. The increase was
attributable to our obtaining new debt to finance the purchase and renovation of
the club in New York. As of March 31, 2006, the balance of long-term debt was
$12,599,743 compared to $12,558,047 a year earlier.

Net income for the six months ended March 31, 2006 was $1,231,526 compared to
$55,594 for the six months ended March 31, 2005. The increase in net income was
primarily due to increase in overall revenues in our existing clubs. Net income
for same-location-same-period of club operations increased to $2,132,747 for the
six months ended March 31, 2006 from $1,136,087 for same period ended March 31,
2005, or by 87.73%. Management currently believes that the Company is in the
position to continue to be profitable by the end of fiscal 2006, but there are
no guarantees with the uncertainties of our new clubs.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2006, we had a working capital of $217,899 compared to a deficit of
$2,047,725 at September 30, 2005. The increase in working capital was primarily
due to increases in cash and cash equivalents and prepaid expenses, other
current assets, and by decreases in accounts payable, accrued liabilities,
current portion of long term debt, and line of credit as a result of increased
cash flow from operations. The value of available-for-sale marketable
securities increased by $22,245.

Including cash provided by discontinued operations, net cash provided by
operating activities in the six months ended March 31, 2006 was $1,021,885
compared to $1,226,299 for the six months ended March 31, 2005. The decrease in
cash provided by operating activities was primarily due to the disposition of
discontinued operations.

Including cash used by discontinued operations, we used $268,275 of cash in
investing activities during the six months ended March 31, 2006 compared to
$3,501,223 during the six months ended March 31, 2005. Including cash used by
discontinued operations, cash of $239,246 was

Page 29

provided by financing activities during the six months ended March 31, 2006
compared to $3,611,588 during the six months ended March 31, 2005.

Historically, our need for capital was a result of construction or acquisition
of new clubs, renovation of older clubs, and investments in technology.
Historically, we have also utilized capital to repurchase our common stock as
part of our share repurchase program.

On February 6, 2006, we issued an unsecured Convertible Debenture (the
"Debenture") to an unrelated investment group for the principal sum of
$1,000,950 bearing interest at the rate of 10% per annum, with a maturity date
of February 1, 2009. Under the terms of the Debenture, we are required to make
three quarterly interest payments beginning May 1, 2006. Thereafter, we are
required to make nine equal quarterly principal and interest payments. At any
time after 366 days from the date of issuance of this Debenture, we have the
right to redeem the Debenture in whole or in part at any time during the term of
the Debenture. At the election of the Holder, the Holder has the right at any
time to convert all or any portion of the principal or interest amount of the
Debenture into shares of our common stock at a rate of $4.75 per share, which
approximates the closing price of the Company's stock on February 6, 2006. The
proceeds of the Debenture was used to payoff certain debt and increase our
working capital.

On April 28, 2006, the Company entered into convertible debentures with three
shareholders for a principal sum of $825,000. The term is for two years and the
interest rate is 12% per annum. At the election of the holders, the holders
have the right at any time to convert all or any portion of the principal or
interest amount of the debenture into shares of our common stock at a rate of
$6.55 per share. The debenture provides, absent shareholder approval, that the
number of shares of our common stock that may be issued by us or acquired by the
holders upon conversion of the debenture shall not exceed 19.99% of the total
number of issued and outstanding shares of our common stock. The proceeds were
partially used to fund the purchase of Joint Ventures, Inc., an operator of an
adult nightclub in South Houston, Texas, formerly known as Dreamers Cabaret &
Sports Bar located at 802 Houston Blvd. The purchase price was for $840,000
paid in cash. The club, located in the Houston suburbs, has been converted to
an XTC Cabaret.

In the opinion of management, working capital is not a true indicator of the
financial status. Typically, businesses in the industry carry current
liabilities in excess of current assets because the business receives
substantially immediate payment for sales, with nominal receivables, while
accounts payable and other current liabilities normally carry longer payment
terms. Vendors and purveyors often remain flexible with payment terms providing
businesses with opportunities to adjust to short-term business down turns. The
Company considers the primary indicators of financial status to be the long-term
trend of revenue growth and mix of sales revenues, overall cash flow,
profitability from operations and the level of long-term debt.

We have available a $100,000 unsecured line-of-credit with a bank other than our
existing debt. Interest is payable monthly on the outstanding balance at a
floating rate of prime plus 1.5%. This arrangement is subject to renewal in
June 2006. There was no outstanding balance under this agreement at March 31,
2006. However, there can be no assurance that we will be able to obtain
additional financing on reasonable terms in the future, if at all, should the
need arise.

In the event the sexually oriented business industry is required in all states
to convert the entertainers who perform at our locations, from being independent
contractors to employee

Page 30

status, we have prepared alternative plans that we believe will protect our
profitability. We believe that the industry standard of treating the
entertainers as independent contractors provides sufficient safe harbor
protection to preclude payroll tax assessment for prior years.

The sexually oriented business industry is highly competitive with respect to
price, service and location, as well as the professionalism of the
entertainment. Although management believes that we are well-positioned to
compete successfully in the future, there can be no assurance that we will be
able to maintain its high level of name recognition and prestige within the
marketplace.

SEASONALITY

Our nightclub operations are affected by seasonal factors. Historically, we
have experienced reduced revenues from April through September with the
strongest operating results occurring during October through March. Our
experience to date indicates that there does not appear to be a seasonal
fluctuation in our Internet activities.

GROWTH STRATEGY

We believe that our club operations can continue to grow organically and through
careful entry into markets and demographic segments with high growth potential.
Upon careful market research, we may open new clubs. As is the case with the
acquisition of the New York and North Carolina clubs, we may acquire existing
clubs in locations that are consistent with our growth and income targets, and
which appear receptive to the upscale club formula we have developed. We may
form joint ventures or partnerships to reduce start-up and operating costs, with
our Company contributing assets in the form of our brand name and management
expertise. We may also develop new club concepts that are consistent with our
management and marketing skills. We may also acquire real estate in connection
with club operations, although some clubs may be on leased premises.

We also expect to continue to grow our Internet profit centers and plan to focus
in the future on high-margin activities that leverage our marketing skills while
requiring a low level of start-up expense and ongoing operating costs.

MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
---------------------------

MARKET INFORMATION

Our common stock is quoted on the NASDAQ SmallCap Market under the symbol "RICK"
The following table sets forth the quarterly high and low closing price per
share for our common stock. Our fiscal year ends September 30.

Page 31

HIGH LOW
----- -----

First Quarter 2004 $1.84 $1.50
Second Quarter 2004 $2.84 $1.74
Third Quarter 2004 $3.30 $2.40
Fourth Quarter 2004 $2.79 $2.21
First Quarter 2005 $3.03 $2.20
Second Quarter 2005 $4.61 $2.85
Third Quarter 2005 $3.19 $2.65
Fourth Quarter 2005 $3.55 $2.70
First Quarter 2006 $3.84 $2.93
Second Quarter 2006 $5.99 $3.77

On May 11, 2006, the closing price for a share of our common stock was $7.33.

RECORD HOLDERS.

As of May 11, 2006, there were approximately 2,300 holders of record of our
common stock.

DIVIDENDS

We have never declared or paid any dividends on our common stock. We do not
have any plans to pay cash dividends on our common stock. We plan to retain our
future earnings, if any, to finance operations and expand our business. The
decision whether to pay cash dividends on our common stock will be made by our
Board of Directors, in its discretion, and will depend on our financial
condition, operating results, capital requirements and other factors that our
Board of Directors considers relevant.

CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------

We have had no changes in or disagreements with accountants on accounting
and financial disclosure.

USE OF PROCEEDS
---------------

We are not selling any shares of our Common Stock in this offering and therefore
will not receive any proceeds from the sale thereof. We may, however, receive
the benefit of proceeds upon the conversion of the Debenture and/or the
Convertible Note held by certain selling stockholders for which we are
registering the underlying shares of Common Stock. Upon conversion of any
portion of the Debenture and/or the Convertible Note, we will apply the proceeds
received directly to the debt for which the Debenture and/or Convertible Note
was issued and the principal amount(s) of the Note and/or the Debenture will be
reduced accordingly. Additionally, we may receive proceeds of approximately
$300,000 upon the exercise of warrants, which we would apply toward general
operating expenses.

Page 32

The selling shareholders will pay any underwriting discounts and commissions and
expenses incurred by the selling shareholders for brokerage, accounting, tax or
legal services or any other expenses incurred by the selling shareholders in
disposing of the shares. We will bear all other costs, fees and expenses
incurred in effecting the registration of the shares covered by this prospectus,
including, without limitation, all registration and filing fees, Nasdaq Small
Cap Market listing fees, blue sky registration and filing fees, and fees and
expenses of our counsel and our accountants.

DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
-----------------------------

DIRECTORS AND EXECUTIVE OFFICERS

Our Directors are elected annually and hold office until the next annual meeting
of our stockholders or until their successors are elected and qualified.
Officers are elected annually and serve at the discretion of the Board of
Directors. There is no family relationship between or among any of our
directors and executive officers. Our Board of Directors consists of five
persons. The following table sets forth our Directors and executive officers:

Name Age Position
----------------------------------------------------------------------------------

Eric S. Langan 38 Director, Chairman, Chief Executive Officer, President and
Chief Financial Officer
Travis Reese 36 Director and V.P.-Director of Technology
Robert L. Watters 55 Director
Alan Bergstrom 60 Director
Steven Jenkins 48 Director

Eric S. Langan has been a Director since 1998 and our President since March
1999. Mr. Langan is also our Chief Financial Officer. He has been involved in
the adult entertainment business since 1989. From January 1997 through the
present, he has held the position of President of XTC Cabaret, Inc. From
November 1992 until January 1997, Mr. Langan was the President of Bathing
Beauties, Inc. Since 1989, Mr. Langan has exercised managerial control over more
than a dozen adult entertainment businesses. Through these activities, Mr.
Langan has acquired the knowledge and skills necessary to successfully operate
adult entertainment businesses.

Robert L. Watters is our founder and has been our Director since 1986. Mr.
Watters was our President and our Chief Executive Officer from 1991 until March
1999. Since 1999, Mr. Watters has owned and operated Rick's Cabaret, and adult
entertainment club in New Orleans, Louisiana, which licenses our name. He was
also a founder in 1989 and operator until 1993 of the Colorado Bar & Grill, an
adult club located in Houston, Texas and in 1988 performed site selection,
negotiated the property purchase and oversaw the design and permitting for the
club that became the Cabaret Royale, in Dallas, Texas. Mr. Watters practiced law
as a solicitor in London, England and is qualified to practice law in New York.
Mr. Watters worked in the international

Page 33

tax group of the accounting firm of Touche, Ross & Co. (now succeeded by
Deloitte & Touche) from 1979 to 1983 and was engaged in the private practice of
law in Houston, Texas from 1983 to 1986, when he became involved in our
full-time management. Mr. Watters graduated from the London School of Economics
and Political Science, University of London, in 1973 with a Bachelor of Laws
(Honours) degree and in 1975 with a Master of Laws degree from Osgoode Hall Law
School, York University.

Steven L. Jenkins has been a Director since June 2001. Since 1988, Mr. Jenkins
has been a certified public accountant with Pringle Jenkins & Associates, P.C.,
located in Houston, Texas. Mr. Jenkins is the President and owner of Pringle
Jenkins & Associates, P.C. Mr. Jenkins has a BBA Degree (1979) from Texas A&M
University. Mr. Jenkins is a member of the AICPA and the TSCPA.

Alan Bergstrom became our Director in 1999. Since 1997, Mr. Bergstrom has been
the Chief Operating Officer of Eagle Securities, which is an investment
consulting firm. Mr. Bergstrom is also a registered stockbroker with Rhodes
Securities, Inc. From 1991 until 1997, Mr. Bergstrom was a Vice
President--Investments with Principal Financial Securities, Inc. Mr. Bergstrom
holds a B.B.A. Degree in Finance, 1967, from the University of Texas.

Travis Reese became our Director and V.P.-Director of Technology in 1999. From
1997 through 1999, Mr. Reese had been a senior network administrator at St.
Vincent's Hospital in Santa Fe, New Mexico. During 1997, Mr. Reese was a
computer systems engineer with Deloitte & Touche. From 1995 until 1997, Mr.
Reese was Vice President with Digital Publishing Resources, Inc., an Internet
service provider. From 1994 until 1995, Mr. Reese was a pilot with Continental
Airlines. From 1992 until 1994, Mr. Reese was a pilot with Hang On, Inc., an
airline company. Mr. Reese has an Associates Degree in Aeronautical Science from
Texas State Technical College.

There is no family relationship between or among any of our directors and
executive officers.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has a Compensation Committee whose members are Robert Watters, Alan
Bergstrom and Steven L. Jenkins. Decisions concerning executive officer
compensation for the fiscal year ended September 30, 2005, were made by the
Compensation Committee. The primary purpose of the Compensation Committee is to
evaluate and review the compensation of executive officers.

We have an Audit Committee of independent directors whose members are Robert L.
Watters, Alan Bergstrom and Steven Jenkins. In May 2000, our Board of Directors
adopted a Charter for the Audit Committee. The Charter establishes the
independence of our Audit Committee and sets forth the scope of our Audit
Committee's duties. The purpose of our Audit Committee is to conduct continuing
oversight of our financial affairs. Our Audit Committee conducts an ongoing
review of our financial reports and other financial information prior to their
being filed with the Securities and Exchange Commission, or otherwise provided
to the public. Our Audit Committee also reviews our systems, methods and
procedures of internal controls in the areas of: financial reporting, audits,
treasury operations, corporate finance, managerial, financial and SEC

Page 34

accounting, compliance with law, and ethical conduct. Our Audit Committee is
objective, and reviews and assesses the work of our independent registered
public accounting firm

All of our Audit Committee members are independent Directors. The Board of
Directors elects the Members of our Audit Committee annually. The Members serve
until their successors are duly elected and qualified. All Members of the audit
Committee are free from any relationship that could conflict with Member's
independent judgment. All Members are able to read and understand fundamental
financial statements, including a balance sheet, income statement, and cash flow
statement. At least one Member has past employment experience in finance or
accounting, requisite professional certification in accounting, or other
comparable experience or background, including a current or past position as a
chief executive or financial officer or other senior officer with financial
oversight responsibilities. Steven L. Jenkins serves as Chairman of the Audit
Committee, having been elected by the Members of our Audit Committee. Steven L.
Jenkins serves as the Audit Committee's Financial Expert, having been elected by
a unanimous vote of the Members of our Audit Committee. The Audit Committee
Charter was previously filed as an exhibit to our Proxy Statement filed with the
Securities and Exchange Commission on June 3, 2005, and can be found on our
website at www.ricks.com.
-------------

We have a Nominating Committee composed of independent directors Robert L.
Watters, Alan Bergstrom and Steven L. Jenkins. In July 2004, the Board
unanimously adopted a Charter with regard to the process to be used for
identifying and evaluating nominees for director. The Charter establishes the
independence of our Nominating Committee and sets forth the scope of the
Nominating Committee's duties. The Nominating Committee Charter can be found on
our website at www.ricks.com.
-------------

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own beneficially more than ten percent of
our common stock, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission. Based solely on the reports we have
received and on written representations from certain reporting persons, we
believe that the directors, executive officers, and greater than ten percent
beneficial owners have complied with all applicable filing requirements, with
the exception of one greater than 10% shareholder who was late with a Form 4
filing for one transaction.

CODE OF ETHICS

We have adopted a code of ethics for our Principal Executive and Senior
Financial Officers, which was previously filed as Exhibit 14 to our Form 10-KSB
for the fiscal year ended September 30, 2003, as filed with the SEC on December
29, 2003.

EXECUTIVE COMPENSATION

The following table reflects all forms of compensation for services to us for
the fiscal years ended September 30, 2005, 2004 and 2003 of certain executive
officers. No other executive officer of ours received compensation that
exceeded $100,000 during fiscal 2005. Mr. Langan is Chairman of the Board, a
Director, Chief Executive Officer, President and Chief Financial Officer. Mr.
Reese is Director and V.P.-Director of Technology.

Page 35

SUMMARY COMPENSATION TABLE

Annual Compensation Long Term Compensation
Awards Payouts

Other Securities
Name and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation (1) Awards SARs Payouts sation
($) ($) ($) ($) (#) ($) ($)
--------------------------------------------------------------------------------------------------------

Eric Langan
2005 $ 344,100 -0- -0- -0- 5,000 -0- -0-
2004 $ 326,038 -0- -0- -0- 280,000 -0- -0-
2003 $ 260,000 -0- -0- -0- 5,000 -0- -0-

Mr. Langan is our Chairman, a Director, Chief Executive Officer, President and Chief Financial Officer.

Travis Reese
2005 $ 165,531 -0- -0- -0- 5,000 -0- -0-
2004 $ 161,000 -0- -0- -0- 55,000 -0- -0-
2003 $ 158,855 -0- -0- -0- 5,000 -0- -0-

Mr. Reese is a Director and V.P.-Director of Technology

--------------------------------------------------------------------------------------------------------

(1) We provide certain executive officers certain personal benefits. Since
the value of such benefits does not exceed the lesser of $50,000 or 10% of
annual compensation, the amounts are omitted.

OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)

Number of Percent of Total
Securities Options/SARs
Underlying Granted To
Options/SARs Employees In Exercise of Expiration
Name Granted Fiscal Year Base Price Date
# % $/share
---------------------------------------------------------------------------

Eric Langan 5,000 shares (1) 5.56 % $ 2.80 7/20/2010

Travis Reese 5,000 shares (1) 5.56 % $ 2.80 7/20/2010
---------------------------------------------------------------------------

(1) These options were granted to Messrs. Langan and Reese for serving in
their capacity as Directors. There were 27,500 shares of options exercised by
Messrs. Langan and Reese during the fiscal year ended September 30, 2005.

Page 36

AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

Number Of Unexercised
Securities Underlying Value of Unexercised
Options/SARs In-The-Money Options/
Shares At FY-End SARs At FY-End
Acquired On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
# $ # $
-------------------------------------------------------------------------------------

Eric Langan 5,000 (1) $ 6,363 290,000 / 105,000 $ 178,350/$55,150

Travis Reese 22,500 (1) $ 25,131 47,500 / 30,500 $ 29,975/$14,650

-------------------------------------------------------------------------------------

(1) There were 27,500 shares of options exercised by these persons during
the fiscal year ended September 30, 2005

EMPLOYEE STOCK OPTION PLANS

While we have been successful in attracting and retaining qualified personnel,
we believe that our future success will depend in part on our continued ability
to attract and retain highly qualified personnel. We pay wages and salaries
that we believe are competitive. We also believe that equity ownership is an
important factor in our ability to attract and retain skilled personnel. We
have adopted Stock Option Plans for employee and directors. The purpose of the
Plans is to further our interests, our subsidiaries and our stockholders by
providing incentives in the form of stock options to key employees and directors
who contribute materially to our success and profitability. The grants
recognize and reward outstanding individual performances and contributions and
will give such persons a proprietary interest in the Company, thus enhancing
their personal interest in our continued success and progress. The Plans also
assist the Company and our subsidiaries in attracting and retaining key
employees and directors. The Plans are administered by the Board of Directors.
The Board of Directors has the exclusive power to select the participants in the
Plans, to establish the terms of the options granted to each participant,
provided that all options granted shall be granted at an exercise price equal to
at least 85% of the fair market value of the common stock covered by the option
on the grant date and to make all determinations necessary or advisable under
the Plans.

In 1995 we adopted the 1995 Stock Option Plan. A total of 300,000 shares may be
granted and sold under the 1995 Plan. As of September 30, 2001, a total of
167,500 stock options had been granted and are outstanding under the Plan, none
of which have been exercised. We do not plan to issue any additional options
under the 1995 Plan.

In August 1999 we adopted the 1999 Stock Option Plan (the "1999 Plan") with
500,000 shares authorized to be granted and sold under the 1999 Plan. In August
2004, shareholders approved an Amendment to the 1999 Plan (the "Amendment")
which increased the total number of shares authorized to 1,000,000. As of
September 30, 2005, 878,000 stock options were outstanding under the 1999 Plan.
As of May 11, 2006, 169,000 of these stock options have been exercised.

Page 37

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth all equity compensation plans as of September 30,
2005:

--------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS PRICE OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))

PLAN CATEGORY (A) (B) (C)
----------------------------- ------------------------------ ------------------------------- --------------------------------

Equity compensation plans
approved by security holders 878,000 $ 2.47 52,000
----------------------------- ------------------------------ ------------------------------- --------------------------------
Equity compensation plans not
approved by security holders 0 0 300,000
----------------------------- ------------------------------ ------------------------------- --------------------------------
TOTAL 878,000 $ 2.47 352,000
--------------------------------------------------------------------------------------------------------------------------------

DIRECTOR COMPENSATION

We do not currently pay any cash directors' fees, but we pay the expenses of our
directors in attending board meetings. In July 2005, we issued 10,000 options
to each Director who is a member of our audit committee and 5,000 options to our
other Directors. These options have a strike price of $2.80 per share and expire
in July 2010.

EMPLOYMENT AGREEMENTS

We have a two-year employment agreement with Mr. Eric S. Langan (the "Langan
Agreement"). The Langan Agreement extends through April 1, 2008 and provides for
an annual base salary of $400,000. The Langan Agreement also provides for
participation in all benefit plans maintained by us for salaried employees. The
Langan Agreement contains a confidentiality provision and an agreement by Mr.
Langan not to compete with us upon the expiration of the Langan Agreement. We
have not established long-term incentive plans or defined benefit or actuarial
plans.

We also have a three-year employment agreement with Mr. Travis Reese (the "Reese
Agreement"). The Reese Agreement extends through February 1, 2007 and provides
for an annual base salary of $175,000. The Reese Agreement also provides for
participation in all benefit plans maintained by us for salaried employees. The
Reese Agreement contains a confidentiality provision and an agreement by Mr.
Reese not to compete with us upon the expiration of the Reese Agreement. We have
not established long-term incentive plans or defined benefit or actuarial plans.
We intend to enter into a new Employment Agreement with Mr. Reese at the end of
the current term.

CODE OF ETHICS

We have adopted a code of ethics for its Principal Executive and Senior
Financial Officers, which was previously filed as Exhibit 14 to our Form 10-KSB
for the fiscal year ended September 30, 2003, as filed with the SEC on December
29, 2003.

Page 38

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

The following table sets forth certain information at May 11, 2006, with respect
to the beneficial ownership of shares of Common Stock by (i) each person known
to us who owns beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each of our directors, (iii) each of our executive officers and (iv)
all of our executive officers and directors as a group. Unless otherwise
indicated, each stockholder has sole voting and investment power with respect to
the shares shown. As of May 11, 2006, there were 4,901,148 shares of common
stock outstanding.

--------------------------------------------------------------------------------
NAME/ADDRESS NUMBER OF SHARES TITLE OF CLASS PERCENT OF
CLASS (9)
-------------------------------- ----------------- -------------- -----------

Eric S. Langan 1,133,010 (1) Common stock 21.8%
10959 Cutten Road
Houston, Texas 77066
-------------------------------- ----------------- -------------- -----------
Robert L. Watters 35,000 (2) Common stock <1%
315 Bourbon Street
New Orleans, Louisiana 70130
-------------------------------- ----------------- -------------- -----------
Steven L. Jenkins -0- Common stock 0%
16815 Royal Crest Drive
Suite 160
Houston, Texas 77058
-------------------------------- ----------------- -------------- -----------
Travis Reese 57,275 (3) Common stock 1.0%
10959 Cutten Road
Houston, Texas 77066
-------------------------------- ----------------- -------------- -----------
Alan Bergstrom 25,000 (4) Common stock <1%
904 West Ave.-Suite 100
Austin, Texas 78701
-------------------------------- ----------------- -------------- -----------
All of our Directors and 1,250,285 (5) Common stock 23.6%
Officers as a
Group of five (5) persons
-------------------------------- ----------------- -------------- -----------

-------------------------------- ----------------- -------------- -----------
E. S. Langan. L.P. 578,632 Common stock 11.8%
10959 Cutten Road
Houston, Texas 77066
-------------------------------- ----------------- -------------- -----------
Ralph McElroy 748,467 (6) Common stock 15.1%
1211 Choquette
Austin, Texas, 78757
-------------------------------- ----------------- -------------- -----------
William Friedrichs 287,890 (7) Common stock 5.8%
16815 Royal Crest Dr., Suite 260
Houston, Texas 77058
-------------------------------- ----------------- -------------- -----------
Jeffrey W. Benton 280,773 (8) Common stock 5.7%
47 Summit Avenue
Summit, NJ
--------------------------------------------------------------------------------

(1) Mr. Langan has sole voting and investment power for 264,378 shares that he
owns directly. Mr. Langan has shared voting and investment power for
578,632 shares that he owns indirectly through E. S. Langan, L.P. Mr.
Langan is the general partner of E. S. Langan, L.P. This amount also
includes options to purchase up to 290,000 shares of common stock that are
presently exercisable. This number specifically excludes 15,050 shares of
common stock held by his wife which is separate property.

Page 39

(2) Includes 5,000 shares of common stock and options to purchase up to 30,000
shares of common stock that are presently exercisable.

(3) Includes 9,775 shares of common stock and options to purchase up to 47,500
shares of common stock that are presently exercisable.

(4) Includes 5,000 shares of common stock and options to purchase up to 20,000
shares of common stock that are presently exercisable.

(5) Includes options to purchase up to 387,500 shares of common stock that are
presently exercisable.

(6) Mr. McElroy is a greater than 10% shareholder of the Company. Mr. McElroy
is the beneficial owner of 698,467 shares of Common Stock and 50,000 shares
of Common Stock issuable upon the exercise of warrants. This number
excludes 220,000 shares of Common Stock (which are being registered herein)
issuable upon the conversion of a Secured Convertible Debenture at a rate
of $3.00 per share and also excludes 91,603 shares of Common Stock issuable
upon the conversion of a Convertible Debenture at a rate of $6.55 per share
as these Debentures provide, absent shareholder approval, that the number
of shares of our common stock that may be issued by us or acquired by the
Mr. McElroy upon conversion of the Debenture shall not exceed 19.99% of the
total number of issued and outstanding shares of our common stock.

(7) Includes 170,000 shares of common stock owned by WMF Investments, Inc. Mr.
Friedrichs is a control person of WMF Investments, Inc.

(8) Includes 60,299 shares of common stock held individually, 210,726 shares of
common stock held indirectly by Fairfield Investment Group, LLC that are
issuable upon the conversion of a convertible debenture, and 9,748 held
indirectly by Fairfield Investment Group, LLC. Mr. Benton is the Managing
Director of Fairfield Advisors and has investment decision and voting
authority for this entity.

(9) These percentages exclude treasury shares in the calculation of percentage
of class.

------------------------

We are not aware of any arrangements that could result in a change of control.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Our Board of Directors has adopted a policy that our business affairs will be
conducted in all respects by standards applicable to publicly held corporations
and that we will not enter into any future transactions and/or loans between us
and our officers, directors and 5% shareholders unless the terms are no less
favorable than could be obtained from independent, third parties and will be
approved by a majority of our independent and disinterested directors. In our
view, all of the transactions described below meet this standard.

In May 2002, we loaned $100,000 to Eric Langan who is our Chief Executive
Officer. The promissory note is unsecured, bears interest at 11% and is
amortized over a period of ten years. The note contains a provision that in the
event Mr. Langan leaves the Company for any reason, the note immediately becomes
due and payable in full. As of May 11, 2006, the balance of the note was
$73,077.

Page 40

we are required to make monthly interest payments beginning September 1, 2005.
We have the right to redeem the Debenture in whole or in part at any time during
the term of the Debenture. At the election of the Holder, the Holder has the
right to require the Debenture to be repaid in thirty (30) equal monthly
installments commencing February 2006. The Holder has the option to convert all
or any portion of the principal amount of the Debenture into shares of our
common stock at a rate of $3.00 per share, subject to adjustment under certain
conditions. The Debenture provides, absent shareholder approval, that the
number of shares of our common stock that may be issued by us or acquired by the
Holder upon conversion of the Debenture shall not exceed 19.99% of the total
number of issued and outstanding shares of our common stock. The Debenture is
secured by certain of our assets. Additionally, we issued Mr. McElroy a Warrant
to purchase 50,000 shares of our common stock at an exercise price of $3.00 per
share until July 22, 2008. The shares of Common Stock underlying the principal
amount of the Debenture and the Warrants have piggyback registration rights.

On April 28, 2006, the Company entered into a convertible debenture with Ralph
McElroy, a greater than 10% shareholder of the Company, for a principal sum of
$600,000. The term is for two years and the interest rate is 12% per annum. At
the election of the holder, the holder have the right at any time to convert all
or any portion of the principal or interest amount of the debenture into shares
of our common stock at a rate of $6.55 per share. The debenture provides,
absent shareholder approval, that the number of shares of the Company's common
stock that may be issued by the Company or acquired by the holder upon
conversion of the debenture shall not exceed 19.99% of the total number of
issued and outstanding shares of the Company's common stock.

SELLING STOCKHOLDERS

The following is a list of the selling stockholders who own or who have a right
to acquire the 552,100 shares of Common Stock covered by this prospectus.
Currently, 222,100 shares of Common Stock are held by certain selling
stockholders. Up to 220,000 Shares of Common Stock are issuable upon the
conversion of a Secured Convertible Debenture held by one selling stockholder.
Up to 60,000 Shares are issuable upon the conversion of a Convertible Note held
by one selling stockholder. Up to 50,000 Shares of Common Stock are issuable
upon the exercise of Warrants held by one selling stockholder As set forth
below and elsewhere in this prospectus, some of these selling stockholders hold,
or within the past three years have held, a position, office or other material
relationship with us or our predecessors or affiliates.

Beneficial ownership is determined in accordance with Rule 13d-3 promulgated by
the Securities and Exchange Commission, and generally includes voting or
investment power with respect to securities. In computing the number of shares
beneficially owned by the holder and the percentage ownership of the holder,
shares of common stock issuable upon exercise of the warrant held by the holder
that are currently exercisable or exercisable within 60 days after the date of
the table are deemed outstanding.

The percent of beneficial ownership for the selling stockholders is based on
4,901,148 shares of common stock outstanding as of May 11, 2006. Shares of
common stock subject to warrants, options and other convertible securities that
are currently exercisable or exercisable within 60

Page 41

days of May 11, 2006, are considered outstanding and beneficially owned by a
selling stockholders who holds those warrants, options or other convertible
securities for the purpose of computing the percentage ownership of that selling
stockholders but are not treated as outstanding for the purpose of computing the
percentage ownership of any other stockholder.

The shares of common stock being offered under this prospectus may be offered
for sale from time to time during the period the registration statement of which
this prospectus is a part remains effective, by or for the account of the
selling stockholders. After the date of effectiveness of the registration
statement of which this prospectus is a part, the selling stockholder may have
sold or transferred, in transactions covered by this prospectus or in
transactions exempt from the registration requirements of the Securities Act,
some or all of its common stock. Information about the selling stockholders may
change over time. Any changed information will be set forth in an amendment to
the registration statement or supplement to this prospectus, to the extent
required by law.

The following table sets forth information concerning the selling stockholders,
including the number of shares currently held and the number of shares offered
by each selling security holder, to our knowledge as of May 11, 2006. At the
time of the acquisition there were no agreements, understandings or arrangements
with any other persons, either directly or indirectly, to distribute the
securities.

--------------------------------------------------------------------------------------------------------
BEFORE THE AFTER THE
OFFERING OFFERING
--------------- -----------
---------------------------- --------------- --------------- ------------ ----------- -------------
Total
Number of Number of Percentage
Shares of Shares to Number to be
common be Offered of Shares Beneficially
Position, stock for the to be Owned
Office or Beneficially Account of Owned after this
Other Owned Prior to the Selling after this Offering
Material the Offering Stockholder Offering (3)
Name of Selling Stockholder Relationship (1) (2) (3) (4)
---------------------------- --------------- --------------- ------------ ----------- -------------

COMMON STOCK
---------------------------- --------------- --------------- ------------ ----------- -------------

Ralph McElroy >10%
shareholder 748,467 (5) 270,000 698,467 (5) 15.3%
---------------------------- --------------- --------------- ------------ ----------- -------------
Jay Teitelbaum None 26,100 26,100 -0- -0-
---------------------------- --------------- --------------- ------------ ----------- -------------
Philip Eisenberg None 110,000 (6) 110,000 -0- -0-
---------------------------- --------------- --------------- ------------ ----------- -------------
American Dream Media (7) None 29,650 10,000 19,650 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
William M. Friedrichs, Jr. >5%
shareholder 287,890 50,000 237,890 5.7%
---------------------------- --------------- --------------- ------------ ----------- -------------
Wade McElroy Son of >10%
shareholder 38,500 17,500 21,000 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Timothy Winata Employee 71,350 (8) 25,000 46,350 1.4%
---------------------------- --------------- --------------- ------------ ----------- -------------
Jante Simoneaux Wife of CEO 15,050(9) 5,000 10,050 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Anderson Studebaker Employee 36,945(10) 5,000 31,945 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Jackie Markham None 5,225 5,000 225 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Wayne Fenlon Employee 11,000 (11) 2,500 8,500 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Doris Jane King Sister of a
>10%
shareholder 7,000 5,000 2,000 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Robert Axelrod Outside
Counsel 90,300 20,000 70,300 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Zachary Axelrod Son of Outside
Counsel 1,000 1,000 -0- -0-
---------------------------- --------------- --------------- ------------ ----------- -------------

---------------------------- --------------- --------------- ------------ ----------- -------------
TOTAL 552,100
--------------------------------------------------------------------------------------------------------

Page 42

(1) Includes shares of common stock for which the selling security holder has
the right to acquire beneficial ownership within 60 days.

(2) This table assumes that each selling security holder will sell all shares
offered for sale by it under this registration statement. Security holders
are not required to sell their shares.

(3) Assumes that all shares of Common Stock registered for resale by this
prospectus have been sold.

(4) Based on 4,901,148 shares of Common stock issued and outstanding as of May
11, 2006.

(5) Mr. McElroy is a greater than 10% shareholder of the Company. Mr. McElroy
is the beneficial owner of 698,467 shares of Common Stock and 50,000 shares
of Common Stock issuable upon the exercise of warrants. This number
excludes 220,000 shares of Common Stock (which are being registered herein)
issuable upon the conversion of a Secured Convertible Debenture at a rate
of $3.00 per share and also excludes 91,603 shares of Common Stock issuable
upon the conversion of a Convertible Debenture at a rate of $6.55 per share
as these Debentures provide that, absent shareholder approval, that the
number of shares of our common stock that may be issued by us or acquired
by Mr. McElroy upon conversion of the Debentures shall not exceed 19.99% of
the total number of issued and outstanding shares of our common stock.

(6) Consists of 50,000 shares of Common Stock and 60,000 shares of Common Stock
which may be acquired upon conversion of the outstanding principal under a
secured convertible note with exercise prices ranging from $7.00 to $7.50
per share.

(7) John Gray is the individual with investment decision and voting power for
this non-natural entity.

(8) Includes 25,000 shares of common stock issuable upon the exercise of
options that are exercisable within 60 days.

(9) Ms. Simoneaux is the wife of Eric Langan, our Chief Executive Officer. Mr.
Langan disclaims beneficial ownership of Ms. Simoneaux's shares.

(10) Includes 27,500 shares of common stock issuable upon the exercise of
options that are exercisable within 60 days.

(11) Includes 5,000 shares of common stock issuable upon the exercise of options
that are exercisable within 60 days.

PLAN OF DISTRIBUTION

As of the date of this prospectus, we have not been advised by the selling
stockholders as to any plan of distribution. Shares owned by the selling
stockholders, or by their partners, pledgees, donees (including charitable
organizations), transferees or other successors in interest, may from time to
time be offered for sale either directly by such individual, or through
underwriters, dealers or agents or on any exchange on which the shares may from
time to time be traded, in the over-the-counter market, or in independently
negotiated transactions or otherwise. The methods by which the shares may be
sold include:

- a block trade (which may involve crosses) in which the broker or
dealer so engaged will attempt to sell the securities as agent but may
position and resell a portion of the block as principal to facilitate
the transaction;

- purchases by a broker or dealer as principal and resale by such
broker or dealer for its own account pursuant to this prospectus;

Page 43

- exchange distributions and/or secondary distributions;

- sales in the over-the-counter market;

- underwritten transactions;

- ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and

- privately negotiated transactions.

Such transactions may be effected by the selling stockholders at market prices
prevailing at the time of sale or at negotiated prices. The selling
stockholders may effect such transactions by selling the common stock to
underwriters or to or through broker-dealers, and such underwriters or
broker-dealers may receive compensations in the form of discounts or commissions
from the selling stockholders and may receive commissions from the purchasers of
the common stock for whom they may act as agent. The selling stockholders may
agree to indemnify any underwriter, broker-dealer or agent that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act. We have agreed to
register the shares for sale under the Securities Act and to indemnify the
selling stockholders, certain representatives of the selling stockholders and
each person who participates as an underwriter in the offering of the shares
against certain civil liabilities, including certain liabilities under the
Securities Act. We are required to pay certain fees and expenses incurred by us
incident to the registration of the shares.

In connection with sales of the common stock under this prospectus, upon
effectiveness of the registration statement, the selling stockholders may enter
into hedging transactions with broker-dealers, who may in turn engage in short
sales of the common stock in the course of hedging the positions they assume.
The selling stockholders also may sell shares of common stock short and deliver
them to close out the short positions, or loan or pledge the shares of common
stock to broker-dealers that in turn may sell them.

Because selling stockholders may be deemed to be statutory "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. The selling stockholders are
subject to the applicable provisions of the Exchange Act, and the rules and
regulations thereunder which may restrict certain activities of, and limit the
timing of purchases and sales of securities by, selling stockholders and other
persons participating in a distribution of securities. The selling stockholders
may also sell shares under Rule 144 of the Securities Act, if available, rather
than under this prospectus. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the shares by the selling
stockholders.

The selling stockholders and any underwriters, dealers or agents that
participate in distribution of the shares may be deemed to be underwriters, and
any profit on sale of the shares by them and any discounts, commissions or
concessions received by any underwriter, dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act. The selling
stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.

Page 44

We agreed to keep this prospectus effective until the earlier of (i) January 18,
2010, or (ii) the time that all of the shares have been sold pursuant to the
prospectus or Rule 144 under the Securities Act or any other rule of similar
effect.

There can be no assurances that the selling stockholders will sell any or all of
the shares offered under this prospectus.

DESCRIPTION OF SECURITIES
-------------------------

GENERAL

The following description of our capital stock is subject to and qualified in
its entirety by our certificate of incorporation and bylaws, which are included
as exhibits to the registration statement of which this prospectus forms a part,
and by the applicable provisions of Texas law.

Our authorized capital stock consists of 16,000,000 shares of which there are
15,000,000 shares of common stock, par value $.01 per share, and 1,000,000
shares of preferred stock, par value $.10 per share.

COMMON STOCK

As of May 11, 2006, there were 4,901,148 shares of common stock outstanding.
The rights of all holders of the common stock are identical in all respects.
The holders of the common stock are entitled to receive ratably such dividends,
if any, as may be declared by the Board of Directors out of legally available
funds. The current policy of the Board of Directors, however, is to retain
earnings, if any, for reinvestment.

Upon liquidation, dissolution or winding up of the Company, the holders of the
common stock are entitled to share ratably in all aspects of the Company that
are legally available for distribution, after payment of or provision for all
debts and liabilities.

The holders of the common stock do not have preemptive subscription, redemption
or conversion rights under our Articles of Incorporation. Cumulative voting in
the election of Directors is not permitted. The outstanding shares of common
stock are validly issued, fully paid and nonassessable. The rights, preferences
and privileges of holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of shares of any series of
preferred stock that are presently outstanding or that may be designated and
issued by us in the future.

PREFERRED STOCK

Our Board of Directors, without further action by the shareholders, is
authorized to issue up to 1,000,000 shares of preferred stock in one or more
series. The Board may, without shareholder approval, determine the dividend
rates, redemption prices, preferences on liquidation or dissolution, conversion
rights, voting rights and any other preferences. As of the date of this
prospectus, our Board has not authorized any series of preferred stock, and
there are no agreements or understandings for the issuance of any shares of
preferred stock. Because of its

Page 45

broad discretion with respect to the creation and issuance of preferred stock
without shareholder approval, our Board could adversely affect the voting power
of the holders of our common and, by issuing shares of preferred stock with
certain voting, conversion and/or redemption rights, could delay, defer or
prevent an attempt to obtain control of our company.

SECURED CONVERTIBLE DEBENTURE

On July 22, 2005, we issued a Secured Convertible Debenture to Ralph McElroy, a
greater than 10% shareholder of the Company, for the principal sum of $660,000
bearing interest at the rate of 12% per annum, with a maturity date of August 1,
2008. Under the terms of the Debenture, we are required to make monthly
interest payments beginning September 1, 2005. We have the right to redeem the
Debenture in whole or in part at any time during the term of the Debenture. At
the election of the Holder, the Holder has the right to require the Debenture to
be repaid in thirty (30) equal monthly installments commencing February 2006.
The Holder has the option to convert all or any portion of the principal amount
of the Debenture into shares of our common stock at a rate of $3.00 per share,
subject to adjustment under certain conditions. The Debenture provides, absent
shareholder approval, that the number of shares of our common stock that may be
issued by us or acquired by the Holder upon conversion of the Debenture shall
not exceed 19.99% of the total number of issued and outstanding shares of our
common stock. The Debenture is secured by certain of our assets. Additionally,
we issued Mr. McElroy a Warrant to purchase 50,000 shares of our common stock at
an exercise price of $3.00 per share until July 22, 2008. The shares of Common
Stock underlying the principal amount of the Debenture and the Warrants have
piggyback registration rights.

On April 28, 2006, the Company entered into convertible debentures with three
shareholders for a principal sum of $825,000. The term is for two years and the
interest rate is 12% per annum. At the election of the holders, the holders
have the right at any time to convert all or any portion of the principal or
interest amount of the debenture into shares of the Company's common stock at a
rate of $6.55 per share. The debenture provides, absent shareholder approval,
that the number of shares of the Company's common stock that may be issued by
the Company or acquired by the holders upon conversion of the debenture shall
not exceed 19.99% of the total number of issued and outstanding shares of the
Company's common stock.

On February 6, 2006, we issued an unsecured Convertible Debenture to an
unrelated investment group for the principal sum of $1,000,950 bearing interest
at the rate of 10% per annum, with a maturity date of February 1, 2009. Under
the terms of this Debenture, we are required to make three quarterly interest
payments beginning May 1, 2006. Thereafter, we are required to make nine equal
quarterly principal and interest payments. At any time after 366 days from the
date of issuance of this Debenture, we have the right to redeem the Debenture in
whole or in part at any time during the term of the Debenture. At the election
of the Holder, the Holder has the right at any time to convert all or any
portion of the principal or interest amount of the Debenture into shares of our
common stock at a rate of $4.75 per share, which approximates the closing price
of the Company's stock on February 6, 2006. The proceeds of the Debenture was
used to payoff certain debt and increase our working capital.

Page 46

SECURED CONVERTIBLE NOTE

On January 18, 2005, we entered a Secured Convertible Note with the Seller of
Peregrine Enterprises, Inc. in the amount of $5,125,000 bearing simple interest
at the rate of 4.0% per annum. The Note is payable commencing 120 days after
Closing as follows: (a) the payment of $58,333.33 per month for twenty-four (24)
consecutive months; (b) the payment of $63,333.33 for twenty-four (24)
consecutive months; (c) the payment of $68,333.33 for twelve (12) consecutive
months; and (d) a lump sum payment of the remaining balance to be paid on the
sixty-first (61st) month. $2,000,000 of the principal amount of the Note is
convertible into shares of our restricted common stock at prices ranging from
$4.00 to $7.50 per share. As of May 11, 2006, the Holder of the Convertible
Note has converted a total of $1,575,000 of the principal sum from the note, for
which we have issued 300,000 shares of our restricted common stock. The parties
also entered a Stock Pledge Agreement and Security Agreement to secure the Note.

OUTSTANDING WARRANTS

In addition to the stock options discussed herein, we have 50,000 warrants
outstanding at an exercise price of $3.00 per share (for which the underlying
shares have been registered herein).

TRANSFER AGENT

The transfer agent for our Common Stock is American Stock Transfer located at 59
Maiden Lane, New York, New York 10038. Their telephone number is 718-921-8275.

INTEREST OF NAMED EXPERTS AND COUNSEL
-------------------------------------

Axelrod, Smith & Kirshbaum, P.C., who has prepared this Registration Statement
and Opinion regarding the authorization, issuance and fully-paid and
non-assessable status of the securities covered by this Registration Statement,
has represented us in the past on certain legal matters. Mr. Robert D. Axelrod
presently owns 90,300 shares of our common stock. His entire relationship with
us has been as legal counsel, and there are no arrangements or understandings
which would in any way cause him to be deemed an affiliate of the Registrant or
a person associated with an affiliate of the Registrant.

EXPERTS
-------

The financial statements of Rick's Cabaret International, Inc. at September 30,
2005 and 2004 included in and made a part of this document have been audited by
Whitley Penn, LLP, independent registered public accounting firm, as set forth
in their report appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.

Page 47

COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
----------------------------------------------

Our certificate of incorporation provides that we shall indemnify our directors
and officers to the fullest extent permitted by Texas law and that none of our
directors will be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability:

- for any breach of the director's duty of loyalty to the Company
or its stockholders;
- for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of the law;
- under the Texas Business Corporation Act for the unlawful payment
of dividends; or
- for any transaction from which the director derives an improper
personal benefit.

These provisions require us to indemnify our directors and officers unless
restricted by Texas law and eliminate our rights and those of our stockholders
to recover monetary damages from a director for breach of his fiduciary duty of
care as a director except in the situations described above. The limitations
summarized above, however, do not affect our ability or that of our stockholders
to seek non-monetary remedies, such as an injunction or rescission, against a
director for breach of his fiduciary duty.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement and the exhibits thereto. Statements
contained in this prospectus as to the contents of any contract or other
document that is filed as an exhibit to the registration statement are not
necessarily complete and each such statement is qualified in all respects by
reference to the full text of such contract or document. For further information
with respect to us and the common stock, reference is hereby made to the
registration statement and the exhibits thereto, which may be inspected and
copied at the principal office of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part thereof may be obtained at prescribed
rates from the Commission's Public Reference Section at such addresses. Also,
the SEC maintains a World Wide Web site on the Internet at http://www.sec.gov
------------------
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. Additional
information can also be obtained through our website at www.Ricks.com. We also
-------------
make available free of charge our annual, quarterly and current reports, proxy
statements and other information upon request. To request such materials,
please contact Mr. Eric Langan, our President and Chief Executive Officer, at
10959 Cutten Road, Houston, Texas 77066.

Page 48

We are in compliance with the information and periodic reporting
requirements of the Exchange Act and, in accordance therewith, will file
periodic reports, proxy and information statements and other information with
the SEC. Such periodic reports, proxy and information statements and other
information will be available for inspection and copying at the principal
office, public reference facilities and Web site of the SEC referred to above.

Page 49

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2005 AND 2004

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm. . . . . . . . F-2

Audited Consolidated Financial Statements:

Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Operations. . . . . . . . . . . . . F-4

Consolidated Statements of Changes in Stockholders' Equity . . F-5

Consolidated Statements of Cash Flows. . . . . . . . . . . . . F-6

Notes to Consolidated Financial Statements . . . . . . . . . . F-8

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Rick's Cabaret International, Inc.

We have audited the accompanying consolidated balance sheets of Rick's Cabaret
International, Inc. and subsidiaries, as of September 30, 2005 and 2004, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. These 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 financial
statements are free of material misstatement. An audit includes 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 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rick's Cabaret
International, Inc. and subsidiaries as of September 30, 2005 and 2004, 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.

/s/ Whitley Penn
Dallas, Texas
December 2, 2005

F - 2

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30,
2005 2004
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents $ 480,330 $ 275,243
Accounts receivable:
Trade 310,692 72,909
Other 118,872 204,093
Marketable securities 28,919 122,350
Inventories 257,626 232,746
Net assets of discontinued operations - 27,674
Prepaid expenses and other current assets 87,991 976,577
------------ ------------
Total current assets 1,284,430 1,911,592

Property and equipment, net 13,416,755 8,681,440

Other assets:
Goodwill and indefinite lived intangibles 9,836,560 1,898,926
Definite lived intangibles, net 126,262 -
Other 365,011 268,919
------------ ------------
Total other assets 10,327,833 2,167,845
------------ ------------

Total assets $25,029,018 $12,760,877
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,034,508 $ 291,650
Accrued liabilities 852,865 568,835
Current portion of long-term debt 1,349,894 492,310
Line-of-credit 94,888 -
------------ ------------
Total current liabilities 3,332,155 1,352,795

Other long-term liabilities 193,648 20,048
Long-term debt 11,896,942 3,201,250
------------ ------------

Total liabilities 15,422,745 4,574,093

Commitments and contingencies - -

Minority interest 31,337 40,808

Stockholders' equity:
Preferred stock, $.10 par, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par, 15,000,000 shares
authorized, 5,220,678 and 4,608,678 shares issued, respectively 52,207 46,087
Additional paid-in capital 13,004,567 11,273,149
Accumulated other comprehensive income 15,572 109,002
Accumulated deficit (2,203,630) (1,988,482)
------------ ------------
10,868,716 9,439,756
Less 908,530 shares of common stock held in treasury, at cost 1,293,780 1,293,780
------------ ------------
Total stockholders' equity 9,574,936 8,145,976
------------ ------------

Total liabilities and stockholders' equity $25,029,018 $12,760,877
============ ============

See accompanying notes to consolidated financial statements.

F - 3

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED SEPTEMBER 30,
2005 2004
-------------- --------------

Revenues:
Sales of alcoholic beverages $ 5,431,049 $ 5,343,858
Sales of food and merchandise 1,688,043 1,581,851
Service revenues 6,632,201 5,839,759
Internet revenues 787,617 796,353
Other 285,497 296,613
-------------- --------------
14,824,407 13,858,434

Operating expenses:
Cost of goods sold 1,865,630 1,623,915
Salaries and wages 5,200,976 4,803,515
Other general and administrative:
Taxes and permits 1,985,989 1,815,883
Charge card fees 229,397 236,894
Rent 558,435 248,074
Legal and professional 685,291 543,550
Advertising and marketing 752,866 756,586
Depreciation and amortization 590,466 479,791
Other 2,656,277 1,955,623
-------------- --------------
14,525,327 12,463,831
-------------- --------------

Income from continuing operations 299,080 1,394,603

Other income (expense):
Interest income 33,434 28,887
Interest expense (699,678) (324,411)
Gain on sale of marketable securities - 19,807
Other (1,149) 10,193
-------------- --------------

Income (loss) from continuing operations before minority interest (368,313) 1,129,079

Minority interest 9,472 (4,777)
-------------- --------------

Income (loss) from continuing operations (358,841) 1,124,302

Discontinued operations:
Loss from discontinued operations (148,294) (349,049)
Gain on sale of a subsidiary 291,987 -
-------------- --------------
Income (loss) from discontinued operations 143,693 (349,049)
-------------- --------------

Net income (loss) $ (215,148) $ 775,253
============== ==============

Basic and diluted earnings (loss) per share:
Continuing operations $ (0.09) $ 0.30
Discontinued operations 0.04 (0.09)
-------------- --------------
Net income (loss) $ (0.05) $ 0.21
============== ==============

Weighted average number of common shares outstanding 3,937,565 3,700,148
============== ==============

See accompanying notes to consolidated financial statements.

F - 4

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED SEPTEMBER 30, 2005 AND 2004

COMMON STOCK ACCUMULATED TREASURY STOCK
-------------------- ADDITIONAL OTHER -----------------------
NUMBER PAID-IN COMPREHENSIVE ACCUMULATED NUMBER
OF SHARES AMOUNT CAPITAL INCOME DEFICIT OF SHARES AMOUNT
--------- --------- ----------- --------------- ------------- --------- ------------

Balance at September 30, 2003 4,608,678 $ 46,087 $11,273,149 $ 120,000 $ (2,763,735) 908,530 $(1,293,780)

Net income - - - - 775,253 - -
Reclassification from unrealized to
realized gain - - - (13,222) - - -
Change in available-for-sale
securities - - - 2,224 - - -

Comprehensive income - - - - - - -
--------- --------- ----------- --------------- ------------- --------- ------------

Balance at September 30, 2004 4,608,678 46,087 11,273,149 109,002 (1,988,482) 908,530 (1,293,780)

Shares issued 612,000 6,120 1,624,762 - - - -
Stock warrants issued - - 106,656 - - - -
Net loss - - - - (215,148) - -
Change in available-for-sale
securities - - - (93,430) - - -
Comprehensive loss - - - - - - -
--------- --------- ----------- --------------- ------------- --------- ------------

Balance at September 30, 2005 5,220,678 $ 52,207 $13,004,567 $ 15,572 $ (2,203,630) 908,530 $(1,293,780)
========= ========= =========== =============== ============= ========= ============

TOTAL
STOCKHOLDERS'
EQUITY
---------------

Balance at September 30, 2003 $ 7,381,721

Net income 775,253
Reclassification from unrealized to
realized gain (13,222)
Change in available-for-sale
securities 2,224
---------------
Comprehensive income 764,255
---------------

Balance at September 30, 2004 8,145,976

Shares issued 1,630,882
Stock warrants issued 106,656
Net loss (215,148)
Change in available-for-sale
securities (93,430)
---------------
Comprehensive loss (308,578)
---------------

Balance at September 30, 2005 $ 9,574,936
===============

See accompanying notes to consolidated financial statements.

F - 5

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER 30,
2005 2004
-------------- --------------

OPERATING ACTIVITIES
Income (loss) from continuing operations $ (358,841) $ 1,124,302
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Depreciation 573,706 479,791
Amortization 16,760 -
Bad debts 75,995 -
Issuance of warrants 5,925 -
Minority interests (9,472) 4,777
Stock issued for professinal services 27,120 -
Gain on sales of marketable securities - (19,807)
Changes in operating assets and liabilities:
Accounts receivable (179,583) (19,465)
Inventories (24,880) (40,435)
Prepaid expenses and other current assets 975,432 (967,975)
Accounts payable and accrued liabilities 987,868 175,120
-------------- --------------
Net cash provided by operating activities 2,090,030 736,308

INVESTING ACTIVITIES
Acquisitions (2,650,000) (265,000)
Proceeds from sale of subsidiary 550,000 -
Proceeds from sales of marketable securities - 21,459
Purchases of property and equipment (4,242,368) (630,988)
Note receivable payments 34,860 7,323
-------------- --------------
Net cash used in investing activities (6,307,508) (867,206)

FINANCING ACTIVITIES
Proceeds from sale of stock 928,762 -
Proceeds from long-term debt 4,762,000 300,000
Payments on long-term debt (889,565) (453,749)
-------------- --------------
Net cash provided by (used in) financing activities 4,801,197 (153,749)

Net cash provided by (used in) discontinued operations (378,632) 56,666
-------------- --------------

Net increase (decrease) in cash and cash equivalents 205,087 (227,981)
Cash and cash equivalents at beginning of year 275,243 503,224
-------------- --------------

Cash and cash equivalents at end of year $ 480,330 $ 275,243
============== ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 695,962 $ 331,765
============== ==============

See accompanying notes to consolidated financial statements.

F - 6

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

NON-CASH TRANSACTIONS

During the year ended September 30, 2004, the Company financed the purchase
of a vehicle with a note payable in the amount of $31,235.

During the year ended September 30, 2004, the Company divested a business,
see Note M. As a result of the divestiture, the Company received a note
receivable in the amount of $235,000, recorded a deferred gain of $163,739,
and removed $78,072 of net assets.

During the year ended September 30, 2005, the Company purchased a 9,000
square foot office building for $512,739, payable with a $86,279 cash at
closing and a $426,460 fifteen-year promissory note, bearing interest rate
at 7%.

During the year ended September 30, 2005, the Company purchased a club in
New York for $7,775,000, payable with $2,500,000 cash at closing and a
five-year secured convertible promissory note, bearing interest at 4%, in
the amount of $5,125,000, and transaction costs of $150,000.

During the year ended September 30, 2005, 12,000 shares of restricted
common stocks were issued as compensation pursuant to a consulting
agreement for a total value of $27,120, and were issued as part of the
transaction costs related to the club in New York.

During the year ended September 30, 2005, the Company purchased a club in
Charlotte for $1,0000,000, payable with a $325,000 seven-year secured
promissory note, bearing interest at 7%, and 180,000 shares of stock valued
at $675,000.

See accompanying notes to consolidated financial statements.

F - 7

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND 2004

A. NATURE OF BUSINESS

Rick's Cabaret International, Inc. (the "Company") is a Texas corporation
incorporated in 1994. The Company currently owns and operates nightclubs that
offer live adult entertainment, restaurant, and bar operations. These nightclubs
are located in Houston, Austin and San Antonio, Texas, as well as Minneapolis,
Minnesota, Charlotte, North Carolina, and New York, New York. The Company also
owns and operates several adult entertainment Internet websites. The Company's
corporate offices are located in Houston, Texas.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows:

BASIS OF ACCOUNTING

The accounts are maintained and the consolidated financial statements have been
prepared using the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.

USE OF ESTIMATES

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At September 30, 2005 and
2004, the Company had no such investments. The Company maintains deposits
primarily in one financial institution, which may at times exceed amounts
covered by insurance provided by the U.S. Federal Deposit Insurance Corporation
("FDIC"). At September 30, 2005, the uninsured portion of these deposits
approximated $27,000. There were no uninsured deposits at September 30, 2004.
The Company has not incurred any losses related to its cash on deposit with
financial institutions.

F - 8

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

ACCOUNTS AND NOTES RECEIVABLE

MARKETABLE SECURITIES

Marketable securities at September 30, 2005 and 2004 consist of common stock.
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires certain investments
be recorded at fair value or amortized cost. The appropriate classification of
the investments in marketable equity is determined at the time of purchase and
re-evaluated at each balance sheet date. As of September 30, 2005 and 2004, the
Company's marketable securities were classified as available-for-sale, which are
carried at fair value, with unrealized gains and losses reported as other
comprehensive income within the stockholders' equity section of the accompanying
consolidated balance sheets. The cost of marketable equity securities sold is
determined on a specific identification basis. The fair value of marketable
equity securities is based on quoted market prices. There has been no realized
gains related to marketable securities for the year ended September 30, 2005.
Marketable securities held at September 30, 2005 and 2004 have a cost basis of
approximately $13,000.

INVENTORIES

PROPERTY AND EQUIPMENT

F - 9

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

GOODWILL AND INTANGIBLE ASSETS

REVENUE RECOGNITION

The Company recognizes revenue from the sale of alcoholic beverages, food and
merchandise and services at the point-of-sale upon receipt of cash, check, or
credit card charge. This includes daily and annual VIP memberships.

Under Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, membership revenue should be deferred and recognized over the
estimated membership usage period. Management estimates that the weighted
average useful lives for memberships are 12 and 24 months for annual and
lifetime memberships, respectively. The Company does not track membership usage
by type of membership, however it believes these lives are appropriate and
conservative, based on management's knowledge of its client base and membership
usage at the clubs. The Company began deferring such revenue in the quarter
ended March 31, 2004, and this amount is recorded in accrued liabilities.

If the Company had deferred membership revenue and recognized it based on the
lives above prior to January 1, 2004, the impact on revenue and net income
recognized would have been increases of approximately $3,600 and $47,000 for
the years ended September 30, 2005 and 2004, respectively. This would have also
resulted in an increase in the deferred revenue balance of approximately $0 and
$12,000 as of September 30, 2005 and 2004, respectively. Management does not
believe the impact of this difference in accounting treatment is material to the
Company's annual and quarterly financial statements.

The Company recognizes Internet revenue from monthly subscriptions to its online
entertainment sites when notification of a new subscription is received from the
third party hosting company or from the credit card company, usually two to
three days after the transaction has occurred. The Company recognizes Internet
auction revenue when payment is received from the credit card as revenues are
not deemed estimable nor collection deemed probable prior to that point.

F - 10

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

ADVERTISING AND MARKETING

Advertising and marketing expenses are primarily comprised of costs related to
public advertisements and giveaways, which are used for promotional purposes.
Advertising and marketing expenses are expensed as incurred and are included in
operating expenses in the accompanying consolidated statements of operations.

INCOME TAXES

Deferred income taxes are determined using the liability method in accordance
with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. In addition, a valuation allowance is established to reduce any
deferred tax asset for which it is determined that it is more likely than not
that some portion of the deferred tax asset will not be realized.

COMPREHENSIVE INCOME

The Company reports comprehensive income in accordance with the provisions of
SFAS No. 130, Reporting Comprehensive Income. Comprehensive income consists of
net income and gains (losses) on available-for-sale marketable securities and is
presented in the consolidated statements of changes in stockholders' equity.

EARNINGS PER COMMON SHARE

The Company computes earnings per share in accordance with SFAS No. 128,
Earnings Per Share. SFAS No. 128 provides for the calculation of basic and
diluted earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution of securities that could share in the
earnings of the Company. The impact of dilutive stock options does not change
earnings per share, therefore basic and diluted earnings per share are the same.

Stock options of approximately 733,000 for the year ended September 30, 2004,
have been excluded from earnings per share due to the stock options being
anti-dilutive. All options were excluded for the year ended September 30, 2005
due to the Company's net loss.

FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with the reporting requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, the Company calculates the fair value of
its assets and liabilities which

F - 11

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

qualify as financial instruments under this statement and includes this
additional information in the notes to consolidated financial statements when
the fair value is different than the carrying value of these financial
instruments. The estimated fair value of accounts receivable, accounts payable
and accrued liabilities approximate their carrying amounts due to the relatively
short maturity of these instruments. The carrying value of short and long-term
debt also approximates fair value since these instruments bear market rates of
interest. None of these instruments are held for trading purposes.

STOCK OPTIONS

At September 30, 2005, the Company has stock options outstanding, which are
described more fully in Note G. The Company accounts for its stock options under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.

The following presents pro forma net income and per share data as if a fair
value accounting method had been used to account for stock-based compensation:

YEAR ENDED SEPTEMBER 30,
2005 2004
-------------- --------------

Net income (loss), as reported $ (215,148) $ 775,253
Less total stock-based employee compensation
expense determined under the fair value
based method for all awards (549,165) (216,616)
-------------- --------------
Pro forma net income (loss) $ (764,313) $ 558,637
============== ==============

Earnings (loss) per share:
Basic and diluted - as reported $ (0.05) $ 0.21
============== ==============

Basic and diluted - pro forma $ (0.19) $ 0.15
============== ==============

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation 46R ("FIN 46R"), a revision to interpretation 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46R clarifies some of the
provisions of FIN 46 and exempts certain entities from its requirements. FIN
46R was effective at the end of the first interim period ending after March 15,
2004. The adoption of FIN 46 and FIN 46R did not have a material impact on the
Company's consolidated financial statements.

F - 12

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

C. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

SEPTEMBER 30,
2005 2004
----------- -----------

Buildings and land $ 9,531,112 $ 8,967,481
Leasehold improvements 4,099,666 565,385
Furniture 939,550 547,574
Equipment 2,079,895 1,260,763
----------- -----------
Total property and equipment 16,650,223 11,341,203
Less accumulated depreciation 3,233,468 2,659,763
----------- -----------

Property and equipment, net $13,416,755 $ 8,681,440
=========== ===========

For the years ended September 30, 2005 and 2004, the Company capitalized
approximately $128,000 and $0, respectively, of interest to property and
equipment in leasehold improvements.

F - 13

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

D. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consisted of the following:

SEPTEMBER 30,
2005 2004
----------- ----------

Indefinite useful lives:
Goodwill $1,898,926 $1,898,926
Licenses 7,937,634 -

Amortization
Period
------------
Definite useful lives:
Discounted lease 18 years 43,022 -
Non-compete agreement 5 years 100,000 -
Less accumulated amortization (16,760) -
----------- ----------

Total goodwill and intangible assets $9,962,822 $1,898,926
=========== ==========

Future amortization expense related to definite lived intangible assets subject
to amortization at September 30, 2005 for each of the years in the five-year
period ending September 30, 2010 and thereafter is 2006 - $22,347, 2007 -
$22,347, 2008 - $22,347, 2009 - $22,347, 2010 - 7,347, and thereafter - $29,527.

F - 14

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. LONG-TERM DEBT

Long-term debt consisted of the following:

SEPTEMBER 30,
2005 2004
----------- ----------

Note payable at prime (as determined by
the Wall Street Journal) plus 1%,
matures December 2004 * $ - $ 296,163
Notes payable at 9%, mature February 2008 * 2,035,303 2,120,680
Notes payable at 12%, mature March 2026 * 140,802 142,263
Note payable at 9%, matures March 2006 * 289,308 293,224
Note payable with imputed interest at 7%,
matures January 2006, unsecured 214,649 415,255
Notes payable at 11%, mature August 2015 * 1,335,338 367,072
Notes payable at 10%, mature December 2014
and January 2015 * 2,868,224 -
Note payable at 7%, matures October 2012,
collateralized by assets of RCI
Entertainment North Carolina, Inc. 325,000 -
Note payable at 7%, matures December 2004 * - 27,667
Convertible note payable at 12%, matures
August 2008 559,270 -
Convertible note payable at 4%, matures
May 2010, collateralized by assets of RCI
Entertainment New York, Inc. 5,042,362 -
Note payable at 7%, matures December 2019 * 414,057 -
Note payable at 8.99%, matures
October 2007, collateralized by a vehicle 22,523 31,236
----------- ----------
Total debt 13,246,836 3,693,560

Less current portion 1,349,894 492,310
----------- ----------

Total long-term debt $11,896,942 $3,201,250
=========== ==========

* Collateralized by real estate

The Company had an unsecured note payable at 10% in the amount of $188,051 at
September 30, 2004, which was part of discontinued operations.

In June, July and November 2004, the Company borrowed $100,000, $100,000, and
$900,000, respectively, from an unrelated individual at the rate of 11% per
annum for a 10 year term. These borrowings were an addition to a previous note.
During fiscal year 2005, the monthly payment of principal and interest of the
new borrowing is $15,034, and $3,445 for the old note. The notes are secured by
our properties located at 3501 Andtree, Austin and at 5718 Fairdale,

F - 15

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. LONG-TERM DEBT - CONTINUED

Houston, Texas. The money received from this new financing was used for the
acquisition and renovation of the New York club.

On November 15, November 17, and December 30, 2004, the Company borrowed
$590,000, $1,042,000, and $1,270,000, respectively, from a financial institution
at an annual interest rate of 10% over a 10 year term. The monthly payments of
principal and interest are $5,694, $10,056, and $12,256, respectively. The
notes are secured by our properties located at 2023 Sable Lane, San Antonio, 410
N. Sam Houston Pkwy. E., and 3113 Bering Drive, Houston, Texas. The money
received from this financing was used for the acquisition and renovation of the
New York club.

As a part of the purchase the North Carolina club, the Company issued 180,000
shares of the Company's common stock valued at $3.75 per share and entered into
a seven year promissory note in the amount of $325,000 bearing interest at the
rate of 7% per annum. The note is payable with an initial payment due November
1, 2005, of interest only for the period of time from the date of Closing until
October 31, 2005, plus a principal reduction payment in the amount of $3,009.
Thereafter, RCI Entertainment North Carolina, Inc., the Company's subsidiary,
will make eighty-three (83) successive equal monthly payments commencing
December 1, 2005, of principal and interest in the amount of $4,905 until paid
in full. The note is secured by the assets of RCI Entertainment North Carolina,
Inc. Pursuant to the terms of the note, on or after November 1, 2005, the
holder shall have the right, but not the obligation to have the Company purchase
from the holder 4,285 shares per month, calculated at a price per share equal to
$3.75 until the holder has received a total of $1,000,000 from the sale of the
shares less the amount of the note. At the Company's election during any given
month, the Company may either buy the monthly shares or, if the Company elects
not to buy the monthly shares from the holder, then the holder shall sell the
monthly shares in the open market. Any deficiency between the amount which the
holder receives from the sale of the monthly shares and the value of the shares
shall be paid by the Company within three (3) days of the date of sale of the
monthly shares during that particular month. The Company's obligation to
purchase the monthly shares from the holder shall terminate and cease at such
time as the holder has received a total of $1,000,000 from the sale of the
shares, less the amount of the note.

On July 22, 2005, the Company entered into a secured convertible debenture with
one of its shareholders for a principal sum of $660,000. The debenture is
convertible into 220,000 shares of the Company's common stock at a conversion
price of $3.00 per share at the option of the holder. The term is for three
years and interest rate is at 12% per annum. The debenture matures on August 1,
2008. The Company also issued 50,000 detachable warrants at $3.00 per share in
relation to this debenture. The value of the discount on notes payable was
estimated to be $106,656 at the date of grant using a Black-Scholes
option-pricing model. For the year ending September 30, 2005, the Company
recorded $5,925 interest expense. The debenture is secured by Company's
ownership in Citation Land, LLC and RCI Holdings, Inc., both are wholly owned
subsidiaries.

As a part of the purchase the New York club, the Company obtained a $5.125
million in a promissory note bearing simple interest at the rate of 4.0% per
annum with a balloon payment at end of five years. Two million dollars of the
principal amount of the Promissory Note is

F - 16

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. LONG-TERM DEBT - CONTINUED

convertible into shares of restricted common stock at prices ranging from $4.00
to $7.50 per share.

In December 2004, as a part of the purchase of a 9,000 square-foot office
building, the Company obtained a fifteen year promissory note in the amount of
$426,460 with interest at 7%.

Future maturities of long-term debt consist of the following:

2006 $ 1,349,894
2007 835,062
2008 3,312,223
2009 909,149
2010 2,894,275
Thereafter 3,946,233
-----------
Total maturities of long-term debt $13,246,836
===========

F. INCOME TAXES

Income tax expense for the years presented differs from the "expected" federal
income tax expense computed by applying the U.S. federal statutory rate of 34%
to earnings before income taxes for the years ended September 30, as a result of
the following:

2005 2004
--------- ----------

Computed expected tax expense (benefit) $(73,151) $ 263,586
State income taxes (6,454) 23,257
Deferred tax asset valuation
Allowance 79,605 (286,843)
--------- ----------
Total income tax expense $ - $ -
========= ==========

The significant components of the Company's deferred tax assets and liabilities
at September 30, are as follows:

2005 2004
----------- ----------

Deferred tax assets (liabilities):
Goodwill $ (138,150) $ 284,018
Property and equipment (254,788) (161,881)
Net operating losses 1,165,143 654,405
Unrealized gain on marketable securities (5,762) (40,331)
Other 72,975 16,646
Valuation allowance (839,418) (752,857)
----------- ----------
$ - $ -
=========== ==========

F - 17

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

F. INCOME TAXES - CONTINUED

The Company has established a valuation allowance to fully reserve the deferred
tax assets at September 30, 2005 and 2004 due to the uncertainty of the timing
and amounts of future taxable income. At September 30, 2005, the Company had
net operating loss carryforwards of approximately $3,149,000, which expire in
2017 through 2020.

G. STOCK OPTIONS

In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan") for
employees and directors. In August 1999 the Company adopted the 1999 Stock
Option Plan (the "1999 Plan") (collectively, "the Plans"). The options granted
under the Plans may be either incentive stock options, or non-qualified options.
The Plans are administered by the Board of Directors or by a compensation
committee of the Board of Directors. The Board of Directors has the exclusive
power to select individuals to receive grants, to establish the terms of the
options granted to each participant, provided that all options granted shall be
granted at an exercise price equal to at least 85% of the fair market value of
the common stock covered by the option on the grant date and to make all
determinations necessary or advisable under the Plans.

Following is a summary of options for the years ended September 30:

WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
2005 PRICE 2004 PRICE
----------------------------------------------

Outstanding at beginning of year 908,000 $ 2.39 498,000 $ 2.35
Granted 90,000 2.80 575,000 2.46
Expired (50,000) 2.49 (165,000) 2.29
Exercised (70,000) 2.21 - -
----------- -----------
Outstanding at end of year 878,000 2.47 908,000 2.42
=========== ===========
Exercisable at end of year 583,000 $ 2.40 408,000 $ 2.32
=========== ===========
Weighted-average remaining
contractual life 2.84 years 3.12 years
=========== ===========

As of September 30, 2005, the range of exercise prices for outstanding options
was $1.40 -$2.80.

The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, Accounting for Stock Based
Compensation, requires the use of option valuation models that were not
developed for use in valuing employee stock options. See footnote B for related
disclosures.

F - 18

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G. STOCK OPTIONS - CONTINUED

Under APB No. 25, no compensation expense is recorded when the exercise price of
the Company's employee stock option equals the fair value of the underlying
stock on the date of grant. Compensation equal to the intrinsic value of
employee stock options is recorded when the exercise price of the stock option
is less than the fair value of the underlying stock on the date of grant. Any
resulting compensation is amortized to expense over the remaining vesting
periods of the options on a straight-line basis. For the years ended September
30, 2005 and 2004, no amounts were recorded to compensation expense related to
stock options issued to employees.

Information regarding pro forma net income is required by SFAS 123, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123. The fair value of these options was
estimated at the date of grant using a Black-Scholes option-pricing model using
the following weighted average assumptions:

2005 2004
--------------------

Volatility 137% 137%
Expected lives 3 years 3.3 years
Expected dividend yield - -
Risk free rates 4.31% 3.45%

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

H. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases certain equipment and facilities under operating leases, of
which rent expense was approximately $558,000 and $536,000 for the years ended
September 30, 2005 and 2004, respectively.

Rent expense for the Company's operating leases, which generally have escalating
rentals over the term of the lease, is recorded using the straight line method
over the initial lease term whereby an equal amount of rent expense is
attributed to each period during the term of the lease, regardless of when
actual payments are made. Generally, this results in rent expense in excess of
cash payments during the early years of a lease and rent expense less than cash
payments in the later years. The difference between rent expense recognized and
actual rental payments is recorded as other long-term liability in the
consolidated balance sheets.

F - 19

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

H. COMMITMENTS AND CONTINGENCIES - CONTINUED

Future minimum annual lease obligations as of September 30, 2005 are as follow:

2006 $ 964,307
2007 984,472
2008 929,076
2009 788,114
2010 552,882
Thereafter 8,517,755
-----------

Total future minimum lease obligations $12,736,606
===========

LEGAL MATTERS

Sexually Oriented Business Ordinance Of Houston, Texas

In January 1997, the City Council of the City of Houston passed a comprehensive
new Ordinance regulating the location of and the conduct within Sexually
Oriented Businesses (the "Ordinance"). The Ordinance established new minimum
distances that Sexually Oriented Businesses may be located from schools,
churches, playgrounds and other sexually oriented businesses. There were no
provisions in the Ordinance exempting previously permitted sexually oriented
businesses from the effect of the new Ordinance. In 1997, the Company was
informed that one of the Company's Houston locations at 3113 Bering Drive failed
to meet the requirements of the Ordinance and accordingly the renewal of the
Company's Business License at that location was denied.

The Company filed a request with the City of Houston requesting an extension of
time during which operations at the Company's north Houston facility could
continue under the Amortization Period provisions of the Ordinance since the
Company was unable to recoup its investment prior to the effective date of the
Ordinance. An administrative hearing was held by the City of Houston to
determine the appropriate Amortization Period to be granted to the Company. At
the Hearing, the Company was granted an amortization period that has since been
reached. The Company has the right to appeal any decision of the Hearing
official to the district court in the State of Texas.

In May 1997, the City of Houston agreed to defer implementation of the Ordinance
until the constitutionality of the entire Ordinance was decided by court trial.
In February 1998, the U.S.

F - 20

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

H. COMMITMENTS AND CONTINGENCIES - CONTINUED

District Court for the Southern District of Texas, Houston Division, struck down
certain provisions of the Ordinance, including the provision mandating a 1,500
foot distance between a club and schools, churches and other sexually oriented
business, leaving intact the provision of the 750 foot distance as it existed
prior to the Ordinance.

The City of Houston has appealed the District Court's rulings with the Fifth
Circuit Court of Appeals. In the event that the City of Houston is successful
in the appeal, the Company could be out of compliance and such an outcome could
have an adverse impact on the Company's future. The permits for the Company's
north Houston location and Bering Drive location have expired.

There are other provisions in the Houston, Texas Ordinance, such as provisions
governing the level of lighting in a sexually oriented business, the distance
between a customer and dancer while the dancer is performing in a state of
undress and provisions regarding the licensing of dancers and club managers that
were upheld by the court which may be detrimental to the Company's business.
The Company, in concert with other sexually oriented businesses, is appealing
these aspects of the Ordinance.

F - 21

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

H. COMMITMENTS AND CONTINGENCIES - CONTINUED

OTHER LEGAL MATTERS

On April 7, 2004, a lawsuit was filed in the 80th Judicial District Court of
Harris County, Texas, styled Cause No. 2004-18510, Charity Renee Stevens, et al.
vs. Lazaro Ernesto Alfonso, et al. This is a wrongful death and personal injury
action against two individuals based on negligence theories and five
entertainment establishments including Rick's based on alleged "dram shop"
violations arising from a two-car collision. Plaintiffs have also sued Ford
Motor Company under a theory of products liability. Plaintiffs include the
children of the decedents, a minor passenger and the mothers of the decedents.
Plaintiffs are seeking unspecified damages including physical pain and
suffering, mental anguish, pecuniary loss, past and future loss of companionship
and consortium, loss of mental and intellectual function, past and future
physical impairment, reduction in earning capacity, increased education costs
and expenses including funeral and medical costs.

Management believes that the Company is not liable for any of the damages and
that the Company is covered by the safe harbor provisions of the Dram Shop Act,
which render certain compliant establishments not liable for the acts of their
patrons. The Company is not aware of any insurance coverage for this claim.
The Company denies that the Company has any liability for the accident and is
vigorously defending the matter.

Discovery is ongoing and the Company has filed a Motion for Summary Judgment on
behalf of Rick's which is currently pending.

For all the above legal matters, no contingent reserves as liabilities have been
recorded in the accompanying balance sheets as such potential losses are not
deemed probable or estimable.

I. LINE-OF-CREDIT

The Company has available a $100,000 unsecured line-of-credit with a bank.
Interest is payable monthly on the outstanding balance at a floating rate of
prime plus 1.5% (8.25% at September 30, 2005). This arrangement is subject to
renewal in June 2006. The amount outstanding under this agreement at September
30, 2005 was $94,888, with the remainder available for future borrowing.

F - 22

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

J. SEGMENT INFORMATION

The following information is presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
Company is engaged in adult night clubs and adult entertainment websites
("Internet"). The Company has identified such segments based on management
responsibility and the nature of the Company's products, services and costs.
There are no major distinctions in geographical areas served as all operations
are in the United States. The Company measures segment profit (loss) as income
(loss) from operations. Total assets are those assets controlled by each
reportable segment.

The following table sets forth certain information about each segment's
financial information for the year ended September 30:

2005 2004
------------ ------------

Business segment sales:
Night clubs $14,708,159 $15,163,331
Internet 788,513 796,353
Discontinued operations (672,265) (2,101,250)
------------ ------------
$14,824,407 $13,858,434

Business segment operating income:
Night clubs $ 2,283,535 $ 2,542,482
Internet 114,500 88,958
General corporate (2,098,955) (1,565,871)
Discontinued operations - 329,034
------------ ------------
$ 299,080 $ 1,394,603

Business segment capital expenditures:
Night clubs $ 4,763,060 $ 659,073
Internet 58,153 5,580
General corporate 516,500 35,546
Discontinued operations (28,693) (55,634)
------------ ------------
$ 5,309,020 $ 644,565

Business segment depreciation and amortization:
Night clubs $ 455,690 $ 385,425
Internet 34,231 43,308
General corporate 122,277 115,404
Discontinued operations (21,732) (64,346)
------------ ------------
$ 590,466 $ 479,791

Business segment assets:
Night clubs $19,037,102 $ 6,640,888
Internet 99,148 108,595
General corporate 5,892,768 6,450,276
Discontinued operations - (438,882)
------------ ------------
$25,029,018 $12,760,877

F - 23

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. COMMON STOCK

L. RELATED PARTY TRANSACTIONS

In May 2002, the Company loaned $100,000 to Eric Langan, Chief Executive Officer
of the Company. The note is unsecured, bears interest at 11% and is amortized
over a period of ten years. The note contains a provision that in the event Mr.
Langan leaves the Company for any reason, the note immediately becomes due and
payable in full. The balance of the note was approximately $79,000 and $86,000
at September 30, 2005 and 2004, respectively, and is included in other assets in
the accompanying consolidated balance sheets.

M. EMPLOYEE RETIREMENT PLAN

The Company sponsors a Simple IRA plan (the "Plan"), which covers all of the
Company's corporate employees. The Plan allows the corporate employees to
contribute up to the maximum amount allowed by law, with the Company making a
matching contribution of 3% of the employee's salary. Expenses related to
matching contributions to the Plan approximated $28,000 and $23,000 for the
years ended September 30, 2005 and 2004, respectively.

N. ACQUISITIONS AND DISPOSITIONS

On March 3, 2004, the Company acquired the assets and business of a 7,000 square
foot gentlemen's club in North Houston and it became the Company's fifth XTC
Cabaret. As a part of the transaction, the Company entered into a new five-year
lease with an option for five additional years. The results of operations of
this new venue are included in the accompanying consolidated financial
statements from the date of acquisition. The $265,000 all-cash purchase
transaction generated goodwill of $20,000. Proforma results of operations have
not been provided, as the amounts were not deemed material to the consolidated
financial statements. The transaction follows the Company's growth strategy.

On September 30, 2004, the Company entered into a Stock Purchase Agreement with
an unrelated third party, whereby the Company sold all of its 510 shares of
common stock of RCI Ventures, Inc. for $15,000 cash and a $235,000 note
receivable bearing interest at a rate of 6%

F - 24

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. ACQUISITIONS AND DISPOSITIONS - CONTINUED

over a five year period. As a part of the transaction, Trumps, a wholly-owned
subsidiary of the Company, and Tantric, a wholly-owned subsidiary of RCI
Ventures., entered into a five year lease agreement for the property located at
5718 Fairdale, Houston, Texas. The Company has recorded a $163,739 deferred
gain related to this transaction for the year ended September 30, 2004. The
gain will be recognized upon collection of the note receivable. The club's
business was accounted for as discontinued operations under accounting
principles generally accepted in the United States of America and therefore, the
club's results of operations and cash flows have been removed from the Company's
consolidated results of continuing operations and cash flows for all periods
presented in this document and such assets and liabilities as of September 30,
2004 have been netted in one line item on the balance sheet. The deferred gain
is netted against the note receivable, included in other assets in the
accompanying balance sheet.

On January 18, 2005, the Company's wholly-owned subsidiary, RCI Entertainment
New York, Inc., a New York corporation ("RCI New York") completed the
acquisition of Peregrine Enterprises, Inc. ("Peregrine"), which operated the
Paradise Club in Midtown Manhattan, New York (50 West 33rd Street). Peregrine
owns and operates an adult entertainment cabaret located in midtown Manhattan.
The cabaret club is located near the Empire State Building and Madison Square
Garden, and is less than 10 blocks from Times Square. The total consideration
was for $7.775 million for the assets and stock of the former Paradise Club,
which had operated on the site for more than a decade. The transaction consisted
of $2.5 million in cash and $5.125 million in a promissory note bearing simple
interest at the rate of 4.0% per annum with a balloon payment at end of five
years and transaction costs of $150,000. The Promissory Note is payable
commencing 151 days after Closing as follows: (a) the payment of $58,333.33 per
month for twenty-four (24) consecutive months; (b) the payment of $63,333.33 for
twenty-four (24) consecutive months; (c) the payment of $68,333.33 for twelve
(12) consecutive months; and (d) a lump sum payment of the remaining balance to
be paid on the sixty-first (61st) month. $2,000,000 of the principal amount of
the Promissory Note is convertible into shares of restricted common stock at
prices ranging from $4.00 to $7.50 per share. The parties also entered into a
Stock Pledge Agreement and Security Agreement to secure the Promissory Note. The
results of operations of the club are included in the Company's consolidated
statement of operations from January 18, 2005.

The following information summarizes the final determination of the purchase
price allocation.

Current assets $ 150,000
Discounted lease 43,022
Non-compete agreement 100,000
License 7,481,978
----------

Net assets acquired $7,775,000

The following unaudited pro forma information presents the results of operations
as if the acquisition had occurred as of the beginning of the immediate
preceding period. Peregrine's operations are for the calendar year 2004. The
pro forma information is not necessarily

F - 25

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. ACQUISITIONS AND DISPOSITIONS - CONTINUED

indicative of what would have occurred had the acquisition been made as of such
periods, nor is it indicative of future results of operations. The pro forma
amounts give effect to appropriate adjustments for the fair value of the assets
acquired, amortization of intangibles and interest expense.

2005 2004
------------ -----------

Revenues $15,310,407 $16,206,998
Net income (loss) from continuing operations (638,841) 425,320
Net income (loss) (495,148) 87,370

Net income (loss) per share - basic and diluted $ (0.13) $ 0.02

On March 31, 2005, the Company completed the sale of one of its clubs known as
'Rick's South' to MBG Acquisition LLC for cash $550,000. In connection with the
sale, the Company recorded a gain of $291,987. The club's business was
accounted for as a discontinued operation under accounting principles generally
accepted in the United States of America, and therefore, the club's results of
operations and cash flows have been removed from the Company's consolidated
results of continuing operations and cash flows for all periods presented and
such assets and liabilities as of September 30, 2004 have been included under
"Net assets of discontinued operation" in the accompanying balance sheet.
Goodwill in the amount of $83,923 was eliminated as the result of this
transaction.

On June 10, 2005, the Company's wholly-owned subsidiary, RCI Entertainment North
Carolina, Inc., a North Carolina corporation ("RCI North Carolina") completed
the acquisition of a 30,000 square foot nightclub in Charlotte, North Carolina.
The name of the club had been changed from 'The Manhattan Club' (5300 Old
Pineville Road) to 'Rick's Cabaret'. The purchase price of the transaction was
$1,000,000 through the issuance of 180,000 shares of restricted common stock
valued at $675,000 and a seven-year promissory note of $325,000, bearing
interest at a rate of 7% per annum. The note is secured by liens upon the
assets of and hereafter acquired assets of RCI Entertainment (North Carolina),
Inc. The results of operations of the club are included in our consolidated
statement of operations from February 1, 2005, when the Company assumed risk of
loss for the club's operations under a management agreement.

Pursuant to the terms of the note, on or after November 1, 2005, the holder
shall have the right, but not the obligation to have the Company purchase from
the holder 4,285 shares per month, calculated at a price per share equal to
$3.75 until the holder has received a total of $1,000,000 from the sale of the
shares less the amount of the note. At the Company's election during any given
month, the Company may either buy the monthly shares or, if the Company elects
not to buy the monthly shares from the holder, then the holder shall sell the
monthly shares in the open market. Any deficiency between the amount which the
holder receives from the sale of the monthly shares and the value of the shares
shall be paid by the Company within three (3) days of the date of sale of the
monthly shares during that particular month. The Company's obligation to
purchase the monthly shares from the holder shall terminate and cease at such
time as the

F - 26

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. ACQUISITIONS AND DISPOSITIONS - CONTINUED

holder has received a total of $1,000,000 from the sale of the shares, less the
amount of the note. Proforma results of operations have not been provided, as
the amounts were not deemed material to the consolidated financial statements.
The transaction follows the Company's growth strategy.

The following information summarizes the final determination of the purchase
price allocation.

Current assets $ 111,752
Property & equipment, net depreciation 640,192
Licenses 455,656
Other assets 5,020
Current liabilities assumed (212,620)
-----------
Net assets acquired $1,000,000

On July 12, 2005, the Company organized RCI Dating Services, Inc. ("RCI
Dating"), which operates as an addition to the Company's internet operations, to
acquire CouplesClick.net from ClickMatch LLC ("ClickMatch"). The Company
transferred its ownership in CouplesTouch.com to RCI Dating and as a result of
the transaction the Company obtained an 85% interest in RCI Dating with the
other 15% owned by ClickMatch.

F - 27

RICK'S CABARET INTERNATIONAL, INC.

TABLE OF CONTENTS
-----------------

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of March 31, 2006 (unaudited)
and September 30, 2005 (audited) F - 29

Consolidated Statements of Operations for the three months and
six months ended March 31, 2006 and 2005 (unaudited) F - 31

Consolidated Statements of Cash Flows for the six months
ended March 31, 2006 and 2005 (unaudited) F - 32

Notes to Consolidated Financial Statements F - 33

F - 28

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS
------

3/31/06 9/30/05
(UNAUDITED) (AUDITED)

CURRENT ASSETS:
Cash and cash equivalents $ 1,473,186 $ 480,330
Accounts receivable
Trade 231,152 310,692
Other, net 140,009 118,872
Marketable securities 51,164 28,919
Inventories 226,254 257,626
Prepaid expenses and other current assets 257,802 87,991
------------ ------------
Total current assets 2,379,567 1,284,430

PROPERTY AND EQUIPMENT:
Buildings, land and leasehold improvements 13,663,451 13,630,778
Furniture and equipment 3,276,540 3,019,445
------------ ------------
16,939,991 16,650,223

Accumulated depreciation (3,690,565) (3,233,468)
------------ ------------
Total property and equipment, net 13,249,426 13,416,755

OTHER ASSETS:
Goodwill and indefinite lived intangibles 9,836,560 9,836,560
Definite lived intangibles, net 115,089 126,262
Other 350,936 365,011
------------ ------------
Total other assets 10,302,585 10,327,833
------------ ------------
Total assets $25,931,578 $25,029,018
============ ============

See accompanying notes to consolidated financial statements.

F - 29

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

3/31/06 9/30/05
(UNAUDITED) (AUDITED)

CURRENT LIABILITIES:
Accounts payable - trade $ 510,442 $ 1,034,508
Accrued liabilities 702,328 852,865
Current portion of long-term debt 948,898 1,349,894
Line of credit --- 94,888
------------ ------------
Total current liabilities 2,161,668 3,332,155

Other long-term liabilities 258,674 193,648
Long-term debt less current portion 11,650,845 11,896,942
------------ ------------
Total liabilities 14,071,187 15,422,745

COMMITMENTS AND CONTINGENCIES --- ---

MINORITY INTERESTS 32,681 31,337

STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par, 1,000,000 shares
authorized; none issued and outstanding --- ---
Common stock, $.01 par, 15,000,000 shares
authorized; 5,499,678 and 5,220,678 shares issued 54,997 52,207
Additional paid-in capital 14,000,780 13,004,567
Accumulated other comprehensive income 37,817 15,572
Accumulated deficit (972,104) (2,203,630)
Less 908,530 shares of common stock held in treasury,
at cost (1,293,780) (1,293,780)
------------ ------------
Total stockholders' equity 11,827,710 9,574,936
------------ ------------

Total liabilities and stockholders' equity $25,931,578 $25,029,018
============ ============

See accompanying notes to consolidated financial statements.

F - 30

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2006 2005 2006 2005
(UNAUDITED) (UNAUDITED)

Continuing Operations:
Revenues:
Sales of alcoholic beverages $2,215,489 $1,192,768 $4,385,484 $2,403,044
Sales of food and merchandise 677,275 413,996 1,315,999 791,098
Service revenues 2,841,119 1,586,890 5,435,920 3,092,841
Internet revenues 203,751 180,729 412,909 367,960
Other 181,882 69,007 348,941 120,657
----------- ----------- ------------ -----------
Total revenues 6,119,516 3,443,390 11,899,253 6,775,600

Operating expenses:
Cost of goods sold 745,295 448,165 1,454,533 845,935
Salaries and wages 1,678,813 1,203,595 3,348,524 2,411,544
Other general and administrative:
Taxes and permits 779,450 477,037 1,474,765 921,627
Charge card fees 104,074 55,609 206,310 115,296
Rent 296,732 105,875 593,578 177,823
Legal and professional 185,288 178,753 335,946 346,079
Advertising and marketing 315,882 215,796 606,550 357,602
Depreciation and amortization 235,788 140,453 468,269 267,242
Other 814,713 618,081 1,663,127 1,177,199
----------- ----------- ------------ -----------
Total operating expenses 5,156,035 3,443,364 10,151,602 6,620,347
----------- ----------- ------------ -----------

Income from continuing operations 963,481 26 1,747,651 155,253

Other income (expense):
Interest income 8,950 11,556 15,386 20,745
Interest expense (271,469) (167,835) (534,521) (256,949)
Minority interests (2,731) (6,877) (1,344) (6,414)
Other 7,839 46 4,354 (734)
----------- ----------- ------------ -----------
Net income (loss) from continuing
operations 706,070 (163,084) 1,231,526 (88,099)

Discontinued operations:
Loss from discontinued operations --- (66,825) --- (148,294)
Gain on sale of subsidiary --- 291,987 --- 291,987
----------- ----------- ------------ -----------
Net income $ 706,070 $ 62,078 $ 1,231,526 $ 55,594
=========== =========== ============ ===========
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.16 $ (0.04) $ 0.28 $ (0.02)
Income from discontinued operations --- 0.06 --- 0.04
----------- ----------- ------------ -----------
Net income, basic $ 0.16 $ 0.02 $ 0.28 $ 0.02
=========== =========== ============ ===========
Net income, diluted $ 0.14 $ 0.02 $ 0.26 $ 0.01
=========== =========== ============ ===========
Weighted average number of common
shares outstanding:
Basic 4,408,237 3,782,481 4,364,649 3,741,315
=========== =========== ============ ===========
Diluted 5,347,386 3,964,987 4,973,583 3,923,821
=========== =========== ============ ===========

Comprehensive income (loss) for the three months ended March 31, 2006 and 2005
were $728,315 and $28,710, and for the six months were $1,253,771 and ($22,265),
respectively. This includes the changes in available-for-sale securities and
net income (loss).

See accompanying notes to consolidated financial statements.

F - 31

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED MARCH 31,
2006 2005
(UNAUDITED) (UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 1,231,526 $ (88,099)
Adjustments to reconcile income (loss) from
continuing operations to cash provided by operating
activities:
Depreciation and amortization 468,269 267,242
Issuance of warrants 17,777 ---
Minority interests 1,344 6,414
Stocks issued for professional services --- 27,120
Changes in operating assets and liabilities (697,031) 813,580
------------ ------------
Cash provided by operating activities 1,021,885 1,026,257

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (289,768) (988,626)
Proceeds from sale of discontinued operations --- 550,000
Acquisition of business, net of cash acquired --- (2,650,000)
Payments for notes receivable 21,493 (10,012)
------------ ------------
Cash used in investing activities (268,275) (3,098,638)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 75,000 474,650
Proceeds from stock options exercised 249,003 ---
Proceeds from long-term debt 1,035,425 3,802,000
Payments on line-of-credit (94,888) ---
Payments on long-term debt (1,025,294) (488,973)
------------ ------------
Cash provided by financing activities 239,246 3,787,677

CASH FLOW FROM DISCONTINUED OPERATIONS:
Cash provided by operating activities --- 200,042
Cash used in investing activities --- (402,585)
Cash used in financing activities --- (176,089)
------------ ------------
Cash used in discontinued operations --- (378,632)

NET INCREASE IN CASH 992,856 1,336,664

CASH AT BEGINNING OF PERIOD 480,330 275,243
------------ ------------
CASH AT END OF PERIOD $ 1,473,186 $ 1,611,907
============ ============
CASH PAID DURING PERIOD FOR:
Interest $ 552,227 $ 242,151
============ ============

Non-cash transactions:
During the quarter ended December 31, 2004, the Company purchased a 9,000
square foot office building for $516,499, payable with $90,039 cash at closing
and a fifteen-year promissory note, bearing interest rate at 7%, in the amount
of $426,460.

In March 2006, the seller of the New York club converted $675,000 of
principal from the related promissory note into 150,000 shares of restricted
common stock.

See accompanying notes to consolidated financial statements.

F - 32

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006

1. BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB of
Regulation S-B. They do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. However, except as disclosed herein, there has
been no material change in the information disclosed in the notes to the
financial statements for the year ended September 30, 2005 included in the
Company's Annual Report on Form 10-KSB, as amended and filed with the Securities
and Exchange Commission. The interim unaudited financial statements should be
read in conjunction with those financial statements included in the Form 10-KSB.
In the opinion of management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been made.
Operating results for the three months and six months ended March 31, 2006 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 2006.

2. STOCK OPTIONS

The Company accounts for its stock options under the recognition and measurement
principles of Accounting Principles Board ("APB") opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. The following table
illustrates the effect on net income (loss) and earnings (loss) per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock Based
Compensation, to stock-based employee compensation. The following presents pro
forma net income (loss) and per share data as if a fair value accounting method
had been used to account for stock-based compensation:

FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2006 2005 2006 2005

Net income, as reported $ 706,070 $ 62,078 $1,231,526 $ 55,594
Less total stock-based employee compensation
expense determined under the fair value
based method for all awards (135,630) (128,393) (271,260) (256,786)
---------- ---------- ----------- ----------
Pro forma net income (loss) $ 570,440 $ (66,315) $ 960,266 $(201,192)
========== ========== =========== ==========

Earnings (loss) per share:
Basic - as reported $ 0.16 $ 0.02 $ 0.28 $ 0.02
========== ========== =========== ==========
Diluted - as reported $ 0.14 $ 0.02 $ 0.26 $ 0.01
========== ========== =========== ==========

Basic - pro forma $ 0.13 $ (0.02) $ 0.22 $ (0.05)
========== ========== =========== ==========
Diluted - pro forma $ 0.11 $ (0.02) $ 0.19 $ (0.05)
========== ========== =========== ==========

F - 33

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006

3. RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.

4. COMPREHENSIVE INCOME

The Company reports comprehensive income in accordance with the provisions of
SFAS No. 130, Reporting Comprehensive Income. Comprehensive income (loss)
consists of net income (loss) and gains (losses) on available-for-sale
marketable securities.

5. COMMON STOCK

On October 11, 2005, 10,000 stock options were exercised by one of the Company's
directors for proceeds of $21,300. In January 2006, 54,000 stock options were
exercised by the Company's employees for proceeds of $138,240 and in February
2006, 10,000 stock options by one of the Company's directors for $25,400. Also,
30,000 shares of the Company's common stock was sold to a non-employee for
$75,000 in January 2006. In March 2006, a non-employee exercised 25,000 stock
options for $64,063 and the seller of the New York club converted $675,000 of
principal from the related promissory note into 150,000 shares of restricted
common stock.

6. SEGMENT INFORMATION

Below is the financial information related to the Company's segments:

FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2006 2005 2006 2005

REVENUES
Club operations $5,915,580 $3,262,661 $11,484,298 $ 6,407,640
Internet websites 203,936 180,729 414,955 367,960
----------- ----------- ------------ ------------
$6,119,516 $3,443,390 $11,899,253 $ 6,775,600
=========== =========== ============ ============
NET INCOME
Club operations $1,317,697 $ 317,999 $ 2,340,205 $ 947,568
Internet websites 30,447 27,226 79,296 58,412
Corporate expenses (642,074) (508,309) (1,187,975) (1,094,079)
Discontinued operations --- 225,162 --- 143,693
----------- ----------- ------------ ------------
$ 706,070 $ 62,078 $ 1,231,526 $ 55,594
=========== =========== ============ ============

F - 34

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006

7. REVENUE RECOGNITION

The Company recognizes revenue from the sale of alcoholic beverages, food and
merchandise, and services at the point-of-sale upon receipt of cash, check, or
credit card charge. This includes daily, annual and lifetime VIP memberships.

If the Company had deferred membership revenue and recognized it based on the
lives above, the impact on revenue and net income recognized would have been an
increase of approximately $0 and $4,243 for the three months and an increase of
$0 and $3,936 for the six months ended March 31, 2006 and 2005, respectively.
This would have also resulted in a deferred revenue balance of approximately $0
and $2,066 as of March 31, 2006 and 2005, respectively. Management does not
believe the impact of this difference in accounting treatment is material to the
Company's annual and quarterly financial statements. However, the Company began
to record revenues in such manner effective January 1, 2004, and hence as of
March 31, 2006 deferred revenues of approximately $19,200 have been recorded
related to such memberships.

The Company recognizes Internet revenue from monthly subscriptions to its online
entertainment sites when notification of a new subscription is received from the
third party hosting company or from the credit card company, usually two to
three days after the transaction has occurred. The Company recognizes Internet
auction revenue when payment is received from the credit card company as
revenues are not deemed estimable nor collection deemed probable prior to that
point.

8. LONG-TERM DEBT

On February 6, 2006, the Company issued a Convertible Debenture (the
"Debenture") to an unrelated investment group for the principal sum of
$1,000,950 bearing interest at the rate of 10% per annum, with a maturity date
of February 1, 2009. Under the terms of the Debenture, the Company is required
to make three quarterly interest payments beginning May 1, 2006. Thereafter, the
Company is required to make nine equal quarterly principal and interest
payments. At any time after 366 days from the date of issuance of this
Debenture, the Company has the right to redeem the Debenture in whole or in part
at any time during the term of the Debenture. At the election of the Holder, the
Holder has the right at any time to convert all or any portion of the principal
or interest amount of the Debenture into shares of our common stock at a rate of
$4.75 per share, which approximates the closing price of the Company's stock on
February 6, 2006. The proceeds of the Debenture was used to

F - 35

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006

8. LONG-TERM DEBT (CONTINUED)

payoff certain debt and increase our working capital.

9. ACQUISITIONS AND DISPOSITIONS

On January 18, 2005, the Company completed the acquisition of Peregrine
Enterprises, Inc., which operated the Paradise Club in Midtown Manhattan, New
York (50 West 33rd Street). The total consideration was for $7.775 million for
the assets and stock of the former Paradise Club, which had operated on the site
for more than a decade. The transaction consisted of $2.5 million in cash and
$5.125 million in a promissory note bearing simple interest at the rate of 4.0%
per annum with a balloon payment at end of five years, part of which is
convertible to restricted shares of Rick's Cabaret common stock at prices
ranging from $4.00 to $7.50 per share, and transaction costs of $150,000. The
results of operations of the club are included in our consolidated statement of
operations from January 18, 2005.

The following unaudited pro forma information presents the results of operations
as if the acquisition had occurred as of the beginning of the immediate
preceding period. The pro forma information is not necessarily indicative of
what would have occurred had the acquisition been made as of such periods, nor
is it indicative of future results of operations. The pro forma amounts give
effect to appropriate adjustments for the fair value of the assets acquired,
amortization of intangibles and interest expense.

FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2005 2005

Revenues $ 3,443,390 $ 7,261,600
Net income (loss) from continuing
operations $ (163,084) $ (368,099)
Net income (loss) $ 62,078 $ (224,406)

Net income (loss) per share - basic and diluted $ 0.02 $ (0.06)

On March 31, 2005, the Company completed the sale of one of its clubs known as
'Rick's South' to MBG Acquisition LLC for $550,000 cash. In connection with the
sale, the Company recorded a gain of $291,987. The club's business was accounted
for as discontinued operations under accounting principles generally accepted in
the United States of America and therefore, the club's results of operations and
such assets and liabilities as of March 31, 2005 have been removed from the
Company's consolidated results of continuing operations and balance sheet for
all periods presented in this document and the cash flows for the six months
ended March 31, 2005 have been provided in the consolidated statement of cash
flows.

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006

10. SUBSEQUENT EVENTS

On April 17, May 1, and May 3, 2006, the seller of the New York club converted a
total of $900,000 of principal from the related promissory note into 150,000
shares of restricted stock.

On April 5, 2006, the Company's wholly owned subsidiary, RCI Holdings, Inc.
completed the acquisition of real property located at 9009 Airport Blvd.,
Houston, Texas where the Company currently operates Rick's Sports Bar
(previously Hummers Sports Bar and XTC South clubs). Pursuant to the terms of
the Agreement, the Company paid a total sales price of $1,300,000 which
consisted of $500,000 in cash and 160,000 shares of the Company's restricted
common stock. As part of the transaction, the Company has agreed to file a
registration statement for the resale of such restricted common stock within 45
days after the closing. Additionally, nine months after the filing of the
Registration Statement, the Seller shall have the right, but not the obligation,
to have the Company buy the shares at a price of $5.00 per share at a rate of no
more than 10,000 shares per month until such time as the Seller receives a total
of $800,000 from the sale of such shares. Alternatively, the Seller shall have
the option to sell such shares in the open market upon the effectiveness of the
Registration Statement. The transaction was the result of arms-length
negotiations between the parties.

On May 9, 2006, the Company purchased Joint Ventures, Inc., an operator of an
adult nightclub in South Houston, Texas, formerly known as Dreamers Cabaret &
Sports Bar located at 802 Houston Blvd. The purchase price was for $840,000 paid
in cash. The club, located in Houston suburbs, has been converted to an XTC
Cabaret.

On April 28, 2006, the Company entered into convertible debentures with three
shareholders for a principal sum of $825,000. The term is for two years and the
interest rate is 12% per annum. At the election of the holders, the holders have
the right at any time to convert all or any portion of the principal or interest
amount of the debenture into shares of the Company's common stock at a rate of
$6.55 per share. The debenture provides, absent shareholder approval, that the
number of shares of the Company's common stock that may be issued by the Company
or acquired by the holders upon conversion of the debenture shall not exceed
19.99% of the total number of issued and outstanding shares of the Company's
common stock.