Edgar Filing: RICKS CABARET INTERNATIONAL INC

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

RICK'S
CABARET

RICK'S CABARET INTERNATIONAL, INC.
1,160,000 SHARES OF COMMON STOCK

This prospectus relates to the offering for resale of up to 530,000 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, 360,000
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 August 17, 2005, the last reported sales price of our Common Stock
was $3.50 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 SEPTEMBER 1, 2005.

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

PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . 7
THE BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION . . . . . . . . . . . . . . . . . . 16
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . 23
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . 24
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS . . . . . . . . . . . . 24
SECURITY OWNERSHIP OF CERTAIN
BENEFICAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 29
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . 31
SELLING STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
INTEREST OF NAMED EXPERTS AND COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . 36
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
WHERE YOU CAN FIND MORE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 37
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 37 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 nine adult nightclubs that offer live adult entertainment, restaurant
and bar operations. Three 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. We are completing renovation of the location and anticipate
opening this club as a fourth "Rick's Cabaret" 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 and operate a sports bar under the name of "Hummers" in Houston and
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 4,287,148 shares (as of August 17, 2005).
Common Stock

Common Stock Up to 530,000 shares of Common Stock held by certain selling stockholders, 220,000
Offered shares of Common Stock issuable upon the conversion of a Convertible Debenture,
360,000 shares of common stock issuable upon the exercise of a Convertible Note (with
conversion prices ranging from $4.50 to $7.50 per share and a weighted average price of
5.46 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.

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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.

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

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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
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

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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 2006, 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 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.

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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 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;

Page 5

- 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.

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

As of August 17, 2005, our Directors and executive officers and their respective
affiliates collectively and beneficially owned approximately 27% 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

Page 6

management from bringing a lawsuit against Directors and officers for breach of
their duty of 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.

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.

Page 7

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,
CouplesClick.net and NaughtyBids.com. The site xxxPassword.com features adult
content licensed through Voice Media, Inc. CouplesTouch.com and CouplesClick.net
are personal 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.

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 in this prospectus registration statement include our
100%-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

Page 8

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, 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.

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.

Page 9

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.

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; and Charlotte, North Carolina. We intend to open a
"Rick's Cabaret" in New York, New York in September 2005. We also operate a
nightclub in Houston's Galleria District as "Club Onyx", an upscale venue that
welcomes all customers but cater 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 a
controlling interest in and operate a sport bar called "Hummers". We sold our
New Orleans nightclub in March 1999, but it continues to use the name "Rick's
Cabaret" under a licensing agreement. In early 2003, we acquired 51% control of
the Wild Horse Cabaret adult nightclub near Hobby Airport, Houston, Texas and
operate it as part of our popular XTC Cabaret group. In May 2003, we opened a
sports bar called "Hummers", which is located next to Wild Horse Cabaret, in
Houston, Texas.

Page 10

RECENT NIGHTCLUB TRANSACTIONS

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

2. 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 own
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.

3. 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.

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. 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. In September 2005, we intend to open the cabaret club as "Rick's
Cabaret" which will occupy 10,000 square feet on three levels, with an
additional 4,000 square feet available for office space.

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.

5. On June 10, 2005, our wholly owned subsidiary, RCI Entertainment (North
Carolina), Inc., a North Carolina corporation entered 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 owns a

Page 11

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 valued at $3.75 per share
and 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 $3,009.29. 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.

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

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 ad 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.

Page 12

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:

(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.

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.

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.

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 13

GOVERNMENTAL REGULATIONS

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
has 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 will be
required to be in compliance with all state and local laws governing the sale of
liquor and zoning for adult oriented businesses.

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 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 August 17, 2005, we had approximately 407 employees, of which 54 are in
management positions, including corporate and administrative operation and
approximately 353 of which are engaged in entertainment, food and beverage
service, including bartenders, waitresses, and entertainers. None of our

Page 14

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.

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
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

Page 15

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.

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.

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 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

Page 16

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 seven adult nightclubs
under the name "Rick's Cabaret" and "XTC" in Houston, Austin and San
Antonio, Texas, Charlotte, North Carolina, and Minneapolis, Minnesota. We
own a club in New York, New York, which we intend to begin operating in
September 2005 as a "Rick's Cabaret." We also own and operate a sport bar
called the "Hummers" 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 three adult Internet membership Web sites at
www.CoupleTouch.com, CouplesClick.net 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
service. 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.

Beginning in fiscal 2002 and continuing through fiscal 2004, 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.

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

Page 17

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 comprised of credit card charges, which are
generally converted to cash in two to five days after a purchase is made. Our
accounts receivable other is comprised of employee advances and other
miscellaneous receivables. Notes receivable are included in other assets in the
accompanying consolidated balance sheets. We recognize 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, 2004 and 2003.

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, 2004 and 2003 consist of common stock.
As of September 30, 2004 and 2003, our 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.

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 seven 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 income of the respective period.

GOODWILL

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

Page 18

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 composed 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 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.

RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004 AS COMPARED
TO THE FISCAL YEAR ENDED SEPTEMBER 30, 2003

For the fiscal year ended September 30, 2004, we had consolidated total revenues
of $15,959,684, compared to consolidated total revenues of $15,059,569 for the
year ended September 30, 2003. This was an increase of $900,115 or 5.97%.
While we had an increase in total revenues in our existing and new nightclub
operations of $1,156,950, the decrease in total revenues resulted from our
Internet businesses was $256,835. Revenues from nightclub operations for
same-location same-period increased by 5.88%, while revenues of Internet
businesses for same-sites same-period decreased by 24.38%. The overall increase
was primarily due to the increase in revenues of our existing and new club
operations.

Our net income before minority interest for the year ended September 30, 2004
was $780,029 compared to $403,936 for the year ended September 30, 2003. The
increase in net income was primarily due to the increase of income from
operations. Our net income from operations for nightclub operations was
$2,542,482 for the year ended September 30, 2004 compared with $1,934,150 for
the year ended September 30, 2003. Our net income from operations for our
Internet businesses was $88,958 for the year ended September 30, 2004 compared
with $36,421 for the year ended September 30, 2003. Our net income for our
nightclub operations for the same-location-same-period increased by 35.48%. Our
net income for our Internet operations for the same-web-site-same-period
increased by 144.25%.

Our cost of goods sold for the year ended September 30, 2004 was 12.42% of total
revenues compared to 14.58 % of related revenues for the year ended September
30, 2003. The decrease was due primarily to decrease in costs of our Internet
activities and an addition of XTC club, which has low cost of goods sold. Our
cost of goods sold for the nightclub operations for the year ended September 30,
2004 was 12.55% of our total revenues from club operations compared to 14.40%
for the year ended September 30, 2003. 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,

Page 19

2004 was 8.77% compared to 17.41% of related revenues for the year ended
September 30, 2003. We have implemented measures to reduce expenses in our
Internet operations.

Our payroll and related costs for the year ended September 30, 2004 were
$5,491,401 compared to $5,393,708 for the year ended September 30, 2003. 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
1.14%. Our payroll for same-site-same-period Internet operations increased by
6.53%. 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,
2004 were $7,419,507 compared to $7,112,974 for the year ended September 30,
2003. The increase was primarily due to the increase in taxes & permit, rent,
insurance, utilities, and advertising & marketing expenses from opening new
locations. Other selling, general and administrative expenses for
same-location-same-period for the nightclub operations increased by 5.32%, while
the same expenses for same-site same-period for Internet operations decreased by
37.27%.

Our interest expense for the year ended September 30, 2004 was $344,438 compared
to $384,221 for the year ended September 30, 2003. The decrease was primarily
due to the decrease in debt. We have decreased our long term debt to $3,881,610
as of September 30, 2004 compared to debt of $4,026,335 as of September 30,
2003.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2005 AS COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 2004

For the nine months ended June 30, 2005, we had consolidated total revenues of
$10,504,612 compared to consolidated total revenues of $10,647,459 for the nine
months ended June 30, 2004, or a decrease of $142,847. The decrease in total
revenues was primarily attributable to the decrease in overall revenues
generated by our club business in previous quarters plus a decrease of $34,887
by our internet business. Our club operations in Houston benefited from the
Super Bowl in the previous year. Total revenues for same-location-same-period
of club operations decreased to $9,539,247 for the nine months ended June 30,
2005 from $9,610,536 for same period ended June 30, 2004, or by 0.74%. The
decrease in internet revenues was due to our transition from programs which
generate high revenues with very low margins to programs which will produce
higher margins from lower revenues.

The cost of goods sold for the nine months ended June 30, 2005 was 12.23% of
total revenues compared to 11.53% for the nine months ended June 30, 2004. This
increase is attributable to the addition of Rick's club, which have higher cost
of goods sold, offset by a reduction in costs of maintaining our internet
operations. The cost of goods sold for the club operations for the nine months
ended June 30, 2005 was 12.69% and 11.66% for the nine months ended June 30,
2004. The cost of goods sold from our internet operations for the nine months
ended June 30, 2005 was 4.52% compared to 9.52% for the nine months ended June
30, 2004. The cost of goods sold for same-location-same-period of club
operations for the nine months ended June 30, 2005, was 12.35%, compared to
11.61% for the same period ended June 30, 2004.

Payroll and related costs for the nine months ended June 30, 2005 were
$3,727,169 compared to $3,676,524 for the nine months ended June 30, 2004. This
increase was the result of additional personnel added to our new club operations
offset by labor cost reduction in our existing club operations. Management
currently believes that its labor and management staff levels are appropriate.

Other general and administrative expenses for the nine months ended June 30,
2005, were $5,174,207 compared to $4,809,424 for the nine months ended June 30,
2004. The increase was due primarily to an

Page 20

increase in legal and professional, rent, indirect operating expenses, travel
and lodging, and utilities from opening new locations in New York, New York and
Charlotte, North Carolina.

Interest expense for the nine months ended June 30, 2005 was $438,298 compared
to $242,337 for the nine months ended June 30, 2004. The increase was
attributable to us obtaining new debt to finance the purchase of the club in New
York. As of June 30, 2005, the balance of long-term debt was $12,839,849
compared to $3,923,356 a year earlier.

Net income for the nine months ended June 30, 2005 was $44,913 compared to
$698,087 for the nine months ended June 30, 2004. The decrease in net income was
primarily due to the increase in operating expenses due to managing two new
locations in New York and North Carolina and increase in interest expense
related to the acquisitions of a club in New York. Net income for
same-location-same-period of club operations increased to $1,973,572 for the
nine months ended June 30, 2005 from $1,899,491 for same period ended June 30,
2004, or by 3.90%. Management currently believes that the Company is in position
to continue to be profitable in fiscal 2005.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2005, we had a working capital deficit of ($1,195,509) compared to
working capital of $538,749 at September 30, 2004. The decrease in working
capital was primarily due to increases in accrued liabilities and current
portion of long term debt, and a decrease in prepaid expenses and other current
assets. The value of available-for-sale marketable securities decreased by
$91,207, which was primarily due to market price fluctuation.

Net cash provided by operating activities in the nine months ended June 30, 2005
was $944,159 compared to net cash provided of $412,715 for the nine months ended
June 30, 2004. The increase in cash provided by operating activities was
primarily due to decreases in other current assets and increases in accounts
payable and accrued expenses.

We used $4,486,152 and $529,142 of cash in investing activities during the nine
months ended June 30, 2005 and 2004, respectively. $3,744,479 of cash was
provided and $86,530 of cash was used in financing activities during the nine
months ended June 30, 2005 and 2004, respectively.

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.

Page 21

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
its 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 50,00 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 borrowing 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.

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.

Page 22

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
indicates that there are no seasonal fluctuations in our Internet activities.

GROWTH STRATEGY

We believe that our nightclub 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 club and the North Carolina club, 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 us contributing equity 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 and/or acquire real estate in
connection with club operations, although some clubs may be in leased premises.

We also expect to continue to grow our Internet profit centers. We plan to focus
on high-margin Internet activities that leverage our marketing skills while
requiring a low level of start-up cost 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.

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

Fourth Quarter 2003 $1.75 $1.25
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

On August 17, 2005, the closing price for a share of our common stock was $3.50.

Page 23

RECORD HOLDERS.

As of August 17, 2005, there were approximately 1,344 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.

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

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:

Page 24

-------------------------------------------------------------------
NAME AGE POSITION
-------------------------------------------------------------------

Eric S. Langan 37 Director, Chairman of the Board, President,
Chief Executive Officer, Chief Financial
Officer
-------------------------------------------------------------------
Travis Reese 35 Director and V.P.-Director of Technology
-------------------------------------------------------------------
Robert L. Watters 54 Director
-------------------------------------------------------------------
Alan Bergstrom 60 Director
-------------------------------------------------------------------
Steven L. Jenkins 48 Director
-------------------------------------------------------------------

INFORMATION CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES

We have an Audit Committee whose members are Robert L. Watters, Alan Bergstrom
and Steven L. Jenkins. Mr. Watters was our President until March 1999, and has
not been an officer or employee since March 1999. Mr. Watters, Mr. Bergstrom
and Mr. Jenkins are independent Directors. The primary purpose of the Audit
Committee is to oversee our financial reporting process on behalf of the Board
of Directors. The Audit Committee meets privately with our Chief Accounting
Officer and with our independent registered public accounting firm and evaluates
the responses by the Chief Accounting Officer both to the facts presented and to
the judgments made by our outside independent registered public accounting firm.
Our Audit Committee has reviewed and discussed our audited financial statements
for the year ended September 30, 2004 with our management. Steven L. Jenkins
serves as the Audit Committee's Financial Expert.

In May 2000, our Board adopted a Charter for the Audit Committee. The Charter
establishes the independence of our Audit Committee and sets forth the scope of
the Audit Committee's duties. The Purpose of the Audit Committee is to conduct
continuing oversight of our financial affairs. The 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. The 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
accounting, compliance with law, and ethical conduct. A majority of the members
of the Audit Committee are independent. The Audit Committee is objective, and
reviews and assesses the work of our independent registered public accounting
firm and our internal audit department.

The Audit Committee reviewed and discussed the matters required by SAS 61 and
our audited financial statements for the fiscal year ended September 30, 2004
with management and our independent registered public accounting firm. The
Audit Committee has received the written disclosures and the letter from our
independent registered public accounting firm required by Independence Standards
Board No. 1, and the Audit Committee has discussed with the independent
registered public accounting firm the independent registered public accounting
firm's independence. The Audit Committee recommended to the Board of Directors
that our audited financial statements for the fiscal year September 30, 2004 be
included in our Annual Report on Form 10-KSB for the fiscal year ended September
30, 2004, as amended.

We have a Nominating Committee whose members are 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. A majority of the members of the Nominating Committee will be
independent. A copy of the Nominating Committee's Charter can be found on the
Company's website at www.Ricks.com.
-------------

Page 25

Subsequent to the fiscal year ending September 30, 2004, the Board of Directors
formed a Compensation Committee whose members are Robert Watters, Alan Bergstrom
and Steven L. Jenkins. Decisions concerning executive officer compensation for
the fiscal year ending September 30, 2004 were made by the full Board of
Directors. Eric S. Langan and Travis Reese are the only directors of the
Company who are also officers of the Company. The primary purpose of the
Compensation Committee is to evaluate and review the compensation of executive
officers.

The Board of Directors held nine (9) meetings during the fiscal year ended
September 30, 2004, one (1) of which was held by unanimous written consent. The
Audit Committee held four (4) meetings during the fiscal year ended September
30, 2004. All of our Directors attended at least 75% of our Board meetings.
All of our Audit Committee members attended at least 75% of our Audit Committee
meetings.

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

DIRECTOR COMPENSATION

We do not currently pay any cash directors' fees, but we pay the expenses of our
directors in attending board meetings. In September 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 vest in September 2006 and have a
strike price of $2.54 per share and expire in September 2009.

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.

EXECUTIVE COMPENSATION

The following table reflects all forms of compensation for services to us for
the fiscal years ended September 30, 2004, 2003 and 2002 certain executive
officers. No other executive officer of ours received compensation that
exceeded $100,000 during fiscal 2004. 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 26

SUMMARY COMPENSATION TABLE

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

Eric Langan 2004 $ 326,038 -0- -0- -0- 280,000 -0- -0-
----------------------------------------------------------------------------------------------------------------
2003 $ 260,000 -0- -0- -0- 5,000 -0- -0-
----------------------------------------------------------------------------------------------------------------
2002 $ 260,000 -0- -0- -0- -0- -0- -0-
----------------------------------------------------------------------------------------------------------------
Travis Reese 2004 $ 161,000 -0- -0- -0- 55,000 -0- -0-
----------------------------------------------------------------------------------------------------------------
2003 $ 158,855 -0- -0- -0- 5,000 -0- -0-
----------------------------------------------------------------------------------------------------------------
2002 $ 137,500 -0- -0- -0- -0- -0- -0-
----------------------------------------------------------------------------------------------------------------

(1) We provide certain executive officers certain personal benefits. Since
the value of such benefits do 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 Exercise of Base
Name Options/SARS Employees in Fiscal Price ($/Sh) Expiration Date
Granted (#) Year (%)
--------------------------------------------------------------------------------------

Eric Langan 75,000 13.04% $ 2.20 2/06/2009
--------------------------------------------------------------------------------------
5,000 (1) .86% $ 2.54 9/14/2009
--------------------------------------------------------------------------------------
200,000 34.78% $ 2.49 9/14/2009
--------------------------------------------------------------------------------------
Travis Reese 5,000 (1) .86% $ 2.54 9/14/2009
--------------------------------------------------------------------------------------
55,000 9.56% $ 2.49 9/14/2009
--------------------------------------------------------------------------------------

(1) These options were granted to Messrs. Langan and Reese for serving in their
capacity as Directors. There were no exercises of options by these persons
during the fiscal year ended September 30, 2004.

Page 27

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

Number of Value of Unexercised
Unexercised In-The-Money
Underlying Options/SARs at FY
Shares Acquired Options/SARs at FY end ($);
Name on Exercise (#) Value Realized ($) end (#); Exercisable/
Exercisable/ Unexercisable
Unexercisable
------------ ---------------- ------------------ ------------------ ---------------------

Eric Langan -0- (1) -0- 190,000/205,000 $ 16,100/ -0-
------------ ---------------- ------------------ ------------------ ---------------------
Travis Reese -0- (1) -0- 40,000/55,000 $ 6,350/ -0-
------------ ---------------- ------------------ ------------------ ---------------------

(1) These persons did not exercise of options during the fiscal year ended
September 30, 2004.

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 assists us 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, 2004, 908,000 stock options are presently outstanding under the
1999 Plan. As of August 17, 2005, 50,000 of these stock options have been
exercised.

Page 28

EQUITY COMPENSATION PLAN INFORMATION(1)

--------------------------------------------------------------------------------------------------------------------------------
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 908,000 $ 2.42 92,000
--------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 0 0 300,000
--------------------------------------------------------------------------------------------------------------------------------
TOTAL 908,000 $ 2.42 392,000
--------------------------------------------------------------------------------------------------------------------------------

(1) As of September 30, 2004.

EMPLOYMENT AGREEMENTS

We have a one-year employment agreement with Eric S. Langan. This Agreement
extends through April 1, 2006 and provides for an annual base salary of
$340,000. The Agreement also provides for participation in all benefit plans
maintained by us for salaried employees. This Agreement contains a
confidentiality provision and an agreement by Mr. Langan not to compete with us
upon the expiration of the Agreement.

We have a three-year employment agreement with Travis Reese. This Agreement
extends through February 1, 2007 and provides for an annual base salary of
$175,000. The Agreement also provides for participation in all benefit plans
maintained by us for salaried employees. This Agreement contains a
confidentiality provision and an agreement by Mr. Reese not to compete with us
upon the expiration of the Agreement.

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.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

The following table sets forth certain information at August 17, 2005, 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 August 17, 2005, there were 4,287,148
shares of common stock outstanding.

Page 29

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

Eric S. Langan 1,155,960 (1) Common stock 25.2%
10959 Cutten Road
Houston, Texas 77066
---------------------------- ----------------- -------------- -----------
Robert L. Watters 35,000 (2) Common stock 0.8%
315 Bourbon Street
New Orleans, Louisiana 70130
---------------------------- ----------------- -------------- -----------
Steven L. Jenkins 20,000 (3) Common stock 0.4%
16815 Royal Crest Drive
Suite 160
Houston, Texas 77058
---------------------------- ----------------- -------------- -----------
Travis Reese 54,775 (4) Common stock 1.2%
10959 Cutten Road
Houston, Texas 77066
---------------------------- ----------------- -------------- -----------
Alan Bergstrom 30,000 (5) Common stock 0.6%
707 Rio Grande, Suite 200
Austin, Texas 78701
---------------------------- ----------------- -------------- -----------
All of our Directors and 1,295,720 (6) Common stock 27.4%
Officers as a
Group of five persons
---------------------------- ----------------- -------------- -----------

---------------------------- ----------------- -------------- -----------
E. S. Langan. L.P. 578,632 Common stock 13.4%
10959 Cutten Road
Houston, Texas 77066
---------------------------- ----------------- -------------- -----------
Ralph McElroy 748,467 (7) Common stock 17.2%
1211 Choquette
Austin, Texas, 78757
---------------------------- ----------------- -------------- -----------
William Friedrichs 400,260 (8) Common stock 9.3%
16815 Royal Crest Dr., #260
Houston, Texas 77058
---------------------------- ----------------- -------------- -----------

_____________________________

(1) Mr. Langan has sole voting and investment power for 252,328 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 295,000 shares of common stock that are exercisable within 60
days.

(2) Includes options to purchase up to 35,000 shares of common stock that are
exercisable within 60 days.

(3) Includes options to purchase up to 20,000 shares of common stock that are
exercisable within 60 days.

(4) Includes 7,275 shares of common stock and options to purchase up to 47,500
shares of common stock that are exercisable within 60 days.

(5) Includes options to purchase up to 30,000 shares of common stock that are
exercisable within 60 days.

(6) Includes options to purchase up to 427,500 shares of common stock that are
exercisable within 60 days.

(7) Includes 698,467 shares of common stock held directly and 50,000 shares of
common stock that would be issuable upon the exercise of warrants at an exercise
price of $3.00 per share. This number specifically excludes

Page 30

220,000 shares of common stock that would be issuable upon conversion of a
convertible debenture held by Mr. McElroy. 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.

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

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

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 August 17, 2005, the balance of the note was
$79,164.

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.

SELLING STOCKHOLDERS

The following is a list of the selling stockholders who own or who have a right
to acquire the 1,160,000 shares of Common Stock covered by this prospectus.
Currently, 530,000 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 360,000 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

Page 31

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
4,287,148 shares of common stock outstanding as of August 17, 2005. Shares of
common stock subject to warrants, options and other convertible securities that
are currently exercisable or exercisable within 60 days of August 17, 2005, 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 August 17, 2005. 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 17.2%
---------------------------- --------------- --------------- ------------ ----------- -------------
Jay Teitelbaum None 150,000 150,000 -0- -0-
---------------------------- --------------- --------------- ------------ ----------- -------------
Tony Hege None 180,000 180,000 -0- 4.1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Philip Eisenberg None 360,000 (6) 360,000 -0- -0-
---------------------------- --------------- --------------- ------------ ----------- -------------
Ahmed Anakar Employee 40,900 (7) 15,000 25,900 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
American Dream Media (8) None 26,650 10,000 16,650 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
William M. Friedrichs, Jr. >5%
shareholder 400,260 50,000 350,260 9.3%
---------------------------- --------------- --------------- ------------ ----------- -------------
Steve Wadley None 25,000 25,000 -0- -0-
---------------------------- --------------- --------------- ------------ ----------- -------------
Wade McElroy Son of >10%
shareholder 52,500 17,500 35,000 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Timothy Winata Employee 106,000 (9) 25,000 81,000 1.8%
---------------------------- --------------- --------------- ------------ ----------- -------------
Jante Simomeaux None 17,570 10,000 7,570 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Anderson Studebaker Employee 36,415 (10) 5,000 31,415 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Jackie Markham None 5,225 5,000 225 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Wayne Fenlon Employee 7,500 (11) 2,500 5,000 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Doris Jane King Sister of a
>10%
shareholder 7,000 5,000 2,000 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Robert Axelrod Outside
Counsel 90,000 (12) 20,000 70,000 <1%
---------------------------- --------------- --------------- ------------ ----------- -------------
Zachary Axelrod Son of Outside
Counsel 10,000 10,000 -0- -0-
---------------------------- --------------- --------------- ------------ ----------- -------------

---------------------------- --------------- --------------- ------------ ----------- -------------
TOTAL 1,160,000
---------------------------- --------------- --------------- ------------ ----------- -------------

(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 4,287,148 shares of Common stock issued and outstanding as of
August 17, 2005.

(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, subject to adjustment under certain conditions. The
Debenture provides, however, 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.

(6) Consists of 360,000 shares of Common Stock which may be acquired upon
conversion of the outstanding principal under a secured convertible note
with exercise prices ranging from $4.00 to $7.50 per share with a weighted
average price of $5.46 per share.

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

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

(9) Includes up to 75,000 shares of common stock issuable upon the exercise of
options that are exercisable within 60 days.

(10) Includes 8,915 shares of common stock and up to 27,500 shares of common
stock issuable upon the exercise of options that are exercisable within 60
days.

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

(12) Consists of 65,000 shares of common stock and 25,000 shares of common stock
issuable upon the exercise of options that are exercisable within 60 days.

Page 33

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;

- 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.

Page 34

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.

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 August 17, 2005, there were 4,287,148 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

Page 35

preferred stock. Because of its 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

SECURED CONVERTIBLE NOTE

On January 18, 2005, we entered a Secured Convertible Note with 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. 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 65,000 shares of our common stock, and has an option to purchase
an additional 25,000 shares of our common stock. His entire relationship with us
has been as legal counsel, and there are no

Page 36

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,
2004 and 2003 included in and made a part of this document have been audited by
Whitley Penn, 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.

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

Page 37

materials, please contact Mr. Eric Langan, our President and Chief Executive
Officer, at 10959 Cutten Road, Houston, Texas 77066.

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 38

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003

TABLE OF CONTENTS

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

Audited Consolidated Financial Statements:

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

Consolidated Statements of Income . . . . . . . . . . . . . . . F-4

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

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

Notes to Consolidated Financial Statements. . . . . . . . . . . F-7

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., a Texas Corporation, and subsidiaries, as of September 30,
2004 and 2003, and the related consolidated statements of income, 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
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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, 2004 and 2003, 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
November 19, 2004

F - 2

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30,
2004 2003
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents $ 278,185 $ 604,865
Accounts receivable:
Trade 72,909 45,319
Other 203,343 213,886
Marketable securities 122,350 135,000
Inventories 261,486 230,451
Prepaid expenses and other current assets 1,010,416 83,647
------------ ------------
Total current assets 1,948,689 1,313,168

Property and equipment, net 8,833,018 8,777,057

Other assets:
Goodwill, net 1,982,848 1,962,848
Other 435,204 202,439
------------ ------------
Total other assets 2,418,052 2,165,287
------------ ------------

Total assets $13,199,759 $12,255,512
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 317,278 $ 189,208
Accrued liabilities 650,348 622,216
Current portion of long-term debt 516,845 449,439
------------ ------------
Total current liabilities 1,484,471 1,260,863

Deferred gain on sale of a subsidiary 163,739 -
Long-term debt 3,364,765 3,576,896
------------ ------------

Total liabilities 5,012,975 4,837,759

Commitments and contingencies - -

Minority interests 40,808 36,032

Stockholders' equity:
Preferred stock, $.10 par, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par, 15,000,000 shares
authorized, 4,608,678 shares issued 46,087 46,087
Additional paid-in capital 11,273,149 11,273,149
Accumulated other comprehensive income 109,002 120,000
Accumulated deficit (1,988,482) (2,763,735)
------------ ------------
9,439,756 8,675,501
Less 908,530 shares of common stock held in treasury, at cost 1,293,780 1,293,780
------------ ------------
Total stockholders' equity 8,145,976 7,381,721
------------ ------------

Total liabilities and stockholders' equity $13,199,759 $12,255,512
============ ============

See accompanying notes to consolidated financial statements.

F - 3

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED SEPTEMBER 30,
2004 2003
-------------- --------------

Revenues:
Sales of alcoholic beverages $ 6,839,948 $ 6,671,498
Sales of food and merchandise 1,712,225 1,661,358
Service revenues 6,290,698 5,333,889
Internet revenues 796,353 1,053,188
Other 320,460 339,636
-------------- --------------
15,959,684 15,059,569

Operating expenses:
Cost of goods sold 1,983,207 2,194,940
Salaries and wages 5,491,401 5,393,708
Other general and administrative:
Taxes and permits 2,215,377 2,074,067
Charge card fees 267,609 254,953
Rent 536,067 336,592
Legal and professional 554,155 714,250
Advertising and marketing 861,280 817,328
Depreciation 544,137 531,561
Other 2,440,882 2,384,223
-------------- --------------
14,894,115 14,701,622
-------------- --------------

Income from operations 1,065,569 357,947

Other income (expense):
Interest income 28,898 16,875
Interest expense (344,438) (384,221)
Gain on sale or disposition of assets - 345,820
Other 30,000 67,515
-------------- --------------

Income before minority interests 780,029 403,936

Minority interests (4,776) 34,358
-------------- --------------

Net income $ 775,253 $ 438,294
============== ==============

Basic and diluted earnings per share $ 0.21 $ 0.12
============== ==============

Weighted average number of common shares outstanding 3,700,148 3,729,167
============== ==============

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, 2004 AND 2003

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

Balance at September 30, 2002 4,608,678 $46,087 $11,273,149 $ - $ (3,202,029) 851,030

Net income - - - - 438,294 -
Change in available-for-sale securities - - - 120,000 - -

Comprehensive income

Purchases of treasury stock - - - - - 57,500
--------- ------- ----------- --------------- ------------- ---------------

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

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
========= ======= =========== =============== ============= ==============

TREASURY STOCK
-------------- TOTAL
STOCKHOLDERS'
AMOUNT EQUITY
-------------- ---------------

Balance at September 30, 2002 $ (1,175,131) $ 6,942,076

Net income - 438,294
Change in available-for-sale securities - 120,000
---------------
Comprehensive income 558,294
---------------
Purchases of treasury stock (118,649) (118,649)
-------------- ---------------

Balance at September 30, 2003 (1,293,780) 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 $(1,293,780) $ 8,145,976
============== ===============

See accompanying notes to consolidated financial statements.
F - 5

RICK'S CABARET INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER 30,
2004 2003
-------------- --------------

OPERATING ACTIVITIES
Net income $ 775,253 $ 438,294
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 544,137 531,561
Minority interests 4,776 (34,358)
Gain on sale of subsidiary - (342,251)
Gain on sales of marketable securities (19,807) -
Gain on sales or disposition of property and equipment - (3,569)
Changes in operating assets and liabilities:
Accounts receivable (18,307) 37,432
Inventories (42,942) (19,649)
Prepaid expenses and other current assets (931,907) (24,831)
Accounts payable and accrued liabilities 186,738 3,697
-------------- --------------
Net cash provided by operating activities 497,941 586,326

INVESTING ACTIVITIES
Acquisitions (265,000) (150,000)
Proceeds from sale of subsidiary 6,811 180,000
Proceeds from sales of marketable securities 21,459 -
Purchases of property and equipment (423,964) (162,220)
Proceeds from sales of property and equipment 12,033 47,718
-------------- --------------
Net cash used in investing activities (648,661) (84,502)

FINANCING ACTIVITIES
Purchases of treasury stock - (118,649)
Proceeds from long-term debt 300,000 -
Payments on long-term debt (475,960) (511,676)
-------------- --------------
Net cash used in financing activities (175,960) (630,325)
-------------- --------------

Net decrease in cash and cash equivalents (326,680) (128,501)
Cash and cash equivalents at beginning of year 604,865 733,366
-------------- --------------

Cash and cash equivalents at end of year $ 278,185 $ 604,865
============== ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 351,791 $ 374,270
============== ==============

NON-CASH TRANSACTIONS
During the year ended September 30, 2003, the Company transferred a Company
vehicle and the related note to an individual. The remaining note payable
was $69,342 which approximated the fair value of the vehicle on the date of
transfer.

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 of a
business, see Note K. 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 from its books.

See accompanying notes to consolidated financial statements.

F - 6

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND 2003

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. 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, 2004 and
2003, 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, 2003, the uninsured portion of these deposits
approximated $95,000. 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 - 7

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

ACCOUNTS AND NOTES RECEIVABLE

Accounts receivable trade is 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. Notes receivable are included in other assets in the
accompanying consolidated balance sheets. 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, 2004 and
2003.

MARKETABLE SECURITIES

Marketable securities at September 30, 2004 and 2003 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, 2004 and 2003, 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. The Company had realized
gains of approximately $20,000 related to marketable securities for the year
ended September 30, 2004. Marketable securities held at September 30, 2004 and
2003 have a cost basis of approximately $13,000 and $15,000, respectively.

INVENTORIES

PROPERTY AND EQUIPMENT

F - 8

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

GOODWILL

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, 2004. No impairment losses were identified as a
result of this evaluation.

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 an increase of approximately $47,000 and a decrease
of approximately $19,000 for the years ended September 30, 2004 and 2003,
respectively. This would have also resulted in an increase in the deferred
revenue balance of approximately $12,000 and $59,000 as of September 30, 2004
and 2003, 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.

ADVERTISING AND MARKETING

Advertising and marketing expenses are primarily composed 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 income.

F - 9

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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 and 498,000 for the years ended September
30, 2004 and 2003, respectively, have been excluded from earnings per share due
to the stock options being anti-dilutive.

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
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.

F - 10

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

STOCK OPTIONS

At September 30, 2004, the Company has stock options outstanding, which are
described more fully in Note F. 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,
2004 2003
-------------- --------------

Net income, as reported $ 775,253 $ 438,294
Less total stock-based employee compensation
expense determined under the fair value
based method for all awards (216,616) (98,882)
-------------- --------------
Pro forma net income $ 558,637 $ 339,412
============== ==============

Earnings per share:
Basic and diluted - as reported $ 0.21 $ 0.12
============== ==============

Basic and diluted - pro forma $ 0.15 $ 0.09
============== ==============

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 is effective at the end of the first interim period ending after March 15,
2004. Entities that have adopted FIN 46 prior to this effective date can
continue to apply the provision of FIN 46 until the effective date of FIN 46R or
elect early adoption of FIN 46R. The adoption of FIN 46 and FIN 46R did not
have a material impact on the Company's consolidated financial statements.

In March 2004, the FASB ratified the recognition and measurement guidance and
certain disclosure requirements for impaired securities as described in Emerging
Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The Company does not
believe the adoption of the recognition and

F - 11

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

measurement guidance in EITF Issue 03-1 will have a material impact on the
Company's consolidated financial statements.

C. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

SEPTEMBER 30,
2004 2003
----------- -----------

Buildings and land $ 9,002,412 $ 8,970,743
Leasehold improvements 581,532 311,411
Furniture 598,924 595,743
Equipment 1,448,305 1,322,624
----------- -----------
Total property and equipment 11,631,173 11,200,521
Less accumulated depreciation 2,798,155 2,423,464
----------- -----------

Property and equipment, net $ 8,833,018 $ 8,777,057
=========== ===========

F - 12

D. LONG-TERM DEBT

Long-term debt consisted of the following:

SEPTEMBER 30,
2004 2003
---------- ----------
Note payable at prime (as
determined by the Wall Street
Journal) plus 1%, matures
December 2004 * $ 296,163 $ 331,364
Notes payable at 9%, matures
February 2018 * 2,120,680 2,198,734
Notes payable at 12%, matures
March 2026 * 142,263 143,559
Note payable at 9%, matures
March 2006 * 293,224 296,795
Note payable at 10%, matures
August 2010, unsecured 188,051 210,260
Note payable with imputed interest
at 7%, matures January 2006,
unsecured 415,255 602,739
Note payable at 11%, matures
February 2007 * 367,072 186,843
Note payable at 7%, matures
December 2004 * 27,667 56,041
Note payable at 8.99%, matures
October 2007, collateralized by
a vehicle 31,235 -
---------- ----------
Total debt 3,881,610 4,026,335
Less current portion 516,845 449,439
---------- ----------

Total long-term debt $3,364,765 $3,576,896
========== ==========

* Collateralized by real estate

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

2005 $ 516,845
2006 842,997
2007 275,432
2008 191,210
2009 207,322
Thereafter 1,847,804
----------

Total maturities of long-term debt $3,881,610
==========

F - 13

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. 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:

2004 2003
---------- ----------
Computed expected tax expense $ 263,586 $ 149,020
State income taxes 23,257 -
Deferred tax asset valuation
allowance (286,843) (149,020)
---------- ----------

Total income tax expense $ - $ -
========== ==========

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

2004 2003
---------- ----------
Deferred tax assets (liabilities):
Goodwill $ 295,712 $ 501,606
Property and equipment 96,339 51,179
Net operating losses 153,636 223,097
Unrealized gain on marketable
securities (40,331) (40,800)
Other 16,646 -
Valuation allowance (522,002) (735,082)
---------- ----------

$ - $ -
========== ==========

The Company has established a valuation allowance to fully reserve the deferred
tax assets at September 30, 2004 and 2003 due to the uncertainty of the timing
and amounts of future taxable income. At September 30, 2004, the Company had
net oerating loss carryforwards of approximately $415,000, which expire in 2011
through 2018.

F. 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

F - 14

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

F. STOCK OPTIONS - CONTINUED

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
2004 PRICE 2003 PRICE
----------------------------------------------

Outstanding at beginning of year 498,000 $ 2.35 643,500 $ 2.40
Granted 575,000 2.46 40,000 1.40
Expired (165,000) 2.29 (185,500) 2.33
Exercised - - - -
----------- -----------
Outstanding at end of year 908,000 2.42 498,000 2.35
=========== ===========
Exercisable at end of year 408,000 $ 2.32 458,000 $ 2.41
=========== ===========
Weighted-average remaining
contractual life 3.12 years 1.58 years
=========== ===========

As of September 30, 2004, the range of exercise prices for outstanding options
was $1.40 - $2.56.

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.

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, 2004 and 2003, 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:

F - 15

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

F. STOCK OPTIONS - CONTINUED

2004 2003
----------------------

Volatility 137% 165%
Expected lives 3.3 years 3.0 years
Expected dividend yield - -
Risk free rates 3.45% 3.00%

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.

G. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases certain equipment and facilities under operating leases, of
which rent expense was $536,000 and $301,000 for the years ended September 30,
2004 and 2003, respectively.

Future minimum annual lease obligations as of September 30, 2004 approximate the
following:

2005 $ 378,000
2006 405,000
2007 419,000
2008 330,000
2009 247,000
Thereafter 126,000
----------

Total future minimum lease obligations $1,905,000
==========

H. 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

F - 16

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

H. SEGMENT INFORMATION -CONTINUED

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:

2004 2003
------------ ------------

Business segment sales:
Night clubs $15,163,331 $14,006,381
Internet 796,353 1,053,188
------------ ------------

$15,959,684 $15,059,569
============ ============

Business segment operating income:
Night clubs $ 2,542,482 $ 1,934,150
Internet 88,958 36,421
General corporate (1,565,871) (1,612,624)
------------ ------------

$ 1,065,569 $ 357,947
============ ============

Business segment capital expenditures:
Night clubs $ 659,073 $ 110,198
Internet 5,580 35,310
General corporate 35,546 16,712
------------ ------------

$ 700,199 $ 162,220
============ ============

Business segment depreciation:
Night clubs $ 385,425 $ 420,312
Internet 43,308 40,960
General corporate 115,404 70,289
------------ ------------

$ 544,137 $ 531,561
============ ============

Business segment assets:
Night clubs $ 6,640,888 $ 6,719,389
Internet 108,595 169,444
General corporate 6,450,276 5,366,679
------------ ------------

$13,199,759 $12,255,512
==========================

F - 17

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

I. 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 $86,000 and $93,000
at September 30, 2004 and 2003, respectively, and is included in other assets in
the accompanying consolidated balance sheets.

J. 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 $23,000 and $24,000 for the
years ended September 30, 2004 and 2003, respectively.

K. ACQUISITIONS AND DISPOSITIONS

On February 19, 2003, the Company acquired 51% control of the Wild Horse Cabaret
adult nightclub near Hobby Airport, Houston, Texas and will operate it as part
of the Company's popular XTC Cabaret group. The purchase price was $150,000 of
which approximately $70,000 was allocated to property and equipment and $80,000
was allocated to goodwill.

In April 2003, the Company organized RCI Ventures Inc. ("RCI Ventures") to
acquire from an unrelated party Nocturnal Concepts, Inc. ("Nocturnal"), which
operates as an addition to the Company's XTC Cabaret group. The Company
transferred its ownership of Tantric Enterprises, Inc. ("Tantric") to RCI
Ventures and as a result of these transactions the Company obtained a 51%
interest in RCI Ventures. RCI Ventures is comprised solely of Tantric and
Nocturnal. The other 49% owner is an unrelated individual who previously owned
100% of Nocturnal. The unrelated individual brings significant club experience
to RCI Ventures.

The transaction was accounted for as an exchange of non-monetary assets under
APB No. 29, Accounting for Non-monetary Transactions. The exchange was not the
culmination of an earnings process, but instead was an agreement under which the
two stockholders share profits from the newly formed RCI Ventures on a
prospective basis based on respective equity ownership. As a result, no step up
in basis was recorded at the acquisition date, and the Company recognized no
gain or loss.

On June 12, 2003, the Company entered into an Asset Purchase Agreement with
Taurus Entertainment Companies, Inc. ("Taurus"), whereby the Company acquired
all the assets and liabilities of Taurus in exchange for 3,752,008 shares of
Taurus of the 4,002,008 that the Company owned plus $20,000 in cash from
Bluestar Physical Therapy, Inc. ("Bluestar"), the acquirer of the Taurus public
shell. As the Company is publicly traded it was determined that the Company had
no future use for the Taurus public shell and the Company wanted to eliminate
the

F - 18

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. ACQUISITIONS AND DISPOSITIONS - CONTINUED

related costs associated with owning a separate public entity. The Company
negotiated to retain 250,000 shares of Taurus to participate in the potential
future gains from an investment in Taurus.

The Company also executed an Indemnification and Transaction Fee Agreement (the
"Agreement") totaling $340,000 for which the Company received $270,000, payable
$140,000 at closing, with $60,000 due on July 15, 2003, and $70,000 due on
August 15, 2003. The remaining outstanding balance of $70,000 is due in the near
term. Management has assessed the collectibility of the outstanding balance and
believes it is fully collectible as it is collateralized by three million shares
of Taurus stock held in escrow.

In accordance with the Agreement, the Company is to indemnify Taurus for
liabilities assumed by the Company, which were included in the closing balance
sheet, and liabilities that exist or may arise in the future related to Taurus
prior to or as of the closing date of the transaction. An additional
significant consideration of this agreement was to compensate the Company for
the time and effort expended to assist in the consummation of this transaction.
The indemnification was requested by Bluestar, as Bluestar did not have
experience with the Company's adult entertainment industry and therefore did not
believe they had a basis to determine what, if any, obligations could exist.
The operations of Bluestar are focused in the medical industry. The

Company previously consolidated Taurus' financial position, in accordance with
the consolidation method of accounting, as the Company owned greater than 50% of
Taurus' shares prior to consummating this transaction, which resulted in the
Company properly including all of Taurus' related liabilities in its
consolidated financial statements. As of the date of the transaction, the
Company determined that it was not probable that there would be any claims to
indemnify in the future. No claims have arisen subsequent to the completion of
the transaction. The gain on the sale of the transaction included $270,000
from the Agreement, and the Company has recognized a $342,000 gain in total
related to this transaction for the year ended September 30, 2003.

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.

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% 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

F - 19

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K. ACQUISITIONS AND DISPOSITIONS - CONTINUED

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.

N. SUBSEQUENT EVENTS (UNAUDITED)

OFFICE BUILDING

On August 12, 2004, the Company entered into a purchase commitment to buy a
9,000 square foot office building for $512,739, payable with $86,279 cash at
closing and the remainder with a fifteen year promissory note bearing interest
at 7%. The Company closed this transaction in mid December 2004.

ACQUISITION OF NEW YORK CLUB

On September 15, 2004, the Company's wholly-owned subsidiary, RCI Entertainment
New York, Inc., a New York corporation ("RCI New York"), entered into a
definitive Stock Purchase Agreement (the "Stock Purchase Agreement") with
Peregrine Enterprises, Inc., a New York corporation ("Peregrine") and its
shareholders, pursuant to which RCI New York agreed to purchase all of the
shares of common stock of Peregrine. 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 Stock Purchase Agreement provides for closing the
transaction on or before December 1, 2004, subject to satisfaction of certain
conditions, including obtaining adequate financing, the transfer of all existing
licenses and permits to RCI New York, obtaining consent of the Landlord,
execution of a Non-Disturbance Agreement, and other conditions consistent with
transactions of this type. The closing has been extended to January 15, 2005.

Under the terms of the Stock Purchase Agreement, the purchase price of the
transaction is $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"). 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 restricted common stock at
prices ranging from $4.00 to $7.50 per share. The parties will also enter a
Stock Pledge Agreement and Security Agreement to secure the Promissory Note.

Upon closing of the transaction, the owners of Peregrine will enter a five-year
covenant not to compete with Peregrine, RCI New York or the Company. The Company
intends to rename the cabaret club as "Rick's Cabaret" which will occupy 10,000
square feet on three levels, with an additional 4,000 square feet available for
office space.

F - 20

RICK'S CABARET INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. SUBSEQUENT EVENTS (UNAUDITED) - CONTINUED

The terms and conditions of the Stock Purchase Agreement were the result of
extensive arm's length negotiations between the parties.

The Company has secured the financing for the retirement, acquisition and
renovation of certain properties in three separate promissory notes pledging
various real properties as collateral. The notes obtained are as follows:

On November 15, 2004, the Company borrowed $590,000 at annual interest rate
of 10% over a 10 year term. The monthly payment of principal and interest
is $5,694.

On November 17, 2004, the Company borrowed $1,042,000 at 10% annual
interest rate over a 10 year term. The monthly payment of principal and
interest is $10,056.

On November 30, 2004, the Company borrowed $900,000 at 11% annual interest
rate over a 10 year term. The monthly payment of principal and interest is
$9,290.

F - 21

Consolidated Financial Statements

Consolidated Balance Sheets as of June 30, 2005 (unaudited)
and September 30, 2004 (audited) . . . . . . . . . . . . . . . . . . . F22-23

Consolidated Statements of Operations for the three months and
nine months ended June 30, 2005 and 2004 (unaudited) . . . . . . . . . . F24

Consolidated Statements of Cash Flows for the nine months
ended June 30, 2005 and 2004 (unaudited) . . . . . . . . . . . . . . . . F25

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .F26

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

ASSETS
------

06/30/05 9/30/04
(UNAUDITED) (AUDITED)

CURRENT ASSETS
Cash and cash equivalents $ 477,729 $ 275,243
Accounts receivable
Trade 89,625 72,909
Other, net 166,016 204,093
Marketable securities 31,143 122,350
Inventories 227,407 232,746
Prepaid expenses and other current assets 315,231 976,577
Net assets of discontinued operations --- 27,674
---------------- ----------------
Total current assets 1,307,151 1,911,592
---------------- ----------------

PROPERTY AND EQUIPMENT
Buildings, land and leasehold improvements 12,534,604 9,394,619
Furniture and equipment 2,342,859 1,946,583
---------------- ----------------
14,877,463 11,341,202

Accumulated depreciation (3,046,133) (2,659,762)
---------------- ----------------
Total property and equipment, net 11,831,330 8,681,440
---------------- ----------------

OTHER ASSETS
Goodwill, net 2,326,031 1,898,926
Other intangible assets, net 7,831,597 ---
Other 491,934 432,658
---------------- ----------------
Total other assets 10,649,562 2,331,584
---------------- ----------------
Total assets $ 23,788,043 $ 12,924,616
================ ================

See accompanying notes to consolidated financial statements.

F-22

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

LIABILITIES AND STOCKHOLDERS' EQUITY

06/30/05 9/30/04
(UNAUDITED) (AUDITED)

CURRENT LIABILITIES
Accounts payable - trade $ 403,740 $ 291,650
Accrued liabilities 1,057,094 588,883
Current portion of long-term debt 1,041,826 492,310
---------------- ----------------
Total current liabilities 2,502,660 1,372,843

Deferred gain on sale of subsidiary 163,739 163,739
Long-term debt less current portion 11,798,023 3,201,250
---------------- ----------------
Total liabilities 14,464,422 4,737,832
---------------- ----------------

COMMITMENTS AND CONTINGENCIES --- ---

MINORITY INTERESTS 47,169 40,808

STOCKHOLDERS' EQUITY
Preferred stock, $.10 par, 1,000,000 shares
authorized; none outstanding --- ---
Common stock, $.01 par, 15,000,000 shares
authorized; 4,995,678 and 4,608,678 shares issued 49,957 46,087
Additional paid-in capital 12,446,049 11,273,149
Accumulated other comprehensive income 17,796 109,002
Accumulated deficit (1,943,570) (1,988,482)
Less 908,530 shares of common stock held in treasury,
at cost (1,293,780) (1,293,780)
---------------- ----------------
Total stockholders' equity 9,276,452 8,145,976
---------------- ----------------

Total liabilities and stockholders' equity $ 23,788,043 $ 12,924,616
================ ================

See accompanying notes to consolidated financial statements.

F-23

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

FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED)

Continuing Operations:
Revenues:
Sales of alcoholic beverages $ 1,363,425 $ 1,269,908 $ 3,766,469 $ 4,329,346
Sales of food and merchandise 414,348 394,785 1,205,446 1,154,109
Service revenues 1,673,269 1,594,664 4,766,110 4,314,514
Internet revenues 200,876 200,300 568,836 603,723
Other 77,093 61,961 197,751 245,767
---------------- ---------------- --------------- ---------------
Total revenues 3,729,011 3,521,618 10,504,612 10,647,459
---------------- ---------------- --------------- ---------------
Operating expenses:
Cost of goods sold 438,444 353,359 1,284,378 1,228,144
Salaries and wages 1,315,625 1,292,352 3,727,169 3,676,524
Other general and administrative:
Taxes and permits 484,244 459,866 1,405,870 1,438,470
Charge card fees 52,353 64,423 167,649 183,299
Rent 128,874 97,800 306,697 256,602
Legal and professional 156,750 130,336 502,829 406,244
Advertising and marketing 185,963 246,246 543,566 616,865
Depreciation and amortization 141,532 122,315 408,773 369,666
Other 661,623 538,591 1,838,823 1,538,278
---------------- ---------------- --------------- ---------------
Total operating expenses 3,565,408 3,305,288 10,185,754 9,714,092
---------------- ---------------- --------------- ---------------

Income from continuing operations 163,603 216,330 318,858 933,367

Other income (expense):
Interest income 6,868 6,270 27,611 21,085
Interest expense (181,348) (83,014) (438,298) (242,337)
Gain from sale of marketable securities - 2,929 - 19,807
Minority interests 53 (17,471) (6,360) (6,925)
Other 143 451 (591) (2,071)
---------------- ---------------- --------------- ---------------
Net income (loss) from continuing
operations (10,681) 125,495 (98,780) 722,926

Discontinued operations:
Income (loss) from discontinued operations - (34,920) (148,294) (24,839)
Gain on sale of discontinued operations - - 291,987 -
---------------- ---------------- --------------- ---------------
Net income (loss) $ (10,681) $ 90,575 $ 44,913 $ 698,087
================ ================ =============== ===============
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.00 $ 0.03 $ (0.03) $ 0.20
Income (loss) from discontinued operations 0.00 (0.01) 0.04 (0.01)
---------------- ---------------- --------------- ---------------
Net income (loss), basic $ 0.00 $ 0.02 $ 0.01 $ 0.19
================ ================ =============== ===============
Net income (loss), diluted $ 0.00 $ 0.02 $ 0.01 $ 0.19
================ ================ =============== ===============
Weighted average number of common
shares outstanding:
Basic 3,967,148 3,700,148 3,816,592 3,700,148
================ ================ =============== ===============
Diluted 3,967,148 3,700,148 3,938,960 3,700,148
================ ================ =============== ===============

Comprehensive income for the three months ended June 30, 2005 and 2004 were
($24,029) and $19,874, and for the nine months were ($46,294) and $664,844,
respectively. This includes the changes in available-for-sale securities and
net income (loss).

See accompanying notes to consolidated financial statements.

F-24

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2005 AND 2004

2005 2004
(UNAUDITED) (UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,913 $ 698,087
Loss from discontinued operations 148,294 24,839
Gain on sale of discontinued operations (291,987) ---
-------------- --------------
Income (loss) from continuing operations (98,780) 722,926
Adjustments to reconcile income (loss) from
continuing operations to cash provided by operating
activities:
Depreciation and amortization 408,773 369,666
Minority interests 6,360 6,925
Gain on sale of marketable securities --- (19,807)
Common Stock issued for professional services 27,120 ---
Changes in operating assets and liabilities 600,686 (666,995)
-------------- --------------
Cash provided by operating activities 944,159 412,715
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,469,609) (288,625)
Proceeds from sale of marketable securities --- 21,460
Proceeds from sale of discontinued operations 550,000 ---
Payments for notes receivable 21,303 3,023
Acquisitions of businesses, net of cash acquired (2,587,846) (265,000)
-------------- --------------
Cash used in investing activities (4,486,152) (529,142)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 474,650 ---
Proceeds from long-term debt 4,062,000 300,000
Payments on long-term debt (792,171) (386,530)
-------------- --------------
Cash provided by (used in) financing activities 3,744,479 (86,530)
-------------- --------------
NET INCREASE (DECREASE) IN CASH 202,486 (202,957)

CASH AT BEGINNING OF PERIOD 275,243 563,559
-------------- --------------
CASH AT END OF PERIOD $ 477,729 $ 360,602
============== ==============
CASH PAID DURING PERIOD FOR:
Interest $ 435,999 $ 244,431
============== ==============

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.

On January 18, 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 rate at 4%, in the amount of
$5,125,000, and transaction costs of $150,000.

On March 31, 2005, 12,000 shares of restricted common stock 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.

On June 10, 2005, the Company purchased a club in Charlotte, North Carolina
for $1,000,000, payable with a seven-year promissory note bearing interest at a
rate of 7%, in the amount of $325,000 and 180,000 shares of common stock valued
at $675,000.

See accompanying notes to consolidated financial statements.

F-25

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005

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, 2004 included in the
Company's Annual Report on Form 10-KSB 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 nine months ended June 30, 2005 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 2005.

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 NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,

2005 2004 2005 2004

Net income (loss), as reported $ (10,681) $ 90,575 $ 44,913 $ 698,087
Less total stock-based employee compensation
expense determined under the fair value
based method for all awards (128,393) (11,943) (385,179) (187,122)
--------------- --------------- --------------- ---------------
Pro forma net income (loss) $ (139,074) $ 78,632 $ (340,266) $ 510,965
=============== =============== =============== ===============
Earnings (loss) per share:
Basic - as reported $ 0.00 $ 0.02 $ 0.01 $ 0.19
=============== =============== =============== ===============
Diluted - as reported $ 0.00 $ 0.02 $ 0.01 $ 0.19
=============== =============== =============== ===============

Basic and diluted - pro forma $ (0.04) $ 0.02 $ (0.09) $ 0.14
=============== =============== =============== ===============

F-26

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005

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 consists
of net income (loss) and gains (losses) on available-for-sale marketable
securities.

5. 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 9.

6. SEGMENT INFORMATION

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

FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004

REVENUES
Club operations $ 3,528,135 $ 3,321,318 $ 9,935,776 $ 10,043,736
Internet websites 200,876 200,300 568,836 603,723
--------------- --------------- --------------- ---------------
$ 3,729,011 $ 3,521,618 $ 10,504,612 $ 10,647,459
=============== =============== =============== ===============
NET INCOME (LOSS)
Club operations $ 466,967 $ 508,275 $ 1,414,536 $ 1,834,454
Internet websites 39,893 36,227 98,304 62,135
Corporate expenses (517,541) (419,007) (1,611,620) (1,173,663)
Discontinued operations --- (34,920) 143,693 (24,839)
--------------- --------------- --------------- ---------------
$ (10,681) $ 90,575 $ 44,913 $ 698,087
=============== =============== =============== ===============

F-27

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005

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 (loss) recognized would have
been an increase of approximately $1,721 and $13,675 for the three months and an
increase of $3,591 and $37,424 for the nine months ended June 30, 2005 and 2004,
respectively. This would have also resulted in a deferred revenue balance of
approximately $345 and $22,126 as of June 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. However, the Company began to record revenues in such manner
effective January 1, 2004, and hence as of June 30, 2005 deferred revenues of
$21,994 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 November 15 and 17, 2004, the Company 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 the Company's properties
located at 2023 Sable Lane, San Antonio and at 410 N. Sam Houston PKWY E.,
Houston, Texas. On November 30, 2004, the Company borrowed $900,000 from an
unrelated individual at an 11% annual interest rate over a 10 year term. The
monthly payment of principal and interest is $9,290. The note is secured by the
Company's properties located in 3501 Andtree, Austin and at 5718 Fairdale,
Houston, Texas. On December 30, 2004, the Company 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 the
Company's property located at 3113 Bering Drive, Houston, Texas.

F-28

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005

8. LONG-TERM DEBT (continued)

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

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 term, respectively.

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 information summarizes the initial allocation of fair values
assigned to the assets and liabilities at the acquisition date based on a
preliminary valuation. Subsequent adjustments may be recorded upon the
completion of the valuation and the final determination of the purchase price
allocation.

Current assets $ 150,000
Discounted lease 446,486
Non-compete agreement 100,000
License 7,307,514
Current liabilities assumed (229,000)
--------------
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. 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.

F-29

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005

9. ACQUISITIONS AND DISPOSITIONS (continued)

FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004

Revenues $ 3,729,011 $ 4,183,244 $ 10,990,612 $ 12,478,285
Net income (loss) from continuing
operations (10,681) 138,309 (378,780) 352,293
Net income (loss) $ (10,681) $ 100,868 $ (235,087) $ 324,935

Net income (loss) per share -
basic and diluted $ 0.00 $ 0.03 $ (0.06) $ 0.09

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 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.

On June 10, 2005, the Company completed the acquisition of a 30,000 square foot
nightclub in Charlotte, North Carolina, which was previously known as 'The
Manhattan Club' (5300 Old Pineville Road). The venue has been renamed Rick's
Cabaret. The purchase price 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%. 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 the
Company's consolidated statement of operations from February 1, 2005, when we
assumed risk of loss for the club's operation under our management.

F-30

RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005

9. ACQUISITIONS AND DISPOSITIONS (continued)

Current assets $ 104,595
Property & equipment, net depreciation 640,192
Goodwill 427,105
Other assets 1,510
Current liabilities assumed (173,402)
--------------
Net assets acquired $ 1,000,000

10. SUBSEQUENT EVENTS

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.

On July 20, 2005, the Company issued 40,000 stock options to its Board of
Directors.

On July 22, 2005, the Company entered into a secured convertible debenture with
one of its 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
interest rate is at 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 Company's ownership in Citation Land, LLC
and RCI Holdings, Inc., both are wholly owned subsidiaries.

In July 2005, the Company received additional borrowing in the amount of
$100,000 from the same unrelated individual who advanced $100,000 in June 2005,
and with whom the Company 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 were included in one of the notes, for a
combined total of $1,341,520.34 payable to this individual.

On July 27, 2005, the Company issued subscription agreements for 200,000 shares
valued at $400,000.

F-31