United
States Securities and Exchange Commission


Washington,
D.C. 20549





Form
10-KSB





x
            Annual Report
      under Section 13 Or 15(d) of the Securities Exchange Act of
      1934


For the
fiscal year ended September 30,
2008


o
            Transition report under Section
      13 or 15(d) of the
      Securities Exchange Act of
1934





Commission
File Number: 0-26958





RICK'S
CABARET INTERNATIONAL, INC.


(Name of
Small Business Issuer in Its Charter)





Texas
            76-0458229(State
      or Other Jurisdiction of Incorporation or Organization)
            (IRS
      Employer Identification No.)





10959
Cutten Road, Houston, Texas 77066


(Address
of Principal Executive Offices)





(281)
397-6730


(Issuer’s
Telephone Number)





Securities
Registered Under Section 12(b) Of The Exchange Act:





Title Of
Each Class n/a


Name Of
Each Exchange On Which Registered n/a





Securities
Registered Pursuant to 12(g) of the Exchange Act:





Title Of
Each Class


Common
Stock, $.01 Par Value





Check whether the issuer: (i) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. YesxNoo





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





The
Issuer's revenues for the year ended September 30, 2008 were
$59,929,478.





The
aggregate market value of Common Stock held by non-affiliates of the registrant
at December 5, 2008, based upon the last reported sales prices on the NASDAQ
Global Market of $4.87 was $37,983,015.





As of
December 5, 2008, there were approximately 9,344,325 shares of Common Stock
outstanding (excluding treasury shares).










TABLE OF CONTENTS






PART
      I
                                                      
                                                      Page
      No.Item
      1.
                                                      Business
                                                      1Item
      2.
                                                      Properties
                                                      9Item
      3.
                                                      Legal
      Proceedings
                                                      11Item
      4.
                                                      Submission of Matters to a Vote of
      Security Holders
                                                      11PART
      IIItem
      5.
                                                      Market
      for Common Equity,Related
      Stockholder Matters and Small Business Issuer Purchases Of Equity
      Securities
                                                      12Item
      6.
                                                      Management's
      Discussion and Analysis or Plan of
    Operation
                                                      14Item
      7.
                                                      Financial
      Statements
                                                      26Item
      8.
                                                      Changes
      in and Disagreements with
      Accountants on Accounting and Financial
      Disclosure
                                                      26Item
      8A(T).
                                                      Controls and
      Procedures
                                                      26Item
      8B.
                                                      Other
      Information
                                                      27PART
      IIIItem
      9.
                                                      Directors,
      Executive Officers, Promoters and Control Persons; Compliance
      with
      Section 16(a) of The Exchange Act
                                                      27Item
      10.
                                                      Executive
      Compensation
                                                      29Item
      11.
                                                      Security
      Ownership of Certain Beneficial Owners and Management andRelated
      Stockholder Matters
                                                      31Item
      12.
                                                      Certain
      Relationships and Related Transactions
                                                      32Item
      13.
                                                      Exhibits
                                                      33Item
      14.
                                                      Principal
      Accountant Fees and Services
                                                      33Signatures
                                                      35




2
 Table of Contents




PART
I





ITEM
      1.
            BUSINESS




INTRODUCTION




Our name
is Rick's Cabaret International, Inc. Through our subsidiaries, we currently own
and/or operate a total of nineteen adult nightclubs that offer live adult
entertainment, restaurant and bar operations. Nine of our clubs operate under
the name "Rick's Cabaret"; four operate under the name “Club Onyx”, upscale
venues that welcome all customers but cater especially to urban professionals,
businessmen and professional athletes; four operate under the name "XTC
Cabaret"; one club that operates as “Encounters”; and one club that operates as
“ Tootsie’s”. Our nightclubs are in Houston, Austin, San Antonio, Dallas and
Fort Worth, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New York,
New York; Miami Gardens, Florida; Philadelphia, Pennsylvania and Las Vegas,
Nevada. In April 2008, we acquired a media division, including the leading trade
magazine serving the multi-billion dollar adult nightclubs industry. As part of
the transaction we also acquired two industry trade shows, two other industry
trade publications and more than 25 industry websites.




We also
own and operate premiere adult entertainment Internet websites. Our online
entertainment sites are, CouplesTouch.com, NaughtyBids.com and xxxpassword.com.
CouplesTouch.com is a personals site for those in the swinging lifestyle.
Naughtybids.com is our online adult auction site. It contains consumer-initiated
auctions for items such as adult videos, apparel, photo sets, adult
paraphernalia and other erotica. There are typically approximately 10,000 active
auctions at this site at any given time. We charge the seller a fee for each
successful auction. The site xxxPassword.com features adult content licensed
through Voice Media, Inc. Most 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. Upon
written request, 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 Form 10-KSB.




References
to “us” or “the Company” include our 100%-owned, 85%-owned and 51%-owned
consolidated subsidiaries.




BUSINESS
ACTIVITIES--NIGHTCLUBS




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




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




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




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




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.


1
 Table of Contents


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 wait staff 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. At most locations, 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 at most locations.




Controls. Operational
and accounting controls are essential to the successful operation of a cash
intensive nightclub and bar business. At each location, we have designed and
implemented internal procedures and controls to ensure the integrity of our
operational and accounting records. Wherever practicable, we separate management
personnel from all cash handling so that management is isolated from and does
not handle any cash. We use a combination of accounting and physical inventory
control mechanisms to maintain a high level of integrity in our accounting
practices. Information technology plays a significant role in capturing and
analyzing a variety of information to provide management with the information
necessary to efficiently manage and control each 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 local 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 create the feeling of an upscale restaurant. The
sound system provides quality sound at levels at which 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 our “Rick's
Cabaret” brand clubs 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 including 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, Time Out New York, and Texas Monthly Magazine. Segments
about Rick's have aired on national and local television programs such as
“20/20”, "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 Forbes, Newsweek, The Wall Street Journal, The New York Times, The
New York Post, Los Angeles Times, Houston Business Journal, and numerous other
national and regional publications.




NIGHTCLUB
LOCATIONS




We
currently operate clubs under the name “Rick's Cabaret” in Houston, San Antonio,
Dallas, Fort Worth and Austin, Texas; Minneapolis, Minnesota; Philadelphia,
Pennsylvania; New York, New York; and Las Vegas, Nevada. We also operate a
similar nightclub under the name “Tootsie’s” in Miami Gardens, Florida. We also
operate a total of four nightclubs (two in Houston, one in Dallas and one in
Charlotte, North Carolina), as “Club Onyx”, upscale venues that welcome all
customers but cater especially to urban professionals, businessmen and
professional athletes. Additionally, we own four nightclubs that operate as “XTC
Cabaret” in San Antonio, Austin, and two in Houston, Texas. We also operate a
club in San Antonio as “Encounters.” We sold our New Orleans, Louisiana
nightclub in March 1999, but it continues to use the name “Rick’s Cabaret” under
a licensing agreement.




2
 Table of Contents


RECENT
NIGHTCLUB TRANSACTIONS




1.
            On
      April 23, 2007, we completed a transaction for the purchase of 100% of the
      outstanding common stock of W.K.C., Inc., a Texas corporation (the
      "Business"), which owned and operated an adult entertainment cabaret known
      as New Orleans Nights ("New Orleans Nights") located in Fort Worth, Texas.
      Pursuant to the Stock Purchase Agreement, we acquired the Business for a
      total cash purchase price of $4,900,000. In addition, RCI Holdings, Inc.,
      our wholly owned subsidiary ("RCI"), entered into an Assignment of that
      certain Real Estate Sales Contract between the owner of the property and
      W.K.C., Inc. for the purchase of the real property located at 7101
      Calmont, Fort Worth, Texas 76116 (the "Real Property") where the club is
      located for a total purchase price of $2,500,000, which consisted of
      $100,000 in cash and $2,400,000 payable in a six year promissory note to
      the sellers which will accrue interest at the rate of 7.25% for the first
      two years, 8.25% for years three and four and 9.25% thereafter (the
      "Promissory Note"). The Promissory Note is secured by a Deed of Trust and
      Security Agreement. Further, RCI entered into an Assignment and Assumption
      of Lease Agreement with the sellers to assume the lease agreement for the
      Real Property.




2.
            On
      May 10, 2007, we entered into a Licensing Agreement with Rick’s Buenos
      Aires Sociedad Anonima (“Licensee”), a corporation organized under the
      laws of Argentina. Under the terms of the Licensing Agreement, we agreed
      to grant Licensee a license for use and exploitation of our logos,
      trademarks and service marks for the operation of an adult entertainment
      facility in the city of Buenos Aires, Argentina, and Latin America.
      Pursuant to the agreement, Licensee agreed to pay us a royalty fee equal
      to 10% of gross revenues of Licensee’s business, net of any value added
      tax. No club has opened as of this
time.




3.
            On
      November 30, 2007, we entered into a Stock Purchase Agreement for the
      acquisition of 100% of the issued and outstanding common stock of Stellar
      Management Corporation, a Florida corporation (the "Stellar Stock") and
      100% of the issued and outstanding common stock of Miami Gardens Square
      One, Inc., a Florida corporation (the "MGSO Stock") which owns and
      operates an adult entertainment cabaret known as "Tootsie’s Cabaret"
      ("Tootsie’s") located at 150 NW 183rd Street, Miami Gardens, Florida 33169
      (the "Transaction"). Pursuant to the Stock Purchase Agreement, we acquired
      the Stellar Stock and the MGSO Stock from Norman Hickmore ("Hickmore") and
      Richard Stanton ("Stanton") for a total purchase price of $25,000,000
      payable $15,000,000 in cash and payable $10,000,000 pursuant to two
      Secured Promissory Notes in the amount of $5,000,000 each to Stanton and
      Hickmore (the "Notes"). The Notes will bear interest at the rate of 14%
      per annum with the principal payable in one lump sum payment on November
      30, 2010. Interest on the Notes will be payable monthly, in arrears, with
      the first payment being due thirty (30) days after the closing of the
      Transaction. We cannot pre-pay the Notes during the first twelve (12)
      months; thereafter, we may prepay the Notes, in whole or in part, provided
      that (i) any prepayment by us from December 1, 2008 through November 30,
      2009, shall be paid at a rate of 110% of the original principal amount and
      (ii) any prepayment by the Company after November 30, 2009, may be prepaid
      without penalty at a rate of 100% of the original principal amount. The
      Notes are secured by the Stellar Stock and MGSO Stock under a Pledge and
      Security Agreement. Additionally, as part of the Transaction, we entered
      into Assignment to Lease Agreements with the landlord for the property
      where Tootsie’s is located. The underlying Lease Agreements for the
      property provide for an original lease term through June 30, 2014, with
      two option periods which give us the right to lease the property through
      June 30, 2034. The terms and conditions of the transaction were the result
      of extensive arm's length negotiations between the
  parties.




4.
            On
      March 31, 2008, the Company’s wholly owned subsidiary, RCI Entertainment
      (Philadelphia), Inc. (the “Purchaser”) completed the acquisition of 100%
      of the issued and outstanding shares of common stock (the “TEZ Shares”) of
      The End Zone, Inc., a Pennsylvania corporation (the “Corporation”) which
      owns and operated a nightclub previously known as “Crazy Horse Too
      Cabaret” (the “Club”) located at 2908 South Columbus Blvd., Philadelphia,
      Pennsylvania 19148 (the “Real Property”) from Vincent Piazza (the
      “Seller”). As part of the transaction, the Company’s wholly owned
      subsidiary, RCI Holdings, Inc. (“RCI Holdings”) acquired from the Piazza
      Family Limited Partnership (the “Partnership Seller”) 51% of the issued
      and outstanding partnership interest (the “Partnership Interests”) in TEZ
      Real Estate, LP, a Pennsylvania limited partnership (the “Partnership”)
      and 51% of the issued and outstanding membership interest (the “Membership
      Interests”) in TEZ Management, LLC, a Pennsylvania limited liability
      company, which is the general partner of the Partnership (the “General
      Partner”). The Partnership owns the Real Property where the Club is
      located. At closing, the Company paid a purchase price of $3,500,000 in
      cash for the Partnership Interests and Membership Interests, and issued
      195,000 shares of the Company’s restricted common stock (the “Rick’s
      Shares”) valued at $23 per share for the TEZ
  Shares.




As part
of the transaction, the Company entered into a Lock-Up/Leak-Out Agreement with
the Seller pursuant to which, on or after one year after the closing date, the
Seller shall have the right, but not the obligation, to have Rick’s purchase
from Seller 5,000 Rick’s Shares per month (the “Monthly Shares”), calculated at
a price per share equal to $23.00 (“Value of the Rick’s Shares”). At the
Company’s election during any given month, the Company may either buy the
Monthly Shares or, if the Company elects not to buy the Monthly Shares from the
Seller, then the Seller shall sell the Monthly Shares in the open market. Any
deficiency between the amount which the Seller receives from the sale of the
Monthly Shares and the Value of
the Rick’s Shares shall be paid by the Company within three (3) business days of
the date of sale of the Monthly Shares during that particular month. The
Company’s obligation to purchase the Monthly Shares from the Seller shall
terminate and cease at such time as the Seller has received a total of
$4,485,000 from the sale of the Rick’s Shares and any deficiency.
As of September 30, 2008, the 195,000 shares of restricted common stock were
classified on the consolidated balance sheet as temporary equity in accordance
with EITF Topic D-98, Classification and Measurement of
Redeemable Securities.


3
 Table of Contents




Additionally,
at closing, the Seller and the Partnership Seller entered a five-year agreement
not to compete with the Company within a twenty (20) mile radius of the Club.
Finally, the Corporation entered into a new lease agreement with the Partnership
giving it the right to lease the Real Property for twenty (20) years (“Original
Term”) with an option for an additional nine (9) years eleven (11) eleven months
(“Option Term”) with rent payable at the rate of (i) $50,000 per month, subject
to adjustment for increases in the Consumer Price Index (CPI) every five years
during the Original Term and the Option Term, or (ii) 8% of gross sales,
whichever is higher. The maximum increase in the CPI for any five (5) year
period shall be 15%.




5.
            On
      March 31, 2008, the Company’s subsidiary, RCI Entertainment (Austin), Inc.
      (“RCI”), completed the acquisition of 49% of the membership interest of
      Playmates Gentlemen’s Club, LLC (“Playmates”) from Behzad Bahrami
      (“Seller”), resulting in 100% ownership by the Company of RCI. Playmates
      owns an adult entertainment cabaret previously known as “Playmates” (the
      “Club”) located at 8110 Springdale Road, Austin, Texas 78724 (the
      “Premises”). Under the terms of the Purchase Agreement, RCI paid a total
      purchase price of $1,401,711 which was paid $701,711 in cash and debt
      forgiveness at the time of closing and the issuance of 35,000 shares of
      the Company’s restricted common stock valued at $20.00 per share (the
      “Shares”). For accounting purposes, the Company’s investment in 2008 is
      only $751,000, due to the previous losses of the minority interest which
      have been expensed. The investment has been assigned to
      goodwill.




Pursuant
to the terms of the Purchase Agreement, on or after one year after the closing
date, the Seller shall have the right, but not the obligation to have the
Company purchase from Seller 5,000 Shares per month (the “Monthly Shares”),
calculated at a price per share equal to $20.00 (“Value of the Shares”). Seller
shall notify the Company during any given month of its election to “Put” the
Monthly Shares to the Company during that particular month. At the Company’s
election during any given month, the Company may either buy the Monthly Shares
or, if the Company elects not to buy the Monthly Shares from the Seller, then
the Seller shall sell the Monthly Shares in the open market. Any deficiency
between the amount which the Seller receives from the sale of the Monthly Shares
and the Value of the Shares shall be paid by the Company within three (3)
business days of the date of sale of the Monthly Shares during that particular
month. The Company’s obligation to purchase the Monthly Shares from the Seller
shall terminate and cease at such time as the Seller has received a total of
$700,000 from the sale of the Shares. As of September 30, 2008, the 35,000
shares of restricted common stock were classified on the consolidated balance
sheet as temporary equity in accordance with EITF Topic D-98, Classification and Measurement of
Redeemable Securities.




In the
event the Seller elects not to “Put” the Shares to the Company, the Seller shall
not sell more than 10,000 Shares during any 90-day period in the open market,
provided that Seller complies with Rule 144 of the Securities Act of 1933, as
amended, in connection with his sale of the Shares. The full results of
operations of this entity are included in the Company’s results of operations
since March 31, 2008.




6.
            On
      April 11, 2008, the Company’s wholly owned subsidiary, RCI Entertainment
      (Dallas), Inc., completed the acquisition of 100% of the issued and
      outstanding partnership interest (the "Partnership Interest") of Hotel
      Development - Texas, Ltd, a Texas limited partnership (the "Partnership")
      and 100% of the issued and outstanding membership interest (the
      "Membership Interest") of HD-Texas Management, LLC, a Texas limited
      liability company, the general partner of the Partnership (the "General
      Partner") from Jerry Golding, Kenneth Meyer, and Charles McClure (the
      "Sellers"). The Partnership owns and operates an adult entertainment
      cabaret previously known as "The Executive Club" (the "Club"), located at
      8550 North Stemmons Freeway, Dallas, Texas 75247 (the "Real Property"). As
      part of the transaction, the Company’s wholly owned subsidiary, RCI
      Holdings, Inc. ("RCI"), also acquired the Real Property from DPC Holdings,
      LLC, a Texas limited liability company
("DPC").




At
closing, the Company paid a total purchase price of $3,590,609 for the
Partnership Interest and Membership Interest, which was paid through the
issuance of 50,694 shares of the Company’s restricted common stock to each of
Messrs. Golding, Meyer and McClure, for an aggregate total of 152,082 shares
(collectively, the "Rick's Club Shares") to be valued at $23.30 per share
($3,544,119) and $46,490 in cash. As consideration for the purchase of the Real
Property, RCI paid total consideration of $5,599,721, which was paid (i)
$4,250,000, payable $610,000 in cash and $3,640,000 through the issuance of a
five year promissory note (the "Promissory Note") and (ii) the issuance of
57,918 shares of the Company’s restricted common stock (the "Rick's Real
Property Shares") to be valued at $23.30 per share ($1,349,721). The Promissory
Note bears interest at a varying rate at the greater of (i) two percent (2%)
above the Prime Rate or (ii) seven and one-half percent (7.5%), and is
guaranteed by Rick's and Eric Langan, the Company’s Chief Executive Officer,
individually. At Closing, the Parties entered into an Amendment to Purchase
Agreement solely to provide for the Sellers to set aside 10,500 Rick's Club
Shares under an Escrow Agreement for the offset of certain liabilities of the
Partnership. The Company also incurred costs in the amount of $37,848, which was
paid in cash.




At
Closing, the Sellers entered into Lock-Up/Leak-Out Agreements pursuant to which
on or after one year after the closing date, the Sellers shall have the right,
but not the obligation to have Rick's purchase from Sellers not more than an
aggregate of 3,621
Shares per month (the "Monthly Club Shares"), calculated at a price per share
equal to $25.00 per share ("Value of the Rick's Club Shares") until each of the
individual Sellers has received a total of $1,267,350 from the sale of the
Rick's Club Shares. At the Company’s election during any given month, the
Company may either buy the Monthly Club Shares or, if the Company elects not to
buy the Monthly Club Shares from the Sellers, then the Sellers shall sell the
Monthly Club Shares in the open market. Any deficiency between the amount, which
the Sellers receive from the sale of the Monthly Club Shares and the Value of
the Rick's Club Shares shall be paid by the Company within three (3) business
days of the date of sale of the Monthly Club Shares during that particular
month. The Company’s obligation to purchase the Monthly Club Shares from the
Sellers shall terminate and cease at such time as the Sellers have received an
aggregate total of $3,802,050 from the sale of the Rick's Club Shares and any
deficiency.


4
 Table of Contents




Additionally,
at Closing, DPC entered into a Lock-Up/Leak-Out Agreement pursuant to which on
or after one year after the closing date, DPC shall have the right, but not the
obligation to have Rick's purchase from DPC 1,379 Shares per month (the "Monthly
Real Estate Shares"), calculated at a price per share equal to $25.00 per share
("Value of the Rick's Real Estate Shares") until DPC has received a total of
$1,447,950 from the sale of the Rick's Real Estate Shares. At the Company’s
election during any given month, the Company may either buy the Monthly Real
Estate Shares or, if the Company elects not to buy the Monthly Real Estate
Shares from DPC, then DPC shall sell the Monthly Real Estate Shares in the open
market. Any deficiency between the amount which DPC receives from the sale of
the Monthly Real Estate Shares and the Value of the Rick's Real Estate Shares
shall be paid by the Company within three (3) business days of the date of sale
of the Monthly Real Estate Shares during that particular month. The Company’s
obligation to purchase the Monthly Real Estate Shares from DPC shall terminate
and cease at such time as DPC has received an aggregate total of $1,447,950 from
the sale of the Rick's Real Estate Shares and any deficiency.




Finally,
at Closing each of the Sellers entered a five year Non-Competition Agreement
with the Company pursuant to which they agreed not to compete with the Company
in Dallas County or any adjacent county.




7.
            On
      June 18, 2008, the Company’s wholly owned subsidiary RCI Entertainment
      (Northwest Highway), Inc. (the “Purchaser”) completed the acquisition of
      certain assets (the “Purchased Assets”) of North by East Entertainment,
      Ltd., a Texas limited partnership (the “Seller”) by and through its
      general partner, Northeast Platinum, LLC, a Texas limited liability
      company (the “General Partner”) pursuant to an Asset Purchase Agreement
      dated May 10, 2008. The Seller owned and operated an adult entertainment
      cabaret known as “Platinum Club II” (the “Club”), located at 10557 Wire
      Way (at Northwest Highway), Dallas, Texas 75220 (the “Real
      Property”).




At
closing, the Company paid a total purchase price of $1,500,000 cash for the
Purchased Assets. At Closing, the principal of the Seller entered into a
five-year agreement not to compete with the Club by operating an establishment
with an urban theme that both serves liquor and provides live female nude or
semi-nude adult entertainment in Dallas County, Tarrant County, Texas or any of
the adjacent counties thereto.




As part
of the transaction, the Company’s wholly owned subsidiary RCI Holdings, Inc.
(“RCI”) also acquired the Real Property from Wire Way, LLC, a Texas limited
liability company (“Wire Way”). Pursuant to a Real Estate Purchase and Sale
Agreement (the “Real Estate Agreement”) dated May 10, 2008, RCI paid total
consideration of $6,000,000, which was paid $1,650,000 in cash and $4,350,000
through the issuance of a five (5) year promissory note (the “Promissory Note”).
The Promissory Note bears interest at a varying rate at the greater of (i) two
percent (2%) above the Prime Rate or (ii) seven and one-half percent (7.5%),
which is guaranteed by the Company and by Eric Langan, the Company’s Chief
Executive Officer, individually. The Company also incurred $69,998 in costs,
which was paid in cash.




8.
            On
      September 5, 2008, our wholly owned subsidiary RCI Entertainment (Las
      Vegas), Inc. (the “Purchaser”) completed the acquisition of certain assets
      (the “Purchased Assets”) of DI Food & Beverage of Las Vegas, LLC, a
      Nevada limited liability company (the “Seller”) pursuant to a Third
      Amended Asset Purchase Agreement (the “Third Amendment”) between
      Purchaser, Rick’s Cabaret International, Inc. (“Rick’s”), Seller, and
      Harold Danzig (“Danzig”), Frank Lovaas (“Lovaas”) and Dennis DeGori
      (“DeGori”) who are all members of Seller. The Seller owned and operated an
      adult entertainment cabaret previously known as “Scores” (the “Club”),
      located at 3355 Procyon Street, Las Vegas, Nevada 89102 (the “Real
      Property”).




At
Closing, Purchaser paid Seller an aggregate amount as follows (the “Purchase
Price”):




(i)
              $12,000,000
      payable by wire transfer;
 
 (ii)
              $3,000,000
      pursuant to a promissory note (“the Rick’s Promissory Note”), executed by
      and obligating Rick’s, bearing interest at eight percent (8%) per annum
      with a five (5) year amortization, with monthly payments of principal
      and interest, with the initial monthly payment due in April 2009 with a
      balloon payment of all then outstanding principal and interest due upon
      the expiration of two (2) years from the execution of the Rick’s
      Promissory Note; and
  (iii)
              200,000
      shares of restricted common stock, par value $0.01 of Rick’s (the “Rick’s
      Shares”) issued to the Seller.


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As part
of the transaction, we entered into a Lock-Up/Leak-Out Agreement with the Seller
pursuant to which, on or after seven (7) months after the closing date, the
Seller shall have the right, but not the obligation, to have Rick’s purchase
from Seller a total of 150,000 of the Rick’s Shares (“Rick’s Put Share”) in an
amount and at a rate of not more than 6,250 of the Rick’s Put Shares per month
(the “Monthly Shares”) calculated at a price per share equal to $20.00 per share
(“Value of the Rick’s Shares”). 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
the Seller, then the Seller shall sell the Monthly Shares in the open market.
Any deficiency between the amount which the Seller receives from the sale of the
Monthly Shares and the Value of the Rick’s Shares shall be paid by us within
three (3) business days of the date of sale of the Monthly Shares during that
particular month. Our obligation to purchase the Monthly Shares from the Seller
shall terminate and cease at such time as the Seller has received a total of
$3,000,000 from the sale of the Rick’s Shares and any deficiency. Under the
terms of the Lock-Up/Leak-Out Agreement, Seller may not sell more than 25,000
Rick’s Shares per 30-day period, regardless of whether the Seller “Puts” the
Rick’s Put Shares to Rick’s or sells them in the open market or
otherwise.




Upon
closing of the transaction, we entered a two-year Non-Compete Agreement with
DeGori (the “DeGori Non-Compete Agreement”) pursuant to which DeGori agreed not
to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada or in a radius of 25 miles of Clark County, Nevada; provided, however,
that the Non-Competition Agreement specifically excluded the Penthouse Club and
the Bada Bing Club located in Clark County, Nevada. We agreed to pay DeGori cash
consideration of $66,667 for entering into the Non-Competition Agreement.
Additionally, at Closing, we also entered into a 12-month Consulting Agreement
with DeGori (the “Consulting Agreement”) for a total aggregate of $133,333 in
consulting fees payable in eighteen (18) equal monthly payments of $7,407.38 per
month with the first payment due October 15, 2008.




Upon
closing of the transaction, we entered a one-year Non-Compete Agreement with
Lovaas (the “Lovaas Non-Compete Agreement”) pursuant to which Lovaas agreed not
to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada, or any of its surrounding counties; provided, however, that this
Non-Competition Agreement shall specifically exclude the Penthouse Club and the
Bada Bing Club located in Clark County, Nevada.




RECENT
MEDIA ACQUISITIONS




On April
15, 2008, the Company’s wholly owned subsidiary, RCI Entertainment (Media
Holdings), Inc., a Texas corporation ("RCI Media"), acquired 100% of the issued
and outstanding common stock (the "ED Stock") of ED Publications, Inc., a Texas
corporation ("ED"), 100% of the issued and outstanding common stock (the "TEEZE
Stock") of TEEZE International, Inc., a Delaware corporation ("TEEZE") and 100%
of the issued and outstanding membership interest (the "Membership Interest") of
Adult Store Buyers Magazine, LLC, a Georgia limited liability
company.




ED Publications,
Inc.




Under the
terms of a Purchase Agreement between Don Waitt ("Waitt"), RCI Media and Rick's
Cabaret International, Inc. ("Rick's") dated April 15, 2008 (the "ED Purchase
Agreement"), the Company agreed to pay Waitt the following consideration for the
purchase of the ED Stock:




(i)
$300,000 cash at closing;




(ii)
$200,000 cash payable in 6 months; and




(iii) The
issuance of 8,696 shares of restricted common stock valued at $23.00 per share
(the "Closing Shares").




Additionally,
during the three (3) year period following the Closing Date (the "Earn Out
Period"), Waitt shall be entitled to earn additional consideration (the
"Additional Consideration") of up to $2,000,000 (the "Maximum Amount")
consisting of $500,000 cash (the “Cash”) and 65,217 shares of restricted common
stock valued at $23.00 per share (the "Earn Out Shares"), based upon the
earnings before income tax, depreciation and amortization ("EBITDA") of RCI
Media. RCI Media will pay the Maximum Amount of the Additional Consideration to
the Seller if RCI Media's EBITDA during the three (3) year period following the
Closing Date totals an aggregate of $2,400,000. At the end of each twelve (12)
month period after the Closing Date, RCI Media shall determine its EBITDA and
shall pay to Waitt any such portion of the Additional Consideration as has been
earned. The Closing Shares and Earn Out Shares are collectively referred to as
the "Rick's Shares".




At
Closing, Waitt entered into a Lock-Up/Leak-Out Agreement with the Company
pursuant to which on or after one year after the closing date with respect to
the Closing Shares, or on or after seven (7) months from the date of issuance
with respect to the Earn Out Shares, if any, Waitt shall have the right, but not
the obligation to have with respect to the Earn Out Shares,
if any, Waitt shall have the right, but not the obligation to have Rick's
purchase from Waitt 5,000 Rick's Shares per month (the "Monthly Shares"),
calculated at a price per share equal to $23.00 per share ("Value of the Rick's
Shares") until Waitt has received an aggregate of $1,700,000 (i) from the sale
of the Rick's Shares sold in the open market or in a private transaction or
otherwise, and (ii) the payment of any deficiency (as defined in the ED Purchase
Agreement) by Rick's. At the Company’s election during any given month, the
Company may either buy the Monthly Shares or, if the Company elects not to buy
the Monthly Shares from Waitt, then Waitt shall sell the Monthly Shares in the
open market. Any deficiency between the amount which Waitt receives from the
sale of the Monthly Shares and the Value of the Rick's Shares shall be paid by
the Company within three (3) business days of the date of sale of the Monthly
Shares during that particular month. The Company’s obligation to purchase the
Monthly Shares from Waitt shall terminate and cease at such time as Waitt has
received an aggregate total of $1,700,000 from the sale of the Rick's Shares and
any deficiency (as defined in the ED Purchase Agreement).




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At
Closing, Waitt also entered a three (3) year Employment Agreement with RCI Media
(the "Employment Agreement") pursuant to which he will serve as President. The
Employment Agreement extends through April 15, 2011, and provides for an annual
base salary of $250,000. Pursuant to the Employment Agreement, Mr. Waitt is also
eligible to participate in all benefit plans maintained by the Company for
salaried employees. Under the terms of the Employment Agreement, Mr. Waitt is
bound to a confidentiality provision and cannot compete with the Company upon
the expiration of the Employment Agreement.




TEEZE/ADULT STORE
BUYER




Under the
terms of a Purchase Agreement between John Cornetta ("Cornetta"), Waitt, RCI
Media and Rick's dated April 15, 2008 (the "TEEZE/ASB Purchase Agreement"), the
Company agreed to pay the following consideration to Cornetta and Waitt for the
purchase of the TEEZE Stock and the Membership Interest:




(i) an
aggregate of $200,000 cash at closing; and




(ii) the
issuance of 6,522 shares of restricted common stock to each of Messrs. Waitt and
Cornetta, for an aggregate of 13,044 shares of restricted common stock to be
valued at $23.00 per share (the "Rick's TEEZE Shares").




Pursuant
to the TEEZE/ASB Purchase Agreement, on or after one year after the closing
date, each of Messrs. Waitt and Cornetta shall have the right, but not the
obligation to have Rick's purchase the Rick's TEEZE Shares calculated at a price
per share equal to $23.00 per share ("Value of the Rick's TEEZE Shares") until
Messrs. Waitt and Cornetta have each received $150,000 (i) from the sale of the
Rick's TEEZE Shares sold by them, regardless of whether sold to Rick's, sold in
the open market or in a private transaction or otherwise, and (ii) the payment
of any deficiency (as defined in the TEEZE/ASB Purchase Agreement) by Rick's. At
the Company’s election during any given month, the Company may either buy the
Rick's TEEZE Shares or, if the Company elects not to buy the Rick's TEEZE
Shares, then Cornetta and/or Waitt shall sell the Rick's TEEZE Shares in the
open market. Any deficiency between the amount which Cornetta or Waitt receives
from the sale of the Rick's TEEZE Shares and the Value of the Rick's TEEZE
Shares shall be paid by the Company within three (3) business days of the date
of sale of the Rick's TEEZE Shares during that particular month. The Company’s
obligation to purchase the Rick's TEEZE Shares shall terminate and cease at such
time as Waitt and Cornetta have each received $150,000 from the sale of the
Rick's TEEZE Shares and any deficiency.




At
Closing, Cornetta entered a five year Non-Competition Agreement with the Company
pursuant to which he agreed not to compete with the Company either directly or
indirectly with TEEZE, ASB, RCI Media, Rick's or any of their affiliates by
publishing any sexually oriented industry trade print publications, with the
exception of a publication known as "Xcitement" which is currently owned and
operated by Cornetta.




BUSINESS
ACTIVITIES--INTERNET ADULT ENTERTAINMENT WEB SITES




In 1999,
we began adult Internet website 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. In 2005 we
purchased CouplesClick.net, a competing site of our CouplesTouch.com site, in
order to broaden our membership throughout the United States. As part of this
transaction, we organized RCI Dating Services, Inc., which operates as an
addition to our internet operations, to acquire CouplesClick.net from
ClickMatch, LLC. We transferred our ownership in CouplesTouch.com to RCI Dating
and, as a result of the transaction, we obtained an 85% interest in RCI Dating,
with the remaining 15% owned by ClickMatch.




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




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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.com 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.




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 ours. 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. The names "Rick's" and "Rick's Cabaret",
“Tootsie’s”, "XTC Cabaret" and “Club Onyx” 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. The sexually
oriented business industry is highly competitive with respect to price, service
and location, as well as the professionalism of the entertainers. 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.




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




In
addition to various regulatory requirements affecting the sale of alcoholic
beverages, in many cities where we operate, the location of a topless cabaret is
subject to restriction by city ordinance. For example, topless nightclubs in
Houston, Texas are subject to "The Sexually Oriented Business Ordinance", which
contains prohibitions on the location of an adult cabaret (see “Legal
Proceedings" herein). 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. In all states
where we operate, management believes we are in compliance with applicable city,
county, state or other local laws governing the sale of alcohol and sexually
oriented businesses.




TRADEMARKS




Our
rights to the tradenames "Rick's", "Rick's Cabaret", “Tootsie’s”, “Club Onyx”
and “XTC Cabaret” are established under common law, based upon our substantial
and continuous use of these tradenames 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", “CLUB ONYX” and “XTC CABARET” service marks. We also own the rights to
numerous tradenames associated with our media division. There can be no
assurance that the steps we have taken to protect our service marks will be
adequate to deter misappropriation.




EMPLOYEES
AND INDEPENDENT CONTRACTORS




As of
September 30, 2008, we had approximately 1,100 employees, of which 175 are in
management positions, including corporate and administrative and Internet
operations and approximately 925 of which are engaged in entertainment, food and
beverage service, including bartenders, waitresses, and entertainers. None of
our employees are represented by a union. We consider our employee relations to
be good. Additionally, as of September 30, 2008, we had independent contractor
relationships with approximately 2,500 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. 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 the sexually oriented
business industry is required in all states to convert entertainers who are now
independent contractors into employees.


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SHARE
REPURCHASES




As of
September 30, 2008, we owned 908,530 treasury shares of our common stock that we
acquired in open market purchases and from investors who originally acquired the
shares from us in private transactions. At this time, we do not have any plan to
use these shares to acquire any assets.




On
September 29, 2008, our Board of Directors authorized us to repurchase up to
$5,000,000 worth of our common stock. During the fiscal year ending September
30, 2008, no shares were purchased under this program. Subsequent to the fiscal
year end, we purchased 48,200 shares of common stock in the open market at
prices ranging from $3.54 to $5.95.






ITEM
      2.
            PROPERTIES




Our
principal executive office is located at 10959 Cutten Road, Houston, Texas
77066, and consists of a 9,000 square feet office/warehouse building. We
purchased this property in December 2004 for $512,739, payable with $86,279 cash
at closing and $426,460 in a promissory note carrying 7% interest and a 15 year
term. The monthly payment is $3,834. As of September 30, 2008, the balance of
the mortgage was $357,413. The last mortgage payment is due in 2019. We believe
that our offices are adequate for our present needs and that suitable space will
be available to accommodate our future needs.




We own
the real property for six locations of Rick's Cabaret (in Houston, San Antonio,
Minneapolis, Fort Worth, Philadelphia and Dallas), two Club Onyx locations in
Houston and one in Dallas and two locations of XTC (in Austin and in San
Antonio). In Houston, we own the property where a club known as “Iniquity” is
located (previously “Club Encounters”),which is currently under
lease to Iniquity LLC. We lease property for our XTC South (Houston), XTC North
(Houston), Club Encounters (San Antonio), Rick’s Cabaret-New York and Las Vegas,
Club Onyx Charlotte, Rick’s Cabaret-Austin and Tootsie’s (Miami Gardens,
Florida) locations.




ADDITIONAL
PROPERTIES WE OWN:




1.
            Club
      Onyx, located on Bering Drive in Houston, has an aggregate 12,300 square
      feet of space. In December 2004, we paid off the old mortgage and obtained
      a new one with an initial balance of $1,270,000 and an interest rate of
      10% per annum over a 10 year term. The money received from this new note
      was used to finance the acquisition of the New York club. As of September
      30, 2008, the balance of the mortgage was $1,181,549. During fiscal year
      2008, we paid $12,256 in monthly principal and interest payments. The
      monthly payment is calculated based on a 20 year amortization schedule.
      The last mortgage payment is due in
2015.




2.
            The
      Rick's Cabaret, located on North Belt Drive in Houston, has 12,000 square
      feet of space. In November 2004, we obtained a mortgage using this
      property as collateral. The principal balance of the new mortgage was
      $1,042,000, with an annual interest rate of 10% over a 10 year term. The
      money received from this new note was used to finance the acquisition of
      the New York club. As of September 30, 2008, the balance of the mortgage
      was $967,452. The monthly payment of principal and interest is $10,056.
      The monthly payment is calculated based on a 20 year amortization
      schedule. The last mortgage payment is due in
  2014.






3.
            The
      Rick's Cabaret located in Minneapolis has 15,400 square feet of space. The
      balance, as of September 30, 2008, that we owe on the mortgage is
      $1,000,000 and the interest rate is 9%. We pay $7,500 in monthly principal
      and interest payments. The last mortgage payment is due in
      2013.




4.
            The
      property for our XTC Cabaret nightclub in Austin has 8,600 square feet of
      space, which sits on 1.2 acres of land. In August 2005, we restructured
      the mortgage by extending the term to 10 years. The balance of the this
      mortgage as of September 30, 2008 is $199,613 with an interest rate of 11%
      and monthly principal and interest payments of $3,445. We also have an
      additional mortgage on the property which we obtained in November 2004.
      The principal balance of the additional mortgage was $900,000, with an
      annual interest rate of 11% over a 10 year term. In June and July 2005, we
      obtained additional funds in the amount of $200,000, which we combined
      with the $900,000 mortgage, and in August 2005 we restructured this
      additional mortgage. The monthly principal and interest payment is
      $15,034. As of September 30, 2008, the balance of the additional mortgage
      was $871,054. The last payments for both mortgages are due in
      2015.




5.
            We
      own the property for our XTC Cabaret nightclub in San Antonio, which has
      7,800 square feet of space. In November 2004, we obtained a mortgage using
      this property as collateral. The principal balance of the new mortgage was
      $590,000, with an annual interest rate of 10% over a 10 year term. The
      money received from this new note was used to finance the acquisition and
      renovation of the New York club. As of September 30, 2008, the balance of
      this mortgage was $547,789. The monthly principal and interest payment is
      $5,694. The last mortgage payment is due in
  2014.




6.
            We
      own an 8,000 square foot Houston property where a club known as “Iniquity”
      (previously “Club Encounters”) is located. In November 2004, this
      property, together with property in Austin, was used as additional
      collateral to secure the $900,000
      mortgage referenced in paragraph 4 above. This property is currently
      listed for sale.


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7.
            Our
      subsidiary, Citation Land LLC, owns a 338-acre ranch in Brazoria County,
      Texas. A balloon payment of $287,920 was paid in March 2006. 11.9 acres of
      this property were sold in October 2007 for $36,000 at no gain or loss.
      This property is currently listed for sale.




8.
            On
      April 5, 2006, our wholly owned subsidiary, RCI Holdings, Inc. completed
      the acquisition of real property located at 9009 Airport Blvd., Houston,
      Texas where we currently operate Club Onyx South. Pursuant to the terms of
      the agreement, we paid a total sales price of $1,300,000, which consisted
      of $500,000 in cash and 160,000 shares of our restricted common
      stock.




9.
            On
      August 24, 2006, our subsidiary, RCI Holdings, Inc. acquired 100% of the
      interest in the improved real property upon which our Rick’s-San Antonio
      is located. The total purchase price for the business and real property
      was $2,900,000. Under terms of the agreement, the Company paid the owners
      of the club and property $600,000 in cash at the time of closing and
      signed promissory notes for the remaining balance. As of September 30,
      2008, the balance of the promissory notes was
  $918,552.




10.
            On
      April 23, 2007, RCI Holdings, Inc., our wholly owned subsidiary, acquired
      the real property located at 7101 Calmont, Fort Worth, Texas 76116 for a
      total purchase price of $2,500,000, which consisted of $100,000 in cash
      and $2,400,000 payable in a six year promissory note to the sellers which
      will accrue interest at the rate of 7.25% for the first two years, 8.25%
      for years three and four and 9.25% thereafter. The promissory note is
      secured by a Deed of Trust and Security Agreement. Further, RCI Holdings,
      Inc. entered into an Assignment and Assumption of Lease Agreement with the
      sellers to assume the lease agreement for the real property. We currently
      operate this property as Rick’s Cabaret. As of September 30, 2008, the
      balance of the promissory note was
$2,117,663.




11.
            As
      part of the acquisition of The End Zone in Philadelphia, Pennsylvania, we
      acquired 51% of the issued and outstanding partnership interest of the
      partnership that owns the real property at 2908 S. Columbus Blvd.,
      Philadelphia, Pennsylvania. At closing, we paid a purchase price of
      $3,500,000 in cash for the partnership
  interests.




12.
            As
      part of the transaction to acquire Hotel Development, Ltd. which operated
      the Executive Club in Dallas, RCI Holdings, Inc. acquired the related real
      property located at 8550 N. Stemmons Freeway, Dallas, Texas from DPC
      Holdings, LLC, a Texas limited liability company. As consideration for the
      purchase of the real property, RCI Holdings, Inc. paid total consideration
      of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in cash and
      $3,640,000 through the issuance of a five year promissory note and (ii)
      the issuance of 57,918 shares of our restricted common stock to be valued
      at $23.30 per share ($1,349,721). The promissory note bears interest at a
      varying rate at the greater of (i) two percent (2%) above the Prime Rate
      or (ii) seven and one-half percent (7.5%), and is guaranteed by us and
      Eric Langan, our Chief Executive Officer, individually. As of September
      30, 2008, the balance of the promissory note was
    $3,606,683.




13.
            As
      part of the acquisition of the Platinum Club II in Dallas, we acquired the
      real property located at 10557 Wire Way Place (at Northwest Highway),
      Dallas, Texas from Wire Way, LLC, a Texas limited liability company.
      Pursuant to a Real Estate Purchase and Sale Agreement dated May 10, 2008,
      we paid total consideration of $6,000,000, which was paid $1,650,000 in
      cash and $4,350,000 through the issuance of a five (5) year promissory
      note. The promissory note bears interest at a varying rate at the greater
      of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half
      percent (7.5%), which is guaranteed by us and by Eric Langan, our Chief
      Executive Officer, individually. As of September 30, 2008, the balance of
      the promissory note was $4,327,169.




PROPERTIES
WE LEASE:




1.
            We
      lease the property in Houston, Texas, where our XTC North is located. The
      lease term is for five years, beginning March 2004, with an additional
      five-year lease option thereafter. The monthly rent was $8,000 until
      August 31, 2006, at which time the monthly base rent increased to
      $9,000.




2.
            We
      lease the property in New York City, New York, where our Rick’s Cabaret
      NYC is located. We assumed the existing lease, which will terminate in
      April 2023. The monthly rent is currently $43,995. Under the term of the
      existing lease, the base rent will increase by approximately 3% each
      year.




3.
            We
      lease the property in Charlotte, North Carolina, where our Club Onyx
      Charlotte is located. We executed an amended lease in February 2007, which
      will terminate in February 2017. The monthly rent is $17,500 until
      February 2010, at which time the monthly base rent will increase to
      $18,500 until February 2013, at which time the rent will escalate to
      $20,000 until February 2017.




4.
            We
      lease the property in South Houston, Texas, where our XTC South is
      located. The lease term is for 79 months, beginning May 1, 2006, and
      terminates in December 2012. The monthly rent is $3,000 for the first 43
      months and $3,500 thereafter.




5.
            We
      lease the property in San Antonio, Texas, where our Club Encounters club
      is located. The lease term is for five years, beginning
      July 1, 2006, with monthly rent of
  $5,000.


10
 Table of Contents





6.
            We
      lease the property in Austin, Texas, where our Rick’s Cabaret Austin is
      located. The lease term is for 10 years, beginning November 10, 2006, with
      monthly payments of $29,000. We also have the option to renew for an
      additional ten years.




7.
            We
      lease the property in Miami Gardens, Florida, where Tootsie’s is located
      with monthly rent of $70,938. Under theAssignment of Lease, the original
      lease term continues through June 30, 2014, with two option periods which
      give us theright
      to lease the property through June 30,
  2034.




8.
            We
      lease the property in Las Vegas, Nevada, where our new Rick’s Cabaret Las
      Vegas club is located with monthly rent of $100,000. The original lease
      term continues through January 1, 2011 with an option period beginning on
      that date through January 1, 2016 at $180,000 per month. We also have an
      option to acquire the property through January 1, 2016 for
      $23,000,000.






ITEM
      3.
            LEGAL PROCEEDINGS




In 1997,
the City of Houston passed a comprehensive new ordinance regulating the location
of and the conduct within sexually oriented businesses (the “Ordinance”), which
became the subject of litigation which affects our Sexually Oriented Business
licenses in Houston, Texas. After extensive litigation, the Trial Court in
Houston rendered its judgment in favor of the City of Houston in January 2007.
The Trial Court found that the City of Houston met its burden that there were
sufficient alternate sites available to relocate all of the existing sexually
oriented businesses in Houston in 1997. The Trial Court found the Ordinance
constitutional and enforceable. Post-trial motions were heard and the relief
sought, a stay against enforcement, was denied by the Trial Court. An appeal to
the Fifth Circuit Court of Appeals was timely filed. The Fifth Circuit granted a
stay pending appeal. Oral argument was held before the Fifth Circuit Court of
Appeals in August 2007. The Fifth Circuit Court of Appeals ruled in favor of the
City of Houston in September 2007. Pleadings were filed seeking a stay against
enforcement of the provisions of the Ordinance with the United States Supreme
Court in conjunction with the request that the United States Supreme Court hear
an appeal of the Fifth Circuit Court of Appeals ruling. The United States
Supreme Court refused to hear the matter.




Additionally,
we filed on behalf of three of our club locations in Houston state court
lawsuits seeking judicial review of the results of the amortization process
contained within the Ordinance. The amortization process was abated in 1998 due
to the possible multiplicity of court actions. The final order by the Trial
Court resulted in the termination of the abatement and allowed the amortization
process to continue as provided in the Ordinance. Trial on the amortization
cases was held in April 2008. At the conclusion of the trial, the Court ruled
that the amortization awards were proper and requested that findings of fact and
conclusions of law be submitted to the Court as well as a judgment in the case.
A form of judgment has been entered by the Court. The amortization award periods
have already expired for our affected clubs. An appeal of the amortization
review by the Harris County District Court was filed. A stay sought by the clubs
during the appeal was denied. In the event all efforts to stop enforcement
activity fail and the City of Houston elects to enforce the judgment, we, as
well as every other similarly situated sexually oriented business located within
the incorporated area of Houston, Texas, will have to either cease providing
nude or semi-nude entertainment or develop alternate methods of operating. We
have already taken steps to clothe our entertainers in a manner to eliminate the
need for licenses and not to be subject to the Ordinance. Approximately 9.4% of
our club operation’s revenues and 2.2% of income before income taxes for the
twelve months ended September 30, 2008 were in Houston, Texas. It is unknown at
this time whether this will have a material effect on our
operations.




OTHER
LEGAL MATTERS




Beginning
January 1, 2008, our Texas clubs became subject to a new state law requiring
each club to collect a $5 surcharge for every club visitor. A lawsuit was filed
by the Texas Entertainment Association, an organization to which we are a
member, alleging the fee amounts to be an unconstitutional tax. On March 28,
2008, a State District Court Judge in Travis County, Texas ruled that the new
state law violates the First Amendment to the United States Constitution and is
therefore invalid. The judge’s order enjoined the State from collecting or
assessing the tax. The State has appealed the court’s ruling. In Texas, when
cities or the State give notice of appeal, it supersedes and suspends the
judgment, including the injunction. Therefore, the judgment of the District
Court cannot be enforced until the appeals are completed. Given the suspension
of the judgment, the State has opted to collect the tax pending the appeal. We
have paid the tax for the first three calendar quarters under protest and
expensed the tax in the accompanying financial statements. The Company’s Texas
clubs have filed a lawsuit against the State to demand repayment of the
taxes.





ITEM
      4.
            SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS






We held
our Annual Meeting of Shareholders on September 2, 2008. Eric S. Langan, Robert
L. Watters, Steven L. Jenkins, Alan Bergstrom, Travis Reese and Luke Lirot were
nominated and elected as Directors with the following vote results at the
shareholder meeting:




11
 Table of Contents




For
                  
                  WithheldEric
      S. Langan
                  
                  6,028,065
                  
                  197,634Robert
      L. Watters
                  
                  6,144,998
                  
                  195,587Steven
      L. Jenkins
                  
                  6,030,112
                  
                  33,545Alan
      Bergstrom
                  
                  6,027,844
                  
                  80,701Travis
      Reese
                  
                  6,192,154
                  
                  197,855Luke
      Lirot
                  
                  6,191,992
                  
                  33,707




At the
Annual Meeting, the Shareholders ratified Whitley Penn LLP as the Company’s
Independent Registered Public Accounting Firm for the fiscal year ended
September 30, 2008, with the following vote results:




6,210,938
                
                Votes
      FOR Ratification8,350
                
                Votes
      AGAINST Ratification6,408
                
                Votes
      ABSTAINING


At the
Annual Meeting, the Shareholders approved an amendment to the Company’s Articles
of Incorporation to increase the number of authorized shares of the Company’s
common stock from 15,000,000 to 20,000,000 with the following vote
results:


5,989,653
                
                Votes
      FOR Ratification87,239
                
                Votes
      AGAINST Ratification148,803
                
                Votes
      ABSTAINING




While no
other matters were presented at the Annual Meeting, the following votes were
submitted by Shareholders with respect to any other business coming before the
Annual Meeting of Shareholders:




4,381,773
                  
                  Votes
      FOR Ratification775,921
                  
                  Votes
      AGAINST Ratification208,293
                  
                  ABSTAINING




The
meeting was adjourned when all matters of business had been
discussed.




PART
II






ITEM
      5.
            MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
      SECURITIES




Our
common stock is quoted on the NASDAQ Global Market under the symbol "RICK". The
following table sets forth the quarterly high and low of sales prices per share
for the common stock for the last two fiscal years.




COMMON
STOCK PRICE RANGE


HIGH
                          
                          LOWFiscal 2008First
      Quarter
                          
                          $
                          29.79
                          
                          
                          $
                          11.01Second
      Quarter
                          
                          $
                          27.47
                          
                          
                          $
                          19.00Third
      Quarter
                          
                          $
                          26.74
                          
                          
                          $
                          14.80Fourth
      Quarter
                          
                          $
                          18.14
                          
                          
                          $
                          9.64Fiscal 2007First
      Quarter
                          
                          $
                          8.88
                          
                          
                          $
                          5.27Second
      Quarter
                          
                          $
                          11.04
                          
                          
                          $
                          6.21Third
      Quarter
                          
                          $
                          9.75
                          
                          
                          $
                          8.26Fourth
      Quarter
                          
                          $
                          12.49
                          
                          
                          $
                          7.89





On
December 5, 2008, the last sales price for the common stock as reported on the
NASDAQ Global Market was $4.87. On December 5, 2008, there were approximately
209 stockholders of record of our common stock (not including shares held by
shareholders in street name).


12
 Table of Contents




TRANSFER
AGENT AND REGISTRAR




The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company, 59 Maiden Lane, New York, New York 10038.




DIVIDEND
POLICY




We have
not paid, and do not currently intend to pay cash dividends on our common stock
in the foreseeable future. Our current policy is to retain all earnings, if any,
to provide funds for operation and expansion of our business. The declaration of
dividends, if any, will be subject to the discretion of the Board of Directors,
which may consider such factors as our results of operation, financial
condition, capital needs and acquisition strategy, among others.




On
September 29, 2008, our board of directors authorized us to repurchase up to
$5,000,000 worth of our common stock. As of September 30, 2008, no shares had
been purchased under this program. Subsequent to the fiscal year end, we
purchased 48,200 shares of common stock at prices ranging from $3.54 to
$5.95.




EQUITY
COMPENSATION PLAN INFORMATION




The
following table sets forth all equity compensation plans as of September 30,
2008:




Plan
      category
                        Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                          (a)
                        Weighted-average
      exercise price of outstanding options, warrants and rights
                          (b)
                        Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                          (c)Equity
      compensation plans approved by security holders
                        420,000
                        $3.86
                        438,000




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 (the “Plans”) for employees 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 us, thus enhancing their personal interest in
our continued success and progress. The Plans also assist 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 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. In July 2007,
shareholders approved an Amendment to the 1999 Plan (the “Amendment”), which
increased the total number of shares authorized to 1,500,000. As of September
30, 2008, 420,000 stock options were outstanding under the 1999
Plan.




RECENT
SALES OF UNREGISTERED SECURITIES




During
the quarter ended September 30, 2008, we completed the following transactions in
reliance upon exemptions from registration under the Securities Act of 1933, as
amended (the "Act") as provided in Section 4(2) thereof. All certificates issued
in connection with these transactions were endorsed with a restrictive legend
confirming that the securities could not be resold without registration under
the Act or an applicable exemption from the registration requirements of the
Act. None of the transactions involved a public offering, underwriting discounts
or sales commissions. We believe that each person was a “qualified” investor
within the meaning of the Act and had knowledge and experience in financial and
business matters, which allowed them to evaluate the merits and risks of our
securities. Each person was knowledgeable about our operations and financial
condition.




In July
2008, we issued 270,000 shares of our restricted common stock to convert certain
outstanding debentures.


13
 Table of Contents


In
September 2008, in connection with the Las Vegas club acquisition, we issued
200,000 shares to the sellers and 10,000 shares as a finder’s
fee.


In
September 2008, a holder of a convertible debenture converted $24,936 of
interest owed into 2,078 shares of our restricted common stock.






ITEM
      6.
            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 Form 10-KSB.




FORWARD
LOOKING STATEMENT AND INFORMATION




We are
including the following cautionary statement in this Form 10-KSB 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 10-KSB 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 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 10-KSB, 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.




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.




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.




As
discussed in the section entitled “Legal Proceedings” herein, we are subject to
litigation regarding our Sexually Oriented Business licenses in Houston, Texas.
In 1997, the City of Houston passed a comprehensive new ordinance regulating the
location of and the conduct within sexually oriented businesses (the
“Ordinance”), which became the subject of litigation which affects our Sexually
Oriented Business licenses in Houston, Texas. After extensive litigation, the
Trial Court in Houston rendered its judgment in favor of the City of Houston in
January, 2007. The Trial Court found that the City of Houston met its burden
that there were sufficient alternate sites available to relocate all of the
existing sexually oriented businesses in Houston in 1997. The Trial Court found
the Ordinance constitutional and enforceable. Post-trial motions were heard and
the relief sought, a stay against enforcement, was denied by the Trial Court. An
appeal to the Fifth Circuit Court of Appeals was timely filed. The Fifth Circuit
granted a stay pending appeal. Oral argument was held before the Fifth Circuit
Court of Appeals in August, 2007. The Fifth Circuit Court of Appeals ruled in
favor of the City of Houston in September 2007. Pleadings were filed seeking a
stay against enforcement of the provisions of the Ordinance with the United
States Supreme Court in conjunction with the request that the United States
Supreme Court hear an appeal of the Fifth Circuit Court of Appeals ruling. The
United States Supreme Court refused to hear the matter.




Additionally,
we filed on behalf of three of our club locations in Houston state court
lawsuits seeking judicial review of the results of the amortization process
contained within the Ordinance. The amortization process was abated in 1998 due
to the possible multiplicity
of court actions. The final order by the Trial Court resulted in the termination
of the abatement and allowed the amortization process to continue as provided in
the Ordinance. Trial on the amortization cases was held in April, 2008. At the
conclusion of the trial, the Court ruled that the amortization awards were
proper and requested that findings of fact and conclusions of law be submitted
to the Court as well as a judgment in the case. A form of judgment has been
entered by the Court. The amortization award periods have already expired for
our affected clubs. An appeal of the amortization review by the Harris County
District Court was filed. A stay sought by the clubs during the appeal was
denied. In the event all efforts to stop enforcement activity fail and the City
of Houston elects to enforce the judgment, we, as well as every other similarly
situated sexually oriented business located within the incorporated area of
Houston, Texas, will have to either cease providing nude or semi-nude
entertainment or develop alternate methods of operating. We have already taken
steps to clothe our entertainers in a manner to eliminate the need for licenses
and not to be subject to the Ordinance. Approximately 9.4% of our club
operation’s revenues and 2.2% of income before income taxes for the twelve
months ended September 30, 2008 were in Houston, Texas. It is unknown at this
time whether this will have a material effect on our
operations.


14
 Table of Contents




Beginning
January 1, 2008, our Texas clubs became subject to a new state law requiring
each club to collect a $5 surcharge for every club visitor. A lawsuit was filed
by the Texas Entertainment Association, an organization to which we are a
member, alleging the fee amounts to be an unconstitutional tax. On March 28,
2008, a State District Court Judge in Travis County, Texas ruled that the new
state law violates the First Amendment to the United States Constitution and is
therefore invalid. The judge’s order enjoined the State from collecting or
assessing the tax. The State has appealed the court’s ruling. In Texas, when
cities or the State give notice of appeal, it supersedes and suspends the
judgment, including the injunction. Therefore, the judgment of the District
Court cannot be enforced until the appeals are completed. Given the suspension
of the judgment, the State has opted to collect the tax pending the appeal. We
have paid the tax for the first three calendar quarters under protest and
expensed the tax in the accompanying financial statements. The Company’s Texas
clubs have filed a lawsuit against the State to demand repayment of the
taxes.




We May Need Additional
Financing or Our Business Expansion Plans May Be Significantly
Limited




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




There is Substantial
Competition in the Nightclub Entertainment Industry, Which May Affect Our
Ability to
Operate Profitably or Acquire Additional Clubs




Our
nightclubs face competition. Some of these competitors may have greater
financial and management resources than we do. 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 Nightclubs
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.
States in which we operate may have 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 any such permits would have
a material adverse effect on the revenues, financial condition and results of
operations of the Company. In all states where we operate, management believes
we are in compliance with applicable city, county, state or other local laws
governing the sale of alcohol.




15
 Table of Contents




We Must Continue to Meet
NASDAQ GlobalMarket
Continued Listing Requirements or We Risk Delisting




Our
securities are currently listed for trading on the NASDAQ Global 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 NASDAQ, it may trade on the over-the-counter market, which may be
a less liquid market. In such case, our shareholders’ ability to trade or obtain
quotations of the market value of shares of our common stock would be severely
limited because of lower trading volumes and transaction delays. These factors
could contribute to lower prices and larger spreads in the bid and ask prices
for our securities. There is no assurance that we will be able to maintain
compliance with the NASDAQ continued listing requirements.




In The Future, We Will Incur
Significant Increased Costs as a Result of Operating as a Public
Company, and Our Management Will Be Required to Devote Substantial Time to New
Compliance Initiatives




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




In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular, commencing in fiscal 2008, we have been required to
perform system and process evaluation and testing on the effectiveness of our
internal controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Subsequently in fiscal 2009, our independent registered
public accounting firm will 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 consider 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. For example, 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
over-serves 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 in Texas 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 in the markets in which we operate which
could have a material adverse effect on the Company.




Limitations on Protection of
Service Marks




Our
rights to the tradenames "Rick's", "Rick's Cabaret", “Tootsie’s”, “Club Onyx”,
and “XTC Cabaret” are established under the common law based upon our
substantial and continuous use of these tradenames in interstate commerce since
at least as early as 1987. "RICK'S AND STARS DESIGN" logo, "RICK'S CABARET",
“CLUB ONYX” and “XTC CABARET” are registered through service mark registrations
issued by the United States Patent and Trademark Office . We also own the rights
to numerous tradenames associated with our media division. 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.


16
 Table of Contents




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.




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
      certain convertible notes;


●
            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
December 5, 2008, our Directors and executive officers and their respective
affiliates collectively and beneficially owned approximately 14.2% 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.


17
 Table of Contents




Our Directors and Officers
Have Limited Liability and Have Rights To Indemnification




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




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




Other Risk Factors May
Adversely Affect Our Financial Performance.




Other
risk factors that could cause our actual results to differ materially from those
indicated in the forward-looking statements by affecting, among many things,
pricing, consumer spending and consumer confidence, include, without limitation,
changes in economic conditions and financial and credit markets, credit
availability, increased fuel costs and availability for our employees, customers
and suppliers, health epidemics or pandemics or the prospects of these events
(such as reports on avian flu), consumer perceptions of food safety, changes in
consumer tastes and behaviors, governmental monetary policies, changes in
demographic trends, terrorist acts, energy shortages and rolling blackouts, and
weather (including, major hurricanes and regional snow storms) and other acts of
God.




GENERAL
INFORMATION




We
operate in three businesses in the adult entertainment industry:




1.
            We
      own and/or operate upscale adult nightclubs serving primarily businessmen
      and professionals. Our nightclubs offer live adult entertainment,
      restaurant and bar operations. Through our subsidiaries, we currently own
      and/or operate a total of nineteen adult nightclubs that offer live adult
      entertainment, restaurant and bar operations. Nine of our clubs operate
      under the name "Rick's Cabaret"; four operate under the name “Club Onyx”,
      upscale venues that welcome all customers but cater especially to urban
      professionals, businessmen and professional athletes; four clubs operate
      under the name "XTC Cabaret"; one club that operates as “Encounters”, and
      one club that operates as “ Tootsie’s”. Our nightclubs are in Houston,
      Austin, San Antonio, Dallas and Fort Worth, Texas; Charlotte, North
      Carolina; Minneapolis, Minnesota; New York, New York; Miami Gardens,
      Florida; Philadelphia, Pennsylvania and Las Vegas, Nevada. No sexual
      contact is permitted at any of our
locations.




2.
            We
      have extensive Internet activities.




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




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




3.
            In
      April 2008, we acquired a media division, including the leading trade
      magazine serving the multi-billion dollar adult nightclubs industry. As
      part of the transaction we also acquired two industry trade shows, two
      other industry trade publications and more than 25 industry
      websites.




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


18
 Table of Contents




For
several years, we have 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 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




Trade
accounts receivable for the nightclub operation is primarily comprised of credit
card charges, which are generally converted to cash in two to five days after a
purchase is made. The media division’s accounts receivable is primarily
comprised of receivables for advertising sales and Expo registration. The
Company’s accounts receivable, other is comprised of employee advances and other
miscellaneous receivables. The long-term portion of notes receivable are
included in other assets in the accompanying consolidated balance sheets. The
Company recognizes interest income on notes receivable based on the terms of the
agreement and based upon management’s evaluation that the notes receivable and
interest income will be collected. The Company recognizes allowances for
doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected.




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, 2008 and 2007 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, 2008 and 2007, the
Company’s marketable securities were classified as available-for-sale, which are
carried at fair value, with unrealized gains and losses reported as other
comprehensive income within the stockholders’ equity section of the accompanying
consolidated balance sheets. The cost of marketable equity securities sold is
determined on a specific identification basis. The fair value of marketable
equity securities is based on quoted market prices. There has been no realized
gains or losses related to marketable securities for the years ended September
30, 2008 and 2007, respectively. Marketable securities held at September 30,
2008 and 2007 have a cost basis of approximately $13,000. Due to lack of market
transaction, the value of marketable security was written off from the Company’s
balance sheet as of September 30, 2008.




Property and
Equipment




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




Goodwill and Intangible
Assets




In June
2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles
Assets, which addresses the accounting for goodwill and other intangible
assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized, but reviewed on an annual basis for impairment. The
Company adopted SFAS No. 142 effective October 1, 2001. The Company’s annual
evaluation was performed as of September 30, 2008, based on a projected
discounted cash flow method using a discount rate determined by management to be
commensurate with the risk inherent in the current business model. The Company
determined that there is no goodwill impairment at September 30, 2008. All of
the Company’s goodwill and intangible assets relate to the nightclub segment,
except for $567,000 related to the media segment. Definite lived intangible
assets are amortized on a straight-line basis over their estimated lives. Fully
amortized assets are written-off against accumulated
amortization.


19
 Table of Contents




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.




The
Company recognizes revenue for VIP memberships in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition, by
deferring membership revenue and recognizing 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 recognizes Internet revenue from monthly subscriptions to its online
entertainment sites when notification of a new or existing subscription and its
related fee are received from the third party hosting company or from the credit
card company, usually two to three days after the transaction has occurred. The
monthly fee is not refundable. 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.




Revenues
from the sale of magazines and related advertising content are recognized when
the issue is published and shipped. Revenues and external expenses related to
the Company’s annual Expo convention are recognized upon the completion of the
convention in August.




Sales and Liquor
Taxes




The
Company recognizes sales and liquor taxes paid as revenues and an equal expense
in accordance with EITF 06-3, How Taxes Collected from Customers
and Remitted to GovernmentalAuthorities Should Be Presented in
the Income Statement. Total sales and liquor taxes aggregated $3,815,648
and $2,256,251 for the years ended September 30, 2008 and 2007,
respectively.




Advertising and
Marketing




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




Income
Taxes




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




In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income
Taxes (FIN 48), to create a single model to address accounting for uncertainty
in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company has adopted FIN
48 as of October 1, 2007, as required. The adoption of FIN 48 has had no effect
on the Company's consolidated financial position, results of operations or cash
flows. There are no unrecognized tax benefits to disclose in the notes to the
financial statements.




Stock
Options




Effective
October 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R, “Share-Based
Payments,” using the modified prospective application method. Under this
transition method, compensation cost recognized for the year ended September 30,
2008, includes the applicable amounts of: (a) compensation of all stock-based
payments granted prior to, but not yet vested as
of October 1, 2006 (based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123 and previously presented in pro
forma footnote disclosures), and (b) compensation cost for all stock-based
payments granted subsequent to October 1, 2006 based on the grant-date fair
value estimated in accordance with the new provisions of SFAS No. 123R. Results
for periods prior to October 1, 2006, have not been restated. The compensation
cost recognized for the year ended September 30, 2008 and 2007 was $157,080 and
$196,871, respectively, as a result of implementing SFAS No. 123R. There were
125,000 and 252,500 stock option exercises for the year ended September 30, 2008
and 2007, respectively.




20
 Table of Contents




Impact of Recently Issued Accounting
Standards




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 141R, “Business Combinations,”
(“SFAS 141R”). SFAS 141R requires most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at full fair value. The Statement applies to all business combinations,
including combinations among mutual entities and combinations by contract alone.
Under SFAS 141R, all business combinations will be accounted for by applying the
acquisition method. SFAS 141R is effective for fiscal years beginning on or
after December 15, 2008 and will be effective for the Company beginning in
fiscal 2010 for business combinations occurring after the effective
date.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51,” (“SFAS 160”). SFAS 160 will require noncontrolling
interests (previously referred to as minority interests) to be treated as a
separate component of equity, not as a liability or other item outside of
permanent equity. The Statement applies to the accounting for noncontrolling
interests and transactions with noncontrolling interest holders in consolidated
financial statements. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008 and is effective for the Company beginning in fiscal
2010. The Company does not expect that SFAS 160 will have a material impact on
its financial statements.




In
December 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 clarifies the definition
of fair value, describes methods used to appropriately measure fair value, and
expands fair value disclosure requirements, but does not change existing
guidance as to whether or not an instrument is carried at fair value. For
financial assets and liabilities, SFAS 157 is effective for fiscal years
beginning after November 15, 2007, which will require the Company to adopt these
provisions in fiscal 2009. For nonfinancial assets and liabilities, SFAS 157 is
effective for fiscal years beginning after November 15, 2008, which will require
the Company to adopt these provisions in fiscal 2010. In February 2007, the FASB
issued Statement of Financial Accounting Standards No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities,” (“SFAS 159”). SFAS 159
provides companies with an option to report selected assets and liabilities at
fair value. This statement contains financial statement presentation and
disclosure requirements for assets and liabilities reported at fair value as a
consequence of the election and is effective for the Company beginning in fiscal
2009. The Company is currently in the process of assessing the impact that SFAS
157 and SFAS 159 may have on the Company’s consolidated financial
statements.




The Staff
of the Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") 110 which expresses the views of the staff regarding the use of a
"simplified" method, as discussed in SAB No. 107 ("SAB 107"), in developing an
estimate of expected term of "plain vanilla" share options in accordance with
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. In
particular, the staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. At the
time SAB 107 was issued, the staff believed that more detailed external
information about employee exercise behavior (e.g., employee exercise patterns
by industry and/or other categories of companies) would, over time, become
readily available to companies. Therefore, the staff stated in SAB 107 that it
would not expect a company to use the simplified method for share option grants
after December 31, 2007. The staff understands that such detailed information
about employee exercise behavior may not be widely available by December 31,
2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007. The
Company has utilized the simplified method for option grants during the year
ended September 30, 2007. There were no option grants during the year ended
September 30, 2008.




RESULTS
OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2008 AS COMPARED TO THE
FISCAL YEAR ENDED SEPTEMBER 30, 2007




For the
fiscal year ended September 30, 2008, we had consolidated total revenues of
$59,929,478, compared to consolidated total revenues of $32,013,940 for the year
ended September 30, 2007. This was an increase of $27,915,538 or 87.2%. The
increase in total revenues was primarily due to revenues generated in our new
clubs and increases in revenues from our existing clubs, especially from our New
York location. Revenues from nightclub operations for same-location same-period
increased by 14.6% and for Internet businesses decreased by a negligible
amount.




Our
operating margin (income from operations divided by total revenues) was 22.9%
for the year ended September 30, 2008 compared to 12.8% for the prior year. The
increase was due principally to the increase in sales and the contribution from
our Miami Gardens, Florida club.




Our
income before minority interest for the year ended September 30, 2008 was
$11,069,734 compared to $2,863,501 for the year ended September 30, 2007. The
increase in income from operations was primarily due to the increase in revenues
from our new clubs and from our New York and Fort Worth locations. Our income
from nightclub operations (excluding corporate overhead) was $15,575,561 for the
year ended September 30, 2008 compared with $6,695,818 for the year ended
September 30, 2007. Our income from operations for our Internet businesses
(excluding corporate overhead) was $89,194 for the year ended September 30, 2008
compared with $63,919 for the year ended September 30, 2007. Our income from
operations for our nightclub operations for the same-location-same-period
increased by 21.9%. Our income for our Internet operations for the
same-web-site-same-period increased by 39.5%.


21
 Table of Contents




Our cost
of goods sold for the year ended September 30, 2008 was 11.6% of total revenues
compared to 12.6% of related revenues for the year ended September 30, 2007. The
decrease was due primarily to the acquisitions of Tootsie’s which has the
ability to buy and store large amounts of inventory, thus taking advantage of
volume discounts. Our cost of goods sold for the nightclub operations for the
year ended September 30, 2008 was 11.7% of our total revenues from club
operations compared to 12.7% for the year ended September 30, 2007. Cost of
goods sold for same-location-same-period decreased to 12.2% for the year ended
September 30, 2008 compared to 12.7% for the year ended September 30, 2007. 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, 2008 was
2.6% compared to 6.6% of related revenues for the year ended September 30,
2007.




Our
payroll and related costs for the year ended September 30, 2008 were $14,002,442
compared to $8,936,730 for the year ended September 30, 2007. The increase was
primarily due to the increase in payroll in our opening new clubs and the
increase in the minimum wage. Our payroll for our nightclub operations for
same-location-same-period increased by 8.7%. The increase was primarily due to
increases in payroll in our clubs due to increases in revenues. Our payroll for
Internet operations increased by 1.2%. 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, 2008 were
$25,247,127 compared to $14,938,002 for the year ended September 30, 2007. The
increase was primarily due to the increase in taxes and permits, rent, legal and
professional, utilities, insurance, and advertising and marketing expenses from
opening new locations, from our existing clubs. Other selling, general and
administrative expenses for same-location-same-period for the nightclub
operations increased by 15.5%. The increase was primarily due to the increase in
taxes and permits, rent, legal and professional, utilities, insurance, and
advertising and marketing expenses. Other selling, general and administrative
expenses for Internet operations decreased by 5.2%.




Our
interest expense for the year ended September 30, 2008 was $2,712,987 compared
to $1,335,713 for the year ended September 30, 2007. The increase was primarily
due to the increase in debt in relation to the purchase of new clubs, including
approximately $8 million in bank financing of real property. We have increased
our long term debt to $33,557,406 as of September 30, 2008 compared to debt of
$14,387,339 as of September 30, 2007.




Our net
income was $7,660,667 for the fiscal year ended September 30, 2008 compared to
$3,054,899. The increase in our net income was primarily a result of the factors
discussed in the paragraphs above.




LIQUIDITY
AND CAPITAL RESOURCES




As of
September 30, 2008, we had working capital of $327,800 compared to a working
capital deficit of $1,030,472 as of September 30, 2007. Because of the large
volume of cash we handle, stringent cash controls have been implemented. The
increase in working capital was primarily due to working capital provided by
operations, net of uses of working capital for investing purposes. At September
30, 2008, our cash and cash equivalents were $5,602,645 compared to $2,998,758
at September 30, 2007.




Our
depreciation for the year ended September 30, 2008 was $2,278,607 compared to
$1,438,158 for the year ended September 30, 2007. Our amortization for the year
ended September 30, 2008 was $263,076 compared to $158,492 for the period ended
September 30, 2007.




The
following table presents a summary of our cash flows from operating, investing,
and financing activities:




Years
      ended September 30,2008
                                
                                
                                2007Net
      cash provided by operating activities
                                
                                $
                                14,819,267
                                
                                
                                $
                                4,383,121Net
      cash used in investing activities
                                
                                
                                (38,711,804
                                )
                                
                                
                                (6,791,794
                                )Net
      cash provided by financing activities
                                
                                
                                26,496,424
                                
                                
                                
                                4,552,499Net
      increase in cash and cash equivalents
                                
                                $
                                2,603,887
                                
                                
                                $
                                2,143,826


The
increase in cash provided by operating activities was primarily due to the
increase in net income. The increase in cash used in investing activities and
cash provided by financing activities relates primarily to acquisitions of
businesses.




We
require capital principally for the acquisition of new clubs, renovation of
older clubs and investments in technology. We may also utilize capital to
repurchase our common stock as part of our share repurchase
program.




Debt
Financing:




On April
23, 2007, RCI Holdings, Inc., our wholly owned subsidiary, entered into an
Assignment of that certain Real Estate Sales Contract between the owner of the
property and W.K.C., Inc. for the purchase of the real property located at 7101
Calmont, Fort Worth, Texas 76116 where New Orleans Nights was located for a
total purchase price of $2,500,000, which consisted of $100,000 in cash and
$2,400,000 payable in a six year promissory note to the sellers which will
accrue interest at the rate of 7.25% for the first two years, 8.25% for years
three and four and 9.25% thereafter. The promissory note is secured by a Deed of
Trust and Security Agreement. Further, RCI Holdings, Inc. entered into an
Assignment and Assumption of Lease Agreement with the sellers to assume the
lease agreement for the Real Property.


22
 Table of Contents




On
October 12, 2007, we borrowed $1,000,000 from an investment company under terms
of a 10% convertible debenture. Interest only is payable quarterly until the
principal plus accrued interest is due in nine equal quarterly payments
beginning in October 2008. The debenture is subject to optional redemption at
any time after 366 days from the date of issuance at 100% of the principal face
amount plus accrued interest. The debenture plus any outstanding convertible
interest is convertible by the holder into shares of our common stock at any
time prior to the maturity date at the conversion price of $12 per
share.




On
November 30, 2007, we entered into a Stock Purchase Agreement for the
acquisition of 100% of the issued and outstanding common stock of Stellar
Management Corporation, a Florida corporation (the "Stellar Stock") and 100% of
the issued and outstanding common stock of Miami Gardens Square One, Inc., a
Florida corporation (the "MGSO Stock") which owns and operates an adult
entertainment cabaret known as "Tootsie’s Cabaret" ("Tootsie’s") located at 150
NW 183rd Street, Miami Gardens, Florida 33169 (the "Transaction"). Pursuant to
the Stock Purchase Agreement, we acquired the Stellar Stock and the MGSO Stock
from Norman Hickmore ("Hickmore") and Richard Stanton ("Stanton") for a total
purchase price of $25,000,000 payable $15,000,000 in cash and payable
$10,000,000 pursuant to two Secured Promissory Notes in the amount of $5,000,000
each to Stanton and Hickmore (the "Notes"). The Notes bear interest at the rate
of 14% per annum with the principal payable in one lump sum payment on November
30, 2010. Interest on the Notes will be payable monthly, in arrears, with the
first payment being due thirty (30) days after the closing of the Transaction.
We cannot pre-pay the Notes during the first twelve (12) months; thereafter, we
may prepay the Notes, in whole or in part, provided that (i) any prepayment by
us from December 1, 2008 through November 30, 2009, shall be paid at a rate of
110% of the original principal amount and (ii) any prepayment by the Company
after November 30, 2009, may be prepaid without penalty at a rate of 100% of the
original principal amount. The Notes are secured by the Stellar Stock and MGSO
Stock under a Pledge and Security Agreement.




Effective
February 1, 2008, the Company borrowed $1,000,000 from a lender. The funds were
utilized to pay off certain other Company debt in the amount of $1,797,529. The
new debt bears interest at 9% and interest is payable monthly until February 1,
2013 at which time the principal is due in full. The note is collateralized by
certain Company-owned property in Minneapolis, Minnesota.




In
February 2008, the Company borrowed $1,561,500 from a lender. The funds were
used to purchase an aircraft. The debt bears interest at 6.15% with monthly
principal and interest payments of $11,323 beginning March 12, 2008. The note
matures on February 12, 2028.




As part
of the acquisition of the Executive Club in Dallas, we acquired the related Real
Property from DPC Holdings, LLC, a Texas limited liability company ("DPC"). As
consideration for the purchase of the Real Property, RCI paid total
consideration of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in
cash and $3,640,000 through the issuance of a five year promissory note (the
"Promissory Note") and (ii) the issuance of 57,918 shares of our restricted
common stock (the "Rick's Real Property Shares") to be valued at $23.30 per
share ($1,349,721). The Promissory Note bears interest at a varying rate at the
greater of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half
percent (7.5%), and is guaranteed by Rick's and Eric Langan,
individually.




As part
of the acquisition of the Platinum Club II in Dallas, we acquired the Real
Property from Wire Way, LLC, a Texas limited liability company (“Wire Way”).
Pursuant to a Real Estate Purchase and Sale Agreement (the “Real Estate
Agreement”) dated May 10, 2008, we paid total consideration of $6,000,000, which
was paid $1,650,000 in cash and $4,350,000 through the issuance of a five (5)
year promissory note (the “Promissory Note”). The Promissory Note bears interest
at a varying rate at the greater of (i) two percent (2%) above the Prime Rate or
(ii) seven and one-half percent (7.5%), which is guaranteed by the Company and
by Eric Langan, the Company’s Chief Executive Officer,
individually.




As part
of the acquisition of the Las Vegas club, part of the purchase price was
$3,000,000 pursuant to a promissory note (“the Rick’s Promissory Note”),
executed by and obligating Rick’s, bearing interest at eight percent (8%) per
annum with a five (5) year amortization, with monthly payments of principal and
interest, with the initial monthly payment due in April 2009 with a balloon
payment of all then outstanding principal and interest due upon the expiration
of two (2) years from the execution of the Promissory Note.




In May
2008, we borrowed $150,000 from two unrelated individuals under terms of a 10%
convertible debenture. Interest only is payable quarterly beginning in August
2008 and the note matures in May 2009. At the election of the holders, the
holders have the right to convert (subject to certain limitations) all or any
portion of the principal and interest amounts of the debentures into shares of
the Company’s common stock at a rate of $25.32 per share. On August 31, 2008,
the Company paid part of the principal in the amount of $50,000 in
cash.




Financing from related
parties:




On
November 9, 2006, we entered into convertible debentures with three shareholders
for a principal sum of $600,000. The term is for two years and the interest rate
is 12% per annum. At the election of the holders, the holders have the right to
convert (subject to certain limitations) all or any portion of the principal
amount of the debentures into shares of our common stock at a rate of $7.50 per
share,
which was higher than the closing price of our stock on November 9, 2006. The
debentures provide, absent shareholder approval, that the number of shares of
our common stock that may be issued by us or acquired by the holders upon
conversion of the debentures shall not exceed 19.99% of the total number of
issued and outstanding shares of our common stock. The proceeds of the
debentures were used for the acquisition of a 51% ownership interest of
Playmates Gentlemen’s Club LLC. These debentures matured and were retired in
November 2008.


23
 Table of Contents




Contractual obligations and
commitments:




We have
long term contractual obligations primarily in the form of operating leases and
debt obligations. The following table summarizes our contractual obligations and
their aggregate maturities as well as future minimum rent payments:




Operating
      Lease
                
                
                Debt(1)
                
                
                Total2009
                
                $
                3,261,190
                
                
                $
                2,644,541
                
                
                $
                5,905,7312010
                
                
                3,233,958
                
                
                
                4,512,345
                
                
                
                7,746,3032011
                
                
                2,280,482
                
                
                
                11,710,241
                
                
                
                13,990,7232012
                
                
                1,947,159
                
                
                
                872,690
                
                
                
                2,819,8492013
                
                
                1,940,185
                
                
                
                2,777,770
                
                
                
                4,717,955Thereafter
                
                
                8,873,224
                
                
                
                11,039,819
                
                
                
                19,913,043$
                21,536,198
                
                
                $
                33,557,406
                
                
                $
                55,093,604




(1)
            The
      interest obligation on debt is not
included.




Put
Options




As part
of certain of our acquisition transactions, we have entered into
Lock-Up/Leak-Out Agreements with the sellers pursuant to which, on or after a
contractual period after the closing date, the seller shall have the right, but
not the obligation, to have us purchase from seller a certain number of our
shares of common stock issued in the transactions in an amount and at a rate of
not more than a contractual number of the shares per month (the “Monthly
Shares”) calculated at a price per share equal to a contractual value per share
(“Value of the Rick’s Shares”). 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
the seller, then the seller shall sell the Monthly Shares in the open market.
Any deficiency between the amount which the seller receives from the sale of the
Monthly Shares and the value of the shares shall be paid by us within three (3)
business days of the date of sale of the Monthly Shares during that particular
month. Our obligation to purchase the Monthly Shares from the Seller shall
terminate and cease at such time as the seller has received a contractual amount
from the sale of the Rick’s Shares and any deficiency. Under the terms of the
Lock-Up/Leak-Out Agreements, the seller may not sell more than a contractual
number of our shares per 30-day period, regardless of whether the seller “Puts”
the shares to us or sells them in the open market or otherwise.




The
maximum obligation that could be owed if our stock were valued at zero is
$13,935,020 and is recorded in our balance sheet at September 30, 2008 as
Temporary Equity. We consider this type of financing transaction to be similar
to interest-free debt. If we are required to buy back any of these put options,
the buy-back transaction will be purely a balance sheet transaction, affecting
only Temporary Equity and Stockholders’ Equity and will have no income statement
effect. Following is a schedule of the annual obligation we would have if our
stock price remains in the future at the closing market price on December 5,
2008 of $4.87 per share:




For
      the Year Ended September 30:2009
                        
                        $
                        2,541,5382010
                        
                        
                        3,527,6832011
                        
                        
                        2,862,9752012
                        
                        
                        2,023,650Total
                        
                        $
                        10,955,846




Each
$1.00 per share movement of our stock price has an aggregate effect of $611,740
on the total obligation.




We are
not aware of any other event or trend that would potentially affect liquidity.
In the event such a trend develops, we believe our working capital and capital
expenditure requirements will be adequately met by cash flows from operations.
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, profitability from
operations and the level of long-term debt.


24
 Table of Contents








%
                
                
                
                %Years
      ended September 30,
                
                2008
                
                increase
                
                2007
                
                increase
                
                2006Sales
      of alcoholic beverage
                
                $
                22,278,479
                
                83.95
                
                $
                12,111,348
                
                37.92
                
                $
                8,781,635Sales
      of food and merchandise
                
                
                5,200,452
                
                63.25
                
                
                3,185,494
                
                20.14
                
                
                2,651,868Service
      revenues
                
                
                28,669,299
                
                92.63
                
                
                14,883,205
                
                30.07
                
                
                11,442,371Internet
      revenues
                
                
                715,759
                
                (2.04)
                
                
                730,629
                
                (8.83)
                
                
                801,395Media
      revenues
                
                
                801,215
                
                n/a
                
                
                --
                
                --
                
                
                --Other
                
                
                2,264,274
                
                105.23
                
                
                1,103,264
                
                36.21
                
                
                809,946Total
      revenues
                
                $
                59,929,478
                
                87.20
                
                $
                32,013,940
                
                30.74
                
                $
                24,487,215Net
      cash provided by operating activities
                
                $
                14,819,267
                
                238.10
                
                $
                4,383,121
                
                60.80
                
                $
                2,725,770Net
      income
                
                $
                7,660,667
                
                150.75
                
                $
                3,054,899
                
                74.29
                
                $
                1,752,714Long-term
      debt
                
                $
                33,557,406
                
                133.24
                
                $
                14,387,339
                
                3.35
                
                $
                13,920,733




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.




Share
repurchase




On
September 29, 2008, the Company was authorized by its board of directors to
repurchase up to an additional $5,000,000 worth of our common stock. As of
September 30, 2008, no shares had been purchased under this plan. Subsequent to
the fiscal year end, we purchased 48,200 shares of common stock at prices
ranging from $3.54 to $5.95.




IMPACT
OF INFLATION




We have
not experienced a material overall impact from inflation in our operations
during the past several years. To the extent permitted by competition, we have
managed to recover increased costs through price increases and may continue to
do so. However, there can be no assurance that we will be able to do so in the
future.




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. Our growth strategy is: (a) to open new clubs after market analysis,
(b) to 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, as is the case with the acquisition of the New York club and
clubs in Charlotte, South Houston, San Antonio, Austin and Miami, (c) to 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, (d)
to develop new club concepts that are consistent with our management and
marketing skills, (e) to acquire real estate in connection with club operations,
although some clubs may be in leased premises, and/or (f) to enter into
licensing agreements in strategic locations, as is the case with the license
agreement with Rick’s Buenos Aires Sociedad Anonima in Argentina.




During
fiscal 2008, we acquired a media division for a total cost of $1,069,754. This
acquisition was funded primarily through issuance of our restricted common stock
valued at $369,754, and $700,000 in cash. This media operation had total
revenues of approximately $801,000 and net loss of approximately $28,000 for
fiscal 2008.




During
fiscal 2008, we acquired five existing nightclub operations and 49% of an
existing nightclub operation for a total cost of $69,768,925, including real
property of $14,761,766. These acquisitions were funded primarily through
indebtedness of $20,990,000, including real property debt of $7,990,000,
issuance of our restricted common stock valued at $12,964,465, $701,711 in debt
forgiveness, and $35,461,116 in cash. These nightclub operations had total
revenues of approximately $22,554,000 and net income of approximately $7,413,000
for fiscal 2008.




During
fiscal 2007, we acquired two existing nightclub operations for a total cost of
$8,900,000. These acquisitions were funded primarily through indebtedness of
$2,400,000, issuance of our restricted common stock valued at $6,379,250, and
$600,000 in cash. Part of the funds received from stock issuances will be used
in cash flows and future acquisitions. These nightclub operations had total
revenues of approximately $5,278,000 and $3,075,000 and net loss of
approximately $248,000 and $245,000 for fiscal 2008 and 2007,
respectively.


25
 Table of Contents


During
fiscal 2006, we acquired three existing nightclub operations for a total cost of
$3,865,000. These acquisitions were funded primarily through indebtedness of
$3,195,000, and $670,000 cash. These nightclub operations had total revenues of
approximately $2,429,000, $2,586,000 and $370,000 and net loss of approximately
$886,000, $836,000 and $330,000 for fiscal 2008, 2007 and 2006,
respectively.




We
continue to evaluate opportunities to acquire new nightclubs and anticipate
acquiring new locations that fit our business model as we have done in the past.
The acquisition of additional clubs will require us to obtain additional debt or
issuance of our common stock, or both. 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. An inability to obtain such additional financing
could have an adverse effect on our growth strategy.




In our
Internet division, 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 and refine and tune our Internet sites for better
positioning in organic search rankings amongst the major search providers. We
will restructure affiliate programs to provide higher incentives to our current
affiliates to better promote our Internet sites, while actively seeking new
affiliates to send traffic to our Internet sites.




In
addition to their strong cash flow, the acquisition of the Media Division will
enable us to create new marketing synergies with major industry product
suppliers and new national advertising opportunities. It also provides us with
additional diversification of our revenue and income streams while remaining
within our core competency.






ITEM
      7.
            FINANCIAL STATEMENTS




The
information required by Item 7 is included in this report beginning on page
36.





ITEM
      8.
            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE




There
have been no changes in or disagreements with accountants on accounting and
financial disclosure.





ITEM
      8A(T).
            CONTROLS AND
PROCEDURES




Disclosure
Controls and Procedures
  Based on
their evaluation of our disclosure controls and procedures (as defined in
Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 [the
"Exchange Act"]), as of the end of the period covered by this Annual Report on
Form 10-KSB, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures are
effective.
  Management's
Report on Internal Control over Financial Reporting
  Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. We have assessed the effectiveness of our internal control
over financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our assessment, we concluded that our internal
control over financial reporting was effective as of September 30,
2008.
  Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projection of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
  Internal
Control over Financial Reporting
  There
were no changes in our internal control over financial reporting during our
fourth quarter ended September 30, 2008, that have materially affected or are
reasonably likely to materially affect, our internal control over financial
reporting.


26
 Table of Contents


ITEM
      8B.
            OTHER INFORMATION




None.




PART
III






ITEM
      9.
            DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
  ACT




DIRECTORS
AND EXECUTIVE OFFICERS




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




Name
                Age
                PositionEric
      S. Langan
                40
                Director,
      Chairman, Chief Executive Officer, PresidentPhillip
      Marshall
                59
                Chief
      Financial OfficerTravis
      Reese
                39
                Director
      and V.P.-Director of TechnologyRobert
      L. Watters
                57
                DirectorAlan
      Bergstrom
                63
                DirectorSteven
      Jenkins
                51
                DirectorLuke
      Lirot
                52
                Director




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




Phillip
Marshall has served as our Chief Financial Officer since May 2007. He was
previously controller of Dorado Exploration, Inc., an oil and gas exploration
and production company, from February 2007 to May 2007. He previously served as
Chief Financial Officer of CDT Systems, Inc., a publicly held water technology
company, from July 2003 to September 2006. In 1972, Mr. Marshall began his
public accounting career with the international accounting firm, KMG Main
Hurdman. After its merger with Peat Marwick, Mr. Marshall served as an audit
partner at KPMG for several years. After leaving KPMG, Mr. Marshall was partner
in charge of the audit practice at Jackson & Rhodes in Dallas from 1992 to
2003, where he specialized in small publicly held companies. Mr. Marshall is
also a trustee of United Mortgage Trust, a publicly held real estate investment
trust.




Robert L.
Watters is our founder and has been our Director since 1986. Mr. Watters was our
President and our Chief Executive Officer from 1991 until March 1999. Since
1999, Mr. Watters has owned and operated Rick’s Cabaret, an adult entertainment
club in New Orleans, Louisiana, which licenses our name. He was also a founder
in 1989 and operator until 1993 of the Colorado Bar & Grill, an adult club
located in Houston, Texas and in 1988 performed site selection, negotiated the
property purchase and oversaw the design and permitting for the club that became
the Cabaret Royale, in Dallas, Texas. Mr. Watters practiced law as a solicitor
in London, England and is qualified to practice law in New York. Mr. Watters
worked in the international tax group of the accounting firm of
Touche, Ross & Co. (now succeeded by Deloitte & Touche) from 1979 to
1983 and was engaged in the private practice of law in Houston, Texas from 1983
to 1986, when he became involved in our full-time management. Mr. Watters
graduated from the London School of Economics and Political Science, University
of London, in 1973 with a Bachelor of Laws (Honours) degree and in 1975 with a
Master of Laws degree from Osgoode Hall Law School, York
University.


27
 Table of Contents




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




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




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




Luke
Lirot became a Director on July 31, 2007. Mr. Lirot received his law degree from
the University of San Francisco in 1986. After serving as an intern in the San
Francisco Public Defender’s Office in 1986, Mr. Lirot returned to Florida and
established a private law practice where he continues to practice and
specializes in adult entertainment issues. He is a past President of the First
Amendment Lawyers’ Association and has actively participated in numerous state
and federal legal matters.




COMMITTEES
OF THE BOARD OF DIRECTORS




AUDIT
COMMITTEE




The
Company has an Audit Committee whose members are Steven Jenkins, Alan Bergstrom
and Luke Lirot. Mr. Jenkins, Mr. Bergstrom and Mr. Lirot are independent
Directors. The primary purpose of the Audit Committee is to oversee the
Company's financial reporting process on behalf of the Board of Directors. The
Audit Committee meets privately with our Chief Financial Officer and with our
independent registered public accounting firm and evaluates the responses by the
Chief Financial 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, 2008 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. A copy of the Audit
Committee Charter was attached to our Proxy Statement as Exhibit “A” filed with
the U.S. Securities and Exchange Commission on July 21, 2008. 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 will be 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, 2008 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 the Company's audited financial statements for the fiscal year September
30, 2008 be included in our Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2008.




NOMINATING
COMMITTEE




The
Company has a Nominating Committee whose members are Steven Jenkins, Alan
Bergstrom and Luke Lirot. 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.


28
 Table of Contents


COMPENSATION
COMMITEE




The
Company has a Compensation Committee whose members are Steven Jenkins, Alan
Bergstrom and Luke Lirot. Decisions concerning executive officer compensation
for the fiscal year ended September 30, 2008 were made by the Compensation
Committee. 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.




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 during the fiscal
year ended September 30, 2008, with the exception of an exit filing on Form 5
which we believe is due for the Estate of Ralph McElroy.




CODE
OF ETHICS




We have
adopted a code of ethics for our Principal Executive and Senior Financial
Officers, which is attached as Exhibit 14 hereto.





ITEM
      10.
            EXECUTIVE
COMPENSATION




The
following table reflects all forms of compensation for services to us for the
fiscal years ended September 30, 2008 and 2007 of certain executive
officers.




Summary
Compensation Table




Name
      and Principal Position
                                              Year
                                              Salary
                                                ($)
                                              Bonus
                                                ($)
                                              Stock
      Awards
                                                ($)
                                              Option
      Awards
                                                ($)
                                              Non-Equity
      Incentive Plan Compensation
                                                ($)
                                              Nonqualified
      Deferred Compensation Earnings
                                                ($)
                                              All
      other compensation
                                                ($)
                                              Total
                                                ($)(a)
                                              (b)
                                              (c)
                                              (d)
                                              (e)
                                              (f)
                                              (g)
                                              (h)
                                              (i)
                                              (j)Eric
      S. Langan, President/CEO
                                              2008
                                                2007
                                              494,713
                                                400,010
                                              -0-
                                                40,000
                                              -0-
                                                -0-
                                              4,727(1)
                                                19,125(1)
                                              -0-
                                                -0-
                                              -0-
                                                -0-
                                              10,478
                                                10,115
                                              509,918
                                                469,250Phillip
      Marshall, CFO
                                              2008
                                                2007
                                              175,000
                                                50,481
                                              20,000
                                                -0-
                                              -0-
                                                -0-
                                              45,870(2)
                                                4,725(2)
                                              -0-
                                              -0-
                                              6,056
                                                1,212
                                              246,926
                                                56,418Travis
      Reese, VP/ Chief Technology Officer
                                              2008
                                                2007
                                              193,226
                                                178,308
                                              -0-
                                                -0-
                                              -0-
                                                -0-
                                              4,727(3)
                                                23,900(3)
                                              -0-
                                              -0-
                                              5,328
                                                5,274
                                              203,281
                                                207,482


1
              Mr.
      Langan received 5,000 options to purchase shares of our common stock at an
      exercise price of $9.40 as Director compensation in August
      2007.
 2
              Mr.
      Marshall received 20,000 options to purchase shares of our common stock at
      an exercise price of $9.40 as compensation in August
  2007.
 3
              Mr.
      Reese received 5,000 options to purchase shares of our common stock at an
      exercise price of $9.40 as Director compensation in August
      2007.




29
 Table of Contents




Outstanding
Equity Awards at Fiscal Year End




OPTION
      AWARDS
                                                                      STOCK
      AWARDSName
                                                                      Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
                                                                      Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
                                                                      Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
                                                                        (#)
                                                                      Option
      Exercise Price ($)
                                                                      Option
      Expiration Date
                                                                      Number
      of Shares or Units of Stock that have not Vested (#)
                                                                      Market
      Value of Shares or Units of Stock that have not Vested
                                                                        ($)
                                                                      Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      that have not Vested
                                                                        ($)
                                                                      Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights that have not Vested
                                                                        ($)(a)
                                                                      (b)
                                                                      (c)
                                                                      (d)
                                                                      (e)
                                                                      (e)
                                                                      (g)
                                                                      (h)
                                                                      (i)
                                                                      (j)Eric
      S. Langan
                                                                      5,000
                                                                      0
                                                                      0
                                                                      2.54
                                                                      9/14/09
                                                                      0
                                                                      0
                                                                      0
                                                                      0200,000
                                                                      0
                                                                      0
                                                                      2.49
                                                                      9/14/09
                                                                      0
                                                                      0
                                                                      0
                                                                      05,000
                                                                      0
                                                                      0
                                                                      2.80
                                                                      7/20/10
                                                                      0
                                                                      0
                                                                      0
                                                                      05,000
                                                                      
                                                                      0
                                                                      6.75
                                                                      5/31/11
                                                                      0
                                                                      0
                                                                      0
                                                                      05,000
                                                                      0
                                                                      0
                                                                      9.40
                                                                      8/24/09
                                                                      0
                                                                      0
                                                                      0
                                                                      0Phillip
      Marshall
                                                                      10,000
                                                                      10,000
                                                                      0
                                                                      9.40
                                                                      8/24/12
                                                                      10,000
                                                                      $98,200
                                                                      0
                                                                      0Travis
      Reese
                                                                      50,000
                                                                      0
                                                                      0
                                                                      2.49
                                                                      9/14/09
                                                                      0
                                                                      0
                                                                      0
                                                                      05,000
                                                                      0
                                                                      0
                                                                      2.80
                                                                      7/20/10
                                                                      0
                                                                      0
                                                                      0
                                                                      05,000
                                                                      
                                                                      0
                                                                      6.75
                                                                      5/31/11
                                                                      0
                                                                      0
                                                                      0
                                                                      05,000
                                                                      0
                                                                      0
                                                                      9.40
                                                                      8/24/09
                                                                      0
                                                                      0
                                                                      0
                                                                      0




DIRECTOR
COMPENSATION


We do not
currently pay any cash directors' fees, but we pay the expenses of our directors
in attending board meetings. In August 2007, we issued 10,000 stock options to
each Director who is a member of our Audit Committee and 5,000 options to our
other Directors. These options become exercisable on August 24, 2008, have a
strike price of $9.40 per share and expire in August 2009.





Name
                        Fees
      Earned or Paid in Cash
                          ($)
                        Stock
      Awards
                          ($)
                        Option
      Awards
                          ($)
                        Non-Equity
      Incentive Plan Compensation
                          ($)
                        Nonqualified
      Deferred Compensation Earnings
                          ($)
                        All
      Other Compensation
                          ($)
                        Total
                          ($)(a)
                        (b)
                        (c)
                        (d)
                        (e)
                        (f)
                        (g)
                        (h)Eric
      S. Langan
                        -0-
                        -0-
                        $4,727
                        -0-
                        -0-
                        -0-
                        $4,727(1)Travis
      Reese
                        -0-
                        -0-
                        $4,727
                        -0-
                        -0-
                        -0-
                        $4,727(2)Robert
      Watters
                        -0-
                        -0-
                        $9,450
                        -0-
                        -0-
                        -0-
                        $9,450(3)Alan
      Bergstrom
                        -0-
                        -0-
                        $9,450
                        -0-
                        -0-
                        -0-
                        $9,450(4)Steve
      Jenkins
                        -0-
                        -0-
                        $9,450
                        -0-
                        -0-
                        -0-
                        $9,450(5)Luke
      Lirot
                        -0-
                        -0-
                        $9,450
                        -0-
                        -0-
                        -0-
                        $9,450(6)


1
              On
      August 24, 2007, Mr. Langan received 5,000 options to purchase shares of
      our common stock at an exercise price of $9.40 as Director compensation
      for the fiscal year ending September 30, 2007; these options vested on
      August 24, 2008.  Mr. Langan has a total of 220,000 options
      outstanding as of September 30,
2008.
 2
              On
      August 24, 2007, Mr. Reese received 5,000 options to purchase shares of
      our common stock at an exercise price of $9.40 as Director compensation
      for the fiscal year ending September 30, 2007; these options vested on
      August 24, 2008.  Mr. Reese has a total of 65,000 options
      outstanding as of September 30,
2008.
 3
              On
      August 24, 2007, Mr. Watters received 10,000 options to purchase shares of
      our common stock at an exercise price of $9.40 as Director compensation
      for the fiscal year ending September 30, 2007; these options vested on
      August 24, 2008.  Mr. Watters has a total of 40,000 options
      outstanding as of September 30,
2008.
  30
 4
              On
      August 24, 2007, Mr. Bergstrom received 10,000 options to purchase shares
      of our common stock at an exercise price of $9.40 as Director compensation
      for the fiscal year ending September 30, 2007; these options vested on
      August 24, 2008.  Mr. Bergstrom has a total of 10,000 options
      outstanding as of September 30,
2008.
 5
              On
      August 24, 2007, Mr. Jenkins received 10,000 options to purchase shares of
      our common stock at an exercise price of $9.40 as Director compensation
      for the fiscal year ending September 30, 2007; these options vested on
      August 24, 2008.  Mr. Jenkins has a total of 10,000 options
      outstanding as of September 30,
2008.
 6
              On
      August 24, 2007, Mr. Lirot received 10,000 options to purchase shares of
      our common stock at an exercise price of $9.40 as Director compensation
      for the fiscal year ending September 30, 2007; these options vested on
      August 24, 2008.  Mr. Lirot has a total of 10,000 options
      outstanding as of September 30,
2008.




EMPLOYMENT
AGREEMENTS




We
entered into a two-year employment agreement with Eric S. Langan (the "Langan
Agreement") on May 8, 2008. The Langan Agreement extends through April 1, 2010
and provides for an annual base salary of $600,000. The Langan Agreement also
provides for participation in all benefit plans maintained by us for salaried
employees. The Langan Agreement contains a confidentiality provision and an
agreement by Mr. Langan not to compete with us upon the expiration of the Langan
Agreement.


We also
entered into a two year Employment Agreement with Phillip K. Marshall to serve
as CFO (the “Marshall Agreement”). The Marshall Agreement extends through May
30, 2009, and provides for an annual base salary of $175,000. Pursuant to the
Marshall Agreement, Mr. Marshall is also eligible to participate in all benefit
plans maintained by us for salaried employees. Under the terms of the Marshall
Agreement, Mr. Marshall is bound to a confidentiality provision and cannot
compete with us upon the expiration of the Marshall Agreement.


We also
have a three-year employment agreement with Travis Reese (the "Reese
Agreement"). The Reese Agreement extends through February 1, 2010, and provides
for an annual base salary of $192,500. The Reese Agreement also provides for
participation in all benefit plans maintained by us for salaried employees. The
Reese Agreement contains a confidentiality provision and an agreement by Mr.
Reese not to compete with us upon the expiration of the Reese
Agreement.


We have
not established long-term incentive plans or defined benefit or actuarial
plans.





ITEM
      11.
            SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS




The
following table sets forth certain information at December 5, 2008, 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 December 5, 2008, there were 9,344,325 shares of common
stock outstanding.





31
 Table of Contents




Name/Address
                  Number
      of shares
                  Title
      of class
                  Percent
      of Class (6)Eric
      S. Langan
                    10959
      Cutten Road
                    Houston,
      Texas 77066
                  1,205,449
      (1)
                  Common
      stock
                  12.6%Phillip
      K. Marshall
                    10959
      Cutten Road
                    Houston,
      Texas 77066
                  10,000
      (2)
                  Common
      stock
                  <1%Robert
      L. Watters
                    315
      Bourbon Street
                    New
      Orleans, Louisiana 70130
                  55,000
      (3)
                  Common
      stock
                  <1%Steven
      L. Jenkins
                    16815
      Royal Crest Drive
                    Suite
      160
                    Houston,
      Texas 77058
                  10,000
      (2)
                  Common
      stock
                  <1%Travis
      Reese
                    10959
      Cutten Road
                    Houston,
      Texas 77066
                  78,380
      (4)
                  Common
      stock
                  <1%Alan
      Bergstrom
                    904
      West Avenue, Suite 100
                    Austin,
      Texas 78701
                  11,150
      (2)
                  Common
      stock
                  <1%Luke
      Lirot
                    2240
      Belleair Road, Suite 190
                    Clearwater,
      GL 33764
                  10,000
      (2)
                  Common
      stock
                  <1%All
      of our Directors and Officers as a Group of seven (7)
    persons
                  1,369,979
      (5)
                  Common
      stock
                  14.2%E.
      S. Langan. L.P.
                    10959
      Cutten Road
                    Houston,
      Texas 77066
                  578,632
      (1)
                  Common
      stock
                  6.2%Diane
      McElroy
                    P.
      O. Box 27244
                    Austin,
      Texas 78755
                  529,959
                  Common
      Stock
                  5.7%





(1)
            Mr.
      Langan has sole voting and investment power for 406,817 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 220,000 shares of common stock that are
      presently exercisable.




(2)
            Includes
      options to purchase up to 10,000 shares of common stock that are presently
      exercisable.




(3)
            Includes
      15,000 shares of common stock and options to purchase up to 40,000 shares
      of common stock that are presently
exercisable.




(4)
            Includes
      13,380 shares of common stock and options to purchase up to 65,000 shares
      of common stock that are presently
exercisable.




(5)
            Includes
      options to purchase up to 365,000 shares of common stock that are
      presently exercisable.




(6)
            These
      percentages exclude treasury shares in the calculation of percentage of
      class.




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




The
disclosure required by Item 201(d) of Regulation S-B is set forth in ITEM 5
herein.





ITEM
      12.
            CERTAIN RELATIONSHIPS AND RELATED
    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.


32
 Table of Contents




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. The balance of the note was $60,943 at September 30, 2007 and is
included in other assets in our consolidated balance sheet. In November 2007,
Mr. Langan paid the note in full.




On July
22, 2005, we issued a Secured Convertible Debenture to Ralph McElroy, a greater
than 10% shareholder, for the principal sum of $660,000. The debenture matured
on August 1, 2008 and bears interest at a rate of 12% per annum. Under the terms
of the Debenture, we were required to make monthly interest payments beginning
September 1, 2005. The debenture was converted into 220,000 shares of common
stock in July 2008. Additionally, we issued Mr. McElroy warrants to purchase
50,000 shares of our common stock at an exercise price of $3.00 per share until
July 22, 2008. These warrants were exercised in July 2008. The shares of Common
Stock underlying the principal amount of the Debenture and the Warrants had
piggyback registration rights and became registered with the SEC on September 1,
2005. Mr. McElroy passed away in June 2007 and his estate is currently under
settlement.




On April
28, 2006, we entered into convertible debentures with three shareholders, one of
which is a greater than 10% shareholder, for a principal sum of $825,000. The
debentures mature April 30, 2009 and bear interest at a rate of 12% per annum.
At the election of the holders, the holders had the right to convert (subject to
certain limitations) until April 30, 2008, all or any portion of the principal
amount of the debentures into shares of our common stock at a rate of $6.55 per
share, which approximates the closing price of our stock on April 28, 2006. The
shares were converted in April 2008 into 125,954 shares of common stock. The
shares of Common Stock underlying the principal amount of the debentures had
piggyback registration rights and were registered with the SEC in June
2006.




On
November 9, 2006, we entered into convertible debentures with three shareholders
for a principal sum of $600,000. The term is for two years and the interest rate
is 12% per annum. At the election of the holders, the holders have the right to
convert (subject to certain limitations) all or any portion of the principal
amount of the debentures into shares of our common stock at a rate of $7.50 per
share, which was higher than the closing price of our stock on November 9, 2006.
The debentures provide, absent shareholder approval, that the number of shares
of our common stock that may be issued by us or acquired by the holders upon
conversion of the debentures shall not exceed 19.99% of the total number of
issued and outstanding shares of our common stock. These debentures matured and
were paid in cash in November 2008.





ITEM
      13.
            EXHIBITS




Exhibit 14 –
Code of Ethics.




Exhibit
21- Subsidiaries of the Registrant.




Exhibit
31.1 - Certification of Chief Executive Officer of Rick’s Cabaret
International, Inc. Corporation required by Rule 13a-14(1) or Rule 15d - 14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.




Exhibit
31.2 - Certification of Chief Financial Officer of Rick’s Cabaret
International, Inc. Corporation required by Rule 13a-14(1) or Rule 15d - 14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.




Exhibit
32.1 - Certification of Chief Executive Officer of Rick’s Cabaret
International, Inc. Corporation pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and Section 1350 of 18 U.S.C. 63.




Exhibit 32.2-
Certification of Chief Financial Officer of Rick’s Cabaret International, Inc.
Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
Section 1350 of 18 U.S.C. 63.






ITEM
      14.
            PRINCIPAL ACCOUNTANT FEES AND
  SERVICES




The
following table sets forth the aggregate fees paid or accrued for professional
services rendered by Whitley Penn LLP for the audit of our annual financial
statements for fiscal year 2008 and fiscal year 2007 and the aggregate fees paid
or accrued for audit-related services and all other services rendered by Whitley
Penn LLP for fiscal year 2008 and fiscal year 2007.




33
 Table of Contents




2008
                  
                  
                  2007Audit
      fees
                  
                  $
                  268,468
                  
                  
                  $
                  170,208Audit-related
      fees
                  
                  
                  13,368
                  
                  
                  
                  13,070Tax
      fees
                  
                  
                  62,540
                  
                  
                  
                  30,170All
      other fees
                  
                  
                  1,035
                  
                  
                  
                  -Total
                  
                  $
                  345,411
                  
                  
                  $
                  213,448




The
category of “Audit fees” includes fees for our annual audit, quarterly reviews
and services rendered in connection with regulatory filings with the SEC, such
as the issuance of comfort letters and consents.




The
category of “Audit-related fees” includes employee benefit plan audits, internal
control reviews and accounting consultation.




The
category of “Tax fees” includes consultation related to corporate development
activities.




All above
audit services, audit-related services and tax services were pre-approved by the
Audit Committee, which concluded that the provision of such services by Whitley
Penn LLP was compatible with the maintenance of that firm’s independence in the
conduct of its auditing functions. The Audit Committee’s outside auditor
independence policy provides for pre-approval of all services performed by the
outside auditors.




34
 Table of Contents




SIGNATURES




In
accordance with the requirements of Section 13 of 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on December 29, 2008.




Rick's
      Cabaret International, Inc./s/
      Eric S. LanganBy:
      Eric S. LanganChief
      Executive Officer and President/s/
      Phillip K. MarshallBy:
      Phillip K. MarshallChief
      Financial Officer and
                        Principal Accounting
      Officer




Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons in the capacities and on the dates indicated:




Signature
                          
                          Title
                          
                          Date/s/
      Eric S. LanganEric
      S. Langan
                          
                          Director,
      Chief Executive Officer, and President
                          
                          December
      29, 2008/s/
      Travis ReeseTravis
      Reese
                          
                          Director
      and V.P.-Director of Technology
                          
                          December
      29, 2008/s/
      Robert L. WattersRobert
      L. Watters
                          
                          Director
                          
                          December
      29, 2008/s/
      Alan BergstromAlan
      Bergstrom
                          
                          Director
                          
                          December
      29, 2008/s/
      Steven JenkinsSteven
      Jenkins
                          
                          Director
                          
                          December
      29, 2008/s/
      Luke LirotLuke
      Lirot
                          
                          Director
                          
                          December
      29,
2008




35
 Table of Contents


RICK’S
CABARET INTERNATIONAL, INC.


CONSOLIDATED
FINANCIAL STATEMENTS




Years
Ended September 30, 2008 and 2007




Table
of Contents





Report of Independent Registered Public Accounting
      Firm
            37Audited
      Consolidated Financial Statements:Consolidated Balance Sheets
            38Consolidated Statements of Operations
            39Consolidated Statements of Changes in Permanent Stockholders’
      Equity
            40Consolidated Statements of Cash Flows
            41Notes to Consolidated Financial
    Statements
            44




36
 Table of Contents


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the
Board of Directors and Stockholders of


Rick’s
Cabaret International, Inc.





We have
audited the accompanying consolidated balance sheets of Rick’s Cabaret
International, Inc. and subsidiaries, as of September 30, 2008 and 2007, and the
related consolidated statements of operations, changes in permanent
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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rick’s Cabaret
International, Inc. and subsidiaries, as of September 30, 2008 and 2007, 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 LLP


Dallas,
Texas


December
29, 2008




37
 Table of Contents


RICK'S
CABARET INTERNATIONAL, INC.




CONSOLIDATED BALANCE SHEETS




September
      30,2008
                        
                        
                        2007AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        5,602,645
                        
                        
                        $
                        2,998,758Accounts
      receivable:Trade,
      net
                        
                        
                        637,035
                        
                        
                        
                        557,295Other,
      net
                        
                        
                        230,298
                        
                        
                        
                        218,746Marketable
      securities
                        
                        
                        -
                        
                        
                        
                        33,368Inventories
                        
                        
                        1,717,237
                        
                        
                        
                        368,557Prepaid
      expenses and other current assets
                        
                        
                        568,599
                        
                        
                        
                        286,883Total
      current assets
                        
                        
                        8,755,814
                        
                        
                        
                        4,463,607Property
      and equipment, net
                        
                        
                        50,038,264
                        
                        
                        
                        21,365,415Other
      assets:Goodwill
      and indefinite lived intangibles
                        
                        
                        76,457,694
                        
                        
                        
                        20,179,610Definite
      lived intangibles, net
                        
                        
                        1,335,509
                        
                        
                        
                        698,584Other
                        
                        
                        481,525
                        
                        
                        
                        368,544Total
      other assets
                        
                        
                        78,274,728
                        
                        
                        
                        21,246,738Total
      assets
                        
                        $
                        137,068,806
                        
                        
                        $
                        47,075,760Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
                        
                        $
                        1,203,555
                        
                        
                        $
                        493,499Accrued
      liabilities
                        
                        
                        4,579,918
                        
                        
                        
                        1,709,426Current
      portion of long-term debt
                        
                        
                        2,644,541
                        
                        
                        
                        3,291,154Total
      current liabilities
                        
                        
                        8,428,014
                        
                        
                        
                        5,494,079Deferred
      tax liability
                        
                        
                        16,894,256
                        
                        
                        
                        4,391,499Other
      long-term liabilities
                        
                        
                        537,967
                        
                        
                        
                        420,415Long-term
      debt-related parties
                        
                        
                        600,000
                        
                        
                        
                        2,085,000Long-term
      debt
                        
                        
                        30,312,865
                        
                        
                        
                        9,011,185Total
      liabilities
                        
                        
                        56,773,102
                        
                        
                        
                        21,402,178Commitments
      and contingenciesMinority
      interest
                        
                        
                        3,358,096
                        
                        
                        
                        180,728Temporary
      equity - Common stock, subject to put rights (611,740 and 215,000 shares,
      respectively)
                        
                        
                        13,935,020
                        
                        
                        
                        1,450,000Permanent
      stockholders' equity:Preferred
      stock, $.10 par, 1,000,000 shares authorized, none
    outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $.01 par, 20,000,000 shares authorized, 9,689,315 and 6,903,354
      shares issued, respectively
                        
                        
                        96,893
                        
                        
                        
                        69,034Additional
      paid-in capital
                        
                        
                        53,948,172
                        
                        
                        
                        22,643,596Accumulated
      other comprehensive income (loss)
                        
                        
                        (13,347
                        )
                        
                        
                        20,021Retained
      earnings
                        
                        
                        10,264,650
                        
                        
                        
                        2,603,98364,296,368
                        
                        
                        
                        25,336,634Less
      908,530 shares of common stock held in treasury, at cost
                        
                        
                        1,293,780
                        
                        
                        
                        1,293,780Total
      stockholders' equity
                        
                        
                        63,002,588
                        
                        
                        
                        24,042,854Total
      liabilities and stockholders' equity
                        
                        $
                        137,068,806
                        
                        
                        $
                        47,075,760




See
accompanying notes to consolidated financial statements.




38
 Table of Contents


RICK'S
CABARET INTERNATIONAL, INC.




CONSOLIDATED
STATEMENTS OF OPERATIONS




Year
      Ended September 30,2008
                          
                          
                          2007Revenues:Sales
      of alcoholic beverages
                          
                          $
                          22,278,479
                          
                          
                          $
                          12,111,348Sales
      of food and merchandise
                          
                          
                          5,200,452
                          
                          
                          
                          3,185,494Service
      revenues
                          
                          
                          28,669,299
                          
                          
                          
                          14,883,205Internet
      revenues
                          
                          
                          715,759
                          
                          
                          
                          730,629Media
      revenues
                          
                          
                          801,215
                          
                          
                          
                          -Other
                          
                          
                          2,264,274
                          
                          
                          
                          1,103,264Total
      revenues
                          
                          
                          59,929,478
                          
                          
                          
                          32,013,940Operating
      expenses:Cost
      of goods sold
                          
                          
                          6,959,889
                          
                          
                          
                          4,035,522Salaries
      and wages
                          
                          
                          13,845,362
                          
                          
                          
                          8,739,859Stock-based
      compensation
                          
                          
                          157,080
                          
                          
                          
                          196,871Other
      general and administrative:Taxes
      and permits
                          
                          
                          7,561,260
                          
                          
                          
                          4,071,677Charge
      card fees
                          
                          
                          1,064,841
                          
                          
                          
                          638,248Rent
                          
                          
                          2,431,053
                          
                          
                          
                          1,494,005Legal
      and professional
                          
                          
                          1,659,034
                          
                          
                          
                          1,124,856Advertising
      and marketing
                          
                          
                          2,557,770
                          
                          
                          
                          1,325,367Depreciation
      and amortization
                          
                          
                          2,541,683
                          
                          
                          
                          1,596,650Insurance
                          
                          
                          867,946
                          
                          
                          
                          785,519Utilities
                          
                          
                          1,284,920
                          
                          
                          
                          800,366Other
                          
                          
                          5,278,620
                          
                          
                          
                          3,101,314Total
      operating expenses
                          
                          
                          46,209,458
                          
                          
                          
                          27,910,254Income
      from operations
                          
                          
                          13,720,020
                          
                          
                          
                          4,103,686Other
      income (expense):Interest
      income
                          
                          
                          136,597
                          
                          
                          
                          58,394Interest
      expense
                          
                          
                          (2,712,987
                          )
                          
                          
                          (1,335,713
                          )Other
                          
                          
                          (73,896
                          )
                          
                          
                          37,134Income
      before minority interest
                          
                          
                          11,069,734
                          
                          
                          
                          2,863,501Minority
      interest
                          
                          
                          30,911
                          
                          
                          
                          427,844Income
      before income taxes
                          
                          
                          11,100,645
                          
                          
                          
                          3,291,345Income
      taxes
                          
                          
                          3,439,978
                          
                          
                          
                          236,446Net
      income
                          
                          $
                          7,660,667
                          
                          
                          $
                          3,054,899Basic
      and diluted earnings per share:Net
      income, basic
                          
                          $
                          0.97
                          
                          
                          $
                          0.54Net
      income, diluted
                          
                          $
                          0.91
                          
                          
                          $
                          0.50Weighted
      average number of common shares outstanding:Basic
                          
                          
                          7,931,121
                          
                          
                          
                          5,700,548Diluted
                          
                          
                          8,413,183
                          
                          
                          
                          6,215,285




See
accompanying notes to consolidated financial statements.




39
 Table of Contents


RICK'S
CABARET INTERNATIONAL, INC.




CONSOLIDATED
STATEMENTS OF CHANGES IN PERMANENT STOCKHOLDERS' EQUITY




Years
Ended September 30, 2008 and 2007




Common
      Stock
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              Treasury
      StockNumber of
      Shares
                                                                                                                              
                                                                                                                              
                                                                                                                              Amount
                                                                                                                              
                                                                                                                              
                                                                                                                              Additional Paid-In
      Capital
                                                                                                                              
                                                                                                                              
                                                                                                                              Accumulated Other Comprehensive
      Income (Loss)
                                                                                                                              
                                                                                                                              
                                                                                                                              Retained Earnings (Accumulated
      Deficit)
                                                                                                                              
                                                                                                                              
                                                                                                                              Number of
      Shares
                                                                                                                              
                                                                                                                              
                                                                                                                              Amount
                                                                                                                              
                                                                                                                              
                                                                                                                              Total Stockholders’EquityBalance
      at September 30, 2006
                                                                                                                              
                                                                                                                              
                                                                                                                              5,805,275
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              58,053
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              15,586,233
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              8,898
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              (450,916
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              908,530
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              (1,293,780
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              13,908,488Shares
      issued
                                                                                                                              
                                                                                                                              
                                                                                                                              1,153,079
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              11,531
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              7,509,942
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              7,521,473Change
      in temporary equity - common stock subject to put
      rights
                                                                                                                              
                                                                                                                              
                                                                                                                              (55,000
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (550
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (649,450
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              (650,000
                                                                                                                              )Stock-based
      compensation
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              196,871
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              196,871Net
      income
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              3,054,899
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              3,054,899Change
      in available-for-sale securities
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              11,123
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              11,123Comprehensive
      income
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              3,066,022Balance
      at September 30, 2007
                                                                                                                              
                                                                                                                              
                                                                                                                              6,903,354
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              69,034
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              22,643,596
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              20,021
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              2,603,983
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              908,530
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              (1,293,780
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              24,042,854Shares
      issued
                                                                                                                              
                                                                                                                              
                                                                                                                              3,182,701
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              31,827
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              43,560,815
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              43,592,042Change
      in temporary equity - common stock subject to put
      rights
                                                                                                                              
                                                                                                                              
                                                                                                                              (396,740
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (3,968
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              (12,481,652
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              (12,485,020
                                                                                                                              )Beneficial
      conversion
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              68,333
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              68,333Stock-based
      compensation
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              157,080
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              157,080Net
      income
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              7,660,667
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              7,660,667Change
      in available-for-sale securities
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              (33,368
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              (33,368
                                                                                                                              )Comprehensive
      income
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              -
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              7,626,869Balance
      at September 30, 2008
                                                                                                                              
                                                                                                                              
                                                                                                                              9,689,315
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              96,893
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              53,948,172
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              (13,347
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              10,264,650
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              908,530
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              (1,293,780
                                                                                                                              )
                                                                                                                              
                                                                                                                              $
                                                                                                                              63,002,588


See
accompanying notes to consolidated financial statements.




40
 Table of Contents


RICK'S
CABARET INTERNATIONAL, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS




Year
      Ended September 30,2008
                              
                              
                              2007Cash
      flows from operating activities:Net
      income
                              
                              $
                              7,660,667
                              
                              
                              $
                              3,054,899Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                              
                              
                              2,278,607
                              
                              
                              
                              1,438,158Amortization
                              
                              
                              263,076
                              
                              
                              
                              158,492Bad
      debts
                              
                              
                              83,206
                              
                              
                              
                              26,777Beneficial
      conversion
                              
                              
                              37,738
                              
                              
                              
                              17,952Common
      stock issued for interest payment
                              
                              
                              106,906
                              
                              
                              
                              87,336Amortization
      of note discount
                              
                              
                              29,627
                              
                              
                              
                              35,552Minority
      interests
                              
                              
                              (30,911
                              )
                              
                              
                              (427,844
                              )Deferred
      rent
                              
                              
                              117,552
                              
                              
                              
                              120,715Deferred
      taxes (benefit)
                              
                              
                              1,448,472
                              
                              
                              
                              (200,364
                              )Stock
      compensation expense
                              
                              
                              157,080
                              
                              
                              
                              196,871Issuance
      of stock for non-employee services
                              
                              
                              137,700
                              
                              
                              
                              -Changes
      in operating assets and liabilities:Accounts
      receivable
                              
                              
                              116,130
                              
                              
                              
                              (437,848
                              )Inventories
                              
                              
                              (832,177
                              )
                              
                              
                              (40,418
                              )Prepaid
      expenses and other current assets
                              
                              
                              (248,241
                              )
                              
                              
                              (96,386
                              )Accounts
      payable and accrued liabilities
                              
                              
                              3,493,835
                              
                              
                              
                              449,229Net
      cash provided by operating activities
                              
                              
                              14,819,267
                              
                              
                              
                              4,383,121Cash
      flows from investing activities:Acquisitions
      of businesses, net of cash acquired
                              
                              
                              (35,672,404
                              )
                              
                              
                              (5,572,245
                              )Proceeds
      from sale of assets
                              
                              
                              36,000
                              
                              
                              
                              9,695Purchases
      of property and equipment
                              
                              
                              (3,139,391
                              )
                              
                              
                              (1,210,136
                              )Issuance
      of notes receivable
                              
                              
                              -
                              
                              
                              
                              (35,000
                              )Note
      receivable payments
                              
                              
                              63,991
                              
                              
                              
                              15,892Net
      cash used in investing activities
                              
                              
                              (38,711,804
                              )
                              
                              
                              (6,791,794
                              )Cash
      flows from financing activities:Proceeds
      from sale of common stock
                              
                              
                              27,352,500
                              
                              
                              
                              5,345,500Proceeds
      from stock options exercised
                              
                              
                              347,700
                              
                              
                              
                              665,471Proceeds
      from long-term debt
                              
                              
                              2,150,000
                              
                              
                              
                              600,000Payments
      on long-term debt
                              
                              
                              (3,353,776
                              )
                              
                              
                              (2,058,472
                              )Distribution
      to minority interests
                              
                              
                              (150,000
                              )
                              
                              
                              -Proceeds
      from warrant conversion
                              
                              
                              150,000
                              
                              
                              
                              -Net
      cash provided by financing activities
                              
                              
                              26,496,424
                              
                              
                              
                              4,552,499Net
      increase in cash and cash equivalents
                              
                              
                              2,603,887
                              
                              
                              
                              2,143,826Cash
      and cash equivalents at beginning of year
                              
                              
                              2,998,758
                              
                              
                              
                              854,932Cash
      and cash equivalents at end of year
                              
                              $
                              5,602,645
                              
                              
                              $
                              2,998,758Supplemental
      Disclosures of Cash Flow InformationCash
      paid during the year for interest
                              
                              $
                              2,239,993
                              
                              
                              $
                              1,176,204Cash
      paid during the year for income taxes
                              
                              $
                              171,036
                              
                              
                              $
                              -




See
accompanying notes to consolidated financial statements.




41
 Table of Contents


RICK'S
CABARET INTERNATIONAL, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)


Non-cash
transactions:




During
the year ended September 30, 2007, the seller of the New York club converted
$75,000 of principal from the related promissory note into 10,000 shares of
restricted common stock.




During
the year ended September 30, 2007, the Company purchased a 51% ownership
interest of Playmates Gentlemen’s Club LLC for $1,533,750, payable with $500,000
cash at closing and 125,000 shares of restricted common stock.




During
the year ended September 30, 2007, the Company foreclosed on a residential house
due to non-payment of a note receivable from an unrelated third party. The
balance of the note receivable was $55,175.




During
the year ended September 30, 2007, the Company acquired the property relating to
its new club in Fort Worth, Texas for $2.5 million, comprised of $100,000 in
cash and a note payable of $2.4 million.




During
the year ended September 30, 2007, the Company foreclosed on certain accounts
and a note receivable in the aggregate amount of approximately $240,000. The net
result of the transaction was that the Company wrote off the note and accounts
and the related deferred gain and recorded $53,000 in furniture and equipment in
the foreclosure.




During
the year ended September 30, 2007, the holder of a convertible debenture
converted $401,752 of principal and interest into 84,579 shares of restricted
common stock.




During
the year ended September 30, 2008, the Company purchased Stellar Management
Corporation and Miami Gardens Square One, Inc., owner/operator of Tootsie’s
Cabaret in Florida for $25,486,000 (which includes inventories and other
assets), payable to the sellers $15,486,000 in cash, $10,000,000 pursuant to two
secured promissory notes in the amount of $5,000,000 each, plus estimated
transaction costs of $175,000.




During
the year ended September 30, 2008, the Company purchased an aircraft through the
issuance of a note payable of $1,561,500.




During
the year ended September 30, 2008, in connection with the acquisition of the
remaining 49% of Playmates Gentlemen’s Club LLC, the Company issued 35,000
common shares valued at $700,000.




During
the year ended September 30, 2008, the Company purchased The End Zone, Inc.,
owner/operator of Crazy Horse Too Cabaret in Philadelphia for $7,985,000 payable
to the sellers $3,500,000 in cash and $4,485,000 pursuant to the issuance of
195,000 shares of restricted common stock.




During
the year ended September 30, 2008, the Company purchased Hotel Development Ltd.,
owner/operator of The Executive Club in Dallas, Texas for a total purchase price
of $3,590,609, which was paid through the issuance of 152,082 shares of the
Company’s restricted common stock and $46,490 in cash. The Company also
purchased the real property associated with the club, for a total consideration
of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in cash and
$3,640,000 through the issuance of a five year promissory note and (ii) the
issuance of 57,918 shares of the Company’s restricted common stock to be valued
at $23.50 per share.




During
the year ended September 30, 2008, the Company acquired three entities to form a
media division for a total consideration of $1,069,754, consisting of $700,000
in cash and 21,740 shares of restricted common stock.




During
the year ended September 30, 2008, the holders of convertible debentures
converted $825,000 of principal into 125,953 shares of the Company’s restricted
common stock.




During
the year ended September 30, 2008, the holder of a convertible debenture
converted $784,922 of principal and interest into 156,116 shares of restricted
common stock.




D uring the
year ended September 30, 2008, the Company purchased the assets of North by East
Entertainment Ltd., owner/operator of the Platinum Club II in Dallas, Texas for
a total purchase price of $1,500,000 cash. As part of the transaction, the
Company also acquired the real property associated with the club for a total
consideration of $6,000,000, which was paid $1,650,000 in cash and $4,350,000
through the issuance of a five-year promissory note. The Company also incurred
acquisition costs of $69,998, which was paid in cash.




See
accompanying notes to consolidated financial statements.


42
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RICK'S
CABARET INTERNATIONAL, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)





Non-cash
transactions: - continued




During
the year ended September 30, 2008, the Company purchased the assets of DI Food
& Beverage of Las Vegas, LLC, owner/operator of the Scores Club in Las
Vegas, Nevada for a total purchase price of $18,147,498, payable through the
issuance of a promissory note in the amount of $3,000,000, the issuance of
200,000 shares of the Company’s restricted common stock, and $12,066,667 in
cash. The Company also incurred acquisition costs of $326,830, which was paid in
cash.




See
accompanying notes to consolidated financial statements.


43
 Table of Contents


RICK’S CABARET INTERNATIONAL, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





September
30, 2008 and 2007




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, San Antonio, Dallas and Fort Worth, Texas, as well
as Minneapolis, Minnesota, Philadelphia, Pennsylvania, Charlotte, North
Carolina, New York, New York, Miami Gardens, Florida, and Las Vegas, Nevada. The
Company also owns and operates several adult entertainment Internet websites and
a media division. 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


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. Actual results could differ from these
estimates and assumptions.




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, 2008 and 2007,
the Company had no such investments. The Company maintains deposits in several
financial institutions, which may at times exceed amounts covered by insurance
provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). At
September 30, 2008 and 2007, the uninsured portion of these deposits
approximated $1,675,000 and $569,000, respectively. The Company has not incurred
any losses related to its cash on deposit with financial
institutions.




Accounts
and Notes Receivable




Trade
accounts receivable for the nightclub operation is primarily comprised of credit
card charges, which are generally converted to cash in two to five days after a
purchase is made. The media division’s accounts receivable is primarily
comprised of receivables for advertising sales and Expo registration. The
Company’s accounts receivable, other is comprised of employee advances and other
miscellaneous receivables. The long-term portion of notes receivable are
included in other assets in the accompanying consolidated balance sheets. The
Company recognizes interest income on notes receivable based on the terms of the
agreement and based upon management’s evaluation that the notes receivable and
interest income will be collected. The Company recognizes allowances for
doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected.




44
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




B.
            Summary
      of Significant Accounting Policies -
continued


Marketable
Securities


Marketable
securities at September 30, 2007 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 securities were written down to zero at
September 30, 2008. 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, 2008 and 2007, the Company’s marketable
securities were classified as available-for-sale, which are carried at fair
value, with unrealized gains and losses reported as other comprehensive income
within the stockholders’ equity section of the accompanying consolidated balance
sheets. The cost of marketable equity securities sold is determined on a
specific identification basis. The fair value of marketable equity securities is
based on quoted market prices. There have been no realized gains or losses
related to marketable securities for the years ended September 30, 2008 or 2007.
Marketable securities held at September 30, 2008 and 2007 have a cost basis of
approximately $13,000. Due to lack of market transaction, the value of
marketable security was written off from the Company’s balance sheet as of
September 30, 2008.




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.




Property
and Equipment




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




Goodwill
and Intangible Assets




In June
2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles
Assets, which addresses the accounting for goodwill and other intangible
assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized, but reviewed on an annual basis for impairment. The
Company adopted SFAS No. 142 effective October 1, 2001. The Company’s annual
evaluation was performed as of September 30, 2008, based on a projected
discounted cash flow method using a discount rate determined by management to be
commensurate with the risk inherent in the current business model. The Company
determined that there is no impairment for the year ended September 30, 2008 or
2007. All of the Company’s goodwill and intangible assets relate to the
nightclub segment, except for $567,000 related to the acquisition of the media
division. Definite lived intangible assets are amortized on a straight-line
basis over their estimated lives. Fully amortized assets are written-off against
accumulated amortization.




Revenue
Recognition




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. The Company recognizes revenue for VIP memberships in
accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, by
deferring and recognizing 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 recognizes Internet revenue from monthly subscriptions to its online
entertainment sites when notification of a new or existing subscription and its
related fee are received from the third party hosting company or from the credit
card company, usually two to three days after the transaction has occurred. The
monthly fee is not refundable. 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.




Revenues
from the sale of magazines and related advertising content are recognized when
the issue is published and shipped. Revenues and external expenses related to
the Company’s annual Expo convention are recognized upon the completion of the
convention in August.




45
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




B.
            Summary
      of Significant Accounting Policies -
continued




Sales and Liquor
Taxes




The
Company recognizes sales and liquor taxes paid as revenues and an equal expense
in accordance with EITF 06-3, How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement.
Total sales and liquor taxes aggregated $3,815,648 and $2,256,251 for the years
ended September 30, 2008 and 2007, respectively.




Advertising
and Marketing




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




Income
Taxes




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




In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income
Taxes (FIN 48), to create a single model to address accounting for uncertainty
in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company has adopted FIN
48 as of October 1, 2007, as required. The adoption of FIN 48 has had no effect
on the Company's consolidated financial position, results of operations or cash
flows. There are no unrecognized tax benefits to disclose in the notes to the
financial statements.




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 permanent 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.




Potential
common stock shares consist of shares that may arise from outstanding dilutive
common stock options and warrants (the number of which is computed using the
“treasury stock method”) and from outstanding convertible debentures (the number
of which is computed using the “if converted method”). Diluted EPS considers the
potential dilution that could occur if the Company’s outstanding common stock
options, warrants and convertible debentures were converted into common stock
that then shared in the Company’s earnings (as adjusted for interest expense,
that would no longer occur if the debentures were converted).


46
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RICK’S CABARET INTERNATIONAL,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




B.
            Summary
      of Significant Accounting Policies -
continued




Net
earnings applicable to common stock and the weighted - average number of shares
used for basic and diluted earnings per share computations are summarized in the
table that follows:




2008
                            
                            
                            2007Basic
      earnings per share:Net
      earnings applicable to common stockholders
                            
                            $
                            7,660,667
                            
                            
                            $
                            3,054,899Average
      number of common shares outstanding
                            
                            
                            7,931,121
                            
                            
                            
                            5,700,548Basic
      earnings per share
                            
                            $
                            0.97
                            
                            
                            $
                            0.54Diluted
      earnings per share:Net
      earnings applicable to common stockholders
                            
                            $
                            7,660,667
                            
                            
                            $
                            3,054,899Adj.
      to net earnings from assumed conversion of debentures (1)
                            
                            
                            -
                            
                            
                            
                            79,200Adj.
      net earnings for diluted EPS computation
                            
                            $
                            7,660,667
                            
                            
                            $
                            3,134,099Average
      number of common shares outstanding:Common
      shares outstanding
                            
                            
                            7,931,121
                            
                            
                            
                            5,700,548Potential
      dilutive shares resulting from exercise of warrants and options
      (2)
                            
                            
                            367,062
                            
                            
                            
                            294,737Potential
      dilutive shares resulting from conversion of debentures
(3)
                            
                            
                            115,000
                            
                            
                            
                            220,000Total
      average number of common shares outstanding used for
    dilution
                            
                            
                            8,413,183
                            
                            
                            
                            6,215,285Diluted
      earnings per share
                            
                            $
                            0.91
                            
                            
                            $
                            0.50




(1)
Represents interest expense on dilutive convertible debentures, that would not
occur if they were assumed converted.


(2) All
outstanding warrants and options were considered for the EPS
computation.


(3)
Convertible debentures (principal and accrued interest) outstanding at September
30, 2008 and 2007 totaling $1,100,694 and $2,788,217, respectively, were
convertible into common stock at a price of $12.00 and $25.32 in 2008 and $3.00
and $7.50 per share in 2007. Debentures convertible into 115,000 shares were
dilutive in 2008 and debentures convertible into 220,000 shares were dilutive in
2007 (based on average balances outstanding).




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.




Stock
Options




At
September 30, 2008, the Company has stock options outstanding, which are
described more fully in Note H. The Company formerly accounted 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. Effective October 1, 2006, the
Company adopted the fair value recognition provisions of SFAS No. 123R, Share-Based Payments, using
the modified prospective application method. Under this transition method,
compensation cost recognized for the years ended September 30, 2008 and 2007
includes the applicable amounts of: (a) compensation of all stock-based payments
granted prior to, but not yet vested as of October 1, 2006 (based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS No. 123 and previously presented in pro forma footnote disclosures), and
(b) compensation cost for all stock-based payments granted subsequent to October
1, 2006 based on the grant-date fair value estimated in accordance with the new
provisions of SFAS No. 123R. The compensation cost recognized for the year ended
September 30, 2008 and 2007 was $157,080 and $196,871, respectively, as a result
of implementing SFAS No. 123R. There were 125,000 and 252,500 stock option
exercises for the years ended September 30, 2008 and 2007,
respectively.


47
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




B.
            Summary
      of Significant Accounting Policies -
continued




Impact
of Recently Issued Accounting Standards




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 141R, “Business Combinations,”
(“SFAS 141R”). SFAS 141R requires most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at full fair value. The Statement applies to all business combinations,
including combinations among mutual entities and combinations by contract alone.
Under SFAS 141R, all business combinations will be accounted for by applying the
acquisition method. SFAS 141R is effective for fiscal years beginning on or
after December 15, 2008 and will be effective for the Company beginning in
fiscal 2010 for business combinations occurring after the effective
date.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51,” (“SFAS 160”). SFAS 160 will require noncontrolling
interests (previously referred to as minority interests) to be treated as a
separate component of equity, not as a liability or other item outside of
permanent equity. The Statement applies to the accounting for noncontrolling
interests and transactions with noncontrolling interest holders in consolidated
financial statements. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008 and is effective for the Company beginning in fiscal
2010. The Company does not expect that SFAS 160 will have a material impact on
its financial statements.




In
December 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 clarifies the definition
of fair value, describes methods used to appropriately measure fair value, and
expands fair value disclosure requirements, but does not change existing
guidance as to whether or not an instrument is carried at fair value. For
financial assets and liabilities, SFAS 157 is effective for fiscal years
beginning after November 15, 2007, which will require the Company to adopt these
provisions in fiscal 2009. For nonfinancial assets and liabilities, SFAS 157 is
effective for fiscal years beginning after November 15, 2008, which will require
the Company to adopt these provisions in fiscal 2010. In February 2007, the FASB
issued Statement of Financial Accounting Standards No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities,” (“SFAS 159”). SFAS 159
provides companies with an option to report selected assets and liabilities at
fair value. This statement contains financial statement presentation and
disclosure requirements for assets and liabilities reported at fair value as a
consequence of the election and is effective for the Company beginning in fiscal
2009. The Company is currently in the process of assessing the impact that SFAS
157 and SFAS 159 may have on the Company’s consolidated financial
statements.




The Staff
of the Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") 110 which expresses the views of the staff regarding the use of a
"simplified" method, as discussed in SAB No. 107 ("SAB 107"), in developing an
estimate of expected term of "plain vanilla" share options in accordance with
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. In
particular, the staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. At the
time SAB 107 was issued, the staff believed that more detailed external
information about employee exercise behavior (e.g., employee exercise patterns
by industry and/or other categories of companies) would, over time, become
readily available to companies. Therefore, the staff stated in SAB 107 that it
would not expect a company to use the simplified method for share option grants
after December 31, 2007. The staff understands that such detailed information
about employee exercise behavior may not be widely available by December 31,
2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007. The
Company has utilized the simplified method for option grants during the year
ended September 30, 2007. There were no option grants during the year ended
September 30, 2008.


C.
              Reclassifications




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




48
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


D.
            Property
      and Equipment




Property
and equipment consisted of the following:




September
      30,2008
                        
                        
                        2007Buildings
      and land
                        
                        $
                        33,965,031
                        
                        
                        $
                        15,275,245Leasehold
      improvements
                        
                        
                        10,274,696
                        
                        
                        
                        5,974,183Furniture
                        
                        
                        2,044,149
                        
                        
                        
                        1,404,259Equipment
                        
                        
                        11,687,197
                        
                        
                        
                        4,365,930Total
      property and equipment
                        
                        
                        57,971,073
                        
                        
                        
                        27,019,617Less
      accumulated depreciation
                        
                        
                        7,932,809
                        
                        
                        
                        5,654,202Property
      and equipment, net
                        
                        $
                        50,038,264
                        
                        
                        $
                        21,365,415




E.
            Goodwill
      and Intangible Assets




Goodwill
and intangible assets consisted of the following:




September
      30,2008
                            
                            
                            2007Indefinite
      useful lives:Goodwill
                            
                            
                            $
                            37,159,351
                            
                            
                            $
                            7,280,179Licenses
                            
                            
                            
                            39,298,343
                            
                            
                            
                            12,899,431AmortizationPeriodDefinite
      useful lives:Discounted
      leases
                            18
      & 6 years
                            
                            
                            146,569
                            
                            
                            
                            146,569Non-compete
      agreements
                            5
      years
                            
                            
                            1,672,000
                            
                            
                            
                            772,000Less
      accumulated amortization
                            
                            
                            
                            (483,060
                            )
                            
                            
                            (219,985
                            )Total
      goodwill and intangible assets
                            
                            
                            $
                            77,793,203
                            
                            
                            $
                            20,878,194




Future
amortization expense related to definite lived intangible assets subject to
amortization at September 30, 2008 for each of the years in the five-year period
ending September 30, 2013 and thereafter is 2009 - $400,489, 2010 - $348,990,
2011 - $294,240, 2012 - $192,654, 2013 - $76,647, and thereafter -
$22,489.




Goodwill
and indefinite lived intangible assets consist of sexually oriented business
licenses or goodwill, which were obtained as part of the acquisitions. These
licenses are the result of zoning ordinances, thus are valid indefinitely,
subject to filing annual renewal applications, which are done at minimal costs
to the Company. As cash flows are expected to continue indefinitely, in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
the licenses are determined to have indefinite useful lives. The discounted cash
flow method of income approach was used in calculating the value of these
licenses in a business combination.




49
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RICK’S
CABARET INTERNATIONAL, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




F.
            Long-term
      Debt




September
      30,2008
                        
                        
                        2007Notes
      payable at 9%, mature February 2008
                        
                        
                        *
                        
                        
                        $
                        -
                        
                        
                        $
                        1,839,771Notes
      payable at 9-11%, mature August 2015
                        
                        
                        *
                        
                        
                        
                        2,070,668
                        
                        
                        
                        1,168,708Notes
      payable at 10%, mature December 2014 and January 2015
                        
                        
                        *
                        
                        
                        
                        2,696,790
                        
                        
                        
                        2,759,711Note
      payable at 7%, matures October 2012, collateralized by assets of RCI
      Entertainment North Carolina, Inc.
                        
                        
                        
                        
                        
                        
                        208,528
                        
                        
                        
                        251,158Note
      payable at 7.5%, matures August 2011
                        
                        
                        *
                        
                        
                        
                        918,552
                        
                        
                        
                        1,187,301Convertible
      note payable to related party at 12%, matures August 2009, converted to
      common stock in July 2008
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        615,413Convertible
      note payable at 4%, matures May 2010, collateralized by assets of RCI
      Entertainment New York, Inc.
                        
                        
                        
                        
                        
                        
                        1,023,965
                        
                        
                        
                        1,727,666Convertible
      notes payable to related parties at 12%, matured and converted to common
      stock in April 2008
                        
                        
                        *
                        
                        
                        
                        -
                        
                        
                        
                        825,000Convertible
      note payable at 10%, converted to common stock in November 2007,
      unsecured
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        691,689Note
      payable at 7%, matures December 2019
                        
                        
                        *
                        
                        
                        
                        357,413
                        
                        
                        
                        377,627Note
      payable at 4.9%, matures December 2010, collateralized by
      equipment
                        
                        
                        
                        
                        
                        
                        16,560
                        
                        
                        
                        23,355Note
      payable at 7.25%, matures May 2013
                        
                        
                        *
                        
                        
                        
                        2,117,663
                        
                        
                        
                        2,319,940Notes
      payable to related parties at 12%, mature November 2009
                        
                        
                        
                        
                        
                        
                        600,000
                        
                        
                        
                        600,000Notes
      payable at 14%, mature November 30, 2010, collateralized by stocks of
      Miami Gardens Square One, Inc. and Stellar Management,
Inc.
                        
                        
                        
                        
                        
                        
                        10,000,000
                        
                        
                        
                        -Note
      payable at 6.15%, matures February 2028, collateralized by an
      aircraft
                        
                        
                        
                        
                        
                        
                        1,538,971
                        
                        
                        
                        -Note
      payable at the greater of 2% above prime or 7.5%, (7.5% at September 30,
      2008), matures April 2013
                        
                        
                        *
                        
                        
                        
                        3,606,683
                        
                        
                        
                        -Note
      payable at the greater of 2% above prime or 7.5%, (7.5% at September 30,
      2008), matures June 2013
                        
                        
                        *
                        
                        
                        
                        4,327,169
                        
                        
                        
                        -Convertible
      notes payable at 10%, matures May 2009
                        
                        
                        
                        
                        
                        
                        100,000
                        
                        
                        
                        -Note
      payable at 8%, matures September 2010
                        
                        
                        
                        
                        
                        
                        3,020,000
                        
                        
                        
                        -Convertible
      note payable at 10%, matures October 2010
                        
                        
                        *
                        
                        
                        
                        954,444
                        
                        
                        
                        -Total
      debt
                        
                        
                        
                        
                        
                        
                        33,557,406
                        
                        
                        
                        14,387,339Less
      current portion
                        
                        
                        
                        
                        
                        
                        2,644,541
                        
                        
                        
                        3,291,154Total
      long-term debt
                        
                        
                        
                        
                        
                        $
                        30,912,865
                        
                        
                        $
                        11,096,185
  *
      Collateralized by real estate




50
 Table of Contents


RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




F.
            Long-term
      Debt - continued




On July
22, 2005, the Company entered into a secured convertible debenture with a
greater than 10% shareholder for a principal sum of $660,000. The debenture was
convertible into 220,000 shares of the Company’s common stock at a conversion
price of $3.00 per share at the option of the holder (subject to certain
limitations). The term was for three years and interest rate is at 12% per
annum. The debenture was converted into 220,000 common shares in July 2008. The
Company also issued 50,000 detachable warrants at $3.00 per share in relation to
this debenture. The warrants were exercisable at any time within the period
beginning on July 22, 2005 and expiring on July 22, 2008 and were exercised in
July 2008. The value of the discount on note payable was estimated to be
$106,656 at the date of grant using a Black-Scholes option-pricing model with
the following assumptions:




Volatility
                        
                        138%Expected
      life
                        
                        3
      yearsExpected
      dividend yield
                        
                        -Risk
      free rate
                        
                        4.31%


For the
years ended September 30, 2008 and 2007, the Company recorded $29,627 and
$35,552, respectively of interest expense. The debenture was secured by the
Company’s ownership in Citation Land, LLC and RCI Holdings, Inc., both are
wholly owned subsidiaries of the Company.




The
Company has accounted for this transaction under Emerging Issues task Force
(“EITF”) Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments. The value of the embedded beneficial
conversion feature on the note payable was estimated to be $53,856, which was
calculated using the EITF Issue No. 98-5 model. For the years ended September
30, 2008 and 2007, the Company recorded $14,960 and $17,952, respectively, of
interest expense related to the value of the embedded beneficial conversion
feature.




As a part
of the purchase the New York club, the Company obtained a $5.125 million
promissory note bearing simple interest at the rate of 4.0% per annum with a
balloon payment at the end of five years. $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. For the year ended September 30,
2007, $75,000 of principal was converted into 10,000 shares of the Company’s
restricted common stock.




On
February 6, 2006, the Company issued a Convertible Debenture (the “Debenture”)
to an unrelated investment group for the principal sum of $1,000,950 bearing
interest at the rate of 10% per annum, with a maturity date of February 1, 2009.
Under the terms of the Debenture, the Company was required to make three
quarterly interest payments beginning May 1, 2006. Thereafter, the Company is
required to make nine equal quarterly principal and interest payments. At any
time after 366 days from the date of issuance of this Debenture, the Company had
the right to redeem the Debenture in whole or in part during the term of the
Debenture. At the election of the holder, the holder had the right at any time
to convert all or any portion of the principal or interest amount of the
Debenture into shares of the Company’s common stock at a rate of $4.75 per
share, which approximates the closing price of the Company’s stock on February
6, 2006. The proceeds of the Debenture were used topay off certain debt and
increase working capital. During the year ended September 30, 2007, the holder
had elected to convert $401,752 of principal and interest into 84,579 shares of
the Company’s restricted common stock. In November 2007, the holder elected to
convert all remaining principal of $691,689 and accrued interest of $21,448 into
150,134 shares of the Company’s restricted common stock.




On April
28, 2006, the Company entered into convertible debentures with three
shareholders, one of which is a greater than 10% shareholder, for a principal
sum of $825,000. The debentures mature April 30, 2009 and bore interest at a
rate of 12% per annum. At the election of the holders, the holders had the right
to convert (subject to certain limitations) until April 30, 2008, all or any
portion of the principal amount of the debentures into shares of the Company’s
common stock at a rate of $6.55 per share, which approximated the closing price
of the Company’s stock on April 28, 2006. The holders converted the debentures
in April 2008 into 125,953 shares of the Company’s common shares. The proceeds
of the debentures were used for the acquisition of Joint Ventures,
Inc.


51
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)




F.
            Long-term
      Debt - continued




On August
24, 2006, as part of the purchase of a club in San Antonio, Texas (formerly
known as “Centerfolds”), the Company obtained three promissory notes: a $400,000
note bearing simple interest at the rate of 12% per annum and maturing March
2007, a $200,000 note bearing interest at the rate of 12% per annum maturing
February 2007, and a $1,700,000 note bearing interest at the rate of 7.5% with a
balloon payment at end of five years. These notes payable are secured by the
real estate.




On
November 9, 2006, the Company entered into convertible debentures with three
shareholders for a principal sum of $600,000. The term is for two years and the
interest rate is 12% per annum. At the election of the holders, the holders have
the right to convert (subject to certain limitations) all or any portion of the
principal amount of the debentures into shares of the Company’s common stock at
a rate of $7.50 per share, which was higher than the closing price of the
Company’s stock on November 9, 2006. The debentures provide, absent shareholder
approval, that the number of shares of the Company’s common stock that may be
issued by the Company or acquired by the holders upon conversion of the
debentures shall not exceed 19.99% of the total number of issued and outstanding
shares of the Company’s common stock. The proceeds of the debentures were used
for the acquisition of a 51% ownership interest of Playmates Gentlemen’s Club
LLC. The debentures were paid in cash in November 2008.




On April
23, 2007, RCI Holdings, Inc., the Company’s wholly owned subsidiary ("RCI"),
entered into an assignment of a certain real estate sales contract between the
owner of the property and W.K.C., Inc. for the purchase of the real property
located at 7101 Calmont, Fort Worth, Texas 76116 (the "Real Property") where the
club is located for a total purchase price of $2,500,000, which consisted of
$100,000 in cash and $2,400,000 payable in a six year promissory note to the
sellers which will accrue interest at the rate of 7.25% for the first two years,
8.25% for years three and four and 9.25% thereafter (the "Promissory Note"). The
Promissory Note is secured by a deed of trust and security agreement. Further,
the Company entered into an assignment and assumption of lease agreement with
sellers to assume the lease agreement for the Real Property.




On
October 12, 2007, the Company borrowed $1,000,000 from an investment company
under terms of a 10% convertible debenture. Interest only is payable quarterly
until the principal plus accrued interest is due in nine equal quarterly
payments beginning in October 2008. The debenture is subject to optional
redemption at any time after 366 days from the date of issuance at 100% of the
principal face amount plus accrued interest. The debenture plus any outstanding
convertible interest is convertible by the holder into shares of the Company’s
common stock at any time prior to the maturity date at the conversion price of
$12 per share.




In
connection with the acquisition of Tootsie’s Cabaret in Miami Gardens, Florida,
the Company entered into two Secured Promissory Notes for a total of $10,000,000
(the "Notes"). The Notes bear interest at the rate of 14% per annum with the
principal payable in one lump sum payment on November 30, 2010. The Company
cannot pre-pay the Notes during the first twelve (12) months; thereafter, the
Company may prepay the Notes, in whole or in part, provided that (i) any
prepayment by the Company from December 1, 2008 through November 30, 2009, shall
be paid at a rate of 110% of the original principal amount and (ii) any
prepayment by the Company after November 30, 2009, may be prepaid without
penalty at a rate of 100% of the original principal amount. The Notes are
secured by the stock of the companies acquired under a Pledge and Security
Agreement.




Effective
February 1, 2008, the Company borrowed $1,000,000 from a lender. The funds were
utilized to pay off certain other Company debt in the amount of $1,797,529. The
new debt bears interest at 9% and interest is payable monthly until February 1,
2013 at which time the principal is due in full. The note is collateralized by
certain Company-owned property in Minneapolis, Minnesota.




In
February 2008, the Company borrowed $1,561,500 from a lender. The funds were
used to purchase an aircraft. The debt bears interest at 6.15% with monthly
principal and interest payments of $11,323 beginning March 12, 2008. The note
matures on February 12, 2028.




As part
of the acquisition of the Executive Club in Dallas, the Company acquired the
related Real Property from DPC Holdings, LLC, a Texas limited liability company
("DPC"). As part of the consideration for the purchase of the Real Property, the
Company entered into a $3,640,000 five year promissory note (the "Promissory
Note"). The Promissory Note bears interest at a varying rate at the greater of
(i) two percent (2%) above the Prime Rate or (ii) seven and one-half percent
(7.5%), and is guaranteed by the Company and Eric Langan, the Company’s Chief
Executive Officer, individually.




52
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


F.
            Long-term
      Debt - continued




As part
of the acquisition of the Platinum Club II in Dallas, the Company acquired the
Real Property from Wire Way, LLC, a Texas limited liability company (“Wire
Way”). Pursuant to a Real Estate Purchase and Sale Agreement (the “Real Estate
Agreement”) dated May 10, 2008, the Company paid total consideration of
$6,000,000, which was paid $1,650,000 in cash and $4,350,000 through the
issuance of a five (5) year promissory note (the “Promissory Note”). The
Promissory Note bears interest at a varying rate at the greater of (i) two
percent (2%) above the Prime Rate or (ii) seven and one-half percent (7.5%),
which is guaranteed by the Company and by Eric Langan, the Company’s Chief
Executive Officer, individually.




On
September 5, 2008, as part of the purchase of a club in Las Vegas, Nevada
(formerly known as “Scores”), the Company obtained an unsecured promissory note
in the amount of $3,000,000 bearing simple interest at the rate of 8% per annum
with a five year amortization, with the initial monthly payment due in April
2009 and a balloon payment of all then outstanding principal and interest upon
the expiration of two (2) years from the execution of the note.




In May
2008, the Company borrowed $150,000 from two unrelated individuals under terms
of a 10% convertible debenture. Interest only is payable quarterly beginning in
August 2008 and the note matures on May 2009. At the election of the holders,
the holders have the right to convert (subject to certain limitations) all or
any portion of the principal and interest amounts of the debentures into shares
of the Company’s common stock at a rate of $25.32 per share. On August 31, 2008,
the Company paid part of the principal in the amount of $50,000 in
cash.




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




2009
                    
                    $
                    2,644,5412010
                    
                    
                    4,512,3452011
                    
                    
                    11,710,2412012
                    
                    
                    872,6902013
                    
                    
                    2,777,770Thereafter
                    
                    
                    11,039,819Total
      maturities of long-term debt
                    
                    $
                    33,557,406




G.
            Income
      Taxes




The
provision for income taxes consisted of the following for the years ended
September 30, 2008 and 2007:




2008
                  
                  
                  2007Current
                  
                  $
                  1,991,506
                  
                  
                  $
                  436,810Deferred
                  
                  
                  1,448,472
                  
                  
                  
                  (200,364
                  )Total
      income tax expense
                  
                  $
                  3,439,978
                  
                  
                  $
                  236,446




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:




2008
                          
                          
                          2007Computed
      expected tax expense
                          
                          $
                          3,774,220
                          
                          
                          $
                          1,119,057State
      income taxes
                          
                          
                          220,997
                          
                          
                          
                          32,913Stock
      option disqualifying dispositions and other permanent
      differences
                          
                          
                          (346,344
                          )
                          
                          
                          (584,516
                          )Net
      operating loss carryforward
                          
                          
                          -
                          
                          
                          
                          (286,838
                          )Change
      in deferred tax valuation allowance
                          
                          
                          (154,679
                          )
                          
                          
                          (44,170
                          )Other
                          
                          
                          (54,216
                          )
                          
                          
                          -Total
      income tax expense
                          
                          $
                          3,439,978
                          
                          
                          $
                          236,446




53
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


G.
            Income Taxes-
      continued




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The significant components of the
Company’s deferred tax assets and liabilities at September 30 are as
follows:




2008
                      
                      
                      2007Deferred
      tax assets (liabilities):Bad
      debts allowance
                      
                      $
                      96,819
                      
                      
                      $
                      93,560Goodwill
      and indefinite lived intangibles
                      
                      
                      (15,266,648
                      )
                      
                      
                      (5,019,816
                      )Property
      and equipment
                      
                      
                      (1,815,896
                      )
                      
                      
                      481,172Net
      operating losses
                      
                      
                      -
                      
                      
                      
                      154,679Unrealized
      (gain)/loss on marketable securities
                      
                      
                      4,671
                      
                      
                      
                      (7,008
                      )Other
                      
                      
                      213,034
                      
                      
                      
                      139,365Valuation
      allowance
                      
                      
                      -
                      
                      
                      
                      (154,679
                      )Net
      deferred tax liabilities
                      
                      $
                      (16,768,020
                      )
                      
                      $
                      (4,312,727
                      )




The net
deferred tax liabilities are recorded in the balance sheets as
follows:




2008
                  
                  
                  2007Current
      assets
                  
                  $
                  126,236
                  
                  
                  $
                  78,772Long-term
      liabilities
                  
                  
                  (16,894,256
                  )
                  
                  
                  (4,391,499
                  )Net
      deferred tax liabilities
                  
                  $
                  (16,768,020
                  )
                  
                  $
                  (4,312,727
                  )




At
September 30, 2007, the Company had net operating loss carryforwards related to
a subsidiary not included in the Company’s consolidated income tax return of
approximately $442,000, which expire in 2027 and were fully reserved with a
valuation allowance due to uncertainty of the timing and amounts of future
taxable income of this subsidiary. During the year ended September 30, 2008, the
remaining 49% of this subsidiary was acquired and the carryforwards were
utilized.




During
the 2007 fiscal year, the Company realized that certain deferred tax liabilities
needed to be recognized relating to prior business acquisitions and recorded
these in the September 30, 2007 balance sheet. The offset to the deferred tax
liabilities was to goodwill. The recognition of these balance sheet items had no
effect on income tax expense for any period.




H.
            Stock
      Options




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




54
 Table of Contents


RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


H.
            Stock
      Options - continued




Following
is a summary of options for the years ended September 30, 2008 and
2007:




Weighted
      Average Exercise Price
                                                                                  
                                                                                  
                                                                                  Weighted Average
      Remaining Contractual Term
                                                                                  
                                                                                  
                                                                                  Aggregate Intrinsic
      Value at September 30, 2008Outstanding
      at October 1, 2006
                                                                                  
                                                                                  
                                                                                  727,500
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2.70Granted
                                                                                  
                                                                                  
                                                                                  70,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  9.40Forfeited
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Exercised
                                                                                  
                                                                                  
                                                                                  (252,500
                                                                                  )
                                                                                  
                                                                                  
                                                                                  2.58Outstanding
      at September 30, 2007
                                                                                  
                                                                                  
                                                                                  545,000
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.60Granted
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Forfeited
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Exercised
                                                                                  
                                                                                  
                                                                                  (125,000
                                                                                  )
                                                                                  
                                                                                  
                                                                                  2.78Outstanding
      at September 30, 2008
                                                                                  
                                                                                  
                                                                                  420,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.86
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.25
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,502,750Exercisable
      at September 30, 2008
                                                                                  
                                                                                  
                                                                                  410,000
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.73
                                                                                  
                                                                                  
                                                                                  
                                                                                  1.18
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2,498,550


As of
September 30, 2008, the range of exercise prices for outstanding options was
$2.49 - $9.40.




In August
2007, the Company issued 10,000 stock options to each Director who is a member
of the Company’s Audit Committee and 5,000 options to the Company’s other
Directors. These options (50,000 in total) become exercisable on August 24,
2008, have a strike price of $9.40 per share and expire in August 2009. On the
same date, an officer received 20,000 options to purchase shares of the
Company’s common stock at an exercise price of $9.40 as compensation. The stock
options, which expire on August 24, 2012, vest over two years with 10,000 stock
options becoming exercisable on August 24, 2008 and 10,000 stock options
becoming exercisable on August 24, 2009.




The fair
value of options issued for the year ended September 30, 2007 were estimated to
be $219,170 at the date of grant using a Black-Scholes option-pricing model
using the following weighted average assumptions:




Volatility
                                75%Expected
      lives
                                2.38
      yearsExpected
      dividend yield
                                -Risk
      free rates
                                4.42%Expected
      forfeiture rate
                                14%




The
expected lives were determined by using the simplified method in accordance with
Staff Accounting Bulletin 107.




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.




During
the years ended September 30, 2008 and 2007, the Company recorded $157,080 and
$196,871 of stock-based compensation, respectively. Total unamortized stock
compensation expense at September 30, 2008 was $44,065 and will be fully
expensed in fiscal year 2009.




55
 Table of Contents


RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


I.
            Commitments
      and Contingencies




Leases




The
Company leases certain equipment and facilities under operating leases, of which
rent expense was approximately $2,431,000 and $1,494,000 for the years ended
September 30, 2008 and 2007, respectively.




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




Future
minimum annual lease obligations as of September 30, 2008 are as
follows:




2009
                            
                            $
                            3,261,1902010
                            
                            
                            3,233,9582011
                            
                            
                            2,280,4822012
                            
                            
                            1,947,1592013
                            
                            
                            1,940,185Thereafter
                            
                            
                            8,873,224Total
      future minimum lease obligations
                            
                            $
                            21,536,198




Legal
Matters


Sexually
Oriented Business Ordinance of Houston, Texas


In 1997,
the City of Houston passed a comprehensive new ordinance regulating the location
of and the conduct within sexually oriented businesses (the “Ordinance”), which
became the subject of litigation, which affects the Company’s Sexually Oriented
Business licenses in Houston, Texas. After extensive litigation, the Trial Court
in Houston rendered its judgment in favor of the City of Houston in January
2007. The Trial Court found that the City of Houston met its burden that there
were sufficient alternate sites available to relocate all of the existing
sexually oriented businesses in Houston in 1997. The Trial Court found the
Ordinance constitutional and enforceable. Post-trial motions were heard and the
relief sought, a stay against enforcement, was denied by the Trial Court. An
appeal to the Fifth Circuit Court of Appeals was timely filed. The Fifth Circuit
granted a stay pending appeal. Oral argument was held before the Fifth Circuit
Court of Appeals in August 2007. The Fifth Circuit Court of Appeals ruled in
favor of the City of Houston in September 2007. Pleadings were filed seeking a
stay against enforcement of the provisions of the Ordinance with the United
States Supreme Court in conjunction with the request that the United States
Supreme Court hear an appeal of the Fifth Circuit Court of Appeals ruling. The
United States Supreme Court refused to hear the matter.




Additionally,
the Company filed on behalf of three of the Company’s club locations in Houston
state court lawsuits seeking judicial review of the results of the amortization
process contained within the Ordinance. The amortization process was abated in
1998 due to the possible multiplicity of court actions. The final order by the
Trial Court resulted in the termination of the abatement and allowed the
amortization process to continue as provided in the Ordinance. Trial on the
amortization cases was held in April 2008. At the conclusion of the trial, the
Court ruled that the amortization awards were proper and requested that findings
of fact and conclusions of law be submitted to the Court as well as a judgment
in the case. A form of judgment has been entered by the Court. The amortization
award periods have already expired for the Company’s affected clubs. An appeal
of the amortization review by the Harris County District Court was filed. A stay
sought by the clubs during the appeal was denied. In the event all efforts to
stop enforcement activity fail and the City of Houston elects to enforce the
judgment, the Company, as well as every other similarly situated sexually
oriented business located within the incorporated area of Houston, Texas, will
have to either cease providing nude or semi-nude entertainment or develop
alternate methods of operating. We have already taken steps to clothe the
Company’s entertainers in a manner to eliminate the need for licenses and not to
be subject to the Ordinance. Approximately 9.4% of the Company’s club
operation’s revenues and 2.2% of income before income taxes for the twelve
months ended September 30, 2008 were in Houston, Texas. It is unknown at this
time whether this will have a material effect on the Company’s
operations.




56
 Table of Contents


RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


I.
            Commitments
      and Contingencies - continued




Other
Legal Matters




Beginning
January 1, 2008, the Company’s Texas clubs became subject to a new state law
requiring each club to collect a $5 surcharge for every club visitor. A lawsuit
was filed by the Texas Entertainment Association, an organization to which the
Company is a member, alleging the fee amounts to be an unconstitutional tax. On
March 28, 2008, a State District Court Judge in Travis County, Texas ruled that
the new state law violates the First Amendment to the United States Constitution
and is therefore invalid. The judge’s order enjoined the State from collecting
or assessing the tax. The State has appealed the court’s ruling. In Texas, when
cities or the State give notice of appeal, it supersedes and suspends the
judgment, including the injunction. Therefore, the judgment of the District
Court cannot be enforced until the appeals are completed. Given the suspension
of the judgment, the State has opted to collect the tax pending the appeal. The
Company has paid the tax for the first three calendar quarters under protest and
expensed the tax in the accompanying financial statements. The Company’s Texas
clubs have filed a lawsuit against the State to demand repayment of the
taxes.




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




J.
            Segment
      Information




The
following information is presented in accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company is engaged in adult
nightclubs, adult entertainment websites (“Internet”) and adult entertainment
magazines and trade shows (“Media”). The Company has identified such segments
based on management responsibility and the nature of the Company’s products,
services and costs. There are no major distinctions in geographical areas served
as all operations are in the United States. The Company measures segment profit
as income 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 years ended September 30:




2008
                
                
                2007Business
      segment sales:Night
      clubs
                
                $
                58,412,504
                
                
                $
                31,283,311Internet
                
                
                715,759
                
                
                
                730,629Media
                
                
                801,215
                
                
                
                -$
                59,929,478
                
                
                $
                32,013,940Business
      segment operating income:Night
      clubs
                
                $
                17,018,592
                
                
                $
                6,643,197Internet
                
                
                148,194
                
                
                
                111,919Media
                
                
                (28,016
                )
                
                
                -General
      corporate
                
                
                (3,418,750
                )
                
                
                (2,651,430
                )$
                13,720,020
                
                
                $
                4,103,686Business
      segment capital expenditures:Night
      clubs
                
                $
                11,009,546
                
                
                $
                2,821,222Internet
                
                
                3,039
                
                
                
                2,146General
      corporate
                
                
                19,938,871
                
                
                
                2,686,103$
                30,951,456
                
                
                $
                5,509,471Business
      segment depreciation and amortization:Night
      clubs
                
                $
                2,015,013
                
                
                $
                1,341,346Internet
                
                
                15,539
                
                
                
                23,056Media
                
                
                10,000
                
                
                
                -General
      corporate
                
                
                501,131
                
                
                
                232,248$
                2,541,683
                
                
                $
                1,596,650




57
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


J.
                  Segment
      Information -
continued




2008
                
                
                2007Business
      segment assets:Night
      clubs
                
                $
                97,583,959
                
                
                $
                29,738,132Internet
                
                
                196,290
                
                
                
                110,871Media
                
                
                1,128,216
                
                
                
                -General
      corporate
                
                
                38,160,341
                
                
                
                17,226,757$
                137,068,806
                
                
                $
                47,075,760




K.
            Common
      Stock




During
the year ended September 30, 2007, the following common stock transactions
occurred:




Stock
options totaling 252,500 shares were exercised by employees and directors for
proceeds of $650,531. Also, 675,000 shares of the Company’s common stock were
sold in two private transactions for $5,345,500, net of offering costs. The
Company also sold 125,000 shares subject to put rights for $1,033,750. The
seller of the New York club converted $75,000 of principal from the related
promissory note into 10,000 shares of restricted common stock. The Company
issued 84,579 shares of common stock for $401,751 of principal and interest owed
on existing convertible debt.




During
the year ended September 30, 2008, the following common stock transactions
occurred:




Stock
options totaling 125,000 shares were exercised by employees and directors for
proceeds of $347,700. Also, 1,837,000 shares of the Company’s common stock were
sold in two private transactions for $27,352,500, net of offering costs. The
Company also sold 611,740 shares subject to put rights for $13,448,594. The
Company issued 552,069 shares of common stock for $2,419,923 of principal and
interest owed on existing convertible debt. The Company also issued 60,000
shares in connection with the Las Vegas transaction which were accounted for as
a deduction from additional paid in capital of $108,300 due to the accounting
for the related put option shares.




L.
            Related Party
      Transactions




In May
2002, the Company loaned $100,000 to Eric Langan, Chief Executive Officer of the
Company. The note is unsecured, bears interest at 11% and is amortized over a
period of ten years. The note contains a provision that in the event Mr. Langan
leaves the Company for any reason, the note immediately becomes due and payable
in full. The balance of the note was approximately $61,000 at September 30, 2007
and is included in other assets in the accompanying consolidated balance sheets.
The note was paid off in full subsequent to September 30, 2007.




On July
22, 2005, the Company entered into a secured convertible debenture with a
greater than 10% shareholder for a principal sum of $660,000. The debenture
matured on August 1, 2009 and bears interest at a rate of 12% per annum. The
debenture was converted to 220,000 shares of common stock in July 2008. The
Company also issued 50,000 detachable warrants at $3.00 per share in relation to
this debenture. The warrants were exercised in July 2008. The value of the
discount on note payable was estimated to be $106,656 at the date of grant using
a Black-Scholes option-pricing model with the following
assumptions:




Volatility
                        138%Expected
      life
                        3
      yearsExpected
      dividend yield
                        -Risk
      free rate
                        4.31%


For the
year ended September 30, 2008 and 2007, the Company recorded $29,627 and $35,552
of interest expense, respectively. The debenture was secured by the Company’s
ownership in Citation Land, LLC and RCI Holdings, Inc., both are wholly owned
subsidiaries of the Company. The Company has accounted for this transaction
under Emerging Issues task Force (“EITF”) Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments. The value of the embedded beneficial
conversion feature on the note payable was estimated to be $53,856, which was
calculated using the EITF Issue No. 98-5 model. For the years ended September
30, 2008 and 2007, the Company recorded $14,960 and $17,952, respectively, of
interest expense related to the value of the embedded beneficial conversion
feature.


On April
28, 2006, the Company entered into convertible debentures with three
shareholders, one of which is a greater than 10% shareholder, for a principal
sum of $825,000. The debentures mature April 30, 2009 and bear interest at a
rate of 12% per annum. At the
election of the holders, the holders had the right to convert (subject to
certain limitations) until April 30, 2008, all or any portion of the principal
amount of the debentures into shares of the Company’s common stock at a rate of
$6.55 per share, which approximates the closing price of the Company’s stock on
April 28, 2006. The shares were converted in April 2008 into 125,953 shares of
common stock. The shares of Common Stock underlying the principal amount of the
debentures had piggyback registration rights and were registered with the SEC in
June 2006. The proceeds of the debentures were used for the acquisition of Joint
Ventures, Inc.


58
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


K.
            Related
      Party Transactions – continued




On
November 9, 2006, the Company entered into convertible debentures with three
shareholders for a principal sum of $600,000. The term is for two years and the
interest rate is 12% per annum. At the election of the holders, the holders have
the right to convert (subject to certain limitations) all or any portion of the
principal amount of the debentures into shares of the Company’s common stock at
a rate of $7.50 per share, which was higher than the closing price of the
Company’s stock on November 9, 2006. The debentures provide, absent shareholder
approval, that the number of shares of the Company’s common stock that may be
issued by us or acquired by the holders upon conversion of the debentures shall
not exceed 19.99% of the total number of issued and outstanding shares of the
Company’s common stock. The proceeds of the debentures were used for the
acquisition of a 51% ownership interest of Playmates Gentlemen’s Club LLC. These
debentures matured and were paid in cash in November 2008.


M.
              Employee
      Retirement Plan


The
Company sponsors a Simple IRA plan (the “Plan”), which covers all of the
Company’s corporate employees. The Plan allows the corporate employees to
contribute up to the maximum amount allowed by law, with the Company making a
matching contribution of 3% of the employee’s salary. Expenses related to
matching contributions to the Plan approximated $44,000 and $39,000 for the
years ended September 30, 2008 and 2007, respectively.




N.
              Acquisitions
      and Dispositions


On April
5, 2006, the Company’s wholly owned subsidiary, RCI Holdings, Inc. completed the
acquisition of real property located at 9009 Airport Blvd., Houston, Texas where
the Company currently operates Club Onyx South (previously Hummers Sports Bar
and XTC South clubs). Pursuant to the terms of the agreement, the Company paid a
total purchase price of $1,300,000, which consisted of $500,000 in cash and
160,000 shares of the Company’s restricted common stock. The purchase price of
$1,300,000 was determined to be the fair value of the real property based on the
nature of the restrictions of the shares issued in the transaction. As part of
the transaction, the Company agreed to file a registration statement for the
resale of such restricted common stock within 45 days after the closing. The
registration statement became effective on June 23, 2006. Additionally, nine
months after the filing of the registration statement, the Seller has the right,
but not the obligation, to have the Company buy the shares at a price of $5.00
per share at a rate of no more than 10,000 shares per month until such time as
the Seller receives a total of $800,000 from the sale of such shares.
Alternatively, the Seller has the option to sell such shares in the open market.
As of September 30, 2007, 90,000 of the shares of restricted common stock were
classified on the consolidated balance sheet as temporary equity in accordance
with EITF Topic D-98, Classification and Measurement of
Redeemable Securities. During the year ended September 30, 2008, the
Seller completed the sale of the related shares and the Company reclassified the
90,000 shares out of temporary to permanent equity. The transaction was the
result of arms-length negotiations between the parties.




On
November 10, 2006, the Company purchased a 51% ownership interest of Playmates
Gentlemen’s Club LLC, an operator of an adult nightclub in Austin, Texas. The
club is located at 8110 Springdale Street. The purchase price of $1,533,750 was
paid $500,000 cash at closing and 125,000 shares of the Company’s restricted
common stock, valued at $8.27 per share in accordance with EITF 99-12. The club
has been converted to a Rick’s Austin. As part of the agreement, twelve months
after the closing date, the seller has the right, but not the obligation, to
have the Company buy the shares at a price of $8.00 per share at a rate of no
more than 5,000 shares per month until such time as the seller receives a total
of $1,000,000 from the sale of such shares. Alternatively, the seller has the
option to sell such shares in the open market. The transaction was the result of
arms-length negotiations between the parties.




The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date.




Property
      and equipment
                  
                  $
                  633,411Non-compete
      agreement
                  
                  
                  175,000Goodwill
                  
                  
                  725,339Net
      assets acquired
                  
                  $
                  1,533,750




The
results of operations of this acquired entity are included in the Company’s
results of operations since November 10, 2006. Proforma results of operations
have not been provided, as the amounts were not deemed material to the
consolidated financial statements.
The transaction follows the Company’s growth strategy.


59
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
            Acquisitions
      and Dispositions – continued




On April
23, 2007, the Company completed a transaction for the purchase of 100% of the
outstanding common stock of W.K.C., Inc., a Texas corporation (the "Business"),
which owned and operated an adult entertainment cabaret known as New Orleans
Nights ("New Orleans Nights") located in Fort Worth, Texas. Pursuant to the
stock purchase agreement, the Company acquired the Business for a total cash
purchase price of $4,900,000. As part of the transaction, the seller entered a
five-year covenant not to compete with the Company or the Business. In addition,
RCI Holdings, Inc., the Company’s wholly owned subsidiary ("RCI"), entered into
an assignment of that certain real estate sales contract between the owner of
the property and W.K.C., Inc. for the purchase of the real property located at
7101 Calmont, Fort Worth, Texas 76116 (the "Real Property") where New Orleans
Nights is located for a total purchase price of $2,500,000, which consisted of
$100,000 in cash and $2,400,000 payable in a six year promissory note to the
sellers which will accrue interest at the rate of 7.25% for the first two years,
8.25% for years three and four and 9.25% thereafter (the "Promissory Note"). The
Promissory Note is secured by a deed of trust and security agreement. Further,
RCI entered into an assignment and assumption of lease agreement with the
sellers to assume the lease agreement for the Real Property.


The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date.




Net
      current assets
                    
                    $
                    30,489Property
      and equipment
                    
                    
                    2,968,126Non-compete
      agreement
                    
                    
                    100,000Goodwill
                    
                    
                    1,561,989SOB
      licenses
                    
                    
                    4,401,512Deferred
      tax liability
                    
                    
                    (1,540,292
                    )Net
      assets acquired
                    
                    $
                    7,521,824





The
results of operations of this acquired entity are included in the Company’s
results of operations since April 24, 2007.




The
following unaudited pro forma information for the year ended September 30, 2007,
presents the results of operations as if the acquisition had occurred as of
October 1, 2006. 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.




Revenues
                      
                      $
                      34,732,721Net
      income
                      
                      
                      3,613,878Net
      income per share – basic
                      
                      $
                      0.63Net
      income per share – diluted
                      
                      $
                      0.58Weighted
      average shares outstanding – basic
                      
                      
                      5,700,548Weighted
      average shares outstanding - diluted
                      
                      
                      6,215,285




On May
10, 2007, the Company entered into a Licensing Agreement with Rick’s Buenos
Aires Sociedad Anonima (“Licensee”), a corporation organized under the laws of
Argentina. The Company agreed to grant Licensee a license for use and
exploitation of the Company’s logos, trademarks and service marks for the
operation of an adult entertainment facility in the city of Buenos Aires,
Argentina, and Latin America. Pursuant to the agreement, Licensee agreed to pay
the Company a royalty fee equal to 10% of gross revenues of Licensee’s business,
net of any value added tax. No club has opened as of this time.




On
November 30, 2007, the Company entered into a Stock Purchase Agreement for the
acquisition of 100% of the issued and outstanding common stock of Stellar
Management Corporation, a Florida corporation (the "Stellar Stock") and 100% of
the issued and outstanding common stock of Miami Garden Square One, Inc., a
Florida corporation (the "MGSO Stock") which owns and operates an adult
entertainment cabaret known as "Tootsie’s Cabaret" ("Tootsie’s") located at 150
NW 183rd Street, Miami Gardens, Florida 33169 (the "Transaction"). Pursuant to
the Stock Purchase Agreement, the Company acquired the Stellar Stock and the
MGSO Stock from Norman Hickmore ("Hickmore") and Richard Stanton ("Stanton") for
a total purchase price of $25,486,000 (which includes inventory and other
assets), payable to the sellers $15,486,000 in cash, $10,000,000 pursuant to two
secured promissory notes in the amount of $5,000,000 each to Stanton and
Hickmore (the "Notes"), plus estimated transaction costs of


60
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
            Acquisitions
      and Dispositions – continued




$175,000.
The Notes will bear interest at the rate of 14% per annum with the principal
payable in one lump sum payment on November 30, 2010. Interest on the Notes will
be payable monthly, in arrears, with the first payment being due thirty (30)
days after the
closing of the Transaction. The Company cannot pre-pay the Notes during the
first twelve (12) months; thereafter, the Company may prepay the Notes, in whole
or in part, provided that (i) any prepayment by the Company from December 1,
2008 through November 30, 2009, shall be paid at a rate of 110% of the original
principal amount and (ii) any prepayment by the Company after November 30, 2009,
may be prepaid without penalty at a rate of 100% of the original principal
amount. The Notes are secured by the Stellar Stock and MGSO Stock under a Pledge
and Security Agreement. As part of the Transaction, Hickmore and Stanton entered
into five-year covenants not to compete with the Company. Additionally, as part
of the Transaction, the Company entered into Assignment to Lease Agreements with
the landlord for the property where Tootsie’s is located. The underlying lease
agreements for the property provide for an original lease term through June 30,
2014, with two option periods which give the Company the right to lease the
property through June 30, 2034. The terms and conditions of the transaction were
the result of extensive arm's length negotiations between the
parties.




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.




Net
      current assets
                    
                    $
                    390,000Property
      and equipment and other assets
                    
                    
                    4,823,020Non-compete
      agreement
                    
                    
                    200,000Other
      assets
                    
                    
                    96,000Goodwill
                    
                    
                    7,044,050SOB
      licenses
                    
                    
                    20,125,856Deferred
      tax liability
                    
                    
                    (7,044,050
                    )Net
      assets acquired
                    
                    $
                    25,634,876




The
results of operations of this acquired entity are included in the Company’s
results of operations since December 1, 2007.


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




FOR
      THE YEAR
                    ENDED
      SEPTEMBER 30,2008
                  
                  
                  2007Revenues
                  
                  $
                  62,896,132
                  
                  
                  $
                  50,230,000Net
      income
                  
                  $
                  8,022,159
                  
                  
                  $
                  6,404,000Net
      income per share – basic
                  
                  $
                  1.01
                  
                  
                  $
                  0.93Net
      income per share – diluted
                  
                  $
                  0.96
                  
                  
                  $
                  0.87Weighted
      average shares outstanding – basic
                  
                  
                  7,931,121
                  
                  
                  
                  6,866,000Weighted
      average shares outstanding – diluted
                  
                  
                  8,417,187
                  
                  
                  
                  7,380,000




On March
31, 2008, the Company’s wholly owned subsidiary, RCI Entertainment
(Philadelphia), Inc. (the “Purchaser”) completed the acquisition of 100% of the
issued and outstanding shares of common stock (the “TEZ Shares”) of The End
Zone, Inc., a Pennsylvania corporation (the “Corporation”) which owns and
operates “Crazy Horse Too Cabaret” (the “Club”) located at 2908 South Columbus
Blvd., Philadelphia, Pennsylvania 19148 (the “Real Property”) from Vincent
Piazza (the “Seller”). As part of the transaction,
the Company’s wholly owned subsidiary, RCI Holdings, Inc. (“RCI Holdings”)
acquired from the Piazza Family Limited Partnership (the “Partnership Seller”)
51% of the issued and outstanding partnership interest (the “Partnership
Interests”) in TEZ Real Estate, LP, a Pennsylvania limited partnership (the
“Partnership”) and 51% of the issued and outstanding membership interest
(the “Membership Interests”) in TEZ Management, LLC, a Pennsylvania limited
liability company, which is the general partner of the Partnership (the “General
Partner”). The Partnership owns the Real Property where the Club is located. At
closing, the
Company paid a purchase price of $3,500,000 in cash for the Partnership
Interests and Membership Interests, and issued 195,000 shares of the Company’s
restricted common stock (the “Rick’s Shares”) valued at $23 per share for the
TEZ Shares.


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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
            Acquisitions
      and Dispositions – continued




As part
of the transaction, the Company entered into a Lock-Up/Leak-Out Agreement with
the Seller pursuant to which, on or after one year after the closing date, the
Seller shall have the right, but not the obligation, to have Rick’s purchase
from Seller 5,000 Rick’s Shares per month (the “Monthly Shares”), calculated at
a price per share equal to $23.00 (“Value of the Rick’s Shares”). At the
Company’s election during any given month, the Company may either buy the
Monthly Shares or, if the Company elects not to buy the Monthly Shares from the
Seller, then the Seller shall sell the Monthly Shares in the open market. Any
deficiency between the amount which the Seller receives from the sale of the
Monthly Shares and the Value of the Rick’s Shares shall be paid by the Company
within three (3) business days of the date of sale of the Monthly Shares during
that particular month. The Company’s obligation to purchase the Monthly Shares
from the Seller shall terminate and cease at such time as the Seller has
received a total of $4,485,000 from the sale of the Rick’s Shares and any
deficiency. As of September 30, 2008, the 195,000 shares of restricted common
stock were classified on the consolidated balance sheet as temporary equity in
accordance with EITF Topic D-98, Classification and Measurement of
Redeemable Securities.




Additionally,
at closing, the Seller and the Partnership Seller entered a five-year agreement
not to compete with the Company within a twenty (20) mile radius of the Club.
Finally, the Corporation entered into a new lease agreement with the Partnership
giving it the right to lease the Real Property for twenty (20) years (“Original
Term”) with an option for an additional nine (9) years eleven (11) eleven months
(“Option Term”) with rent payable at the rate of (i) $50,000 per month, subject
to adjustment for increases in the Consumer Price Index (CPI) every five years
during the Original Term and the Option Term, or (ii) 8% of gross sales,
whichever is higher. The maximum increase in the CPI for any five (5) year
period shall be 15%.




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.




Property
      and equipment and other assets
                  
                  $
                  3,882,885Non-compete
      agreement
                  
                  
                  100,000Goodwill
                  
                  
                  1,458,583SOB
      licenses
                  
                  
                  4,207,770Deferred
      tax liability
                  
                  
                  (1,458,583
                  )Net
      assets acquired
                  
                  $
                  8,190,655





The
results of operations of this acquired entity are included in the Company’s
results of operations since March 31, 2008.


Proforma
results of operations have not been provided, as the amounts were not deemed
material to the consolidated financial statements. The transaction follows the
Company’s growth strategy.




On March
31, 2008, the Company’s subsidiary, RCI Entertainment (Austin), Inc. (“RCI”),
completed the acquisition of 49% of the membership interest of Playmates
Gentlemen’s Club, LLC (“Playmates”) from Behzad Bahrami (“Seller”), resulting in
100% ownership by the Company of RCI. Playmates owns an adult entertainment
cabaret known as “Playmates” (the “Club”) located at 8110 Springdale Road,
Austin, Texas 78724 (the “Premises”). Under the terms of the Purchase Agreement,
RCI paid a total purchase price of $1,401,711 which was paid $701,711 in cash
and debt forgiveness at the time of closing and the issuance of 35,000 shares of
the Company’s restricted common stock valued at $20.00 per share (the “Shares”).
For accounting purposes, the Company’s investment is only $751,000, due to the
previous losses of the minority interest which have been expensed. The
investment has been assigned to goodwill.




Pursuant
to the terms of the Purchase Agreement, on or after one year after the closing
date, the Seller shall have the right, but not the obligation to have the
Company purchase from Seller 5,000 Shares per month (the “Monthly Shares”),
calculated at a price per share equal to $20.00 (“Value of the Shares”). Seller
shall notify the Company during any given month of its election to “Put” the
Monthly Shares to the Company during that particular month. At the Company’s
election during any given month, the Company may either buy the Monthly Shares
or, if the Company elects not to buy the Monthly Shares from the Seller, then
the Seller shall sell the Monthly Shares in the open market. Any deficiency
between the amount which the Seller receives from the sale of the Monthly Shares
and the Value of the Shares shall be paid by the Company within three (3)
business days of the date of sale of the Monthly Shares during that particular
month. The Company’s obligation to purchase the Monthly Shares from the Seller
shall terminate and cease at such time as the Seller has received a total of
$700,000 from the sale of the Shares. As of September 30, 2008, the 35,000 shares of
restricted common stock were classified on the consolidated balance sheet as
temporary equity in accordance with EITF Topic D-98, Classification and Measurement of
Redeemable Securities.


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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
            Acquisitions
      and Dispositions – continued




In the
event the Seller elects not to “Put” the Shares to the Company, the Seller shall
not sell more than 10,000 Shares during any 90-day period in the open market,
provided that Seller complies with Rule 144 of the Securities Act of 1933, as
amended, in connection with his sale of the Shares.




The full
results of operations of this entity are included in the Company’s results of
operations since March 31, 2008.




In April
11, 2008, the Company’s wholly owned subsidiary, RCI Entertainment (Dallas),
Inc., completed the acquisition of 100% of the issued and outstanding
partnership interest (the "Partnership Interest") of Hotel Development - Texas,
Ltd, a Texas limited partnership (the "Partnership") and 100% of the issued and
outstanding membership interest (the "Membership Interest") of HD-Texas
Management, LLC, a Texas limited liability company, the general partner of the
Partnership (the "General Partner") from Jerry Golding, Kenneth Meyer, and
Charles McClure (the "Sellers"). The Partnership owns and operates an adult
entertainment cabaret known as "The Executive Club" (the "Club"), located at
8550 North Stemmons Freeway, Dallas, Texas 75247 (the "Real Property"). As part
of the transaction, the Company’s wholly owned subsidiary, RCI Holdings, Inc.
("RCI"), also acquired the Real Property from DPC Holdings, LLC, a Texas limited
liability company ("DPC").




At
closing, the Company paid a total purchase price of $3,590,609 for the
Partnership Interest and Membership Interest, which was paid through the
issuance of 50,694 shares of the Company’s restricted common stock to each of
Messrs. Golding, Meyer and McClure, for an aggregate total of 152,082 shares
(collectively, the "Rick's Club Shares") to be valued at $23.30 per share
($3,544,119) and $46,490 in cash. As consideration for the purchase of the Real
Property, RCI paid total consideration of $5,599,721, which was paid (i)
$4,250,000, payable $610,000 in cash and $3,640,000 through the issuance of a
five year promissory note (the "Promissory Note") and (ii) the issuance of
57,918 shares of the Company’s restricted common stock (the "Rick's Real
Property Shares") to be valued at $23.30 per share ($1,349,721). The Promissory
Note bears interest at a varying rate at the greater of (i) two percent (2%)
above the Prime Rate or (ii) seven and one-half percent (7.5%), and is
guaranteed by Rick's and Eric Langan, individually. At Closing, the Parties
entered into an Amendment to Purchase Agreement solely to provide for the
Sellers to set aside 10,500 Rick's Club Shares under an Escrow Agreement for the
offset of certain liabilities of the Partnership. The Company also incurred
costs in the amount of $37,848, which was paid in cash.




At
Closing, the Sellers entered into Lock-Up/Leak-Out Agreements pursuant to which
on or after one year after the closing date, the Sellers shall have the right,
but not the obligation to have Rick's purchase from Sellers not more than an
aggregate of 3,621 Shares per month (the "Monthly Club Shares"), calculated at a
price per share equal to $25.00 per share ("Value of the Rick's Club Shares")
until each of the individual Sellers has received a total of $1,267,350 from the
sale of the Rick's Club Shares. At the Company’s election during any given
month, the Company may either buy the Monthly Club Shares or, if the Company
elects not to buy the Monthly Club Shares from the Sellers, then the Sellers
shall sell the Monthly Club Shares in the open market. Any deficiency between
the amount, which the Sellers receive from the sale of the Monthly Club Shares
and the Value of the Rick's Club Shares shall be paid by the Company within
three (3) business days of the date of sale of the Monthly Club Shares during
that particular month. The Company’s obligation to purchase the Monthly Club
Shares from the Sellers shall terminate and cease at such time as the Sellers
have received an aggregate total of $3,802,050 from the sale of the Rick's Club
Shares and any deficiency.




Additionally,
at Closing, DPC entered into a Lock-Up/Leak-Out Agreement pursuant to which on
or after one year after the closing date, DPC shall have the right, but not the
obligation to have Rick's purchase from DPC 1,379 Shares per month (the "Monthly
Real Estate Shares"), calculated at a price per share equal to $25.00 per share
("Value of the Rick's Real Estate Shares") until DPC has received a total of
$1,447,950 from the sale of the Rick's Real Estate Shares. At the Company’s
election during any given month, the Company may either buy the Monthly Real
Estate Shares or, if the Company elects not to buy the Monthly Real Estate
Shares from DPC, then DPC shall sell the Monthly Real Estate Shares in the open
market. Any deficiency between the amount which DPC receives from the sale of
the Monthly Real Estate Shares and the Value of the Rick's Real Estate Shares
shall be paid by the Company within three (3) business days of the date of sale
of the Monthly Real Estate Shares during that particular month. The Company’s
obligation to purchase the Monthly Real Estate Shares from DPC shall terminate
and cease at such time as DPC has received an aggregate total of $1,447,950 from
the sale of the Rick's Real Estate Shares and any deficiency.




Finally,
at Closing each of the Sellers entered a five year Non-Competition Agreement
with the Company pursuant to which they agreed not to compete with the Company
in Dallas County or any adjacent county.




63
 Table of Contents


RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
            Acquisitions
      and Dispositions – continued




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.


Net
      current assets
                  
                  $
                  34,445Property
      and equipment and other assets
                  
                  
                  6,264,850Non-compete
      agreement
                  
                  
                  300,000Goodwill
                  
                  
                  977,082SOB
      licenses
                  
                  
                  2,640,763Deferred
      tax liability
                  
                  
                  (977,082
                  )Net
      assets acquired
                  
                  $
                  9,240,058




The
results of operations of this entity are included in the Company’s results of
operations since April 11, 2008.


Proforma
results of operations have not been provided, as the amounts were not deemed
material to the consolidated financial statements. The transaction follows the
Company’s growth strategy.




On June
18, 2008, the Company’s wholly owned subsidiary RCI Entertainment (Northwest
Highway), Inc. (the “Purchaser”) completed the acquisition of certain assets
(the “Purchased Assets”) of North by East Entertainment, Ltd., a Texas limited
partnership (the “Seller”) by and through its general partner, Northeast
Platinum, LLC, a Texas limited liability company (the “General Partner”)
pursuant to an Asset Purchase Agreement dated May 10, 2008. The Seller owned and
operated an adult entertainment cabaret known as “Platinum Club II” (the
“Club”), located at 10557 Wire Way (at Northwest Highway), Dallas, Texas 75220
(the “Real Property”).


At
closing, the Company paid a total purchase price of $1,500,000 cash for the
Purchased Assets. At Closing, the principal of the Seller entered into a
five-year agreement not to compete with the Club by operating an establishment
with an urban theme that both serves liquor and provides live female nude or
semi-nude adult entertainment in Dallas County, Tarrant County, Texas or any of
the adjacent counties thereto.




As part
of the transaction, the Company’s wholly owned subsidiary RCI Holdings, Inc.
(“RCI”) also acquired the Real Property from Wire Way, LLC, a Texas limited
liability company (“Wire Way”). Pursuant to a Real Estate Purchase and Sale
Agreement (the “Real Estate Agreement”) dated May 10, 2008, RCI paid total
consideration of $6,000,000, which was paid $1,650,000 in cash and $4,350,000
through the issuance of a five (5) year promissory note (the “Promissory Note”).
The Promissory Note bears interest at a varying rate at the greater of (i) two
percent (2%) above the Prime Rate or (ii) seven and one-half percent (7.5%),
which is guaranteed by the Company and by Eric Langan, the Company’s Chief
Executive Officer, individually. The Company also incurred $69,998 in costs,
which was paid in cash.




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.




Net
      current assets
                  
                  $
                  151,784Property
      and equipment and other assets
                  
                  
                  6,000,000Non-compete
      agreement
                  
                  
                  100,000Goodwill
                  
                  
                  1,402,970Other
      assets
                  
                  
                  43,500Net
      assets acquired
                  
                  $
                  7,698,254




The full
results of operations of this entity are included in the Company’s results of
operations since June 18, 2008.




Proforma
results of operations have not been provided, as the amounts were not deemed
material to the consolidated financial statements. The transaction follows the
Company’s growth strategy.




64
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
              ACQUISITIONS
      AND DISPOSITIONS –
continued




On
September 5, 2008, the Company’s wholly owned subsidiary RCI Entertainment (Las
Vegas), Inc. (the “Purchaser”) completed the acquisition of certain assets (the
“Purchased Assets”) of DI Food & Beverage of Las Vegas, LLC, a Nevada
limited liability company (the “Seller”) pursuant to a Third Amended Asset
Purchase Agreement (the “Third Amendment”) between
Purchaser,


Rick’s
Cabaret International, Inc. (“Rick’s”), Seller, and Harold Danzig (“Danzig”),
Frank Lovaas (“Lovaas”) and Dennis DeGori (“DeGori”) who are all members of
Seller. The Seller owned and operated an adult entertainment cabaret known as
“Scores” (the “Club”), located at 3355 Procyon Street, Las Vegas, Nevada 89102
(the “Real Property”).




At
Closing, Purchaser paid Seller an aggregate amount as follows (the “Purchase
Price”):




(i)
              $12,000,000
      payable by wire transfer;


(ii)
              $3,000,000
      pursuant to a promissory note (“the Rick’s Promissory Note”), executed by
      and obligating Rick’s, bearing interest at eight percent (8%) per annum
      with a five (5) year amortization, with monthly payments of principal and
      interest, with the initial monthly payment due in April 2009 with a
      balloon payment of all then outstanding principal and interest due upon
      the expiration of two (2) years from the execution of the Rick’s
      Promissory Note; and
  (iii)
                200,000
      shares of restricted common stock, par value $0.01 of Rick’s (the “Rick’s
      Shares”) issued to the Seller, valued at $13.77 per
      share
  As part
of the transaction, the Company entered into a Lock-Up/Leak-Out Agreement with
the Seller pursuant to which, on or after seven (7) months after the closing
date, the Seller shall have the right, but not the obligation, to have Rick’s
purchase from Seller a total of 150,000 of the Rick’s Shares (“Rick’s Put
Share”) in an amount and at a rate of not more than 6,250 of the Rick’s Put
Shares per month (the “Monthly Shares”) calculated at a price per share equal to
$20.00 per share (“Value of the Rick’s Shares”). At the Company’s election
during any given month, the Company may either buy the Monthly Shares or, if the
Company elects not to buy the Monthly Shares from the Seller, then the Seller
shall sell the Monthly Shares in the open market. Any deficiency between the
amount which the Seller receives from the sale of the Monthly Shares and the
Value of the Rick’s Shares shall be paid by us within three (3) business days of
the date of sale of the Monthly Shares during that particular month. The
Company’s obligation to purchase the Monthly Shares from the Seller shall
terminate and cease at such time as the Seller has received a total of
$3,000,000 from the sale of the Rick’s Shares and any deficiency. Under the
terms of the Lock-Up/Leak-Out Agreement, Seller may not sell more than 25,000
Rick’s Shares per 30-day period, regardless of whether the Seller “Puts” the
Rick’s Put Shares to Rick’s or sells them in the open market or
otherwise.




Upon
closing of the transaction, the Company entered a two-year Non-Compete Agreement
with DeGori (the “DeGori Non-Compete Agreement”) pursuant to which DeGori agreed
not to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada or in a radius of 25 miles of Clark County, Nevada; provided, however,
that the Non-Competition Agreement specifically excluded the Penthouse Club and
the Bada Bing Club located in Clark County, Nevada. The Company agreed to pay
DeGori cash consideration of $66,667 for entering into the Non-Competition
Agreement. Additionally, at Closing, the Company also entered into a 12-month
Consulting Agreement with DeGori (the “Consulting Agreement”) for a total
aggregate of $133,333 in consulting fees payable in eighteen (18) equal monthly
payments of $7,407.38 per month with the first payment due October 15,
2008.




Upon
closing of the transaction, the Company entered a one-year Non-Compete Agreement
with Lovaas (the “Lovaas Non-Compete Agreement”) pursuant to which Lovaas agreed
not to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada, or any of its surrounding counties; provided, however, that this
Non-Competition Agreement shall specifically exclude the Penthouse Club and the
Bada Bing Club located in Clark County, Nevada.




The
Company incurred $326,830 in costs in connection with the
acquisition.




65
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
            ACQUISITIONS
      AND DISPOSITIONS – continued




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.




Net
      current assets
                    
                    $
                    112,885Property
      and equipment and other assets
                    
                    
                    1,953,065Non-compete
      agreement
                    
                    
                    100,000Goodwill
                    
                    
                    15,981,548Net
      assets acquired
                    
                    $
                    18,147,498




The
results of operations of this acquired entity are included in the Company’s
results of operations since September 5, 2008.


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




FOR
      THE YEAR
                  ENDED
      SEPTEMBER 30,2008
                
                
                2007Revenues
                
                $
                76,508,029
                
                
                $
                50,567,000Net
      income
                
                $
                9,006,947
                
                
                $
                4,462,000Net
      income per share – basic
                
                $
                1.11
                
                
                $
                0.68Net
      income per share – diluted
                
                $
                1.05
                
                
                $
                0.64Weighted
      average shares outstanding – basic
                
                
                8,131,121
                
                
                
                6,573,000Weighted
      average shares outstanding – diluted
                
                
                8,617,187
                
                
                
                7,087,000




The
following unaudited pro forma information presents the results of operations as
if the acquisitions of W.K.C., Inc., Miami Gardens Square One, Inc. and DI Food
and Beverage of Las Vegas, LLC had occurred as of the beginning of the immediate
preceding period. The pro forma information is not necessarily indicative of
what would have occurred had the acquisition been made as of such periods, nor
is it indicative of future results of operations. The pro forma amounts give
effect to appropriate adjustments for the fair value of the assets acquired,
amortization of intangibles and interest expense.




FOR
      THE YEAR
                    ENDED
      SEPTEMBER 30,2008
                  
                  
                  2007Revenues
                  
                  $
                  79,474,683
                  
                  
                  $
                  71,501,841Net
      income
                  
                  $
                  9,368,439
                  
                  
                  $
                  8,370,080Net
      income per share – basic
                  
                  $
                  1.15
                  
                  
                  $
                  1.18Net
      income per share – diluted
                  
                  $
                  1.10
                  
                  
                  $
                  1.11Weighted
      average shares outstanding – basic
                  
                  
                  8,131,121
                  
                  
                  
                  7,065,548Weighted
      average shares outstanding – diluted
                  
                  
                  8,617,187
                  
                  
                  
                  7,580,285




66
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
ACQUISITIONS AND DISPOSITIONS – continued




Media
Acquisitions




On April
15, 2008, the Company’s wholly owned subsidiary, RCI Entertainment (Media
Holdings), Inc., a Texas corporation ("RCI Media"), acquired 100% of the issued
and outstanding common stock (the "ED Stock") of ED Publications, Inc., a Texas
corporation ("ED"), 100% of the issued and outstanding common stock (the "TEEZE
Stock") of TEEZE International, Inc., a Delaware corporation ("TEEZE") and 100%
of the issued and outstanding membership interest (the "Membership Interest") of
Adult Store Buyers Magazine, LLC, a Georgia limited liability
company.




ED Publications,
Inc.




Under the
terms of a Purchase Agreement between Don Waitt ("Waitt"), RCI Media and Rick's
Cabaret International, Inc. ("Rick's") dated April 15, 2008 (the "ED Purchase
Agreement"), the Company agreed to pay Waitt the following consideration for the
purchase of the ED Stock:




(i)
$300,000 cash at closing;




(ii)
$200,000 cash payable in 6 months; and




(iii) The
issuance of 8,696 shares of restricted common stock valued at $23.00 per share
(the "Closing Shares").




Additionally,
during the three (3) year period following the Closing Date (the "Earn Out
Period"), Waitt shall be entitled to earn additional consideration (the
"Additional Consideration") of up to $2,000,000 (the "Maximum Amount")
consisting of $500,000 cash (the “Cash”) and 65,217 shares of restricted common
stock valued at $23.00 per share (the "Earn Out Shares"), based upon the
earnings before income tax, depreciation and amortization ("EBITDA") of RCI
Media. RCI Media will pay the Maximum Amount of the Additional Consideration to
the Seller if RCI Media's EBITDA during the three (3) year period following the
Closing Date totals an aggregate of $2,400,000. At the end of each twelve (12)
month period after the Closing Date, RCI Media shall determine its EBITDA and
shall pay to Waitt any such portion of the Additional Consideration as has been
earned. The Closing Shares and Earn Out Shares are collectively referred to as
the "Rick's Shares".




At
Closing, Waitt entered into a Lock-Up/Leak-Out Agreement with the Company
pursuant to which on or after one year after the closing date with respect to
the Closing Shares, or on or after seven (7) months from the date of issuance
with respect to the Earn Out Shares, if any, Waitt shall have the right, but not
the obligation to have with respect to the Earn Out Shares, if any, Waitt shall
have the right, but not the obligation to have Rick's purchase from Waitt 5,000
Rick's Shares per month (the "Monthly Shares"), calculated at a price per share
equal to $23.00 per share ("Value of the Rick's Shares") until Waitt has
received an aggregate of $1,700,000 (i) from the sale of the Rick's Shares sold
in the open market or in a private transaction or otherwise, and (ii) the
payment of any deficiency (as defined in the ED Purchase Agreement) by Rick's.
At the Company’s election during any given month, the Company may either buy the
Monthly Shares or, if the Company elects not to buy the Monthly Shares from
Waitt, then Waitt shall sell the Monthly Shares in the open market. Any
deficiency between the amount which Waitt receives from the sale of the Monthly
Shares and the Value of the Rick's Shares shall be paid by the Company within
three (3) business days of the date of sale of the Monthly Shares during that
particular month. The Company’s obligation to purchase the Monthly Shares from
Waitt shall terminate and cease at such time as Waitt has received an aggregate
total of $1,700,000 from the sale of the Rick's Shares and any deficiency (as
defined in the ED Purchase Agreement).




At
Closing, Waitt also entered a three (3) year Employment Agreement with RCI Media
(the "Employment Agreement") pursuant to which he will serve as President. The
Employment Agreement extends through April 15, 2011, and provides for an annual
base salary of $250,000. Pursuant to the Employment Agreement, Mr. Waitt is also
eligible to participate in all benefit plans maintained by the Company for
salaried employees. Under the terms of the Employment Agreement, Mr. Waitt is
bound to a confidentiality provision and cannot compete with the Company upon
the expiration of the Employment Agreement.




TEEZE/Adult StoreBuyers Magazine
LLC




Under the
terms of a Purchase Agreement between John Cornetta ("Cornetta"), Waitt, RCI
Media and Rick's dated April 15, 2008 (the "TEEZE/ASB Purchase Agreement"), the
Company agreed to pay the following consideration to Cornetta and Waitt for the
purchase of the TEEZE Stock and the Membership Interest:


67
 Table of Contents




RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


N.
            ACQUISITIONS
      AND DISPOSITIONS – continued




(i) an
aggregate of $200,000 cash at closing; and




(ii) the
issuance of 6,522 shares of restricted common stock to each of Messrs. Waitt and
Cornetta, for an aggregate of 13,044 shares of restricted common stock to be
valued at $23.00 per share (the "Rick's TEEZE Shares").




Pursuant
to the TEEZE/ASB Purchase Agreement, on or after one year after the closing
date, each of Messrs. Waitt and Cornetta shall have the right, but not the
obligation to have Rick's purchase the Rick's TEEZE Shares calculated at a price
per share equal to $23.00 per share ("Value of the Rick's TEEZE Shares") until
Messrs. Waitt and Cornetta have each received $150,000 (i) from the sale of the
Rick's TEEZE Shares sold by them, regardless of whether sold to Rick's, sold in
the open market or in a private transaction or otherwise, and (ii) the payment
of any deficiency (as defined in the TEEZE/ASB Purchase Agreement) by Rick's. At
the Company’s election during any given month, the Company may either buy the
Rick's TEEZE Shares or, if the Company elects not to buy the Rick's TEEZE
Shares, then Cornetta and/or Waitt shall sell the Rick's TEEZE Shares in the
open market. Any deficiency between the amount which Cornetta or Waitt receives
from the sale of the Rick's TEEZE Shares and the Value of the Rick's TEEZE
Shares shall be paid by the Company within three (3) business days of the date
of sale of the Rick's TEEZE Shares during that particular month. The Company’s
obligation to purchase the Rick's TEEZE Shares shall terminate and cease at such
time as Waitt and Cornetta have each received $150,000 from the sale of the
Rick's TEEZE Shares and any deficiency.




At
Closing, Cornetta entered a five year Non-Competition Agreement with the Company
pursuant to which he agreed not to compete with the Company either directly or
indirectly with TEEZE, ASB, RCI Media, Rick's or any of their affiliates by
publishing any sexually oriented industry trade print publications, with the
exception of a publication known as "Xcitement" which is currently owned and
operated by Cornetta.




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 for the ED Publications, Inc., Adult Store Buyers Magazine LLC, and
TEEZE International, Inc. acquisitions. Subsequent adjustments may be recorded
upon the completion of the valuation and the final determination of the purchase
price allocation.




Net
      current assets
                  
                  $
                  469,378Non-compete
      agreement
                  
                  
                  100,000Goodwill
                  
                  
                  567,125Net
      current liabilities
                  
                  
                  (66,749
                  )Net
      assets acquired
                  
                  $
                  1,069,754




The
results of operations of these entities are included in the Company’s results of
operations since April 15, 2008.




Proforma
results of operations have not been provided, as the amounts were not deemed
material to the consolidated financial statements. The transaction follows the
Company’s growth strategy.




P.
            Subsequent
      Events




Subsequent
to the fiscal year end, the Company purchased 48,200 shares of common stock at
prices ranging from $3.54 to $5.95.




Certain
related party debentures aggregating $600,000 matured and were paid in cash in
November 2008.




68
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RICK’S
CABARET INTERNATIONAL, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Q.
Quarterly Results of Operations (Unaudited)


Fiscal
      Year 2008
                                    Quarters
      EndedDec.
      31
                                  
                                  
                                  March
      31
                                  
                                  
                                  June
      30
                                  
                                  
                                  Sept.
      30Revenues
                                  
                                  $
                                  10,954,338
                                  
                                  
                                  $
                                  15,464,260
                                  
                                  
                                  $
                                  16,278,461
                                  
                                  
                                  $
                                  17,232,419Net
      income
                                  
                                  $
                                  1,783,272
                                  
                                  
                                  $
                                  2,605,380
                                  
                                  
                                  $
                                  1,829,204
                                  
                                  
                                  $
                                  1,442,811Basic
      net income per share
                                  
                                  $
                                  0.26
                                  
                                  
                                  $
                                  0.34
                                  
                                  
                                  $
                                  0.22
                                  
                                  
                                  $
                                  0.16Diluted
      net income per share
                                  
                                  $
                                  0.24
                                  
                                  
                                  $
                                  0.32
                                  
                                  
                                  $
                                  0.21
                                  
                                  
                                  $
                                  0.15Basic
      weighted average shares outstanding
                                  
                                  
                                  6,806,234
                                  
                                  
                                  
                                  7,561,163
                                  
                                  
                                  
                                  8,240,914
                                  
                                  
                                  
                                  9,116,171Diluted
      weighted average shares outstanding
                                  
                                  
                                  7,635,326
                                  
                                  
                                  
                                  8,473,497
                                  
                                  
                                  
                                  8,860,699
                                  
                                  
                                  
                                  9,378,452




Fiscal
      Year 2007
                    Quarters
      EndedDec.
      31
                  
                  
                  March
      31
                  
                  
                  June
      30
                  
                  
                  Sept.
      30Revenues
                  
                  $
                  7,030,129
                  
                  
                  $
                  7,569,589
                  
                  
                  $
                  8,446,351
                  
                  
                  $
                  8,968,243Net
      income
                  
                  $
                  352,954
                  
                  
                  $
                  492,344
                  
                  
                  $
                  1,031,727
                  
                  
                  $
                  1,178,208Basic
      net income per share
                  
                  $
                  0.07
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.17
                  
                  
                  $
                  0.19Diluted
      net income per share
                  
                  $
                  0.06
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.16
                  
                  
                  $
                  0.18Basic
      weighted average shares outstanding
                  
                  
                  5,141,489
                  
                  
                  
                  5,365,602
                  
                  
                  
                  6,112,678
                  
                  
                  
                  6,182,423Diluted
      weighted average shares outstanding
                  
                  
                  5,433,024
                  
                  
                  
                  5,647,442
                  
                  
                  
                  6,789,647
                  
                  
                  
                  6,865,947