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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                -----------------

                                   FORM 10-KSB
                                -----------------

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934; For the Fiscal Year Ended: September 30, 1997

                                       OR

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

Commission File Number: 0-26958

                       RICK'S CABARET INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)

         Texas                                               76-0458229
(State or other jurisdiction                                 (IRS Employer
of incorporation or organization)                            Identification No.)

                                3113 Bering Drive
                              Houston, Texas 77057
          (Address of principal executive offices, including zip code)

                                 (713) 785-0444
              (Registrant's telephone number, including area code)
                                -----------------

         Securities registered under Section 12(b) of the Exchange Act:

                                                   Name of Each Exchange
   Title of Each Class                              on which Registered
   -------------------                              -------------------

           N/A                                              N/A

         Securities registered pursuant to 12(g) of the Exchange Act:

                               Title of Each Class
                               -------------------

                          Common Stock, $.01 par value
                         Common Stock Purchase Warrants

         Indicate by check mark whether the registrant (i) has 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. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

         Issuer's   revenues  for  the  year  ended   September  30,  1997  were
$6,277,579. The aggregate market value of Common Stock held by non-affiliates of
the  registrant at December 23, 1997,  based upon the last reported sales prices
on Nasdaq, was $5,388,575.  As of December 23, 1997, there were 4,204,922 shares
of Common Stock outstanding.

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<PAGE>
<TABLE>
<CAPTION>

                                TABLE OF CONTENTS


PART I

<S>     <C>         <C>                                                                          <C>
         Item 1.    Business..................................................................... 3

         Item 2.    Properties...................................................................10

         Item 3.    Legal Proceedings............................................................11

         Item 4.    Submission of Matters to a Vote of Security Holders..........................12


PART II

         Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters........13

         Item 6.    Management's Discussion and Analysis of Financial Condition
                       and Results of Operations.................................................13

         Item 7.    Financial Statements.........................................................18

         Item 8.    Changes in and Disagreements With Accountants on Accounting
                       and Financial Disclosure..................................................18



PART III

         Item 9.    Directors, Executive Officers, Promoters and Control Persons; Compliance
                       with Section 16(a) of The Exchange Act....................................19

         Item 10.   Executive Compensation.......................................................20

         Item 11.   Security Ownership of Certain Beneficial Owners and Management...............21

         Item 12.   Certain Relationships and Related Transactions...............................22

         Item 13.   Exhibits and Reports on Form 8-K.............................................23
</TABLE>


                                                       2

<PAGE>

                                     PART I

ITEM 1.       BUSINESS

         The Company currently owns and operates Rick's Cabaret,  premiere adult
nightclubs  offering topless  entertainment and restaurant and bar operations in
Houston, Texas and New Orleans,  Louisiana.  The Company owns the Houston, Texas
facility.  The New Orleans facility is leased.  The Company recently  acquired a
facility in  Minneapolis,  Minnesota for a new location of Rick's  Cabaret.  The
Minneapolis  facility  is  currently  undergoing   renovation  and  the  Company
anticipates  opening the  Minneapolis  location  for  business in January  1998.
Rick's Cabaret, which caters primarily to businessmen, has developed a clientele
base which includes professionals, business executives and other individuals who
tend to entertain more  frequently  than the average person and who tend to have
greater disposable income.  From its inception,  the Company's  objective was to
provide a first-class  entertainment  environment for the business consumer.  To
achieve this goal and reach its target market, Rick's created an attractive, yet
discreet environment, complimented by a first-class bar and restaurant operation
conducive to attracting  businessmen and out-of-town  convention clientele.  The
Company  also  currently  owns and  operates  Tantra,  a  non-sexually  oriented
discotheque and billiard club in Houston, Texas.

HISTORY AND INTRODUCTION

         The Company was organized as a Texas corporation in 1994 to acquire all
of the outstanding capital stock of Trumps, Inc., a Texas corporation ("Trumps")
from Robert L. Watters,  its sole stockholder.  As a result of this transaction,
Trumps became a wholly owned subsidiary of the Company.

         Trumps was  incorporated  in 1982 and has operated Rick's Cabaret since
1983.  Mr.  Watters  initially  became a 10%  stockholder of Trumps in November,
1987,  becoming one of three  stockholders  in Trumps.  Mr.  Watters'  ownership
interest  in  Trumps  increased  to 50% of the  outstanding  stock in 1989.  Mr.
Watters  became  the sole  stockholder  of  Trumps  in 1993  through a series of
business transactions with the only other then remaining stockholder.

         In September,  1995,  the Company  acquired all of the capital stock of
Tantric  Enterprises,  Inc.,  Tantra  Dance,  Inc.,  and  Tantra  Parking,  Inc.
(collectively  "Tantra") from Mr. Watters.  The Tantra companies own and operate
Tantra, a non-sexually oriented discotheque and billiard club in Houston, Texas.

         In February,  1996,  the Company formed RCI  Entertainment,  Louisiana,
Inc., a Louisiana  corporation,  which  operates the  Company's  location in New
Orleans,  Louisiana.  Rick's  Cabaret has been open in New  Orleans,  Louisiana,
since late December, 1996.

         In January  1997,  the Company  formed RCI  Entertainment  (Minnesota),
Inc., a Minnesota corporation,  for the purpose of administering,  operating and
managing  its new  location in  Minneapolis,  Minnesota.  The Company  presently
anticipates that it will open its new facility in Minneapolis in January 1998.

         The Company formed RCI Entertainment  (Texas),  Inc. in June, 1996, for
the  purpose of  acquiring  1.13 acres of land in  Houston,  Texas.  The Company
recently sold the property in November 1997.


                                        3
<PAGE>

BUSINESS STRATEGY

         Prior  to  Rick's  opening  in  1983 in  Houston,  Texas,  the  topless
nightclub business was characterized by small  establishments  generally managed
by their owner. Such  establishments  were often dimly lit and the standards for
performers'  personal  appearance and personality  were not  maintained.  It was
customary  for  performers to alternate  between  dancing and  waitressing.  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
who frequently  interrupted  the music to make general  announcements.  Usually,
only  cash  was  accepted  and  businessmen   felt   uncomfortable  in  such  an
environment.  Recognizing a void in the market for a first-class  adult cabaret,
the Company designed Rick's and targeted the businessmen's segment of the market
by providing a unique quality entertainment environment. The following summarize
the areas of operation of Rick's which  management  believe  distinguish it from
its competitors.

         FEMALE  ENTERTAINMENT.  Management of the Company has followed a policy
of  maintaining  high  standards in the areas of both  personal  appearance  and
personality of its topless  entertainers  and  waitresses.  Though a performer's
physical  appearance is very  important,  of equal  importance is her ability to
present  herself  attractively  and to converse  intelligently  with  customers.
Management  insists  that the  performers  it  hires  are  experienced  dancers.
Prospective  performers are initially  interviewed  by the Company's  management
personnel. Management makes a determination as to whether a particular applicant
is suitable based on such factors of appearance,  attitude, dress, communication
skills and  demeanor.  If an applicant is found to be suitable,  she is given an
identification  card and a computer  number.  New  performers  are given a brief
orientation to the club and the applicable  rules and  regulations  which govern
each  performer's  conduct.  The Company  charges each  performer a facility fee
ranging  from $17.00 per shift for day  shifts,  to $27.00 per shift for evening
and night shifts. Each entertainer retains 100% of all cash payments made to her
by customers  for any dance  performed.  If a customer  desires to pay by credit
card, the Company  processes the credit card charge and pays the entertainer 80%
of any  performance  charged to a credit  card.  All credit card charges made by
customers while at Rick's must be approved, in writing, by management before any
charge is accepted.

         The performers dance on the main stage or on smaller stages  throughout
the club. While their performances  include topless dancing,  management insists
that they be elegantly attired when not performing, as opposed to being scantily
dressed as in many other adult  cabarets.  Full nudity is never permitted in the
club. Management will not hire any performers who have tatoos and the performers
who are hired are  provided  guidelines  as to the  manner of dress,  hairstyle,
makeup  and  general  demeanor,  in an effort to  maintain  a high  standard  of
professionalism  amongst  the  performers  and to ensure  that they  maintain  a
pleasant,  congenial demeanor at all times.  Further,  management evaluates each
performer's appearance and performance on a nightly basis and advises performers
if their dress,  makeup,  hairstyle,  general appearance or demeanor do not meet
the standards which Rick's sets forth.  Rick's has had 18 entertainers  who have
performed at Rick's  featured as  centerfolds  in the  country's  leading  men's
entertainment  magazines.  Though these policies have the effect of limiting the
number of performers who are permitted to dance or serve as waitresses at Rick's
Cabaret,  the  Company  believes  that its  policy  of  maintaining  these  high
standards is in its best interest of long-term market position.

         MANAGEMENT.  It is common  practice  in the adult  cabaret  industry to
allow its day-to-day  operational management to receive the bulk of their income
directly from the performers in the form of cash tips. Rick's,  however, was the
first cabaret,  to its knowledge,  to place managers on a salary and to prohibit
managers from  receiving  cash tips.  The Company has  recruited its  management
staff exclusively


                                        4
<PAGE>

from outside of the topless  industry,  in the belief that management  which has
not been exposed to operating  practices  prevalent in the topless  industry and
with diverse management backgrounds will produce a management team that operates
with a high level of  integrity.  This practice of training  management  without
adult  nightclub  experience  may cause the Company to  experience a shortage of
qualified  management  necessary to fulfill its anticipated  growth plans due to
the additional time required to train such personnel.

         COMPLIANCE  POLICIES.  The management of Rick's Cabaret has a policy of
ensuring  that its business is carried on in  conformity  with local,  state and
federal  laws. In  particular,  the Company's  management  has a "no  tolerance"
policy  as to  illegal  drug  use in or  around  the  premises.  Posters  placed
throughout  the  nightclub  reinforce  this  policy as do  periodic  unannounced
searches of the  entertainer's  lockers.  Entertainers and waitresses who arrive
for work are not  allowed  to leave  the  premises  without  the  permission  of
management.  Once an entertainer does leave the premises,  she is not allowed to
return to work until the next day. Management  continually monitors the behavior
of  entertainers,  waitresses  and customers to ensure that proper  standards of
behavior are observed.  The Company's  management has the power to levy fines on
entertainers for breaches of the Company's rules. In the event an entertainer is
fined  three  times  by  management,  the  entertainer  is  barred  from  future
performances at Rick's Cabaret.

         Management also reviews all credit card charges made by customers while
at Rick's. Specifically,  management has in place a formal policy which provides
that all credit card charges must be approved,  in writing, by management before
any charges are accepted.  Management is  particularly  trained to review credit
card  charges to ensure that the only credit card  charges  approved for payment
are for food, drink and entertainment at Rick's Cabaret.

         FOOD AND DRINK. The Company believes a key to the success of a premiere
adult  nightclub  is a quality,  first-class  bar and  restaurant  operation  to
compliment  its adult  entertainment.  The Company  employs a full-time  Service
Manager who is in charge of  recruiting  and  training a  professional  waitress
staff and ensuring that each  customer  receives  prompt and courteous  service.
Rick's  employs a Chef with 20 years  experience  and a Bar  Manager,  who is in
charge of  ordering  inventory  and  scheduling  of bar  staff,  with four years
experience.  The Company believes 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. The Company's  restaurant  operation is a full
service  operation which provides  business lunch buffets and a full-scale lunch
and dinner menu service offering hot and cold appetizers, salads, seafood, steak
and lobster.  An extensive selection of premiere wines are offered to compliment
any customer's  lunch or dinner  selection.  Drinks are provided to customers in
large glasses with a generous measure of alcohol.

         CONTROLS.  Operational  and  accounting  controls are  essential to the
successful operation of a cash intensive nightclub and bar business. The Company
has  implemented  internal  procedures  and  controls  designed  to  ensure  the
integrity of its  operational  and  accounting  records.  The Company  separates
management  personnel  from all cash  handling  to  ensure  that  management  is
isolated from and does not handle any cash.  The Company uses a  combination  of
accounting and physical  inventory control  mechanisms to ensure a high level of
integrity in its  accounting  practices.  Computers  play a significant  role in
capturing and analyzing a variety of information to provide  management with the
information necessary to efficiently manage and control the nightclub.  Deposits
of cash and credit  card  receipts  are  reconciled  each day to a daily  income
report.  In  addition,  management  reviews 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,

                                        5
<PAGE>

and (iii) a daily cash requirements analysis which reconciles the previous day's
cash on hand to the  requirements  for the next day's  operations.  These  daily
computer  reports  alert  management of any  variances  from expected  financial
results based on historical norms.  Further, the Company conducts,  on a monthly
basis,  an  independent  overview  of its  financial  condition  and has engaged
independent  accountants to conduct an annual audit and to review and advise the
Company relating to its internal controls.

         ATMOSPHERE. Rick's maintains a high standard in its facility and in its
decor.  The furniture and  furnishings  in the club area were designed to create
the feeling of an upscale  restaurant.  The sound system was designed to provide
quality  sound at levels  where  conversations  could  still  take  place.  This
environment is carefully  monitored,  in terms of maintenance,  music selection,
entertainer  and waitress  appearance  and all aspects of customer  service on a
continuous basis.

         VIP ROOM.  In keeping with Rick's  emphasis on serving the upper-end of
the business  market,  Rick's opened its VIP room in 1987, which is open only to
individuals who purchase  memberships.  This room is approximately  3,000 square
feet in size  and  memberships  are  sold  which  give  access  to the  room and
discounts on food and drinks.  The VIP room provides a higher level of luxury in
its  decor  and  services.  Membership  in Rick's  VIP room  requires  a joining
membership fee which ranges from $250 for a non-resident  individual  membership
to $550  for an  individual  resident  membership  and  $1,200  for a  corporate
membership.  Additionally,  a  non-member  may use the VIP room for a  one-night
admission fee of $100.  Membership in Rick's VIP room will also entitle  members
to  access to other VIP  rooms at all  other  locations  opened by the  Company.
Rick's is the only adult cabaret in Houston,  Texas,  which  features a "members
only" room.

         ADVERTISING  AND  PROMOTION.   Rick's  marketing   philosophy   towards
customers  is  to  portray  Rick's  as  a  premiere  cabaret  providing  topless
entertainment in a fun, yet discreet,  environment.  Hotel  publications,  local
radio, cable television,  newspapers, billboards, taxi-cab reader boards as well
as a variety of promotional campaigns ensure that Rick's name is kept before the
public.

         Rick's has received a  significant  amount of media  exposure  over the
years.  Mr. Watters has appeared twice on the talk show "Geraldo"  talking about
Rick's and was  featured  in an episode of  "Lifestyles  of the Rich and Famous"
focusing on the topless  industry.  In addition,  Penthouse  magazine produced a
nine page article on the club and Playboy  magazine  covered  Rick's spring 1993
golf  tournament in a recent  article.  In the past,  Rick's has sponsored  golf
tournaments and outings which have generated significant interest and tradition.
Articles  covering the nightclub  have  appeared in Glamour  magazine as well as
Ladies Home Journal.  The nightclub has been  mentioned in an inside cover story
in Time  magazine as well as being  mentioned on numerous  occasions in both the
Houston Chronicle and the Houston Post and in a recent 1995 article published in
Texas Monthly.  In 1993 Rick's  produced the Girls of Rick's,  a 90 minute video
feature,  which was aired as a Pay-per-View  feature on Warner cable.  The video
was  reviewed  in several  local  newspapers  as well as the  Hollywood  Variety
magazine.  In December,  1994,  Rick's provided  entertainers for a Pay-Per-View
feature produced by a local radio station.

         Rick's  received  extensive  national  coverage of its IPO and articles
appeared  in THE WALL  STREET  JOURNAL,  LOS  ANGELES  TIMES,  HOUSTON  BUSINESS
JOURNAL, and numerous other regional newspapers.  The television program "Extra"
ran a short feature on Rick's as did the program "Inside Edition."


                                        6
<PAGE>

RICK'S CABARET IN NEW ORLEANS, LOUISIANA AND MINNEAPOLIS, MINNESOTA.

         In addition to the Company's flagship operation in Houston,  Texas, the
Company has locations in New Orleans, Louisiana and Minneapolis,  Minnesota. The
Company opened its location in New Orleans,  Louisiana, in late December,  1996,
which is located at 315  Bourbon  Street in the New  Orleans  celebrated  French
Quarter.  The Company's lease for the New Orleans' location  commenced on May 7,
1996,  and has a term of 39 1/2 years.  The lease is a triple net lease with the
tenant paying taxes,  maintenance and insurance. The club occupies 16,200 square
feet in a three  story  building.  The club is  comprised  of two  entertainment
venues,  the first  being a cabaret in the format of Rick's  Cabaret in Houston,
Texas,  which is presently open and occupies the bottom floor.  The second venue
and format,  yet to be opened,  will occupy the second floor of the building and
will be a theater seating 250 patrons.  Live choreographed shows will take place
twice a night with a cast separate from the cabaret facilities. Rent is based on
a fixed  minimum  payment with a percentage  supplement  in the event that gross
sales exceed certain numbers.

         A facility in downtown Minneapolis, Minnesota was purchased in November
1997 and it is currently being renovated.  The Company  anticipates  opening the
Minneapolis  location for business in January 1998. The Minneapolis facility had
previously been operated as an adult entertainment venue.

TANTRA

         The  Company  owns  and  operates  Tantra,   a  non-sexually   oriented
discotheque  and billiard club in Houston,  Texas.  Tantra is located in a 6,500
square foot building and  incorporates  separate areas for bar service,  dancing
and  playing  billiards.  The  billiard  area of the  club is also  designed  to
accommodate  occasional live  performances by local and national acts. Tantra is
designed to appeal to an  audience  of people  between the ages of 21 through 40
who wish to dance to music  which  may be  categorized  as modern  dance  music.
Tantra is designed to appeal to both couples and single men and women. Tantra is
seen as a separate,  but complimentary,  business activity to Rick's Cabaret and
is part of the Company's  business  philosophy to diversify into a broader based
entertainment company.

FUTURE EXPANSION

         It is the Company's  intention to open adult cabarets in the format and
bearing  the name  "Rick's  Cabaret"  in other  cities.  The  Company  also will
consider the acquisition of adult cabarets in other cities. In determining which
cities will be prime locations for a "Rick's  Cabaret" a variety of factors will
be considered.  The current regulatory  environment will be one of such factors.
The city  must  presently  permit  alcoholic  beverages  to be sold in a topless
cabaret and must permit table dancing in the table-side  style similar to Rick's
present location in Houston,  Texas.  Another factor which will be considered is
the  availability  of  sites.  The city must  have  available  a number of sites
suitable  for  conversion  to a Rick's  style  cabaret,  located in high traffic
commercial areas. The Company also will review potential competition in the area
and will attempt to analyze the current market  conditions and  profitability of
other adult cabarets in the city. The proximity to Houston of a particular  city
will also be considered. In the early years of expansion the city must be within
easy commuting distance by air of Houston.  This will facilitate the training of
management in Houston and enable the  participation of Houston-based  management
in the construction and opening of the new enterprise.  It is anticipated that a
significant  number of  personnel  from the  Houston  operation  will be used to
ensure that the same  operational  systems and controls  used at its location in
Houston will be implemented  and  maintained at its new locations.  The existing
business  climate  will  also be of  critical  importance.  The city must have a
significant population

                                        7
<PAGE>
of indigenous businessmen, be a recognized tourist destination and have a well
developed convention business.

COMPETITION

         The adult  topless club  entertainment  business is highly  competitive
with respect to price,  service and location,  as well as the professionalism of
its entertainment. For example, Rick's Cabaret in Houston competes with a number
of locally-owned adult cabarets,  some of whose names may enjoy recognition that
equals  that of  Rick's.  While  there are  restrictions  on the  location  of a
so-called  "sexually  oriented business" there are no barriers to entry into the
adult  cabaret  entertainment  market  and only the name  "Rick's"  and  "Rick's
Cabaret" are proprietary.  There are  approximately 50 adult cabarets located in
the Houston area of which  approximately  10 are in direct  competition with the
Company.  The  Company  believes  that  the  combination  of its  existing  name
recognition  and the  entertainment  environment  that it has  created  which is
distinctive and unique will allow the Company to effectively  compete within the
industry.  In the past year,  Rick's has been the fourth highest adult nightclub
in the Houston area in alcoholic  beverage  sales,  according to the information
made  available by the Texas  Alcoholic  Beverage  Commission.  In the two years
prior thereto,  Rick's was either the second or third highest adult nightclub in
alcoholic beverage sales in the Houston area. Although the Company believes that
it is  well-positioned to compete  successfully,  there can be no assurance that
Rick's will be able to maintain its high level of name  recognition and prestige
within the marketplace.

GOVERNMENTAL REGULATIONS

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

         Various groups have  increasingly  advocated  certain  restrictions  on
"happy hour" and other promotions  involving  alcoholic  beverages.  The Company
feels its entertainment  value,  admittance charge beginning after normal "happy
hours" and its policy of not  discounting  drink prices are  effective  tools in
promoting  its  business.   The  Company  cannot  predict   whether   additional
restrictions  on the promotion of sales of alcoholic  beverages will be adopted,
or if adopted, the effect of such restrictions on its business.

         In addition to various  regulatory  requirements  affecting the sale of
alcoholic beverages, in Houston, and in many other cities, location of a topless
cabaret is subject to restriction by city  ordinance.  Rick's is subject to "The
Sexually   Oriented  Business   Ordinance"  (the  "Ordinance")   which  contains
prohibitions  on  the  location  of an  adult  cabaret.  The  prohibitions  deal
generally  with distance from schools,  churches,  and other  sexually  oriented
businesses and contain restrictions based on the percentage of residences within
the  immediate  vicinity of the sexually  oriented  business.  The granting of a
Sexually

                                        8
<PAGE>
Oriented Business Permit ("Business Permit") is not subject to discretion; the
Business Permit must be granted if the proposed operation satisfies the
requirements of the Ordinance.

         In  January,  1997,  the City  Council of the City of Houston  passed a
comprehensive  new ordinance  regulating  the location of and the conduct within
Sexually  Oriented  Businesses.  The new  Ordinance,  which is pending  judicial
review,  establishes  new distances  that Sexually  Oriented  Businesses  may be
located  to  schools,   churches,   playgrounds  and  other  sexually   oriented
businesses.  There  are no  provisions  in the  Ordinance  exempting  previously
permitted sexually oriented businesses from the effect of the new Ordinance. The
Company was  informed  that Rick's  Cabaret at its location at 3113 Bering Drive
failed to meet the  requirements of the Ordinance and accordingly the renewal of
the Company's Business License at that location had been denied.

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

         The Company filed a written request with the City of Houston requesting
an extension of time during  which the Company may  continue  operations  at its
original  location  under the  Amortization  Period  provisions of the Ordinance
since the Company  was unable to recoup its  investment  prior to the  effective
date of the Ordinance. An administrative hearing (the "Hearing") was held by the
City of Houston to determine the appropriate  Amortization  Period to be granted
to the Company.  At the  Hearing,  the Company  requested  that it be granted an
Amortization  Period at its original location equal to forty-five years from the
effective  date of the Ordinance.  The Company has been granted an  amortization
period  through  July 1998.  The Company has the right to appeal any decision of
the Hearing official to the district court in the State of Texas.

         On May 12, 1997, the City of Houston agreed to defer  implementation of
the Ordinance until the  constitutionality of the entire Ordinance is decided by
court trial.  It is presently  anticipated  that a court hearing will be held in
sometime  in  1998.  There  are  other  provisions  in the  ordinance,  such  as
provisions governing the level of lighting in a sexually oriented business,  the
distance between a customer and dancer while the dancer is performing in a state
of undress  and  provisions  regarding  the  licensing  of dancers  which may be
detrimental  to  the  conduct  of  business  by the  Company  and  all of  these
provisions  also will be the  subject  of the  above  mentioned  litigation.  No
assurance  can be given as to the  likelihood  of the success of any  litigation
filed against the City of Houston.

         The  Company  is also  required  to  have a  dancehall  permit  for the
operation of a discotheque in the city of Houston. The dancehall permit is not a
discretionary  permit,  but must be granted by the city if the provisions of the
applicable ordinance are satisfied. A dancehall permit may be revoked or renewal
may be refused if  certain  criminal  activities  occur on the  premises  or the
person listed as the applicant has committed  certain named  offenses.  Tantra's
dancehall permit is presently held by Mr. Watters.  The Company believes that it
could  obtain a new  dancehall  permit if for any reason Mr.  Watters  failed to
renew or was refused the renewal of the  dancehall  permit.  Prior to  expanding
into any new market,  the Company  will take all steps  necessary  to obtain any
required  dancehall  permits  and to comply  with any other  related  regulatory
requirements within that market.

TRADEMARKS

         Rights of the Company to the trademarks  "Rick's" and "Rick's  Cabaret"
are  established  under common law,  based upon the  Company's  substantial  and
continuous  use of these  trademarks  in interstate  commerce  since at least as
early as 1987.

                                        9
<PAGE>

         'RICK'S AND STARS  DESIGN"  logo was  registered  by the United  States
Patent  and  Trademark  Office  ("PTO")  in  1989.  Due to an  oversight,  these
registrations  were  canceled  by the PTO for  failure of the  Company to file a
required affidavit with the PTO setting forth that the service mark was still in
use in commerce.  Applications for service mark registrations for this mark were
refiled,  and the PTO has issued new  registrations for the service mark "RICK'S
AND STARS DESIGN".

         The Company has also obtained service mark  registrations  from the PTO
for the Company's RICK'S CABARET service mark.

         There  can be no  assurance  that the  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 the Company's  rights from  infringement,  which may be costly
and time consuming.

EMPLOYEES AND INDEPENDENT CONTRACTORS

         As of September 30, 1997, the Company had  approximately  160 full-time
employees,  of which 12 are in  management  positions,  including  corporate and
administrative operations and approximately 148 are engaged in food and beverage
service,  including  bartenders and waitresses.  None of the Company's employees
are represented by a union and the Company  considers its employee  relations to
be good.

         Additionally, the Company has independent contractor relationships with
over 400  entertainers,  who are  self-employed  and work with the  Company on a
non-exclusive basis as independent contractors.

ITEM 2.       PROPERTIES

         The  Company  owns the  premises  where  Rick's  Cabaret  is located in
Houston,  Texas. The cabaret  contains an aggregate 12,300 square feet,  divided
into two separate club areas and executive and administrative  offices. The main
club area and the VIP club area  together  contain  10,500  square feet and seat
approximately  300 people.  The executive and  administrative  offices  comprise
1,800 square feet. A woman's apparel  boutique leases  approximately  300 square
feet  at  the  same  location.  SRD  Vending  Company,  Inc.  ("SRD"),  a  Texas
Corporation  wholly-owned  by Mr.  Watters also  occupies 120 square feet at the
same location. SRD provides and maintains the cigarette vending machines located
at Rick's Cabaret. See, CERTAIN TRANSACTIONS.

         The Company presently owns a 6,500 square foot building in which Tantra
is located. The building  incorporates  separate areas for bar service,  dancing
and playing billiards. The building is currently leased to Tantra, pursuant to a
ten year lease  agreement  which expires on August 1, 2004. The lease  agreement
provides for lease payments of the greater of (i) $1,500 per month or (ii) 5% of
Tantra's  gross  receipts  per month until such time as the Company has received
$250,000 of rental income.

         The Company  leases the premises where Rick's Cabaret is located in New
Orleans,  Louisiana. The Company's lease for the New Orleans' location commenced
on May 7, 1996, and has a term of 39 1/2 years.  The lease is a triple net lease
with tenant  paying taxes,  maintenance  and  insurance.  The club will occupies
16,200 square feet in a three story building.


                                       10
<PAGE>

         A facility in downtown Minneapolis, Minnesota was purchased in November
1997 and it is currently being renovated.  The Company  anticipates  opening the
Minneapolis  location for business in January 1998. The Minneapolis facility had
previously been operated as an adult entertainment venue.

ITEM 3.           LEGAL PROCEEDINGS

         The  Company  and  Mr.  Watters  are  presently   involved  in  certain
litigation.  In DALLAS J. FONTENOT V. TRUMPS, INC. AND ROBERT L. WATTERS,  Cause
No. 94-057144 in the 127th District Court of Harris County, Texas (the "Fontenot
Lawsuit"), Mr. Fontenot sued the Company and Mr. Watters for alleged breaches of
an Agreement entered into in April, 1993 among Mr. Fontenot, the Company and Mr.
Watters.  Mr.  Fontenot  alleges that Mr.  Watters and the Company have breached
this  Agreement,  but does not  indicate  the  manner  in which the  breach  has
occurred.  The Company  believes that it has fully complied with its obligations
under this Agreement.  The litigation is presently in the discovery  stage.  The
Company  believes,  after  consultation  with counsel,  that it has  substantial
defenses to the claims being  asserted  against it and that the risk of material
financial exposure to the Company is unlikely.

         In March, 1997,  Classic Affairs and Robert Sabes initiated  litigation
against the Company in Minneapolis, Minnesota styled ROBERT W. SABES AND CLASSIC
AFFAIRS,  INC.,  D/B/A SHIEK'S  PALACE ROYALE V. RICK'S  CABARET  INTERNATIONAL,
INC., A TEXAS  CORPORATION,  RCI ENTERTAINMENT  (MINNESOTA),  INC. AND ROBERT L.
WATTERS,  in District Court, 4th Judicial District,  Case No.  CT97-006457.  The
suit  alleges  that the  Company  and Mr.  Watters  violated  a  Non-Competition
Agreement which was to have been executed upon the closing of the acquisition of
Shiek's Palace Royale, which never took place.

         Mr. Sabes ("Sabes") and Classic Affairs,  Inc. ("Classic  Affairs") are
seeking an order from the Court that the covenant not to compete is binding upon
the Company and Mr. Watters even though the acquisition of Shiek's Palace Royale
never took place, as well as an order for unspecified  damages for the breach of
the agreement.  The Company and Mr. Watters have answered the original complaint
and have denied all of the allegations  contained therein.  Further, the Company
has filed a Counterclaim  against Sabes and Classic Affairs  alleging that Sabes
and  Classic  Affairs  are  seeking to  interfere  with the  Company's  right to
purchase  another  adult  entertainment  facility  in  Minneapolis.  The Company
believes, after consultation with counsel, that the claims asserted by Sabes and
Classic  Affairs are  without  merit and are  subject to  defenses.  The Company
intends  to defend  this suit  against  the  claims  asserted  and to pursue its
counterclaim against Sabes and Classic Affairs.

SEXUALLY ORIENTED BUSINESS ORDINANCE OF HOUSTON, TEXAS

         In  January,  1997,  the City  Council of the City of Houston  passed a
comprehensive  new ordinance  regulating  the location of and the conduct within
Sexually  Oriented  Businesses.  The new  Ordinance,  which is pending  judicial
review,  establishes  new distances  that Sexually  Oriented  Businesses  may be
located  to  schools,   churches,   playgrounds  and  other  sexually   oriented
businesses.  There  are no  provisions  in the  Ordinance  exempting  previously
permitted sexually oriented businesses from the effect of the new Ordinance. The
Company was  informed  that Rick's  Cabaret at its location at 3113 Bering Drive
failed to meet the  requirements of the Ordinance and accordingly the renewal of
the Company's Business License at that location had been denied.

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


                                       11
<PAGE>

         The Company filed a written request with the City of Houston requesting
an extension of time during  which the Company may  continue  operations  at its
original  location  under the  Amortization  Period  provisions of the Ordinance
since the Company  was unable to recoup its  investment  prior to the  effective
date of the Ordinance. An administrative hearing (the "Hearing") was held by the
City of Houston to determine the appropriate  Amortization  Period to be granted
to the Company.  At the  Hearing,  the Company  requested  that it be granted an
Amortization  Period at its original location equal to forty-five years from the
effective  date of the Ordinance.  The Company has been granted an  amortization
period  through  July 1998.  The Company has the right to appeal any decision of
the Hearing official to the district court in the State of Texas.

         On May 12, 1997, the City of Houston agreed to defer  implementation of
the Ordinance until the  constitutionality of the entire Ordinance is decided by
court trial.  There are other  provisions in the  ordinance,  such as provisions
governing the level of lighting in a sexually  oriented  business,  the distance
between a customer  and  dancer  while the  dancer is  performing  in a state of
undress  and  provisions  regarding  the  licensing  of  dancers  which  may  be
detrimental  to  the  conduct  of  business  by the  Company  and  all of  these
provisions also will be the subject of the above mentioned litigation.

         No assurance  can be given as to the  likelihood  of the success of any
litigation  filed  against  the City of  Houston,  but in the  event  that  such
litigation  is  unsuccessful  it is likely that the Company will be able to take
the benefit of an Amortization Provision contained in the new ordinance designed
to allow recovery of a business's investment and which will allow the Company to
continue in business at its present location during the Amortization Period.

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

         During the fourth quarter of 1997, there were no matters submitted to a
vote of the Security Holders, through solicitation of proxies or otherwise.


                                       12
<PAGE>

                                     PART II


ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS


                           PRICE RANGE OF COMMON STOCK


The  Company's  Common Stock is traded on The NASDAQ  SmallCap  Market under the
symbol  "RICK." The following  table sets forth the quarterly  high and low last
sales prices per share for the Common Stock, as reported by NASDAQ.

                                                     COMMON STOCK PRICE RANGE
                                                     ------------------------
                                                       HIGH              LOW
                                                       ----              ---
1996

         First Quarter.........................   $   5                $ 3 15/16
         Second Quarter........................   $   5 3/4            $ 4 1/2
         Third Quarter.........................   $   5 9/16           $ 4 3/4
         Fourth Quarter........................   $   5 3/8            $ 4.00

1997
         First Quarter.........................   $  5  1/2            $  4.00
         Second Quarter........................   $  4 7/16            $  2 3/4
         Third Quarter.........................   $  3.00              $  2.25
         Fourth Quarter........................   $  2 5/8             $  2.00


         On  December  23,  1997 the last sales  price for the  Common  Stock as
reported by The NASDAQ  SmallCap  Market was $2 1/4 per share.  On December  23,
1997, there were approximately 374 stockholders of record of the Common Stock.

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


ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS

         The  following  discussion  should  be read  in  conjunction  with  the
financial  statements and notes thereto for the fiscal years ended September 30,
1997 and 1996.

                                       13
<PAGE>
GENERAL

     The Company was formed in December  1994 to acquire all of the  outstanding
capital stock of Trumps,  Inc., a Texas  corporation  ("Trumps") formed in 1982.
Since 1983,  Trumps has  operated  Rick's  Cabaret,  a premier  adult  nightclub
offering topless entertainment in Houston,  Texas. In 1995, the Company acquired
Tantra,  a non-sexually  oriented  discotheque and billiard club also located in
Houston, Texas from Robert L. Watters, the principal shareholder.  Tantra became
operational  during the second  quarter of fiscal 1995.  In February  1996,  the
Company formed RCI Entertainment  (Louisiana) Inc., a Louisiana  corporation for
the purpose of administering,  operating,  managing and leasing its new location
in New Orleans, Louisiana. The Company opened its new facility in New Orleans in
late December,  1996. In addition,  the Company formed RCI Entertainment (Texas)
Inc. in June 1996,  for the purpose of acquiring  1.13 acres of land in Houston,
Texas. The Company sold the Land in November, 1997. In January, 1997 the Company
formed  RCI  Entertainment  (Minnesota)  Inc.  for  the  purpose  of  acquiring,
renovating  operating and managing its new facility in  Minneapolis,  Minnesota.
The  Company  expects  to open it new  facility  in  Minneapolis,  Minnesota  in
January, 1998. The Company's fiscal year end is September 30.

     Revenues are derived from the sale of liquor,  beer,  wine and food,  which
comprises  approximately 59% of total revenues, and charges to the entertainers,
cover charges and other income which comprise  approximately 41% of total fiscal
1997 revenues.

RESULTS OF OPERATIONS

     YEAR ENDED  SEPTEMBER 30, 1997  COMPARED TO YEAR ENDED  SEPTEMBER 30, 1996.
For the 1997  fiscal  year,  the  Company  had  consolidated  total  revenues of
$6,277,579,  an increase of $1,647,281  from fiscal 1996 revenues of $4,630,298.
Single location  revenues for Rick's Cabaret - Houston  declined 17% from fiscal
1996 to fiscal 1997 or approximately  $594,000. The decline at Rick's Cabaret in
Houston is offset by the opening of Rick's  Cabaret New Orleans  which  provided
revenues of $2,296,779 during the nine months of this fiscal period for which it
was open. The overall decline in single location  revenues in Houston,  Texas is
attributable  to the increased level of competition in the area and the chilling
effect of a new  ordinance  passed in January,  1997 by the City of Houston City
Council.  Management  intends to offset this revenue decline with the opening of
an  additional  location  in  Minneapolis,   Minnesota  during  January,   1998.
Currently, management is also studying additional potential acquisitions,  which
would additionally serve to offset the current revenue declines.

     Costs of goods sold were 32% and 30% of sales of  alcoholic  beverages  and
food for fiscal 1997 and 1996, respectively.  This slight increase is due to the
increase in food sales  which  carries a higher cost than  beverage  sales.  The
Company  continues a program 

                                       14

<PAGE>

to improve margins from liquor and food sales and food service efficiency.

     Salaries and wages  increased  42% or $625,400  from fiscal 1996 due to the
addition of  personnel in all areas of the company due to the opening of the New
Orleans  location  and  in  preparation  for  the  opening  of the  location  in
Minneapolis, Minnesota.

     Other general and  administrative  expenses  increased 23% or $749,579 from
fiscal 1996 to fiscal 1997.  Charge card fees increased  $40,951  largely due to
opening the new location in New Orleans.  Legal and accounting decreased $25,099
as a  result  of the  final  settlement  of two  cases  involving  the  company.
Advertising  and promotion  increased by $241,130  reflecting  the cost of media
expenditure  in New Orleans.  The  company's  current  media  expenditures  have
declined  reflecting the decrease in need for advertising in New Orleans.  Other
costs  increased  during fiscal 1996 as a result of (i)  additional  expenses of
$52,000 to  recognize  refunds due to wait staff  employees in Houston for shift
charges and tip processing  fees,  and (ii)  increased  travel and lodging costs
incurred by staff  involved with the opening of the New Orleans and  Minneapolis
locations and the review of other potential acquisitions.

     This Company  experienced a net loss of $1,293,330 for fiscal 1997 compared
to a net loss of  $708,614  for  fiscal  1996.  Management  has  taken  steps as
discussed in greater detail in the section  LIQUIDITY AND CAPITAL RESOURCES (see
below) to ensure the  Company  will  become  profitable  in early  fiscal  1998,
principally  as  a  result  of  increased  revenues  and  decreased  advertising
expenditures  and  also as  income  from  the  opening  of the new  location  in
Minneapolis is realized.

     YEAR ENDED  SEPTEMBER 30, 1996  COMPARED TO YEAR ENDED  SEPTEMBER 30, 1995.
For the 1996  fiscal  year,  the  Company  had  consolidated  total  revenues of
$4,630,298,  an increase of $95,592  from  fiscal 1995  revenues of  $4,534,706.
Single location  revenues for Rick's Cabaret - Houston  declined 11% from fiscal
1995 to fiscal 1996 or approximately  $463,000. The decline at Rick's Cabaret is
offset  by the  addition  and  opening  of Tantra  which  provided  revenues  of
$845,000.  The overall decline in single location revenues in Houston,  Texas is
attributable to the increased level of competition in the area.

     Costs of good sold  were 29% and 28% of sales of  alcoholic  beverages  and
food for fiscal 1996 and 1995, respectively.  This slight increase is due to the
increase in food sales which carries a higher cost than beverage sales.

     Salaries and wages  increased  18% or $226,527  from fiscal 1995 due to the
addition of  management  personnel  and staff in the kitchen and  administrative
areas  of the  Company.  Management  staffing  were  increased  in order to have
adequately  trained  personnel  to  assist  with  the  planning  and  preopening
activities of the New Orleans location and other locations.

     Other general and administrative  expenses increased 33% or $1,306,394 from
fiscal 1995 to fiscal 1996.  Charge card fees decreased  $67,803  largely due to
increased cash sales during fiscal 1996 and more  favorable  discount terms from
1995.  Legal and accounting  increased  $225,566 as a result of additional  fees
incurred  as two of the  Companies  lawsuits  approached  the  final  settlement
phases. Advertising and promotion 

                                       15
<PAGE>

increased by $235,378 as the Company continued an outdoor  advertising  campaign
started in fiscal 1995 in order to capitalize on the extensive  media  attention
the Company attracted as a result of the public offering completion. In addition
during the fourth quarter of fiscal 1996, the Company started an extensive radio
advertising campaign on several stations in the Houston,  Texas area. Management
believes the positive  effects of advertising for the Company are often deferred
for a period of several months.  Other costs  increased  during fiscal 1996 as a
result of (i)  expenses  of  $132,000  to  recognize  refunds  due to wait staff
employees in Houston for shift charges and tip processing  fees, (ii) expense of
$250,000 to reflect  the cost of a  financial  marketing  company  advising  the
Company in financial matters,  (iii) an additional accrual of $50,000 to reflect
costs of a legal settlement and (iv) increased travel and lodging costs incurred
by staff  involved with the opening of the New Orleans  locations and the review
of other potential  acquisitions.  During the fourth quarter of fiscal 1996, the
Company  capitalized  preopening  costs of $170,000  relating to the New Orleans
location which is currently undergoing renovation and is not expected to produce
revenues until December 1996.

     Interest  income  increased to $162,688  during  fiscal 1996 as a result of
investing the proceeds of the Company's public offering.

     The Company  experienced a net loss of ($708,614)  for fiscal 1996 compared
to net income of $359,427 for fiscal 1995.


LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 1997 the Company had working capital of $107,342, compared
to working  capital of  $2,755,893  at the end of fiscal  1996.  The decrease in
working capital is primarily due to the Company's opening of its facility in New
Orleans.  Additionally,  the  Company  sold  46,845  shares of common  stock for
$152,246.

     In the opinion of  management,  working  capital is not a true indicator of
the status of the Company due to the short cycle to liquidity,  which results in
the  realization of cash within no more than five (5) days after the culmination
of a transaction.

     Net cash  used by  operating  activities  in  fiscal  1997  was  ($544,768)
compared to net cash used by  operating  activities  of  ($1,004,848)  in fiscal
1996. The decrease in cash used by operating activities was due primarily to the
net loss of  ($1,293,330)  being  balanced  by  depreciation  of  $311,464,  the
cumulative  effect of  accounting  change of  $151,138,  an increase in accounts
payable  and  accrued  liabilities  of  $218,894  and a change in  income  taxes
payable/receivable  of  $187,770.  Net cash  used in  investing  activities  was
$4,321,541  in 1997 and was due to  investments  in the land and building at the
original Houston location,  leasehold improvements in New Orleans,  property and
equipment. Cash provided by financing activities was $2,073,716 due primarily to
funding of loans for leasehold  improvements  in New Orleans and purchase of the
land and building of the original nightclub location in Houston, Texas.

     Management  believes  it has  implemented  plans that will  ensure that the
Company will become  profitable  in fiscal 1998.  Management  has taken steps to
restructure management compensation to reduce the salary costs of management and
to reorganize its accounting  function to more efficiently  manage the business.
Additionally, steps have 

                                       16
<PAGE>

already been taken to reduce advertising  expenditure by over $400,000 in fiscal
1998 compared to fiscal 1997. New Orleans  represented  the first  expansion for
the company outside of its original market of Houston, Texas and as a result the
opening expenses for New Orleans reflected the company's determination to make a
market impact through widespread advertising. In Minneapolis, by comparison, the
company will capitalize on its high traffic location and on the relative lack of
competition instead of spending heavily on media and advertising.  Extensive use
will be made in opening the Minneapolis  location on media  materials  developed
for the opening of the New Orleans location. Emphasis will continue to be placed
on reduction of Cost of Goods Sold by setting and monitoring management goals at
each location.

     Although  the Company has not  established  lines of credit  other than the
existing debt, there can be no assurance that the Company will be able to obtain
additional  financing on reasonable  terms, if at all. The Company has, however,
developed  numerous  contacts with  professionals  who have expertise in raising
capital through private placement of securities and the Company will look to the
public  marketplace  to find the  resources  necessary  to continue  its planned
expansion.

     Because of the large volume of cash handled by the company,  stringent cash
controls  have been  implemented  by the  Company.  These  procedures  have been
improved  over the life of the Company,  to take  advantage of  improvements  in
technology.  Management believes that it will be able to duplicate the financial
controls that exist at its current location at future locations,  and that these
controls  will provide  sufficient  safeguards  to protect the  interests of the
Company.  In the event the  topless  club  industry  is  required to convert the
entertainers  who perform from independent  contractor to employee  status,  the
Company has prepared alternative plans that Management believes will protect the
profitability of the Company. In addition, Management believes that the industry
standard  of treating  the  entertainers  as  independent  contractors  provides
sufficient safe harbor protection to preclude any tax assessment for prior years
payroll taxes.

     The adult topless club  entertainment  business is highly  competitive with
respect to price,  service and location,  as well as the  professionalism of the
entertainment.  Rick's  Cabaret  competes with a number of  locally-owned  adult
cabarets,  some of whose  names  enjoy  recognition  that equals that of Rick's.
Although the Company believes that it is well-positioned to compete successfully
in the future,  there can be no  assurance  that Rick's will be able to maintain
its high level of name recognition and prestige within the marketplace.

SEASONALITY

     The  Company is  significantly  affected by  seasonal  factors.  Typically,
Rick's has experienced reduced revenues from May through September.  The Company
has  historically  experienced  its strongest  operating  results during October
through April.

SPECIAL NOTE REGARDING FORWARD LOOKING INFORMATION

     The Management  Discussion and Analysis  contains  various "forward looking
statements"  which represent the Company's  expectations  or beliefs  concerning
future events and involve a number of risks and uncertainties. Important factors
that could  cause  actual  results  to differ  materially  from those  indicated
include risks and uncertainties 

                                       17
<PAGE>

relating to the impact and  implementation  of the  sexually  oriented  business
ordinance  in the City of  Houston,  the  timing of the  opening  of the club in
Minneapolis,  Minnesota and the  availability  of  acceptable  financing to fund
corporate expansion efforts.

ITEM 7.      FINANCIAL STATEMENTS

     The information  required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.


ITEM 8.      CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING AND
             FINANCIAL   DISCLOSURE8.   CHANGES   IN  AND   DISAGREEMENTS   WITH
             ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     There  have  been  no  changes  in  accountants   since  the   Registrant's
incorporation in 1994, nor have there been any disagreements with accountants on
any  matter  of  accounting   principles  or  practices,   financial   statement
disclosure, or auditing scope or procedure.

                                       18
<PAGE>

                                    PART III


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

DIRECTORS AND EXECUTIVE OFFICERS.

         Directors  are elected  annually  and hold office until the next annual
meeting of the stockholders of the Company or until their successors are elected
and qualified.  Officers are elected annually and serve at the discretion of the
Board of Directors.  There is no family relationship between or among any of the
directors  and  executive  officers  of the  Company.  Under  the  terms  of the
Underwriting Agreement in connection with the Company's initial public offering,
the Company agreed that, for a period of three years ending  October,  1998, the
Company's  Board of Directors will consist of a minimum of five persons,  two of
whom shall not be affiliated  with the Company.  To date, the Company's Board of
Directors consists of four persons.

         ROBERT WATTERS,  age 46, has been a director of the Company since 1986,
and has been the sole  stockholder  of the Company since March 1993. Mr. Watters
has been  president  and chief  executive  officer of the Company since 1991 and
presently serves also as its chief financial  officer.  He was also a founder in
1989 and  operator  until 1993 of the  Colorado  Bar & Grill,  an adult  cabaret
located in Houston,  Texas and in 1988 performed site selection,  negotiated the
property  purchase  and oversaw the design and  permitting  for the cabaret 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 state.
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 the full-time  management of the Company. 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.

         ERICH  NORTON  White,  age 27, vice  president,  secretary  and general
manager has served as a Director of the Company  since  July,  1995.  Mr.  White
joined the Company in January,  1993 as a night  manager and since May, 1995 has
been its General Manager. From October, 1989, until joining the Company in 1993,
Mr.  White worked in the  hospitality  industry  for the  Bennigan's  restaurant
chain. Mr. White completed the Bennigan's Restaurant Management Training Program
in 1992.

         SCOTT C.  MITCHELL,  age 44, has served as a  director  of the  Company
since  December,  1994. Mr. Mitchell has been a certified  public  accountant in
private practice since 1976 and has been a principal of his own firm since 1981.
Mr.  Mitchell's  current firm  Mitchell & Cavallo,  P.C.  serves a wide range of
business and individual  clients.  Mr.  Mitchell has been licensed since 1980 to
practice law in the State of Texas and since 1986 has been  admitted to practice
before  the Tax Court of the  United  States.  Further,  Mr.  Mitchell  has been
appointed  by  various  District  Courts as a  receiver  and  special  master of
business  entities  under  court  jurisdiction.  Mr.  Mitchell  was  appointed a
Receiver of the Company in September, 1989 with limited authority to oversee and
review the receipt and  disbursement of revenues of the Company.  Mr.  Mitchell,
however,  had no authority over the management of the Company.  The receivership
was  terminated in March,  1993. Mr.  Mitchell  graduated from the University of
Texas with an honors degree in Business Administration.

                                       19
<PAGE>
         MARTIN SAGE, age 46 has served as a Director of the Company since July,
1995. Mr. Sage is the founder and director of Sage  Productions,  Inc., which is
involved in the  development of applying  advanced  learning theory to business.
The Sage Learning Method enables  individuals to build innovative  approaches to
management,  leadership  and team  building.  The Sage Learning  Method works to
create  dynamic   relationships   which  motivate  and  create  synergy  between
individuals and the businesses  where they work. For the past 16 years, Mr. Sage
has served as a consultant to businesses  throughout the United States  bringing
his innovative approach to business to many organizations and corporations.

CERTAIN SECURITIES FILINGS

The Company believes that all persons have complied with Section 16(a) of the
Exchange Act.

ITEM 10.      EXECUTIVE COMPENSATION

         The following table reflects all forms of compensation  for services to
the Company for the fiscal years ended  September 30, 1997, 1996 and 1995 of the
chief  executive  officer of the Company.  No executive  officer (other than the
chief executive  officer) of the Company  received  compensation  which exceeded
$100,000 during 1997.
<TABLE>
<CAPTION>

                                         SUMMARY COMPENSATION TABLE

                                                                               LONG-TERM
                                              ANNUAL COMPENSATION             COMPENSATION                   ALL
                                              -------------------             ------------                   ---
                                                                               RESTRICTED      STOCK        OTHER
                                                                                 STOCK         OPTIONS      COMPEN-
NAME & PRINCIPAL POSITION           YEAR     SALARY     BONUS     OTHER(1)       AWARDS       (SHARES)      SATION
-------------------------           ----     ------     -----     -----        ----------     --------      ------
<S>                                 <C>     <C>          <C>         <C>            <C>            <C>          <C>
Robert L. Watters                   1997    $325,000    -0-         -0-            -0-            -0-          -0-
Chief Executive Officer             1996    $325,000    -0-         -0-            -0-            -0-          -0-
                                    1995    $298,000    -0-         -0-            -0-            -0-          -0-
</TABLE>

--------------
       (1) The Company provides Mr. Watters certain personal benefits. Since the
value of such  benefits  does not  exceed the lesser of $50,000 or 10% of annual
compensation, the amounts are omitted.


DIRECTOR COMPENSATION

         The Company does not currently  pay any cash  directors'  fees,  but it
pays the  expenses  of its  directors  in  attending  board  meetings.  Scott C.
Mitchell,  Martin Sage and Erich N. White, directors of the Company were granted
stock  options on October  12,  1995 for  services  provided  to the  Company as
directors.  Messrs.  Mitchell,  Sage and White  were each  granted  5,000  stock
options,  all at an exercise price of $3.00 per share until  January,  2005. The
options are  exercisable  only as to  one-fourth  of the total  number of shares
covered by each grant of options  during  each  12-month  period  commencing  12
months after the grant date.

EMPLOYEE STOCK OPTION PLAN

         While the Company  has been  successful  in  attracting  and  retaining
qualified personnel, the Company believes that its future success will depend in
part on its continued ability to attract and retain highly qualified  personnel.
The Company  pays wages and  salaries  which it believes  are  competitive.  The
Company  also  believes  that equity  ownership  is an  important  factor in its
ability to attract and retain  skilled  personnel,  and in 1995  adopted a Stock
Option Plan (the "Plan") for employees and directors.


                                       20
<PAGE>

         The purpose of the Plan is to further the interest of the Company,  its
subsidiaries and its  stockholders by providing  incentives in the form of stock
options to key employees and directors who contribute  materially to the success
and  profitability  of  the  Company.  The  grants  will  recognize  and  reward
outstanding individual performances and contributions and will give such persons
a proprietary interest in the Company, thus enhancing their personal interest in
the Company's  continued  success and  progress.  This Plan will also assist the
Company and its  subsidiaries  in  attracting  and  retaining  key employees and
directors.  The options  granted under this Plan may be either  Incentive  Stock
Options, as that term is defined in Section 422A of the Internal Revenue Code of
1986, as amended, or nonstatutory options taxed under Section 83 of the Internal
Revenue  Code of 1986,  as  amended.  The Plan is  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 the  participants  in the Plan, 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 Plan. A
total of 300,000  shares may be  optioned  and sold  under the  Company's  Stock
Option Plan.  As of September  30, 1997,  105,000 stock options had been granted
under the Plan, none of which have been exercised.

EMPLOYMENT AGREEMENT

         The Company presently has a three year employment agreement with Robert
L. Watters  (the  "Agreement")  to serve as its  President  and Chief  Executive
Officer. The Agreement, which extends through December 31, 2000, provides for an
annual base salary of $300,000.  The Agreement  also allows for an annual bonus,
in the discretion of the Board of Directors (excluding Mr. Watters),  based upon
the financial  performance,  including  evaluation of the income and earnings of
the Company during the year. The Agreement  also provides for  participation  in
all benefit plans maintained by the Company for salaried employees. Mr. Watters'
Agreement  contains a confidentiality  provision and an agreement by Mr. Watters
not to compete  with the  Company  upon the  expiration  of the  Agreement.  The
Company has not established,  nor does it provide for, long-term incentive plans
or defined benefit or actuarial plans.

ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets forth  certain  information  at December 23,
1997, with respect to the beneficial  ownership of shares of Common Stock by (i)
each  person who owns  beneficially  more than 5% of the  outstanding  shares of
Common Stock, (ii) each director of the Company, (iii) each executive officer of
the Company and (iv) all  executive  officers and  directors of the Company as a
group.

Robert L. Watters
3113 Bering
Houston, Texas 77057                         1,800,000(1)           (43.15%)

Erich Norton White
3113 Bering
Houston, Texas 77057                            23,125(1)(2)         (0.01%)

                                       21
<PAGE>

Scott C. Mitchell
820 Gessner
Suite 1380
Houston, Texas 77024                         12,500(1)(3)               (0.01%)

Martin Sage
100 Congress Ave., Ste.  2100
Austin, Texas 78701                           2,500(1)(3)               (0.01%)

Rock Fund
3601 West Commercial Blvd.
Fort Lauderdale, Florida, 33309             244,600                     (5.86%)

All directors and officers as a
  group (4 persons)                       1,838,125                    (44.03%)

---------------------------
(1)      Messrs.  Watters,  White,  Mitchell  and  Sage  have  sole  voting  and
         investment power with respect to the shares shown as beneficially owned
         by them.
(2)      Includes  options to purchase  22,500  shares at an  exercise  price of
         $3.00 per share, which are presently exercisable;  includes warrants to
         purchase 625 shares of Common Stock of the Company at an exercise price
         of $3.00  per  share  which  are  presently  exercisable;  and does not
         include  options to purchase an additional  7,500 shares at an exercise
         price of $3.00 per share,  which will not become exercisable within the
         next 60 days.
(3)      Includes options to purchase 2,500 shares at an exercise price of $3.00
         per share, which are presently exercisable; and does not include option
         to  purchase 2,500 shares at an exercise price of $3.00 per share which
         will not become exercisable within the next 60 days.


ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Prior to the Company's reorganization, the Company, as a privately-held
company engaged in certain  business  transactions  with Mr.  Watters,  its sole
stockholder.  These  transactions are described below. The Board of Directors of
the Company has adopted a policy that  Company  affairs will be conducted in all
respects by standards  applicable  to  publicly-held  corporations  and that the
Company will not enter into any future  transactions  and/or  loans  between the
Company and its 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 the  independent,  disinterested  directors  of the
Company.  In  the  Company's  view,  all  of the  transactions  described  below
involving the Company meet this standard.

         The Company  was  organized  in 1994 to acquire all of the  outstanding
common stock of Trumps,  Inc.  ("Trumps"),  a Texas corporation  formed in 1982,
from Robert L. Watters, its sole stockholder.  The Company issued to Mr. Watters
1,750,000 shares of its common stock in exchange for the common stock of Trumps.
This exchange,  which resulted in Trumps  becoming a wholly owned  subsidiary of
the Company,  was  consummated in February 1995. The  transaction was entered as
part of a  corporate  reorganization,  the  result of which  was to  create  the
Company as a holding company for Trumps.

         In August,  1995, the Board of Directors of the Company  authorized the
acquisition from Mr. Watters of all of the capital stock of Tantric Enterprises,
Inc., Tantra Dance, Inc., and Tantra Parking, Inc. (collectively  "Tantra"). The
Company  issued to Mr. Watters 50,000 shares of its common stock in exchange for
the stock of Tantra. The exchange was consummated in September, 1995. The Tantra
companies  own and operate  Tantra,  a  non-sexually  oriented  discotheque  and
billiard  club in Houston,  Texas.  The Board of Directors  determined  that the
combination of the

                                       22
<PAGE>

business  operations  of Tantra and the Company will create a synergy which will
enhance the profitability of both businesses.  Moreover,  the diversification of
the Company's  operations  into the business of Tantra is anticipated to enhance
the public image of the Company.  The Board of Directors has received an opinion
of an independent  third-party  appraiser that the terms of the  transaction are
fair and  reasonable to the Company and are at least as favorable to the Company
as would be the case between unrelated parties. Mr. Watters had no cost basis in
the stock of Tantra.

         As of September 30, 1993, SRD Vending Company,  Inc. ("SRD"), a company
wholly-owned by Robert L. Watters, had advanced the Company $60,501. This amount
was increased during the Company's 1994 fiscal year to $69,722. During November,
1994, the Company converted these advances, which were demand obligations of the
Company,  to a  promissory  note in favor of SRD in the amount of  $69,722.  The
promissory  note,  which bears interest at the rate of 9% per annum,  was due in
full on November 30, 1995, at which time it was paid.

         SRD has provided  and  maintained  the  cigarette  vending  machines at
Rick's  Cabaret  since  1986.  SRD's  revenues  are  generated  from the sale of
cigarettes from vending machines  located at Rick's Cabaret.  SRD is responsible
(i) to service  the vending  machines  to ensure  that they are in good  working
order and (ii) to  maintain  an  adequate  supply of  cigarettes  in the vending
machines.  The Company has agreed with SRD that the revenues  received  from the
vending  machines  after  December  31, 1994 will be split  equally  between the
Company and SRD.  During the  Company's  fiscal years ending 1997 and 1996,  SRD
received less than $25,000 per year from the vending machines.

         During the  Company's  fiscal years  ending 1997 and 1996,  the Company
paid $20,090 and $17,179,  respectively,  for accounting  services to accounting
firms in which Mr. Mitchell, a director of the Company, was a principal.

ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

Exhibit No.   Identification of Exhibit
              -------------------------

27.1-         Financial Data Schedule


--------------------
(b)      Reports on Form 8-K.

         No reports on Form 8-K were filed during the three months ended
September 30, 1997.

                                       23
<PAGE>

                                   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 the 30 day of December, 1997.

                                  RICK'S CABARET INTERNATIONAL, INC.


                                  By: /s/ ROBERT L. WATTERS
                                     ----------------------------------
                                     Robert L. Watters, Chairman of the
                                     Board, Chief Executive Officer and
                                     Chief 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:

<TABLE>
<CAPTION>

SIGNATURE                                             TITLE                                      DATE
---------                                             -----                                      ----


<S>                                       <C>                                        <C>
/s/ ROBERT L. WATTERS                     Chairman of the Board,                     December 30, 1997
-------------------------------           Chief Executive Officer,
    Robert L. Watters                     Chief Accounting Officer,
                                          and Director

/s/ ERICH NORTON WHITE                    Director and Executive                     December 30, 1997
--------------------------------
    Erich Norton White                    Vice President

/s/ SCOTT C. MITCHELL                     Director                                   December 30, 1997
--------------------------------
    Scott C. Mitchell

/s/ MARTIN SAGE                           Director                                   December 30, 1997
--------------------------------
    Martin Sage
</TABLE>

                                                        24
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES

                          AUDITED FINANCIAL INFORMATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          PAGE
                                                                          ----

Independent Auditor's Report..............................................F-2

Consolidated Balance Sheets for the years ended
         September 30, 1997 and 1996......................................F-3

Consolidated Statements of Operations for the years ended
         September 30, 1997 and 1996......................................F-4

Consolidated Statements of Changes in Stockholders' Equity
         for the years ended September 30, 1997 and 1996..................F-5

Consolidated Statements of Cash Flows for the years ended
         September 30, 1997 and 1996......................................F-6

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


<PAGE>

                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
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, 1997 and 1996, and the
related consolidated  statements of operations,  changes in stockholders' equity
and cash flows for the years then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  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, 1997 and 1996,
and the  results  of their  operations  and their  cash flows for the years then
ended in conformity with generally accepted accounting principles.

As  discussed in Note 2 to the  financial  statements,  the Company  changed its
method of accounting for preopening costs in the year ended September 30, 1997.

                                           /s/ JACKSON & RHODES P.C.
                                           -------------------------
                                               Jackson & Rhodes P.C.


Dallas, Texas
December 18, 1997


                                      F-2
<PAGE>

               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>

                                     ASSETS

                                                                      1997           1996
                                                                  -----------    -----------
<S>                                                               <C>            <C>        
Current assets:
  Cash                                                            $   357,410    $ 3,150,003
  Accounts receivable                                                  29,695         73,531
  Inventories                                                          61,953         47,620
  Prepaid expenses                                                     57,413         47,735
  Income taxes receivable                                                  --        172,198
  Land held for sale (Note 9)                                         815,652             --
                                                                  -----------    -----------
       Total current assets                                         1,322,123      3,491,087
                                                                  -----------    -----------
Property and equipment:
  Buildings, land and leasehold improvements                        5,285,119      2,225,710
  Furniture and equipment                                           1,188,800        742,320
                                                                  -----------    -----------
                                                                    6,473,919      2,968,030
  Less accumulated depreciation                                      (813,853)      (554,338)
                                                                  -----------    -----------
                                                                    5,660,066      2,413,692
                                                                  -----------    -----------
Other assets                                                          165,504        228,062
                                                                  -----------    -----------
                                                                  $ 7,147,693    $ 6,132,841
                                                                  ===========    ===========

                           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long-term debt (Note 3)                      $   398,798    $   153,677
  Accounts payable - trade (Note 5)                                   634,046        336,253
  Accrued expenses                                                    166,365        245,264
  Income taxes payable                                                 15,572             --
                                                                  -----------    -----------
       Total current liabilities                                    1,214,781        735,194

Long-term debt, less current portion (Note 3)                       1,754,175         77,826
                                                                  -----------    -----------
           Total liabilities                                        2,968,956        813,020
                                                                  -----------    -----------

Commitments and contingencies (Note 6)                                     --             --

Stockholders' equity (Notes 1 and 9):
       Preferred stock - $.10 par, authorized
            1,000,000 shares; none issued                                  --             --
       Common stock - $.01 par, authorized
            15,000,000 shares; issued 4,114,922 and 4,068,077          41,149         40,681
       Additional paid-in capital                                   5,940,306      5,788,528
       Retained earnings (deficit)                                 (1,802,718)      (509,388)
                                                                  -----------    -----------
            Total stockholders' equity                              4,178,737      5,319,821
                                                                  -----------    -----------
                                                                  $ 7,147,693    $ 6,132,841
                                                                  ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3
<PAGE>
<TABLE>
<CAPTION>

               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996

                                                               1997           1996
                                                           -----------    -----------
<S>                                                        <C>            <C>        
Revenues:
      Sales of alcoholic beverages                         $ 3,192,356    $ 2,252,714
      Sales of food                                            563,281        274,577
      Service revenues                                       2,184,002      1,742,890
      Other                                                    337,940        360,117
                                                           -----------    -----------
                                                             6,277,579      4,630,298
                                                           -----------    -----------
Operating expenses:
      Cost of goods sold                                     1,197,416        753,216
      Salaries and wages                                     2,123,131      1,497,731
      Other general and administrative:
           Taxes and permits                                   705,516        514,799
           Charge card fees                                    122,324         81,373
           Rent                                                341,509        305,761
           Legal and accounting                                307,038        332,137
           Advertising                                         774,548        533,418
           Other                                             1,775,240      1,509,108
                                                           -----------    -----------
                                                             7,346,722      5,527,543
                                                           -----------    -----------
Loss from operations                                        (1,069,143)      (897,245)

      Interest expense                                         160,784         41,369
                                                           -----------    -----------

Loss before income taxes and cumulative effect
      of accounting change                                  (1,229,927)      (938,614)

      Income taxes (benefit) (Note 4)                          (87,735)      (230,000)
                                                           -----------    -----------
Loss before cumulative effect of accounting change          (1,142,192)      (708,614)

Cumulative effect of change in accounting for preopening
      costs - no income tax effect                            (151,138)            --
                                                           -----------    -----------
Net loss                                                   $(1,293,330)   $  (708,614)
                                                           ===========    ===========
Loss per common share:
      Before cumulative effect of change in accounting
           for preopening costs                                  (0.30)         (0.20)
      Effect of accounting change                                (0.03)            --
                                                           -----------    -----------
Loss per common share                                      $     (0.33)   $     (0.20)
                                                           ===========    ===========
Weighted average shares outstanding                          4,114,922      3,535,081
                                                           ===========    ===========

Proforma amounts assuming the new accounting method
    is applied retroactively:
          Net loss                                         $(1,217,809)   $  (859,752)
                                                           ===========    ===========
          Net loss per share                               $     (0.30)   $     (0.24)
                                                           ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-4


<PAGE>
<TABLE>
<CAPTION>
                                         RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                           FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996


                                                     Common Stock
                                            -----------------------------      Additional          Retained
                                               Number of                        Paid-in            Earnings
                                                Shares          Amount          Capital            (Deficit)           Total
                                            -------------    ------------    --------------    ----------------   --------------

<S>                                             <C>          <C>             <C>               <C>                <C>           
 Balance, September 30, 1995                    1,800,000    $     18,000    $           --    $      199,226     $      217,226

 Sale of common stock for cash,
    net of offering costs of $1,365,041         2,218,077          22,181         5,539,028                --          5,561,209

 Common stock issued for services                  50,000             500           249,500                --            250,000

 Net income (loss)                                     --              --                --          (708,614)          (708,614)
                                            -------------    ------------    --------------    --------------     --------------

 Balance, September 30, 1996                    4,068,077          40,681         5,788,528          (509,388)         5,319,821

 Sale of common stock for cash                     46,845             468           151,778                --            152,246

 Net income (loss)                                     --              --                --        (1,293,330)        (1,293,330)
                                            -------------    ------------    --------------    --------------     --------------
 Balance, September 30, 1997                    4,114,922    $     41,149    $    5,940,306    $   (1,802,718)    $   $4,178,737
                                            =============    ============    ==============    ==============     ==============
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       F-5
<PAGE>
<TABLE>
<CAPTION>

               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended September 30, 1997 and 1996

                                                          1997           1996
                                                      -----------    -----------
<S>                                                   <C>            <C>         
Net loss                                              $(1,293,330)   $  (708,614)

Adjustments to reconcile net loss to net
 cash used by operating activities:
    Depreciation and amortization                         311,464        145,621
    Cumulative effect of accounting change                151,138             --
    Common stock issued for services                           --        250,000
    Changes in assets and liabilities:
      Accounts receivable                                  43,836        (73,531)
      Inventories                                         (14,333)       (16,008)
      Prepaid expenses and other assets                  (150,207)      (185,375)
      Accounts payable and accrued liabilities            218,894        (17,248)
      Income taxes payable/receivable                     187,770       (399,693)
                                                      -----------    -----------
        Net cash used by operating activities            (544,768)    (1,004,848)
                                                      -----------    -----------
Cash flows from investing activities:
    Additions to property and equipment                (4,321,541)    (1,816,681)
                                                      -----------    -----------

Cash flows from financing activities:
    Common stock issued, less offering costs              152,246      5,561,209
    Increase in long-term debt                          2,070,332             --
    Payments on long-term debt                           (148,862)      (174,469)
    (Increase) decrease in deferred financing costs            --        389,680
                                                      -----------    -----------
        Net cash provided by financing activities       2,073,716      5,776,420
                                                      -----------    -----------
Net increase in cash                                   (2,792,593)     2,954,891
Cash at beginning of year                               3,150,003        195,112
                                                      -----------    -----------
Cash at end of year                                   $   357,410    $ 3,150,003
                                                      ===========    ===========

Cash paid during the period for:
    Interest                                          $   151,338    $    35,301
                                                      ===========    ===========
    Income taxes                                      $        --    $   186,857
                                                      ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6

<PAGE>

               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1997 AND 1996


1.    ORGANIZATION

      Rick's Cabaret International,  Inc. (the "Company") was formed in December
      1994,  to  acquire  all  the  outstanding  common  stock  of  Trumps  Inc.
      ("Trumps"),  a company owned 100% by the Company's sole  stockholder.  The
      Company owns a premiere adult nightclub offering topless entertainment and
      restaurant and bar operations and a non-sexually  oriented bar in Houston,
      Texas.  The Company also opened another  premier adult nightclub in leased
      facilities on Bourbon Street in New Orleans, Louisiana in January 1997.

      On  October  13,  1995,  the  Company  completed  its public  offering  of
      1,840,000  shares of common  stock.  The  proceeds  from the sale of stock
      amounted  to  approximately  $4,270,000  net  of  underwriting  discounts,
      commissions and expenses of the offering.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BASIS OF PRESENTATION

      The Company's  financial  statements have been presented on the basis that
      it is a going concern,  which  contemplates  the realization of assets and
      the  satisfaction  of  liabilities  in the normal course of business.  The
      Company is reporting net losses of  $1,293,330  and $708,614 for the years
      ended  September  30,  1997 and 1996 and net cash  resources  were used in
      operating  activities  for  each  year.  The  following  is a  summary  of
      management's  plan to raise  capital  and  generate  additional  operating
      funds.

      Management  believes  it has  implemented  plans that will ensure that the
      Company will become  profitable in fiscal 1998,  including taking steps to
      restructure  management   compensation  to  reduce  the  salary  costs  of
      management  and reorganize  the  accounting  function to more  effectively
      manage the business. Additionally, steps have already been taken to reduce
      advertising  expenditures  by over  $400,000  in fiscal  1998  compared to
      fiscal 1997. New Orleans  represented  the first expansion for the Company
      outside its original market of Houston,  Texas and as a result the opening
      expenses for New Orleans  reflected the Company's  determination to make a
      market impact through widespread advertising. In Minneapolis (see Note 9),
      by comparison,  the Company will  capitalize on its high traffic  location
      and on the relative  lack of  competition  instead of spending  heavily on
      media  advertising.  Extensive use will be made in opening the Minneapolis
      location on media  materials  developed for the opening of the New Orleans
      location.  Emphasis  will  continue to be placed on  reduction  of cost of
      goods sold by setting and monitoring management goals at each location. If
      needed,   the  Company  has  also   developed   numerous   contacts   with
      professionals  who have  expertise  in  raising  capital  through  private
      placement  of  securities   and  the  Company  will  look  to  the  public
      marketplace to find the resources to continue its planned expansion.

                                      F-7
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      PRINCIPLES OF CONSOLIDATION

      The consolidated  financial statements include the accounts of the Company
      and its wholly-owned  subsidiaries.  All significant intercompany balances
      and transactions are eliminated in consolidation.

      NET LOSS PER COMMON SHARE

      Net loss per  common  share is  computed  by  dividing  net  income by the
      weighted average number of shares outstanding during the years.

      USE OF ESTIMATES AND ASSUMPTIONS

      Preparation  of the Company's  financial  statements  in  conformity  with
      generally  accepted  accounting  principles  requires  management  to make
      estimates  and  assumptions  that  affect  certain  reported  amounts  and
      disclosures.   Accordingly,   actual   results  could  differ  from  those
      estimates.

      INVENTORIES

      Inventories,  consisting  principally  of liquor  and food  products,  are
      stated at the lower of cost or market (first-in, first-out method).

      CASH EQUIVALENTS

      For purposes of the  statement of cash flows,  the Company  considers  all
      highly  liquid debt  instruments  purchased  with an original  maturity of
      three months or less to be cash equivalents.

      PROPERTY AND EQUIPMENT

      Property and equipment are stated at cost.  Cost of property  renewals and
      betterments are capitalized; costs of property maintenance and repairs are
      charged against operations as incurred.

      Depreciation is computed using the straight-line method over the estimated
      useful lives of the individual assets, as follows:

              Building and improvements                         31 years
              Equipment                                        5-7 years
              Leasehold improvements                            40 years

      REVENUE RECOGNITION

      The Company recognizes all revenues at point-of-sale upon receipt of cash,
      check or  charge  sale.  This  includes  VIP Room  Memberships,  since the
      memberships are non-refundable and the Company has no material  obligation
      for future performance.

                                      F-8
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      INCOME TAXES

      The Company  accounts for its income taxes in accordance with Statement of
      Financial  Accounting  Standards  No.  109,  which  reflects  an asset and
      liability  approach in accounting  for income taxes.  The objective of the
      asset and  liability  method  is to  establish  deferred  tax  assets  and
      liabilities for the temporary  differences between the financial reporting
      basis and the tax basis of the Company's assets and liabilities at enacted
      tax rates  expected  to be in effect  when such  amounts  are  realized or
      settled.

      CHANGE IN ACCOUNTING PRINCIPLE - PREOPENING COSTS

      The Company has changed its method of accounting for preopening  costs for
      new locations from the deferral method to directly  expensing the costs in
      the  period in which  they were  incurred.  Management  believes  that the
      direct  expense  method is preferable  because it does not subject  future
      periods to losses  resulting from estimates of future  recoverability  and
      more reasonably matches costs with revenues.

      The change in accounting  principle resulted in an increase in net loss of
      $151,138 for the year ended September 30, 1997,  reflecting the cumulative
      effect of this  change for the  periods  prior to 1997.  The effect of the
      change on the net loss before  cumulative  effect of the accounting change
      is an increase of approximately $312,000.

      ADVERTISING COSTS

      During 1997, the Company  deferred costs of  approximately  $101,000 which
      represents  expenditures  incurred to develop a new  advertising  campaign
      which will be used in other  locations  during the next  eighteen  months.
      These costs are for logo design,  artwork and ad layouts,  a  photographic
      library and the associated  creative fees. These costs are being amortized
      over  eighteen  months.  Amortization  amounted to  approximately  $52,000
      during the year ended September 30, 1997.

                                      F-9
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.    LONG-TERM DEBT
<TABLE>
<CAPTION>

      Following is a summary of long-term debt at September 30:
                                                                               1997      1996
                                                                              -------   -------
<S>                                                                           <C>       <C>    
       Note payable to a bank, due in monthly installments
       of $1,800, including interest at 10%, matures October
       1996, secured by the Company's land and building                        $81,825   $90,045

       Notes payable to affiliated companies owned by the
       Company's sole stockholder, interest at 9% and
       principal due November 30, 1996                                              --    21,294

       Note payable to a bank, payable $1,000 per month plus interest at the
       prime rate plus 1%, matures December 29, 1996,  collateralized by the
       Company's accounts receivable, inventory, furniture, fixtures
       and equipment and a second lien on real estate                            8,000    20,000
</TABLE>

<TABLE>
<CAPTION>
                                                                                        1997           1996
                                                                                     ----------     ----------
<S>                                                                                      <C>            <C>   
      Note payable to a bank, payable $1,500 per month plus interest at the
      prime rate plus 1%, matures October 28, 1996,  collateralized  by the
      Company's accounts  receivable,  inventory,  furniture,  fixtures and
      equipment and a second lien on real estate                                    $        --    $    15,252

      9% note payable to individuals,  payable $1,203 per month,  including
      interest,  until  maturity on January 15, 2000,  collateralized  by a
      first lien on real estate                                                          77,825         84,912

      Note payable to a bank,  payable $10,000 per month,  plus interest at
      9%,  collateralized  by all assets of the Company's  subsidiary,  RCI
      Entertainment Louisiana, Inc.                                                     231,904             --

      Note payable to a bank, payable $9,919 per month,  including interest
      at  8.5%,  matures July 2002,  collateralized  by  all  assets of the
       Company's subsidiary, RCI Entertainment Louisiana, Inc.                          793,159             --

      Note payable to a bank, payable $13,434 per month, including interest
      at the prime rate plus 1%, matures December 2001,  collateralized  by
      land and building in Houston, Texas                                               960,260             --
                                                                                    -----------    -----------
                                                                                      2,152,973        231,503
      Less current portion                                                             (398,798)      (153,677)
                                                                                    -----------    -----------
      Long-term debt                                                                $ 1,754,175    $    77,826
                                                                                    ===========    ===========
</TABLE>

                                      F-10
<PAGE>

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

3.   LONG-TERM DEBT (CONTINUED)

     Substantially  all the  Company's  assets  are  pledged to secure the above
     debt.  The prime rate was 8.5% at  September  30, 1997.  Following  are the
     maturities of long-term debt for the years ending September 30:

                  1998                           $  398,798
                  1999                              307,934
                  2000                              196,395
                  2001                              196,761
                  2002                            1,041,313
                  Thereafter                         11,772

4.   INCOME TAXES

     Income tax expense (benefit) consisted of current taxes for 1997 and 1996.

     Following is a reconciliation of income taxes (benefit) at the U.S. Federal
     tax  rate to the  amounts  recorded  by the  Company  for the  years  ended
     September 30:
<TABLE>
<CAPTION>
                                                                                     1997              1996
                                                                                  ----------        ---------
<S>                                                                                <C>              <C>       
         Tax credit on loss before income
             taxes at the statutory rate                                           $(418,000)       $(319,000)
         Separate return limitation - unavailable
             loss carrybacks                                                         330,265           89,000
                                                                                  ----------        ---------
                                                                                  $  (87,735)       $(230,000)
                                                                                  ==========        =========
</TABLE>

     The  components of the net deferred tax  asset/liability  are as follows at
     September 30, 1997 and 1996:
<TABLE>
<CAPTION>

                                                                                     1997              1996
                                                                                  ----------        ---------
<S>                                                                                <C>              <C>       
              Operating loss carryforwards                                        $ (476,000)      $ (107,000)
              Deductible preopening costs                                                 --           65,000
              Deferred tax asset valuation allowance                                 476,000           42,000
                                                                                 -----------       ----------
                                                                                  $       --       $       --
                                                                                 ===========       ==========
</TABLE>

     For  tax  purposes,  the  Company  has a net  operating  loss  carryforward
     amounting to approximately  $1,400,000 which will expire,  if not utilized,
     in 2012.

                                      F-11
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   RELATED PARTY TRANSACTIONS

     As of September 30, 1994,  SRD Vending  Company,  Inc.  ("SRD"),  a company
     wholly-owned  by Mr.  Watters,  had  advanced the Company  $69,722.  During
     November  1994, the Company  converted  these  advances,  which were demand
     obligations  of the  Company,  to  promissory  notes in favor of SRD in the
     amount of $69,722. The promissory note, which bears interest at the rate of
     9% per annum,  was due in full on  November  30,  1996 at which time it was
     paid.

     SRD has provided and  maintained the cigarette  vending  machines at Rick's
     Cabaret since 1986.  During 1997 and 1996,  The Company  received less than
     $25,000 each year from the vending  machines.  The Company  agreed with SRD
     that any revenues  received from the vending  machines  after  December 31,
     1994 would be split equally between the Company and SRD.

     During 1997 and 1996,  the Company paid $20,090 and $17,179,  respectively,
     for  accounting  services to an accounting  firm in which a director of the
     Company was a principal.

6.   COMMITMENTS AND CONTINGENCIES

     LEASES

     The  Company  formerly  leased its Houston  nightclub  space from a company
     whose  ownership  was subject to  litigation.  Ownership was claimed by the
     Company's sole  stockholder,  Mr. Robert  Watters,  and by a former Company
     stockholder.  Lease  payments were equal to the larger of $10,000 per month
     or 5% of gross receipts per month.  The lease expired in February 1996, and
     the Company began leasing the space on a  month-to-month  basis.  The lease
     provided that the Company was obligated to pay for any  maintenance  to the
     premises,  to maintain  adequate  insurance  on the building and to pay all
     utilities and taxes. Rental expense on the building amounted to $63,000 and
     $173,776 for the years ended September 30, 1997 and 1996, respectively. The
     lawsuit was settled in 1996, resulting in the former stockholder owning the
     building.   The  Company  has   purchased  the  property  from  the  former
     stockholder (see below).

     The Company  has entered  into an  operating  lease for a nightclub  in New
     Orleans,  Louisiana.  The 39 1/2 year lease  commenced in May 1996 and is a
     triple net lease with the tenant paying taxes,  maintenance  and insurance.
     The lease also requires certain contingent rentals based on revenues at the
     nightclub.  Following is a schedule of minimum lease payments for the years
     ending September 30:

              1998                                         $   300,000
              1999                                             300,000
              2000                                             300,000
              2001                                             300,000
              2002                                             300,000
              Thereafter                                     8,315,000

     Rent expense amounted to approximately  $214,000 and $306,000 for the years
     ended September 30, 1997 and 1996, respectively.

                                      F-12
<PAGE>

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


6.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

     CONCENTRATION OF CREDIT RISK

     The  Company  invests its cash and  certificates  of deposit  primarily  in
     deposits  with major  banks.  Certain  deposits  are in excess of federally
     insured limits.  The Company has not incurred losses related to its cash on
     deposit with banks.

     LITIGATION

     Included in accounts  payable at  September  30, 1997 and 1996 is a $30,000
     and $150,000 liability,  respectively,  to a former stockholder under terms
     of a settlement agreement with the former stockholder.

     In  1991,  Mr.  Watters  and a  former  stockholder  of  the  Company  (the
     "Plaintiffs")  filed suit against another former stockholder of the Company
     (the "Defendant"). The suit sought to compel the Defendant to convey to the
     Plaintiffs all of its ownership interest in two entities,  one of which, Zu
     Corporation,  owns the land where  Rick's is located and which is leased by
     the  Company.  In October  1996,  after  years of trials and  appeals,  the
     Defendant  and the Company  settled the case and the Company  agreed to buy
     the  property  for  $2,000,000.  The  closing on the  property  occurred in
     December 1996.

     In 1989,  one of the former  stockholders  of the Company was sued over his
     ownership interest in the Company.  Mr. Watters and the Company were joined
     in the litigation based on allegations that they had improperly transferred
     certain assets to the Company from another  corporation that had previously
     operated  Rick's.  In 1992,  Summary  Judgment was rendered in favor of the
     Company  and Mr.  Watters.  Subsequent  to an  appeal,  the Texas  Court of
     Appeals  remanded the case to the trial court.  The Company and Mr. Watters
     mediated  this  matter and entered  into a  settlement  agreement  with the
     plaintiff.  The settlement  agreement provided that the litigation would be
     dismissed,  with  prejudice,  as to the Company,  Mr. Watters and all other
     entities with which Mr. Watters is or was associated.  In consequence,  the
     action was  satisfactorily  settled as to all parties,  and all  defendants
     have  now  been  dismissed  with   prejudice.   The  lawsuit  is  therefore
     terminated, and all judgment dismissing same is now final.

     A former  Company  stockholder  has sued the  Company  and Mr.  Watters for
     alleged  breaches  of an  Agreement  entered  into in April  1993 among the
     stockholder,  the Company and Mr. Watters. The stockholder alleges that Mr.
     Watters and the Company have breached this Agreement.  The Company believes
     that it has fully complied with its obligations under this

                                      F-13
<PAGE>

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


6.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

     LITIGATION (CONTINUED)

     Agreement.  The litigation is presently in the discovery stage. The Company
     believes, after consultation with counsel, that it has substantial defenses
     to the  claims  being  asserted  against  it and that the risk of  material
     financial exposure to the Company is unlikely.

     In March  1997,  Classic  Affairs  and Robert  Sabes  initiated  litigation
     against the Company in  Minneapolis,  Minnesota.  The suit alleges that the
     Company and Mr. Watters violated a  Non-Competition  Agreement which was to
     have been executed upon the closing of the  acquisition  of Shiek's  Palace
     Royale, which never took place.

     Mr. Sabes  ("Sabes")  and Classic  Affairs,  Inc.  ("Classic  Affairs") are
     seeking an order from the Court that the covenant not to compete is binding
     upon the Company and Mr.  Watters  even though the  acquisition  never took
     place, as well as an order form  unspecified  damages for the breach of the
     agreement. The Company and Mr. Watters have answered the original complaint
     and have denied all of the  allegations  contained  therein.  Further,  the
     Company has filed a Counterclaim against Sabes and Classic Affairs alleging
     the Sabes and Classic  Affairs are seeking the interfere with the Company's
     right to purchase another adult entertainment facility in Minneapolis.  The
     Company believes, after consultation with counsel, that the claims asserted
     by Sabes and Classic Affairs are without merit and are subject to defenses.
     The Company  intends to defend this suit against the claims asserted and to
     pursue its counterclaim against Sabes and Classic Affairs.

     The  Company is also the  subject  of other  routine  legal  matters in the
     ordinary course of business.

     The Company  does not believe  that the  ultimate  resolution  of the above
     matters will have a material impact on the Company's  financial position or
     results of operations.

     SEXUALLY ORIENTED BUSINESS ORDINANCE OF HOUSTON, TEXAS

     In  January,  1997,  the  City  Council  of the  City of  Houston  passed a
     comprehensive  new  ordinance  regulating  the  location of and the conduct
     within Sexually Oriented  Businesses.  The new Ordinance,  which is pending
     judicial   review,   establishes  new  distances  that  Sexually   Oriented
     Businesses  may be  located to  schools,  churches,  playgrounds  and other
     sexually  oriented  businesses.  There are no  provisions  in the Ordinance
     exempting previously permitted sexually oriented businesses from the effect
     of the new  Ordinance.  The Company was informed that Rick's Cabaret at its
     location  at 3113  Bering  Drive  failed  to meet the  requirements  of the
     Ordinance and accordingly the renewal of the Company's  Business License at
     that location has been denied.

                                      F-14
<PAGE>

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


6.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

     SEXUALLY ORIENTED BUSINESS ORDINANCE OF HOUSTON, TEXAS (CONTINUED)

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

     The Company filed a written request with the City of Houston  requesting an
     extension of time during which the Company may continue  operations  at its
     original location under the amortization period provisions of the Ordinance
     since  the  Company  was  unable  to  recoup  its  investment  prior to the
     effective date of the Ordinance.  An administrative hearing (the "Hearing")
     was held by the City of Houston to determine the  appropriate  amortization
     period to be granted to the Company. At the Hearing,  the Company requested
     that it be granted an amortization period at its original location equal to
     forty-five years from the effective date of the Ordinance.  The Company has
     been granted an amortization  period through July 1998. The Company has the
     right to appeal any decision of the Hearing  official to the district court
     in the State of Texas.

     On May 12, 1997, the city of Houston agreed to defer  implementation of the
     Ordinance until the constitutionality of the entire Ordinance is decided by
     court  trial.  There  are  other  provisions  in  the  ordinance,  such  as
     provisions  governing the level of lighting in sexually oriented  business,
     the distance  between a customer and dancer while the dancer is  performing
     in a state of undress and  provisions  regarding  the  licensing of dancers
     which may be  detrimental to the conduct of business by the Company and all
     of  these  provisions  also  will  be the  subject  of the  above-mentioned
     litigation.

     No  assurance  can be  given as to the  likelihood  of the  success  of any
     litigation  filed  against the City of Houston,  but in the event that such
     litigation is  unsuccessful,  it is likely that the Company will be able to
     take  the  benefit  of an  amortization  provision  contained  in  the  new
     ordinance  designed to allow recovery of a business's  investment and which
     will allow the Company to  continue  in  business  at its present  location
     during the amortization period.

                                      F-15
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  following   disclosure  of  the  estimated  fair  value  of  financial
     instruments is made in accordance  with the  requirements  of SFAS No. 107,
     Disclosures about Fair Value of Financial  Instruments.  The estimated fair
     value amounts have been determined by the Company,  using available  market
     information and appropriate valuation methodologies.

     The fair value of financial  instruments  classified  as current  assets or
     liabilities  including  cash and cash  equivalents  and notes and  accounts
     payable  approximate  carrying value due to the short-term  maturity of the
     instruments.  The fair value of short-term and long-term  debt  approximate
     carrying value base on their  effective  interest rates compared to current
     market rates.

     OTHER

     The Company presently has a three year employment  agreement with Robert L.
     Watters (the  "Agreement")  to serve as its President  and Chief  Executive
     Officer.  The Agreement,  which extends through December 31, 2000, provides
     for an annual base salary of  $300,000.  The  Agreement  also allows for an
     annual bonus,  at the  discretion of the Board of Directors  (excluding Mr.
     Watters), based upon the financial performance, including evaluation of the
     income and  earnings of the Company  during the year.  The  Agreement  also
     provides for  participation  in all benefit plans maintained by the Company
     for salaried employees. The Agreement contains a confidentiality  provision
     and an  agreement  by Mr.  Watters not to compete with the Company upon the
     expiration of the Agreement.

7.   EMPLOYEE STOCK OPTION PLAN

     The Company has adopted a Stock Option Plan (the "Plan") for  employees and
     directors. The options granted under this Plan maybe either Incentive Stock
     Options,  as that term is defined in Section 422A of the  Internal  Revenue
     Code of 1986, as amended, or nonstatutory options taxed under Section 83 of
     the Internal Revenue Code of 1986, as amended.  The Plan is 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 the
     participants  in the Plan, 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 Plan. A total of 300,000
     shares may be optioned and sold under the Company's Stock Option Plan.

                                      F-16
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   EMPLOYEE STOCK OPTION PLAN (CONTINUED)

     During the year ended September 30, 1997 and 1996,  options were granted as
     follows:

                                                   1997                1996
                                                 -------             -------

        Outstanding at beginning of year         105,000                  --
        Granted                                       --             105,000
        Exercised                                     --                  --
                                                 -------             -------
        Outstanding at end of year               105,000             105,000
                                                 -------             -------
        Exercisable at end of year                    --                  --
                                                 -------             -------
        Exercise price per share          $3.00 to $4.75      $3.00 to $4.75

     SFAS 123

     In October 1995, the Financial  Accounting  Standards Board ("FASB") issued
     SFAS 123,  "Accounting  for Stock-Based  Compensation."  SFAS 123 defines a
     fair value  based  method of  accounting  for an employee  stock  option or
     similar equity  instrument and encourages all entities to adopt that method
     of accounting for all of their employee stock compensation plans. Under the
     fair value based  method,  compensation  cost is measured at the grant date
     based on the value of the award. However, SFAS 123 also allows an entity to
     continue to measure  compensation  cost for those plans using the intrinsic
     value  based  method  of  accounting  prescribed  by APB  Opinion  No.  25,
     "Accounting for Stock Issued to Employees."

     Under the intrinsic value based method, compensation cost is the excess, if
     any,  of the  quoted  market  price of the  stock  at  grant  date or other
     measurement date over the amount an employee must pay to acquire the stock.
     Entities electing to remain with the accounting in Opinion 25 must make pro
     forma disclosures of net income and earnings per share as if the fair value
     based  method of  accounting  had been  applied.  The pro forma  disclosure
     requirements  are  effective  for  financial  statements  for fiscal  years
     beginning  after  December  15,  1995.  The  Company has elected to measure
     compensation cost,  including options issued, under Opinion 25. The Company
     issued no options  during the year ended  September  30, 1997.  The Company
     made no charges to expense  for the year  ended  September  30,  1996 under
     Opinion 25.

                                      F-17
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   EMPLOYEE STOCK OPTION PLAN (CONTINUED)

     Pro forma  disclosures  as  required  by SFAS 123 for the fiscal year ended
     September 30, 1996 are as follows:


              Pro forma net loss                           $   (1,397,007)
                                                           --------------
              Pro forma net loss per share                 $         (.34)
                                                           --------------


     The fair  value of the  awards  was  estimated  at the grant  date  using a
     Black-Scholes  option  pricing  model with the following  weighted  average
     assumptions for 1996: risk-free interest rate of 5.9%; volatility factor of
     73%; and an expected life of the awards of two years.  The weighted average
     fair value of stock options for the year ended September 30, 1996 was $.99.

8.   STOCKHOLDERS' EQUITY

     During the year ended  September 30, 1996, the Company issued 50,000 shares
     valued at $250,000 to an advertising and public relations firm for services
     rendered.

     The Company has outstanding 1,160,000 warrants to purchase its common stock
     as a result  of its  public  offering.  The  warrants  are  exercisable  as
     follows:  920,000 at $3.00 per share until October  1998,  160,000 at $4.35
     per share until  October  2000 and 80,000 at $4.35 per share until  October
     1998.

9.   SUBSEQUENT EVENTS

     A facility in downtown  Minneapolis,  Minnesota  was  purchased in November
     1997,   and  is  currently   being   renovated.   The  facility  will  cost
     approximately  $3,000,000:  $200,000  cash at  closing,  90,000  shares  of
     Company common stock, a 10% note payable of $200,000 due in eighteen months
     and  the  balance  of   $2,500,000   in  a  10%  note  with  a  twenty-year
     amortization,  maturing  in  2007.  The  Company  anticipates  opening  the
     Minneapolis location for business in January 1998. The Minneapolis facility
     had previously been operated as an adult entertainment venue.

     In November  1997,  the Company sold certain land held for sale in Houston,
     Texas for  approximately  $873,500.  The Company  paid  $302,000 of debt in
     connection  with the sale  and  received  $470,000  in  cash.  The  Company
     recorded a nominal gain on the transaction.

                                      F-18
<PAGE>
               RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.  ACCOUNTING DEVELOPMENTS

     SFAS 128

     In February  1997,  FASB issued SFAS 128,  "Earnings  per Share."  SFAS 128
     requires all companies to present  "basic"  earnings per share ("EPS") and,
     for companies with a complex capital structure, "diluted" EPS. Basic EPS is
     computed by dividing net income  available for common  shareholders  by the
     weighted-average  number of common  shares  outstanding  during the period.
     Diluted EPS is computed by dividing  income  (adjusted for preferred  stock
     dividends and any potential income or loss from convertible  securities) by
     the weighted-average  number of common shares outstanding during the period
     plus  the  number  of  additional   common  shares  that  would  have  been
     outstanding if any dilutive potential common stock had been issued. Certain
     disclosures  regarding the  computation are also required by the statement.
     SFAS 128 is effective for financial  statements  issued for periods  ending
     after  December 15, 1997. The statement is not allowed to be applied early;
     however,  pro  forma  EPS  amounts  computed  under  SFAS 128  prior to its
     adoption  may be  presented  in notes to the  financial  statements.  After
     adopting SFAS 128,  companies must restate all prior-period EPS information
     presented. Pro forma basic net loss per share each year is equal to the net
     loss per  share  reported  in the  accompanying  statement  of  operations.
     Diluted net loss per share is not  applicable  since the Company has losses
     in each year and increasing the shares  outstanding would decrease loss per
     share.


                                      F-19