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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, 1996

                                       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. [ ]

         Issuer's revenues for the year ended September 30, 1996 were
$4,630,298. The aggregate market value of Common Stock held by non-affiliates
of the registrant at December 20, 1996, based upon the last reported sales
prices on Nasdaq, was $9,781,082. As of December 20, 1996, there were 4,068,077
shares of Common Stock outstanding.

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                               TABLE OF CONTENTS


<TABLE>
<S>     <C>               <C>                                                                                          <C>
PART I
         Item 1.          Business  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3

         Item 2.          Properties  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

         Item 3.          Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10

         Item 4.          Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . .  11


PART II

         Item 5.          Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . .  11


         Item 6.          Management's Discussion and Analysis of Financial Condition
                             and Results of Operations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

         Item 7.          Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15

         Item 8.          Changes in and Disagreements With Accountants on Accounting
                             and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15



PART III

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

         Item 10.         Executive Compensation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18

         Item 11.         Security Ownership of Certain Beneficial Owners and Management  . . . . . . . . . . . . . .  20

         Item 12.         Certain Relationships and Related Transactions  . . . . . . . . . . . . . . . . . . . . . .  21

         Item 13.         Exhibits and Reports on Form 8-K  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
</TABLE>





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                                     PART I

ITEM 1.  BUSINESS

         The Company currently owns and operates Rick's Cabaret, a premiere
adult nightclub offering topless entertainment and restaurant and bar
operations in Houston, Texas. 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

         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, for the purpose of administering, operating,
managing and leasing its new location in New Orleans, Louisiana. The Company
presently anticipates that it will open its new facility in New Orleans in
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 is presently evaluating the plans to build a new adult
oriented nightclub at this location within the next twelve to eighteen months.


BUSINESS STRATEGY

         Prior to Rick's opening in 1983, 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





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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 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





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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, 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





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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. For the past 12 years, Rick's has
sponsored a semi-annual golf tournament and outing which has 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."

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. The
Company intends to open additional Tantra nightclubs in each city in which it
expands its adult nightclub





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operations. 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. Construction has commenced
on its newly acquired location in New Orleans, Louisiana, which is located at
315 Bourbon Street in the New Orleans celebrated French Quarter. The Company
anticipates the opening of the New Orleans' location in late December, 1996.
The Company's lease for the New Orleans' location commenced on June 1, 1996, and
has a term of 40 years. The lease is a triple net lease with tenant paying
taxes, maintenance and insurance. The club will occupy 16,200 square feet in a
three story building. The club will be comprised of two entertainment venues,
the first being a cabaret in the format of Rick's Cabaret in Houston, Texas,
which will occupy the bottom floor. The second venue and format 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.

         Additionally, a one acre tract of land has been purchased on U.S.
Highway 59 in Houston, Texas, to serve as a new location for Rick's Cabaret in
Houston, Texas. Management believes that the new site is superior in many
respects to its existing location. There are over 250,000 cars per day which
will view the new facility and the location is convenient to the three main
business districts in Houston, Texas, including the downtown business district.
It is also in close proximity to Houston's main sports facilities. The Company
is presently evaluating plans to build the new club at this location within the
next 12 to 18 months.

         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 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. 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





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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 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. Rick's has held a Business Permit
since passage of the city ordinance in 1986. The Business Permit, which is
transferable, is valid for a period of one year and is renewable by application
of the permit holder. The permit holder for Rick's Cabaret is Robert Watters
who, prior to the Company's recent public offering, was the sole stockholder of
the Company. In the event of the failure by Mr. Watters to renew the Business
Permit it is likely that a new Business Permit would not be granted for the
location of Rick's Cabaret, because of the location of another sexually
oriented business enterprise within the prohibited distance to Rick's Cabaret.

         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





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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.

        "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, 1996, the Company had approximately 135 full-time
employees, of which 10 are in management positions, including corporate and
administrative operations and approximately 125 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 leases 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
Company has the right to acquire the premises from the owner. See, Legal
Proceedings. 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. In addition, 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.

         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





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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 also owns a one acre tract of land on US Highway 59 in
Houston, Texas. The Company is presently evaluating whether to build a new club
on this property.


ITEM 3.  LEGAL PROCEEDINGS

         On October 9, 1996, Rick's Cabaret International, Inc., Trumps, Inc.
(its wholly owned subsidiary) and  Robert L. Watters (Rick's Cabaret
International, Inc. and Trumps, Inc., collectively referred to as the
"Company") entered into a Settlement Agreement and Release (the "Settlement
Agreement") with Casa El Sol -- Acapulco, S.A., Zu Corporation and 3113 Bering
Corporation (collectively "Casa El Sol") pursuant to which the Company settled
its longstanding lawsuit with Casa El Sol styled Dallas Fontenot, Robert
Watters and Trumps, Inc. v. Casa El Sol -- Acapulco, S.A. and Zu Corporation,
et al.; Cause No. 91-09194 (the "Litigation") and entered into an agreement to
acquire the real property and improvements thereon where Rick's Cabaret is
presently located in Houston, Texas (the "Property").

         Pursuant to the terms of the Settlement Agreement, the Company has the
right to acquire the Property from Casa El Sol for $2,000,000, payable $500,000
into escrow upon the execution of the Settlement Agreement and $1,500,000
million payable on or before January 6, 1997, at the discretion of the Company.
The purchase price was determined as a result of arms-length negotiations by
the parties and was part of the overall settlement of the outstanding
Litigation.

         The Litigation was originally filed in 1991 by Mr. Watters and a
former stockholder of the Company (the "Plaintiffs") against another former
stockholder of the Company (the "Defendant"). The lawsuit 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 building where Rick's is
located and which is leased by the Company. The Defendant joined the Company as
a party to the lawsuit, claiming that the Company had breached its lease
agreement due to the alleged late payment of rent for one month. The case was
tried in August, 1992, and judgment was rendered in favor of the Plaintiffs and
the Company. The Defendant appealed this decision and, in an opinion rendered
in August, 1995, the Texas Court of Appeals for the 14th Judicial District
reversed and remanded the case for a new trial in the District Court. After
rehearing, the Court of Appeals reversed and rendered judgment against Mr.
Watters and the Company. Thereafter, the Company filed an application for writ
of error with the Texas Supreme Court.

         The Settlement Agreement provided that the Company withdraw and
dismiss its application for writ of error that was pending before the Supreme
Court of Texas and that Casa El Sol execute a Release of Judgment and Related
Rights which released the Company and Mr. Watters from any and all rights or
claims of Casa El Sol related to the Litigation.

         In Vernon Young, Jr. v. Dallas J. Fontenot, Jr., Trumps, Inc. and
Robert Lewis Watters, Cause No. 87-33344 in the 11th District Court of Harris
County, Texas (the "Young Lawsuit"), filed in 1987, Dallas Fontenot, 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 June, 1993,
Summary Judgment was rendered in favor of the Company and Mr. Watters by the
District Court. Subsequent to an appeal by the party suing the former
stockholder, the Texas Court of Appeals, 8th Judicial District reversed the
summary judgment and remanded the case to the trial court. The Company filed an
application for Writ of Error with the Texas Supreme Court. This





                                       10
<PAGE>   11
Writ was denied and the case was remanded to the district court for trial. The
Company and Mr. Watters recently mediated this matter and pursuant to such
mediation, entered into a settlement agreement with the Plaintiff, Mr. Young.
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. Subsequently, the remaining Defendants and the
Intervenor agreed to a settlement of the litigation. In consequence, the action
was satisfactorily settled as to all parties, and all Defendants have now been
dismissed with prejudice. The Young Lawsuit is therefore terminated, and the
judgment dismissing same is now final.

         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 in its initial stages and
no trial date has been set. 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 remote.

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

         During the fourth quarter of 1996, there were no matters submitted to
a vote of the Security Holders, through solicitation of proxies or otherwise.


                                    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.

<TABLE>
<CAPTION>
                                                                            Common Stock Price Range
                                                                            ------------------------
                                                                            High                 Low
                                                                            ----                 ---
<S>      <C>                                                                <C>                  <C>
1995
         Fourth Quarter . . . . . . . . . . . . . . . . . . . . .           $ 5                 $  3 7/8

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
                                                                                                                      
</TABLE>





                                       11
<PAGE>   12

         On December 20, 1996, the last sales price for the Common Stock as
reported by The NASDAQ SmallCap Market was $4.3125 per share. On December 20,
1996, there were approximately 300 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, 1996 and
1995.

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 presently anticipates that it will open
its new facility in New Orleans in 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 plans to build a
new adult oriented nightclub at this location within the next twelve to
eighteen months. The Company's fiscal year end is September 30.

    Revenues are derived from the sale of liquor, beer, wine and food, which
comprises approximately 55% of total revenues, and charges to the entertainers
and cover charges which comprise approximately 21% and 17% respectively of
total fiscal 1996 revenues. For fiscal 1995, these percentages were 50%, 21%
and 13%, respectively. Cover charges, as a percentage of total revenues,
increased during fiscal 1996 due to the acquisition of Tantra, which derives a
greater portion of its overall revenue from this source than does Rick's
Cabaret. The remaining revenues are derived from the sale of memberships,
merchandise, and miscellaneous other revenue sources. Membership sales are for
access to Rick's VIP Room, and range in price from $550 to $1,200 for a
lifetime membership. Additional benefits include waiver of cover charges, 10%
to 15% discount on drink prices, complimentary drink tickets and miscellaneous
other benefits depending on the type of membership purchased. Membership sales
were $18,550 and $67,889, which represented sales of 25 and 90 memberships for
the fiscal years 1996 and 1995.





                                       12
<PAGE>   13
RESULTS OF OPERATIONS

    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. Management
intends to offset this revenue decline with the opening of an additional
location in New Orleans, Louisiana during December 1996. During December 1996,
the Company also signed a letter of intent for the acquisition of a club in
Minneapolis, Minnesota. Currently, management is also studying additional
potential acquisitions which would additionally serve to offset the current
revenue declines.

    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. The
Company has currently embarked on a program to improve margins from food sales
and food service efficiency.

    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 is currently increased in order to
have adequately trained personnel to assist with the planning and preopening
activities of the New Orleans location and other locations which are currently
being studied.

    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 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.

    This Company experienced a net loss of ($708,614) for fiscal 1996 compared
to net income of $359,427 for fiscal 1995. Management anticipates that the
Company will continue to experience losses in early fiscal 1997 until revenue
growth from acquisitions and the opening of new locations is realized.

    Year Ended September 30, 1995 compared to Year Ended September 30, 1994.
For the 1995 fiscal year, the Company had consolidated total revenues of
$4,534,706, a decrease of $32,587 from fiscal 1994 revenues of $4,567,293.
Single location revenues for Rick's Cabaret declined 11% from fiscal 1994 or





                                       13
<PAGE>   14
approximately $489,000. The decline at Rick's Cabaret is offset by the addition
and opening of Tantra during the second quarter of fiscal 1995 which provided
revenues of $490,000. The overall decline in revenues is attributable to the
increased level of competition in the Houston, Texas area and a decline in
advertising expenditures during early fiscal 1995. Additionally, management
time and working capital which otherwise would have been invested by the
Company in advertising was committed to the successful completion in October
1995 of the Company's initial public offering. During the later quarters of
fiscal 1995 and after completing the initial public offering, management has
increased advertising expenditures and has retained the services of an
advertising and public relations firm.

    Cost of goods sold were 28% and 27% of sales of alcoholic beverages and
food for fiscal 1995 and 1994, respectively.  This increase is believed to be
attributable to a slight increase in food sales which carries a higher cost
than beverage sales.

    Salaries and wages decreased 3% or $39,891 from fiscal 1994 due to a
reduction in the bonus accrued to the Chief Executive Officer and a reduction
in management staffing, offset by $122,281 in Tantra salaries for fiscal 1995.

    Other general and administrative expenses decreased 23% or $251,035 from
fiscal 1994 to fiscal 1995. Decreases occurred in all general and
administrative expense categories except Taxes and Permits which increased 4%
from 1994 due to the acquisition and opening of Tantra. Charge card fees
decreased $25,746 due to the decrease in sales noted above.  Legal and
accounting decreased $29,047 due to a lower level of activity relating to the
defense of lawsuits. Advertising and promotion was lower by $109,746 at Rick's
Cabaret as the Company reduced advertising during the early quarters of fiscal
1995 due to increased working capital needs in preparation for its initial
public offering, offset by $96,627 in Tantra advertising. Additionally, the
amortization of a non-compete agreement ($48,000) was completed in 1994 with no
corresponding expense in 1995. Management believes that the reductions in all
categories, in addition to the reasons stated above, are attributable to
additional management controls instituted at the beginning of fiscal year 1995.

    Interest expense was reduced to $55,976 from $129,377 due to a reduction in
the average amount of bank and lease financing debt outstanding during the
year.

    Net income increased for fiscal 1995 by $168,386 or 88% as compared to
fiscal 1994.

LIQUIDITY AND CAPITAL RESOURCES

    At September 30, 1996 the Company had working capital of $2,755,893,
compared to a working capital deficit of $741,220 at the end of fiscal 1995.
The increase in working capital is primarily due to the Company's completion of
its initial public offering by selling 1,840,000 common shares to the public
market. Funds available to the Company (after deducting underwriting
commissions and expenses associated with the offering) of approximately
$4,270,000 will be used for capital improvements to the original Houston
location, opening two additional locations, and for general corporate working
capital purposes. Additionally, the Company sold 328,077 additional shares
resulting in additional capital of $1,066,250.

    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 1996 was ($1,004,848). The
increase in cash used by operating activities as due primarily to the net loss
of ($708,614), an increase in accounts receivable of





                                       14
<PAGE>   15
$73,531, an increase in inventories of $16,008, an increase in prepaid expenses
and other assets of $185,375, a decrease in accounts payable and accrued
liabilities of $17,248 and a decrease in income taxes payable/receivable of
$399,693.  Net cash used in investing activities was $1,861,681 in 1996 and was
due to investments in land, property and equipment.  Cash provided by financing
activities was $5,776,420 due primarily to the sale of common stock less
offering costs.

    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.

    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 in Houston 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.

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 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.





                                       15
<PAGE>   16

              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES

                         AUDITED FINANCIAL INFORMATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>                                                        
                                                                        PAGE
                                                                        ----
<S>                                                                      <C>
Independent Auditors' Report  . . . . . . . . . . . . . . . . . . . . .  F-2
                                                                 
Consolidated Balance Sheets for the years ended                  
         September 30, 1996 and 1995  . . . . . . . . . . . . . . . . .  F-3
                                                                 
Consolidated Statements of Operations for the years ended        
         September 30, 1996 and 1995  . . . . . . . . . . . . . . . . .  F-4
                                                                 
Consolidated Statements of Changes in Stockholders' Equity       
         for the years ended September 30, 1996 and 1995  . . . . . . .  F-5
                                                                 
Consolidated Statements of Cash Flows for the years ended        
         September 30, 1996 and 1995  . . . . . . . . . . . . . . . . .  F-6
                                                                 
Notes to Consolidated Financial Statements  . . . . . . . . . . . . . .  F-7
</TABLE>                                                         
<PAGE>   17
                                                                 
                          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, 1996 and 1995, 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 financial position of Rick's Cabaret
International, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.




                                                  Jackson & Rhodes P.C.



Dallas, Texas
December 19, 1996




                                     F-2
<PAGE>   18
             RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                         SEPTEMBER 30, 1996 AND 1995


<TABLE>                                                        
<CAPTION>                                                      
                                   ASSETS
                                                               
                                                                                    1996                   1995
                                                                                -----------            -----------
<S>                                                                             <C>                    <C>
Current assets:                                                
      Cash                                                                      $ 3,150,003            $   195,112
      Accounts receivable                                                            73,531                   --
      Inventories                                                                    47,620                 31,612
      Prepaid expenses                                                              172,198                 51,455
      Income taxes receivable                                                        47,735                   --
                                                                                -----------            -----------
           Total current assets                                                   3,491,087                278,179
                                                                                -----------            -----------
                                                               
Property and equipment:                                        
      Buildings, land and leasehold improvements                                  2,225,710                664,902
      Furniture and equipment                                                       742,320                486,447
                                                                                -----------            -----------
                                                                                  2,968,030              1,151,349
                                                               
      Less accumulated depreciation                                                (554,338)              (408,717)
                                                                                -----------            -----------
                                                               
                                                                                  2,413,692                742,632
                                                                                -----------            -----------
                                                               
Other assets:                                                  
      Deferred offering costs (Note 1)                                                 --                  389,680
      Other                                                                         228,062                 38,967
                                                                                -----------            -----------
                                                               
                                                                                $ 6,132,841            $ 1,449,458
                                                                                ===========            ===========
                                                               
                                                               
                    LIABILITIES AND STOCKHOLDERS' EQUITY       
                                                               
Current liabilities:                                           
      Current portion of long-term debt (Note 3)                                $   153,677            $   193,139
      Accounts payable - trade (Note 5)                                             336,253                501,012
      Accrued expenses                                                              245,264                 97,753
      Income taxes payable                                                             --                  227,495
                                                                                -----------            -----------
           Total current liabilities                                                735,194              1,019,399
                                                               
Long-term debt, less current portion (Note 3)                                        77,826                212,833
                                                                                -----------            -----------
                                                               
               Total liabilities                                                    813,020              1,232,232
                                                                                -----------            -----------
                                                               
Commitments and contingencies (Note 6)                                                 --                     --
                                                               
Stockholders' equity (Note 1):                                 
      Preferred stock - $.10 par, authorized                   
           1,000,000 shares; none issued                                               --                     --
      Common stock - $.01 par, authorized                      
           15,000,000 shares;  issued 4,068,077 and 1,800,000                        40,681                 18,000
      Additional paid-in capital                                                  5,788,528
      Retained earnings (deficit)                                                  (509,388)               199,226
                                                                                -----------            -----------
           Total stockholders' equity                                             5,319,821                217,226
                                                                                -----------            -----------
                                                               
                                                                                $ 6,132,841            $ 1,449,458
                                                                                ===========            ===========
</TABLE>                                                       

         See accompanying notes to consolidated financial statements.


                                     F-3

<PAGE>   19
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>


                                                        1996             1995
                                                    -----------      -----------
<S>                                                 <C>              <C>

Revenues:
     Sales of alcoholic beverages                   $ 2,252,714      $ 2,286,157
     Sales of food                                      274,577          213,537
     Service revenues                                 1,742,890        1,700,133
     Other                                              360,117          334,879
                                                    -----------      -----------

                                                      4,630,298        4,534,706
                                                    -----------      -----------

Operating expenses:
     Cost of goods sold                                 753,216          699,630
     Salaries and wages                               1,497,731        1,271,204
     Other general and administrative:
         Taxes and permits                              514,799          541,214
         Charge card fees                                81,373          149,176
         Rent                                           305,761          294,592
         Legal and accounting                           332,137          106,571
         Advertising                                    533,418          298,040
         Other                                        1,509,108          580,609
                                                    -----------      -----------

                                                      5,527,543        3,941,036
                                                    -----------      -----------

Income (loss) from operations                          (897,245)         593,670

     Interest expense                                    41,369           40,243
                                                    -----------      -----------

Income (loss) before income taxes                      (938,614)         553,427

     Income taxes (benefit) (Note 4)                   (230,000)         194,000
                                                    -----------      -----------

Net income (loss)                                   $  (708,614)     $   359,427
                                                    ===========      ===========

Net income (loss) per common share                  $     (0.20)     $      0.20
                                                    ===========      ===========

Weighted average shares outstanding                   3,535,081        1,800,000
                                                    ===========      ===========

</TABLE>



        See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>
<PAGE>   20
             RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


<TABLE>
<CAPTION>

                                                              Common Stock                                         
                                                        -----------------------       Additional         Retained
                                                        Number of                      Paid-in           Earnings
                                                         Shares          Amount        Capital           (Deficit)            Total
                                                        ---------       -------      -----------         ---------        ----------
<S>                                                    <C>              <C>            <C>              <C>               <C>
Balance, September 30, 1993                            1,750,000        $17,500        $    --          $(351,242)        $(333,742)

Acquisition of Tantra (Note 1)                            50,000            500             --               --                 500

Net income                                                  --             --               --            191,041           191,041
                                                       ---------        -------        ---------        ---------         ---------

Balance, September 30, 1994                            1,800,000         18,000             --           (160,201)         (142,201)

Net income                                                  --             --               --            359,427           359,427
                                                       ---------        -------        ---------        ---------         ---------

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
                                                       =========        =======      ===========       =========        ===========
</TABLE>


         See accompanying notes to consolidated financial statements.

                                     F-5

<PAGE>   21
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


<TABLE>
<CAPTION>
                                                                 1996              1995
                                                              ----------         --------
<S>                                                           <C>                <C>
Net income (loss)                                            $ (708,614)        $ 359,427

Adjustments to reconcile net income (loss) to net
  cash provided (used) by operating activities:
   Depreciation                                                 145,621           110,258
   Common stock issued for services                             250,000             -
   Changes in assets and liabilities:
    Accounts receivable                                         (73,531)           15,947
    Inventories                                                 (16,008)           (6,321)
    Prepaid expenses and other assets                          (185,375)          (51,455)
    Accounts payable and accrued liabilities                    (17,248)          188,652
    Income taxes payable/receivable                            (399,693)          140,319
                                                             ----------         ---------
      Net cash provided (used) by operating activities       (1,004,848)          756,827
                                                             ----------         ---------

Cash flows from investing activities:
  Additions to property and equipment                        (1,816,681)         (439,609)
  Retirements of fully depreciated assets                         -                25,394
  Increase in other assets                                        -                (1,867)
                                                             ----------         ---------
      Net cash used in investing activities                  (1,816,681)         (416,082)
                                                             ----------         ---------

Cash flows from financing activities:
  Common stock issued, less offering costs                    5,561,209             -
  Increase in long-term debt                                      -               133,526
  Payments on long-term debt                                   (174,469)           (3,109)
  (Increase) decrease in deferred financing costs               389,680          (389,680)
                                                             ----------         ---------
      Net cash provided (used) by financing activities        5,776,420          (259,263)
                                                             ----------         ---------

Net increase in cash                                          2,954,891            81,482

Cash at beginning of year                                       195,112           113,630
                                                             ----------         ---------
Cash at end of year                                          $3,150,003         $ 195,112
                                                             ==========         =========

Cash paid during the period for:
  Interest                                                   $   35,301         $  34,083
                                                             ==========         =========
  Income taxes                                               $  186,857         $  53,681
                                                             ==========         =========
</TABLE>

Non-cash transaction:
  On December 29, 1994, the Company acquired certain land with a $95,000 note
  (see Note 3).

         See accompanying notes to consolidated financial statements.


                                     F-6
<PAGE>   22
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1996 AND 1995




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 in
     Houston, Texas.  The Company also is presently constructing another
     premier adult nightclub in leased facilities on Bourbon Street in New
     Orleans, Louisiana.

     Effective August 1, 1995, the Company acquired Tantric Enterprises, Inc.
     and two related companies, Tantra Dance, Inc. and Tantra Parking, Inc.
     (collectively, "Tantra") from Mr. Robert Watters (the "Combination") for
     50,000 shares of the Company's common stock.  The Tantra companies were
     incorporated on August 1, 1994 but had no operations until December 1994.
     The acquisition has been accounted for in a manner similar to the
     pooling-of-interests method due to Mr. Watter's control of the respective
     companies.  Accordingly, the Company has presented, in the accompanying
     financial statements, the combination of the companies as if the
     acquisition had occurred upon the inception of Tantra. Outstanding common
     shares at September 30, 1996 and 1995 are represented by the Company's
     outstanding shares plus the 50,000 shares issued for Tantra.

     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.

     A portion of the proceeds of the Company's public offering has been used
     for capital improvements at the existing Houston, Texas location, payments
     on the Company's existing borrowings, and for working capital. The balance
     is primarily being invested temporarily in cash equivalents and short term
     investments.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
     and its subsidiaries and Tantra, as explained in Note 1.  All significant
     intercompany balances and transactions are eliminated in consolidation.





                                      F-7
<PAGE>   23
             RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Net Income (Loss) Per Common Share

     Net income (loss) per common share is computed by dividing net income by
     the weighted average number of shares outstanding during the years, after
     giving retroactive effect to the reorganization transaction and the
     Combination (Note 1).

     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:



<TABLE>
             <S>                                    <C>
             Building and improvements               31 years 
             Equipment                              5-7 years
             Leasehold improvements                 5-7 years
</TABLE>





                                      F-8
<PAGE>   24
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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.

     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.

     Preopening Costs

     Costs incurred in advance of opening a new nightclub are deferred and
     amortized against subsequent operations on a straight-line basis over
     eighteen months.  Preopening costs are included in other assets.

3.   LONG-TERM DEBT

     Following is a summary of long-term debt at September 30:
<TABLE>
<CAPTION>
                                                                                   1996              1995
                                                                                   ----              ----
          <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.                                           $ 90,045         $ 94,372

           Notes payable to affiliated companies
           owned by the Company's sole stockholder,
           interest at 9% and principal due November 30, 1996.                      21,294           46,279

           Note payable to a bank, payable $10,000
           per month plus interest at the prime rate
           plus 1%, matures August 24, 1996,
           collateralized by accounts receivable, inventory,
           furniture and fixtures of the Company.                                    -              110,000
</TABLE>





                                      F-9
<PAGE>   25
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                   1996             1995
                                                                                   ----             ----
         <S>                                                                   <C>              <C>
           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.                     $  20,000         $ 31,000

           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           32,930

           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.                                                        84,912           91,391  
                                                                               ---------         --------
                                                                                 231,503          405,972
           Less current portion                                                 (153,677)        (193,139)
                                                                               ---------         -------- 
           Long-term debt                                                      $  77,826         $212,833
                                                                               =========         ========
</TABLE>


    Substantially all the Company's assets are pledged to secure the above debt.

    Following are the maturities of long-term debt for the years ending 
    September 30:

<TABLE>
                 <S>                                         <C>
                 1997                                        $153,677
                 1998                                           7,751
                 1999                                           8,478
                 2000                                          61,597
</TABLE>

4.  INCOME TAXES

    Income tax expense (benefit) consisted of current taxes for 1996 and 1995.





                                      F-10
<PAGE>   26
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





4.  INCOME TAXES (CONTINUED)

    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>
                                                               1996             1995
                                                               ----             ----
         <S>                                                <C>                <C>
         Taxes on income (loss) before income        
             taxes at the statutory rate                    $(319,000)         $188,200
         Separate return limitation - unavailable    
             loss carrybacks                                   89,000               -
         Other differences                                        -               5,800
                                                            ---------          --------
                                                            $(230,000)         $194,000
                                                            =========          ========
</TABLE>

    The components of the net deferred tax liability are as follows at
September 30, 1996 and 1995:

<TABLE>
<CAPTION>
                                                               1996              1995
                                                               ----              ----
         <S>                                                <C>                <C>
         Operating loss carryforwards                       $(107,000)         $   -
         Deductible preopening costs                           65,000              -
         Deferred tax asset valuation allowance                42,000              -      
                                                            ---------          --------  
                                                            $     -            $   -     
                                                            =========          ========
</TABLE>

    For tax purposes, the Company has a net operating loss carryforward
    amounting to approximately $300,000 which will expire, if not utilized in
    2011.

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, is due in full on November 30, 1995.  The balance
    outstanding at September 30, 1995 was $46,279.

    SRD has provided and maintained the cigarette vending machines at Rick's
    Cabaret since 1986.  During 1994, SRD received less than $25,000 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 1996 and 1995, the Company paid $ 7,775 and $16,550, respectively,
    for accounting services to an accounting firm in which a director of the
    Company was a principal.





                                      F-11
<PAGE>   27
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





6.  COMMITMENTS AND CONTINGENCIES

    Leases

    Included in accounts payable at September 30, 1996 and 1995 is a $150,000
    and $100,000 liability, respectively, to a former stockholder for the
    purchase of treasury stock under terms of a settlement agreement with the
    former stockholder.

    The Company leases 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 (Note 6).  Lease payments are 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 has been leasing the space on a month-to-month basis.
    The lease provides that the Company is 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 amounted to $173,776 and $175,652
    for the years ended September 30, 1996 and 1995, respectively.  The lawsuit
    was settled in 1996, resulting in the former stockholder owning the
    building.  The Company has agreed to buy the property from the former
    stockholder (see below).

    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, 1997, 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.

    Rent expense amounted to approximately $306,000 and $295,000 for the years
    ended September 30, 1996 and 1995, respectively.

    The Company has entered into an operating lease for a nightclub in New
    Orleans, Louisiana. The 40 year lease commenced in June 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:

<TABLE>
             <S>                                        <C>
             1997                                       $  260,000
             1998                                          300,000
             1999                                          300,000
             2000                                          300,000
             2001                                          300,000
             Thereafter                                  8,575,000
</TABLE>





                                      F-12
<PAGE>   28
              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.

    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, receivables 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 based on their effective interest rates compared to current
    market rates.

    Litigation

    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 is expected to
    occur 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 recently 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.





                                      F-13
<PAGE>   29
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



    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.


6.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

    Litigation (Continued)

    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, but does not indicate
    the manner in which this breach has occurred.  The Company believes that it
    has fully complied with its obligations under this Agreement.  The
    litigation is in its initial stages and no trial date has been set.  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 is remote.

    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.

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





                                      F-14
<PAGE>   30
              RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.  EMPLOYEE STOCK OPTION PLAN (CONTINUED)

    optioned and sold under the Company's Stock Option Plan.  During the
    year ended September 30, 1996, options were granted as follows:

<TABLE>
         <S>                                      <C>
         Granted                                  105,000
         Exercised                                    -   
                                                  -------
         Outstanding at end of year               105,000      
                                                  -------     
         Exercisable at end of year                   -          
                                                  -------
         Exercise price per share             $3.00 to $4.75
</TABLE>

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.





                                      F-15
<PAGE>   31
                                    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 45, 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 26, 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 43, 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.

    Martin Sage, age 45 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





                                       16
<PAGE>   32
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.

    Robert Gary White, age 41, Chief Financial Officer, has been with the
Company since February, 1996. A CPA in the state of Texas since 1979, Mr. White
was previously an audit manager with Jackson & Rhodes, P.C., an accounting firm
located in Dallas, Texas, from 1994 to 1996, where he was responsible for the
Rick's Cabaret International, Inc.  engagement. He has additional experience in
managing his own accounting practice and consulting with entertainment
companies, which he did from 1992 to 1994. Additionally, from 1989 through
1991, Mr. White was an officer of International Broadcast Systems, Ltd., a
NASDAQ listed entertainment company, becoming a director in 1990. Prior
thereto, he was with Deloitte Touche L.L.P. (formerly Touche Ross & Co.) for
twelve and one half years. He is a 1977 graduate of the University of Texas at
Austin with a B.B.A. in accounting.

CERTAIN SECURITIES FILINGS

    Robert Watters, Scott Mitchell, Martin Sage, and Erich Norton White, all
directors of the Company, each failed to timely file one report on Form 3 as
required by Section 16(a) of the Exchange Act. The reports were of their
respective beneficial holdings owned at the time they each became subject to
reporting on Form 3. Messrs. Mitchell and Sage each subsequently filed one
amendment to Form 3. Mr. White subsequently filed two amendments to Form 3.





                                       17
<PAGE>   33
ITEM 10.     EXECUTIVE COMPENSATION

    The following table reflects all forms of compensation for services to the
Company for the fiscal years ended September 30, 1996, 1995 and 1994 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 1996.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                       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                       1996    $325,000   -0-        -0-             -0-           -0-         -0-
 Chief Executive Officer                1995    $298,000   -0-        -0-             -0-           -0-         -0-
                                        1994    $382,970   -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-





                                       18
<PAGE>   34
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.

         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,
1996, 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, 1997,
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.





                                       19
<PAGE>   35
ITEM 11.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information at December 20,
1996, 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.

<TABLE>
<CAPTION>
                                                         Shares Beneficially Owned
                                                         -------------------------
Name and Address of Beneficial Owner (1)                 Number            Percent
----------------------------------------                 ------            -------
<S>                                                      <C>               <C>
Robert L. Watters
3113 Bering
Houston, Texas 77057 . . . . . . . . . . . . . .         1,800,000         36.86%

Erich Norton White
3113 Bering
Houston, Texas 77057 . . . . . . . . . . . . . .            14,675(2)        .30%

Scott C. Mitchell
820 Gessner, Suite 1380
Houston, Texas 77024 . . . . . . . . . . . . . .            11,250(3)        .29%

Martin Sage
100 Congress Ave., Ste. 2100
Austin, Texas 78701 . . . . . . . . . . . . . . .            1,250(3)        .01%

Robert Gary White
3113 Bering
Houston, Texas 77057 . . . . . . . . . . . . . . .             -0-(4)        .00%

Rock Fund
3601 West Commercial Blvd.
Fort Lauderdale, Florida, 33309. . . . . . . . . . .       244,600          5.0%

All directors and executive officers as
a group (5 persons) . . . . . . . . . . . . . . . .      1,827,175         37.46%
---------------                                                                                     
</TABLE>

(1)      Messrs. Watters, White and Mitchell have sole voting and investment
         power with respect to the shares shown as beneficially owned by them.

(2)      Includes options to purchase 13,750 shares at an exercise price of
         $3.00 per share, which are presently exercisable; and does not include
         options to purchase 16,250 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 1,250 shares at an exercise price of
         $3.00 per share, which are presently exercisable; and does not include
         options to purchase 3,750 shares at an exercise price of $3.00 per
         share which will not become exercisable within the next 60 days.

(4)      Does not include options to purchase 25,000 shares at an exercise
         price of $4 3/4 per share, none of which are exercisable within the
         next 60 days.





                                       20
<PAGE>   36
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 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.

         In 1986, the Company entered into a lease agreement with Zu
Corporation, a Texas corporation ("Zu"), for the land and building where Rick's
Cabaret is located (the "Zu Lease Agreement"). In 1991, Mr. Watters exercised
an option to purchase all of the outstanding shares of capital stock of Zu. The
seller, however, contested the validity of the exercise of this option and Mr.
Watters initiated litigation. The litigation has been settled. See "Legal
Proceedings."

         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





                                       21
<PAGE>   37
December 31, 1994 will be split equally between the Company and SRD. During the
Company's fiscal years ending 1996 and 1995, SRD received less than $25,000 per
year from the vending machines.

         During the Company's fiscal years ending 1996 and 1995, the Company
paid $7,775 and $16,560, 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

 3.1(1)-         Certificate of Incorporation of the Registrant

 3.2(1)-         Bylaws of the Registrant

 4.1(1)-         Common Stock specimen

 4.2(1)-         See Exhibits 3.1 and 3.2. for provisions of the Articles of
                 Incorporation and Bylaws of the Registrant defining rights of
                 holders of common stock of the Registrant

 4.3(1)-         Form of Representative's Warrant Agreement and Form of Warrant
                 Certificate

 4.4(1)-         Warrant Agreement and Warrant Specimen

 5.1(1)-         Opinion of Axelrod, Smith & Kirshbaum, including Consent

10.1   -         Lease of premises located at 315-21 Bourbon Street, New
                 Orleans, Louisiana, dated February 13, 1996

10.2(1)-         Lease Agreement between Zu Corporation as Lessor and Trump's,
                 Inc., as Lessee, dated February 28, 1986

10.3(1)-         Amendment to Lease Agreement between Zu Corporation, Lessor
                 and Trump's, Inc., Lessee, dated September 10, 1989

10.4(1)-         Lease Agreement between Trump's, Inc., as Lessor and Tantric
                 Enterprises, Inc., as Lessee dated December 1, 1994

10.5(1)-         Agreement between Trump's, Inc., and SRD Vending Company, Inc.

10.6(1)-         Form of Financial Advisory Agreement between Barron Chase
                 Securities, Inc. and Registrant

10.7(1)-         Form of Merger and Acquisition Agreement between Barron Chase
                 Securities, Inc. and the Registrant

10.8(1)-         Employee Stock Option Plan

10.9(1)-         Employment Agreement between the Registrant and Robert L.
                 Watters

21.1-            Subsidiaries of Registrant

27.1-            Financial Data Schedule

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

(1)      Previously filed as an exhibit to the Company's Registration Statement
         on Form SB-2 (No. 33-88372), as amended, and incorporated herein by
         reference thereto.


(b)      Reports on Form 8-K.

         No reports on Form 8-K were filed during the three months ended 
September 30, 1996.





                                       22
<PAGE>   38
                                   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 27th day of December,
1996.

                                        RICK'S CABARET INTERNATIONAL, INC.


                                        By:   /s/ Robert L. Watters 
                                           -----------------------------------
                                           Robert L. Watters, Chairman
                                           of the Board and Chief 
                                           Executive 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 27, 1996
-------------------------------    Chief Executive Officer,                        
       Robert L. Watters           and Director                 
                                                                
  /s/ Erich Norton White           Director and Executive         December 27, 1996
-------------------------------    Vice President                                  
      Erich Norton White                                        
                                                                
  /s/ Scott C. Mitchell            Director                       December 20, 1996
-------------------------------                                                    
      Scott C. Mitchell                                         
                                                                
  /s/                              Director                       December __, 1996
-------------------------------                                                     
      Martin Sage                                               
                                                                
   /s/ Robert Gary White           Chief Financial Officer and    December 27, 1996
-------------------------------    Principal Accounting Officer                    
       Robert Gary White                                        
</TABLE>





                                       23
<PAGE>   39
                              INDEX TO EXHIBITS




Exhibit No.                     Description 
-----------                     -----------

10.1   -         Lease of premises located at 315-21 Bourbon Street, New
                 Orleans, Louisiana, dated February 13, 1996

21.1   -         Subsidiaries of Registrant

27.1   -         Financial Data Schedule