United
      States Securities and Exchange Commission


Washington,
      D.C. 20549





**Form
      10-KSB**





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


For
      the
      fiscal year ended **September
      30, 2006**


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





Commission
      File Number:   0-26958





**RICK'S
      CABARET INTERNATIONAL, INC.**


(Name
      of
      Small Business Issuer in Its Charter)





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








**10959
      Cutten Road, Houston, Texas 77066**


(Address
      of Principal Executive Offices)





**(281)
      397-6730**


(Issuer’s
      Telephone Number)





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





Title
      Of
      Each Class n/a


Name
      Of
      Each Exchange On Which Registered n/a





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





Title
      Of
      Each Class


**Common
      Stock, $.01 Par Value**





Check
      whether the issuer: (i) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (ii) has been
      subject to such filing requirements for the past 90 days. Yes x  No
o





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





The
      Issuer's revenues for the year ended September 30, 2006 were
      $24,487,215.





The
      aggregate market value of Common Stock held by non-affiliates of the registrant
      at December 15, 2006, based upon the last reported sales prices on the NASDAQ
      SmallCap Market, was $13,139,638.





As
      of
      December 15, 2006, there were approximately 5,334,515 shares of Common Stock
      outstanding (this amount excludes treasury shares).










**TABLE
      OF CONTENTS**








**PART
                I**
            
            **Page
                No.**Item
                1.
            Business
            1Item
                2.
            Properties
            11Item
                3.
            Legal
                Proceedings
            14Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            17**PART
                II**Item
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small
                Business Issuer Purchases Of Equity Securities
            17Item
                6.
            Management's
                Discussion and Analysis or Plan of
                Operation
            20Item
                7.
            Financial
                Statements
            40Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            40Item
                8A.
            Controls
                and Procedures
            40Item
                8B.
            Other
                Information
            40**PART
                III**Item
                9.
            Directors,
                Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of The Exchange Act
            40Item
                10.
            Executive
                Compensation
            43Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters
            46Item
                12.
            Certain
                Relationships and Related
                Transactions
            47Item
                13.
            Exhibits
            49Item
                14.
            Principal
                Accountant Fees and Services
            49


*Table
            of Contents*




**PART
      I**





**ITEM
                1.**
            **BUSINESS**





**INTRODUCTION**





Our
      name
      is Rick's Cabaret International, Inc. We currently own and/or operate a total
      of
      thirteen adult nightclubs that offer live adult entertainment, restaurant and
      bar operations. Six of our clubs operate under the name "Rick's Cabaret"; three
      operate under the name “Club Onyx”, upscale venues that welcome all customers
      but cater especially to urban professionals, businessmen and professional
      athletes; and four of the clubs operate under the name "XTC". Our nightclubs
      are
      in Houston, Austin and San Antonio, Texas; Charlotte, North Carolina;
      Minneapolis, Minnesota; and New York, New York. In May 2006, we combined our
      sports bar under the name of “Hummers” and XTC at same location and converted
      them into “Rick’s Sports Cabaret”. We also own and operate premiere adult
      entertainment Internet websites.





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





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





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




**BUSINESS
      ACTIVITIES--NIGHTCLUBS**





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


1
 *Table
          of Contents*


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




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




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




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




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


2
 *Table
          of Contents*


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




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




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




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


3
 *Table
          of Contents*


Rick's
      Cabaret has received a significant amount of media exposure over the years
      in
      national magazines such as Playboy, Penthouse, Glamour Magazine, The Ladies
      Home
      Journal, Time Magazine, Time Out New York, and Texas Monthly Magazine. Segments
      about Rick's have aired on national and local television programs such as
“20/20”, "Extra" and "Inside Edition", and we have provided entertainers for
      Pay-Per-View features as well. Business stories about Rick's Cabaret have
      appeared in The Wall Street Journal, The New York Times, The New York Post,
      Los
      Angeles Times, Houston Business Journal, and numerous other regional
      publications.





NIGHTCLUB
      LOCATIONS





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





RECENT
      NIGHTCLUB TRANSACTIONS





1.
            On
                January 18, 2005, our wholly-owned subsidiary, RCI Entertainment
                (New
                York), Inc. (“RCI New York”), a New York corporation, completed the
                acquisition of Peregrine Enterprises, Inc. (“Peregrine”), a New York
                corporation, pursuant to which RCI New York agreed to purchase all
                of the
                shares of common stock of Peregrine. Peregrine owned and operated
                an adult
                entertainment cabaret located in midtown Manhattan. The club is located
                near the Empire State Building and Madison Square Garden, and is
                less than
                10 blocks from Times Square.





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


4
 *Table
          of Contents*


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





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





Through
      October 4, 2006, the holder of the promissory note converted $2,000,000 of
      principal from the related promissory note into 360,000 shares of the Company’s
      common stock.





2.
            On
                March 31, 2005, we entered an Stock Purchase Agreement with MBG
                Acquisition, LLC, a Delaware limited liability company to sell all
                of the
                issued and outstanding shares of RCI Entertainment (Houston), Inc.,
                our
                wholly owned subsidiary, which owned and operated an adult entertainment
                cabaret known as Rick’s Cabaret - South located at 15301 Gulf Freeway,
                Houston, Texas. The Agreement provided for a sales price of $550,000,
                which was paid in cash upon closing. We
                recorded a gain of $291,987.





The
      club’s business was accounted for as discontinued operations under accounting
      principles generally accepted in the United States of America and therefore,
      the
      club’s results of operations and cash flows have been removed from the Company’s
      consolidated results of continuing operations and cash flows for all periods
      presented in this document.





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





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


5
 *Table
          of Contents*


Pursuant
      to the terms of the Note, on or after November 1, 2005, Hege shall have the
      right, but not the obligation to have Rick’s purchase from Hege 4,285 Shares per
      month (the “Monthly Shares”), calculated at a price per share equal to $3.75
      until Hege has received a total of $1,000,000 from the sale of the Shares less
      the amount of the Note. At our election during any given month, we may either
      buy the Monthly Shares or, if we elect not to buy the Monthly Shares from Hege,
      then Hege shall sell the Monthly Shares in the open market. Any deficiency
      between the amount which Hege receives from the sale of the Monthly Shares
      and
      the Value of the Shares shall be paid by us within three (3) days of the date
      of
      sale of the Monthly Shares during that particular month. Our obligation to
      purchase the Monthly Shares from Hege shall terminate and cease at such time
      as
      Hege has received a total of $1,000,000 from the sale of the Shares, less the
      amount of the Note. This obligation was satisfied on May 11, 2006 when all
      shares had been sold for more than $675,000.





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





Subsequent
      to fiscal year end, on December 14, 2006, we converted this club into “Club Onyx
      Charlotte”.





4.
            On
                May 9, 2006, we purchased Joint Ventures, Inc., an operator of an
                adult
                nightclub in South Houston, Texas, formerly known as Dreamers Cabaret
                & Sports Bar located at 802 Houston Blvd. The purchase price of
                $840,000 was paid in cash. The club, located in a Houston suburb,
                has been
                converted to an XTC Cabaret.





5.
            On
                July 7, 2006, we entered into a stock purchase agreement to acquire
                Texas
                S&I, Inc., a Texas corporation, for $125,000, consisting of $55,000
                paid in cash at closing and $70,000 in a five year note payable bearing
                interest at a rate of 4% per annum. The note was paid off in full.
                Texas
                S&I, Inc. owned and operated Club Exotica in San Antonio. We have
                converted this club into “Club Onyx San
                Antonio”.





6.
            On
                August 24, 2006, our subsidiary, RCI Debit Services, Inc., acquired
                99% of
                the ownership interest in an adult entertainment cabaret known as
                “Centerfolds” located at 5418 Brewster Street, San Antonio, Texas.
                Additionally, under the terms of the transaction, our subsidiary,
                RCI
                Holdings, Inc. acquired 100% of the interest in the improved real
                property
                upon which Centerfolds is located. The total purchase price for the
                business and real property was $2,900,000. Under terms of the agreement,
                we paid the owners of the club and property $600,000 in cash at the
                time
                of closing and signed promissory notes for the remaining balance.
                In
                addition, certain members of the current ownership structure entered
                a
                five-year covenant not to compete with
                us.


6
 *Table
          of Contents*


7.
            Subsequent
                to our fiscal year end, on November 10, 2006, we purchased a 51%
                ownership
                interest of Playmate’s Gentlemen’s Club LLC, an operator of an adult
                nightclub in Austin, Texas. The club is located at 8110 Springdale
                Street,
                Austin, Texas. The purchase price of $1,500,000 was paid $500,000
                cash at
                closing and 125,000 shares of our restricted common stock. The club
                has
                been converted to a “Rick’s Austin”. As part of the agreement, twelve
                months after the closing date, the seller has the right, but not
                the
                obligation, to have us buy the shares at a price of $8.00 per share
                at a
                rate of no more than 5,000 shares per month until such time as the
                seller
                receives a total of $1,000,000 from the sale of such shares.
                Alternatively, the seller has the option to sell such shares in the
                open
                market. The transaction was the result of arms-length negotiations
                between
                the parties.





**BUSINESS
      ACTIVITIES--INTERNET ADULT ENTERTAINMENT WEB SITES**





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





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





**BUSINESS
      ACTIVITIES--INTERNET ADULT AUCTION WEB SITES**





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


7
 *Table
          of Contents*


**TRANSACTION
      WITH VOICE MEDIA**





In
      May
      2002, we purchased 700,000 shares of our own common stock from Voice Media,
      Inc.
      for an aggregate price of $918,700 (or $795,302 adjusted for imputed interest)
      that equals approximately $1.32 per share. That purchase price was below market
      value on the date of the purchase. Voice Media, Inc. presently owns none of
      our
      shares of common stock. These shares are presently held as treasury shares.
      We
      may cancel these shares at a later date. The control person of Voice Media,
      Inc.
      is Ron Levi, who was a Director until June 2002. The terms of this transaction
      were the result of arms-length negotiations between Voice Media, Inc. and us.
      We
      believe the transaction was favorable to us in view of the market value of
      our
      common stock and the payment terms, although no appraisal or fairness opinion
      was done. All management contracts previously signed relating to the management
      of xxxPassword.com will remain in effect. Pursuant to the transaction, the
      purchase price was to be paid in four annual installments. We paid off this
      note
      in full during fiscal year 2006.





**TRANSACTION
      WITH TAURUS ENTERTAINMENT**





On
      June
      12, 2003, we entered into an Asset Purchase Agreement with Taurus Entertainment
      Companies, Inc. (“Taurus”), whereby we acquired all the assets and liabilities
      of Taurus in exchange for 3,752,008 shares of Taurus out of the 4,002,008 that
      we owned plus $20,000 in cash. We also executed an Indemnification and
      Transaction Fee Agreement with Taurus for which we received $270,000 in cash,
      with $140,000 payable at closing, $60,000 due on July 15, 2003 and $70,000
      due
      on August 15, 2003. We have received the $60,000 payment and have restructured
      the remaining balance originally due August 15, 2003, with a note receivable
      bearing 12% annual interest over a five year term. The note was collateralized
      by 3,000,000 shares of Taurus, now known as Bluestar Health, Inc. (“Bluestar”).
      Taurus is not current in its payment obligation and we have initiated steps
      to
      collect the amount owing. We foreclosed on the collateralized shares in August
      2006. As such, we presently own the shares and can sell them in the open market.
      The value of the shares currently totals approximately $150,000, based on market
      price at September 30, 2006. We intend to achieve collectibility either through
      repurchase of the shares by Bluestar or by selling the shares in the open market
      or in a private transaction. Legal counsel for us has been in discussions with
      legal counsel for Bluestar regarding the existing obligation of Bluestar to
      us
      and the possible resolution of this obligation by the acquisition of the shares
      by Bluestar or by another third party. Further, legal counsel has been in
      discussions with a third party regarding the private sale of the shares. These
      discussions are ongoing. We believe that further discussions with these separate
      parties may result in the private sale of the shares in an amount to recover
      the
      outstanding amount due under the note receivable.


8
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          of Contents*


**COMPETITION**





The
      adult
      topless club entertainment business is highly competitive with respect to price,
      service and location. All of our nightclubs compete with a number of locally
      owned adult clubs, some of whose names may have name recognition that equals
      that of Rick's Cabaret or XTC. While there may be restrictions on the location
      of a so-called "sexually oriented business", there are no barriers to entry
      into
      the adult cabaret entertainment market. For example, there are approximately
      50
      adult nightclubs located in the Houston area, all of which are in direct
      competition with our Houston cabarets. In Minneapolis, Rick's Cabaret is
      favorably located downtown and is a short walk from the Metrodome Stadium and
      the Target Center. There are two adult nightclubs in Minneapolis in direct
      competition with us. In Charlotte, there are 2 main competitors. We are
      centrally located with easy access to our location from the airport and the
      sports stadium. There are approximately 16 adult clubs in Manhattan of which
      7
      compete with Rick’s. Only one of those competitors’ is located in Midtown.
      Rick’s location is one block from the Empire State Building and one block from
      Madison Square Garden. Amtrak and local commuter trains have station stops
      within one block of Rick’s location at Penn Station and we are located just 9
      blocks from Times Square. There are 7 adult clubs in Austin and 9 in San Antonio
      that are in direct competition with our clubs. Our Rick’s Austin is located at
      Springdale in between Highway 290 and the new I-130 (Austin By-pass). We
      anticipate a significant increase in traffic when the construction on I-130
      is
      completed. Our Rick’s San Antonio is located at I-35 in the northern part of the
      city.





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





**GOVERNMENTAL
      REGULATIONS**





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


9
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          of Contents*


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




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





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





**TRADEMARKS**





Our
      rights to the trademarks "Rick's" and "Rick's Cabaret" are established under
      common law, based upon our substantial and continuous use of these trademarks
      in
      interstate commerce since at least as early as 1987. We have registered our
      service mark, 'RICK'S AND STARS DESIGN", with the United States Patent and
      Trademark Office. We have also obtained service mark registrations from the
      Patent and Trademark Office for the "RICK'S CABARET" service mark. There can
      be
      no assurance that the steps we have taken to protect our service marks will
      be
      adequate to deter misappropriation.




**EMPLOYEES
      AND INDEPENDENT CONTRACTORS**





As
      of
      September 30, 2006, we had approximately 560 employees, of which 94 are in
      management positions, including corporate and administrative and Internet
      operations and approximately 466 of which are engaged in entertainment, food
      and
      beverage service, including bartenders, waitresses, and entertainers. None
      of
      our employees are represented by a union. We consider our employee relations
      to
      be good. Additionally, as of September 30, 2006, we had independent contractor
      relationships with more than 800 entertainers, who are self-employed and perform
      at our locations on a non-exclusive basis as independent contractors. Our
      entertainers in Minneapolis, Minnesota act as commissioned employees.


10
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**SHARE
      REPURCHASES**





As
      of
      September 30, 2006 we owned 908,530 treasury shares of our common stock that
      we
      acquired in open market purchases and from investors who originally acquired
      the
      shares from us in private transactions. At this time, we do not have any plan
      to
      use these shares to acquire any assets.





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








**ITEM
                2.**
            **PROPERTIES**





Our
      principal executive office is located at 10959 Cutten Road, Houston, Texas
      77066
      which consists of a 9,000 square feet office/warehouse building. We purchased
      this property in December 2004 for $512,739, payable with $86,279 cash at
      closing and $426,460 in a promissory note carrying 7% interest and a 15 year
      term. The monthly payment is $3,834. As of September 30, 2006, the balance
      of
      the mortgage was $396,477. The last mortgage payment is due in 2019. We believe
      that our offices are adequate for our present needs and that suitable space
      will
      be available to accommodate our future needs.





We
      own
      four locations of Rick's Cabaret (two in Houston, one in San Antonio, and one
      in
      Minneapolis), Club Onyx Houston, and the two locations of XTC (one in Austin
      and
      one in San Antonio). We own the property where Encounters club in Houston is
      located **,** which
      is
      currently under lease to Tantric Enterprises, Inc. We lease XTC South, XTC
      North, Club Onyx San Antonio, Rick’s New York, Rick’s Charlotte, and Rick’s
      Austin locations.





**CLUB
      PROPERTIES WE OWN:**





1.
            Club
                Onyx, located on Bering Drive in Houston, has an aggregate 12,300
                square
                feet of space. In December 2004, we paid off the old mortgage and
                obtained
                a new one with initial balance of $1,270,000 and interest rate of
                10% per
                annum over a 10 year term. The money received from this new note
                was used
                to finance the acquisition of the New York club. As of September
                30, 2006,
                the balance of the mortgage was $1,233,766. During fiscal year 2006,
                we
                paid $12,256 in monthly principal and interest payments. The monthly
                payment is calculated based on a 20 year amortization schedule. The
                last
                mortgage payment is due in
                2015.


11
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          of Contents*


2.
            The
                Rick's Cabaret, located on North Belt Drive in Houston, has 12,000
                square
                feet of space. In November 2004, we obtained a mortgage using this
                property as collateral. The principal balance of the new mortgage
                is
                $1,042,000, with an annual interest rate of 10% over a 10 year term.
                The
                money received from this new note was used to finance the acquisition
                of
                the New York club. As of September 30, 2006, the balance of the mortgage
                was $1,010,651. The monthly payment of principal and interest is
                $10,056.
                The monthly payment is calculated based on a 20 year amortization
                schedule. The last mortgage payment is due in
                2014.




3.
            The
                Rick's Cabaret, located in Minneapolis, has 15,400 square feet of
                space.
                The balance, as of September 30, 2006, that we owed on the mortgage
                is
                $1,941,917 and the interest rate is 9%. We pay $22,732 in monthly
                principal and interest payments. The last mortgage payment is due
                in 2008
                with a balloon payment of
                $1,794,432.





4.
            The
                XTC nightclub in Austin has 8,600 square feet of space, which sits
                on 1.2
                acres of land. In August 2005, we restructured the mortgage by extending
                the term to 10 years. The balance of the mortgage that we owed as
                of
                September 30, 2006 is $234,274 with an interest rate of 11% and monthly
                principal and interest payments of $3,445. In November 2004, we obtained
                an additional mortgage. The principal balance of the new mortgage
                is
                $900,000, with an annual interest rate of 11% over a 10 year term.
                In June
                and July 2005, we obtained additional funds in the amount of $200,000.
                In
                August 2005 we combined the additional funds into the $900,000 mortgage.
                The money received from this new note was used to finance the acquisition
                and renovation of the New York club. The monthly principal and interest
                payment is $15,034. As of September 30, 2006, the balance of the
                mortgage
                was $1,022,306. The last payments for both mortgages are due in
                2015.





5.
            We
                own XTC nightclub in San Antonio, which has 7,800 square feet of
                space. In
                November 2004, we obtained a mortgage using this property as collateral.
                The principal balance of the new mortgage is $590,000, with an annual
                interest rate of 10% over a 10 year term. The money received from
                this new
                note was used to finance the acquisition and renovation of the New
                York
                club. As of September 30, 2006, the balance of this mortgage was
                $572,250.
                The monthly principal and interest payment is $5,694. The last mortgage
                payment is due in 2014.





6.
            The
                property where Encounters is located has 8,000 square feet of space.
                In
                December 2004, we paid off the mortgage we previously had. In November
                2004, together with property in Austin, this property was used as
                additional collateral to secure the $900,000 mortgage above. Beginning
                November 2004, we began receiving a monthly lease payment from Tantric
                Enterprises, Inc. in the amount of $4,000 for this space.


12
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7.
            Our
                subsidiary, Citation Land LLC, owns a 350-acre ranch in Brazoria
                County,
                Texas. The balance as of September 30, 2005 that we owed on the Brazoria
                County ranch mortgage was $289,308 and the interest rate was 9%.
                During
                fiscal year 2006, we paid $2,573 in monthly principal and interest
                payments. A balloon payment of $287,920 was paid in March 2006.





8.
            Our
                subsidiary, Citation Land LLC, owned approximately 50 acres of raw
                land in
                Wise County, Texas. The balance as of September 30, 2006 that we
                owed on
                the Wise County raw land mortgage was $139,157 with an interest rate
                of
                12%. We paid $1,537 in monthly principal and interest payments. Subsequent
                to fiscal year end, on October 11, 2006, we sold these properties
                for
                $165,000, which was the amount we had recorded for such properties
                at
                September 30, 2006, after recording a $68,134 impairment charge at
                September 2006. The proceeds were used to pay off the
                mortgage.





9.
            On
                April 5, 2006, our wholly owned subsidiary, RCI Holdings, Inc. completed
                the acquisition of real property located at 9009 Airport Blvd., Houston,
                Texas where we currently operate Rick’s Sports Cabaret (previously Hummers
                Sports Bar and XTC South clubs). Pursuant to the terms of the agreement,
                we paid a total sales price of $1,300,000 which consisted of $500,000
                in
                cash and 160,000 shares of our restricted common
                stock.





10.
            On
                August 24, 2006, our subsidiary, RCI Holdings, Inc. acquired 100%
                of the
                interest in the improved real property upon which our Rick’s San Antonio
                is located. The total purchase price for the business and real property
                was $2,900,000. Under terms of the agreement, the Company paid the
                owners
                of the club and property $600,000 in cash at the time of closing
                and
                signed promissory notes for the remaining balance.





**CLUB
      PROPERTIES WE LEASE:**





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





2.
            We
                lease the property in New York City, New York, where our Rick’s Cabaret
                NYC is located. We assumed the existing lease which will terminate
                in
                April 2023. The monthly rent is $41,469 until May 2007, at which
                time the
                monthly base rent increases to $42,713. Under the term of the existing
                lease, the base rent will increase by approximately 3% each
                year.





3.
            We
                lease the property in Charlotte, North Carolina, where our Rick’s Cabaret
                Charlotte is located. Subsequent to fiscal year end, on December
                14, 2006,
                we converted this club into Club Onyx Charlotte. We assumed the existing
                lease, which will terminate in June 2009, with an additional five-year
                lease option thereafter. The monthly rent is $22,000 until July 2007,
                at
                which time the monthly base rent will increase to
                $23,000.


13
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          of Contents*


4.
            We
                lease the property in South Houston, Texas, where our XTC South is
                located. The lease term is for seventy-nine months, beginning May
                1, 2006.
                The monthly rent is $3,000 for the first forty-three months and $3,500
                thereafter.





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





6.
            Subsequent
                to our fiscal year end, we leased the property in Austin, Texas,
                where our
                Rick’s Austin is located. The lease term is for 10 years, beginning
                November 10, 2006, with monthly payments of $29,000. We also have
                the
                option to renew for another ten
                years.








**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**





SEXUALLY
      ORIENTED BUSINESS ORDINANCE OF HOUSTON, TEXAS





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





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





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


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          of Contents*


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





The
      City
      of Houston has appealed the District Court’s rulings with the Fifth Circuit
      Court of Appeals. In the event that the City of Houston is successful in the
      appeal, we could be out of compliance and such an outcome could have an adverse
      impact on our future at such locations. Our nightclub in our south Houston
      location has a valid permit/license that expired in December 2006. The permits
      for our north Houston location and our Bering Drive location have expired.





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





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





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





The
      appeals process as it relates to the Court’s rulings in 1998 has been exhausted.
      Under the holding of the Fifth Circuit Court of Appeals, the City of Houston
      has
      the burden of proof to show that, under the distance measurements contained
      in
      the 1997 ordinance, there are alternate sites available for relocation. The
      trial commenced on December 4, 2006. A decision from the Trial Court is not
      anticipated until some time in 2007. In the event the City of Houston can meet
      its burden and prevails at trial, we would appeal that ruling. The effect of
      any
      potential adverse ruling on our operations in Houston is unknown. An adverse
      ruling would affect all sexually oriented businesses in Houston. In that event,
      we would change our method of operations to require our entertainers to wear
      latex and bikini bottoms. While management believes this potential change will
      not have a meaningful effect on our operations, as the effect would be to all
      similarly situated businesses, the effect is unknown. It is possible an adverse
      ruling may allow for additional competition in the Houston market.


15
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          of Contents*


**OTHER
      LEGAL MATTERS** ****





On
      October 6, 2006, a lawsuit was filed in the 224 th Judicial
      District Court of Bexar County, Texas under Cause No. 2006-CI-15656 and styled *Edward
      Jimenez, et al v. Rick’s Cabaret International, Inc., et al* .
      This is
      a wrongful death and personal injury cause of action against two individuals,
      based upon negligence theories, and against us and our co-defendants, all of
      which are now our subsidiaries, based upon alleged “dram shop” violations,
      arising out of a two-vehicle collision on August 1, 2006. The collision occurred
      prior to our acquiring Spiros Partners Ltd. Spiros Partners Ltd. owns and
      operates our Rick’s San Antonio. Plaintiffs include the parents - one of whom
      was driving - of the two juvenile decedents, one of the decedent’s minor
      siblings and another minor child, both of whom were also passengers in the
      car
      that was struck by the allegedly intoxicated defendant driver. Plaintiffs are
      seeking unspecified damages for past and future physical pain and suffering,
      mental anguish, physical impairment, loss of companionship and consortium,
      funeral and medical expenses, property damages, and exemplary
      damages.





Management
      believes that we are not liable for any of the damages and that they are covered
      by the “safe harbor” provision set forth in Section 106.14 of the Texas
      Alcoholic Beverage Code, which provides that certain compliant establishments
      are not liable for the acts of their patrons. There does exist insurance
      coverage for this claim, although this insurance does not cover any exemplary
      damages awarded, nor those amounts beyond its limits. Management has denied
      any
      liability for this accident and is vigorously defending the lawsuit, which
      is
      presently in the beginning stages of the discovery process with a preliminary
      motion to dismiss two of our subsidiaries having been denied.





On
      June
      2, 2006, a lawsuit was filed in the 131 st Judicial
      District Court of Bexar County, Texas under Cause No. 2006-CI-08592 and styled *Richard
      P. Branson v. Spiros Partner,Ltd. dba The Penthouse Club* .
      This
      action occurred prior to our acquiring Spiros Partners Ltd. Spiros Partners
      Ltd.
      owns and operates our Rick’s San Antonio. This was a fraud, assault, abuse of
      process, invasion of privacy and slander action based upon the plaintiff’s
      allegation that the Club intentionally took advantage of and assaulted him
      while
      he was there on July 3, 2004, then subsequently was responsible for his
      malicious prosecution by the Bexar County District Attorney. Plaintiff sought
      unspecified damages for past and future physical pain and suffering, mental
      anguish, physical disability, financial injury and exemplary damages.





Management
      does not believe it is liable for any of the damages. There was no insurance
      coverage for the acts complained of by the plaintiff. Management denied any
      liability for these allegations and vigorously defended the lawsuit. On December
      13, 2006, our motion for summary judgment (based upon the plaintiff having
      no
      evidence to support any of his contentions) was granted in full. The plaintiff
      has 30 days to appeal.


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On
      April
      7, 2004, a lawsuit was filed in the 80 th Judicial
      District Court of Harris County, Texas, styled Cause No. 2004-18510, *Charity
      Renee Stevens, et al. vs. Lazaro Ernesto Alfonso, et al* .
      This is
      a wrongful death and personal injury action against two individuals based on
      negligence theories and five entertainment establishments including us based
      on
      alleged “dram shop” violations arising from a two-car collision. Plaintiffs have
      also sued Ford Motor Company under a theory of products liability. Plaintiffs
      include the children of the decedents, a minor passenger and the mothers of
      the
      decedents. Plaintiffs are seeking unspecified damages including physical pain
      and suffering, mental anguish, pecuniary loss, past and future loss of
      companionship and consortium, loss of mental and intellectual function, past
      and
      future physical impairment, reduction in earning capacity, increased education
      costs and expenses including funeral and medical costs. Subsequent to fiscal
      year end, the case was settled on December 11, 2006 (subject to court’s
      approval), which we recorded as accrued liabilities and other expense
      in September 2006.





One
      of
      our locations is currently being investigated by the Equal Employment
      Opportunity Commission (“EEOC”) as the result of two (2) complaints which were
      filed with the EEOC by former employees. The complaints are that male employees
      were used to replace female employees in certain positions at the particular
      club location. We have provided the EEOC with the materials and information
      requested. We have fully cooperated with the investigation. A finding by the
      EEOC is not anticipated until 2007.








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




We
      held
      our Annual Meeting of Shareholders on May 22, 2006. The results of the meeting
      have been disclosed in our quarterly report Form 10-QSB for the period ending
      June 30, 2006.








**PART
      II**




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




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


17
 *Table
          of Contents*


**COMMON
      STOCK PRICE RANGE**





HIGH
            
            LOWFiscal
                2006First
                Quarter
            
            $
            3.86
            
            $
            2.93Second
                Quarter
            
            $
            6.20
            
            $
            3.76Third
                Quarter
            
            $
            7.40
            
            $
            5.30Fourth
                Quarter
            
            $
            7.97
            
            $
            6.08Fiscal
                2005First
                Quarter
            
            $
            3.03
            
            $
            2.20Second
                Quarter
            
            $
            4.61
            
            $
            2.85Third
                Quarter
            
            $
            3.19
            
            $
            2.65Fourth
                Quarter
            
            $
            3.55
            
            $
            2.70





On
      December 15, 2006, the last sales price for the common stock as reported on
      the
      NASDAQ SmallCap Market was $5.27. On December 15, 2006, there were approximately
      1,480 stockholders of record of the common stock.





**TRANSFER
      AGENT AND REGISTRAR**





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





**DIVIDEND
      POLICY**





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





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


18
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          of Contents*


**EQUITY
      COMPENSATION PLAN INFORMATION**





The
      following table sets forth all equity compensation plans as of September 30,
      2006:





**Plan
                category**
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
              
              **(a)**
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
              
              **(b)**
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))**
              
              **(c)**Equity
                compensation plans approved by security holders
            727,500
            $2.70
            8,000





**DIRECTOR
      COMPENSATION**





We
      do not
      currently pay any cash directors' fees, but we pay the expenses of our directors
      in attending board meetings. In May 2006, we issued 10,000 stock options to
      each
      Director who is a member of our Audit Committee and 5,000 options to our other
      Directors. These options have a strike price of $6.75 per share and expire
      in
      May 2011.





**EMPLOYEE
      STOCK OPTION PLANS**





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





In
      August
      1999 we adopted the 1999 Stock Option Plan (the “1999 Plan”) with 500,000 shares
      authorized to be granted and sold under the 1999 Plan. In August 2004,
      shareholders approved an Amendment to the 1999 Plan (the “Amendment”) which
      increased the total number of shares authorized to 1,000,000. As of September
      30, 2006, 727,500 stock options are presently outstanding under the 1999 Plan,
      with 194,500 of which have been exercised during the fiscal
      year.


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**RECENT
      SALES OF UNREGISTERED SECURITIES**





During
      the quarter ended September 30, 2006, we completed the following transactions
      in
      reliance upon exemptions from registration under the Securities Act of 1933,
      as
      amended (the "Act") as provided in Section 4(2) thereof. All certificates issued
      in connection with these transactions were endorsed with a restrictive legend
      confirming that the securities could not be resold without registration under
      the Act or an applicable exemption from the registration requirements of the
      Act. None of the transactions involved a public offering, underwriting discounts
      or sales commissions. We believe that each person was a “qualified” investor
      within the meaning of the Act and had knowledge and experience in financial
      and
      business matters, which allowed them to evaluate the merits and risks of our
      securities. Each person was knowledgeable about our operations and financial
      condition.





1.
            In
                July 2006, the seller of the New York club converted $350,000 of
                principal
                from the related promissory note into 50,000 shares of restricted
                common
                stock.





2.
            In
                August 2006, a holder of a convertible debenture converted $25,023
                of
                interest owed into 5,269 shares of restricted common
                stock.








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





The
      following discussion should be read in conjunction with our audited consolidated
      financial statements and the related notes to the financial statements included
      in this Form 10-KSB.




**FORWARD
      LOOKING STATEMENT AND INFORMATION**





We
      are
      including the following cautionary statement in this Form 10-KSB to make
      applicable and take advantage of the safe harbor provision of the Private
      Securities Litigation Reform Act of 1995 for any forward-looking statements
      made
      by us or on behalf of us. Forward-looking statements include statements
      concerning plans, objectives, goals, strategies, future events or performance
      and underlying assumptions and other statements, which are other than statements
      of historical facts. Certain statements in this Form 10-KSB are forward-looking
      statements. Words such as "expects," "believes," "anticipates," "may," and
      "estimates" and similar expressions are intended to identify forward-looking
      statements. Such statements are subject to risks and uncertainties that could
      cause actual results to differ materially from those projected. Such risks
      and
      uncertainties are set forth below. Our expectations, beliefs and projections
      are
      expressed in good faith and we believe that they have a reasonable basis,
      including without limitation, our examination of historical operating trends,
      data contained in our records and other data available from third parties.
      There
      can be no assurance that our expectations, beliefs or projections will result,
      be achieved, or be accomplished. In addition to other factors and matters
      discussed elsewhere in this Form 10-KSB, the following are important factors
      that in our view could cause material adverse affects on our financial condition
      and results of operations: the risks and uncertainties related to our future
      operational and financial results, the risks and uncertainties relating to
      our
      Internet operations, competitive factors, the timing of the openings of other
      clubs, the availability of acceptable financing to fund corporate expansion
      efforts, our dependence on key personnel, the ability to manage operations
      and
      the future operational strength of management, and the laws governing the
      operation of adult entertainment businesses. We have no obligation to update
      or
      revise these forward-looking statements to reflect the occurrence of future
      events or circumstances.


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**RISK
      FACTORS**





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





Our
      Business Operations are Subject to Regulatory Uncertainties Which May Affect
      Our
      Ability to Continue Operations of Existing Nightclubs, Acquire Additional
      Nightclubs or Be Profitable




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




As
      discussed in the section entitled “Legal Proceedings” herein, we are subject to
      litigation regarding our Sexually Oriented Business licenses in Houston, Texas.
      The trial commenced on December 4, 2006. A decision from the Trial Court is
      not
      anticipated until some time in 2007. In the event the City of Houston can meet
      its burden and prevails at trial, we would appeal that ruling. The effect of
      any
      potential adverse ruling on our operations in Houston is unknown. An adverse
      ruling would affect all sexually oriented businesses in Houston. In that event,
      we would change our method of operations to require our entertainers to wear
      latex and bikini bottoms. While management believes this potential change will
      not have a meaningful effect on our operations, as the effect would be to all
      similarly situated businesses, the effect is unknown. It is possible an adverse
      ruling may allow for additional competition in the Houston market.


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




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





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




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





Risk
      of Adult Nightclubs Operations





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


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Permits
      Relating to the Sale of Alcohol





We
      derive
      a significant portion of our revenues from the sale of alcoholic beverages.
      In
      Texas, the authority to issue a permit to sell alcoholic beverages is governed
      by the Texas Alcoholic Beverage Commission (the "TABC"), which has the
      authority, in its discretion, to issue the appropriate permits. Rick's presently
      holds a Mixed Beverage Permit and a Late Hours Permit (the "Permits"). These
      Permits are subject to annual renewal, provided we have complied with all rules
      and regulations governing the permits. Renewal of a permit is subject to
      protest, which may be made by a law enforcement agency or by a member of the
      general public. In the event of a protest, the TABC may hold a hearing at which
      time the views of interested parties are expressed. The TABC has the authority
      after such hearing not to issue a renewal of the protested alcoholic beverage
      permit. While we have never been subject to a protest hearing against the
      renewal of our Permits, there can be no assurance that such a protest could
      not
      be made in the future, nor can there be any assurance that the Permits would
      be
      granted in the event such a protest was made. Other states may have similar
      laws
      which may limit the availability of a permit to sell alcoholic beverages or
      which may provide for suspension or revocation of a permit to sell alcoholic
      beverages in certain circumstances. The temporary or permanent suspension or
      revocations of either of the Permits or the inability to obtain permits in
      areas
      of expansion would have a material adverse effect on the revenues, financial
      condition and results of operations of the Company.





We
      Must Continue to Meet The NASDAQ Small Cap Market Continued Listing Requirements
      or We Risk Delisting




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





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





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


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In
      addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
      effective internal controls for financial reporting and disclosure controls
      and
      procedures. In particular, commencing in fiscal 2008, we must perform system
      and
      process evaluation and testing on the effectiveness of our internal controls
      over financial reporting, as required by Section 404 of the Sarbanes-Oxley
      Act. Subsequently in fiscal 2009, our independent registered public accounting
      firm will report on the effectiveness of our internal controls over financial
      reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our
      testing, or the subsequent testing by our independent registered public
      accounting firm, may reveal deficiencies in our internal controls over financial
      reporting that are deemed to be material weaknesses. Our compliance with
      Section 404 will require that we incur substantial accounting expense and
      expend significant management efforts. We currently do not have an internal
      audit group, and we will need to hire additional accounting and financial staff
      with appropriate public company experience and technical accounting knowledge.
      Moreover, if we are not able to comply with the requirements of Section 404
      in a timely manner, or if we or our independent registered public accounting
      firm identifies deficiencies in our internal controls over financial reporting
      that are deemed to be material weaknesses, the market price of our stock could
      decline, and we could
      be
      subject to sanctions or investigations by the SEC or other regulatory
      authorities, which would require additional financial and management
      resources.





Uninsured
      Risks





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





Limitations
      on Protection of Service Marks





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


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Anti-takeover
      Effects of Issuance of Preferred Stock





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





We
      Do
      Not Anticipate Paying Dividends on Common Shares in the Foreseeable
      Future




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




Future
      Sales of Our Common Stock May Depress Our Stock Price




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




O ur
      Stock Price Has Been Volatile and May Fluctuate in the Future




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




•
            our
                performance and prospects;


•
            the
                depth and liquidity of the market for our
                securities;


•
            sales
                by selling shareholders of shares issued or issuable in connection
                with
                the Debenture and/or Convertible
                Note;


•
            investor
                perception of us and the industry in which we
                operate;


•
            changes
                in earnings estimates or buy/sell recommendations by
                analysts;


•
            general
                financial and other market conditions;
                and


•
            domestic
                economic conditions.


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





Our
      Management Controls a Significant Percentage of Our Current Outstanding Common
      Stock and Their Interests May Conflict With Those of Our
      Shareholders





As
      of
      December 15, 2006, our Directors and executive officers and their respective
      affiliates collectively and beneficially owned approximately 25.1% of our
      outstanding common stock, including all warrants exercisable within 60 days.
      This concentration of voting control gives our Directors and executive officers
      and their respective affiliates substantial influence over any matters which
      require a shareholder vote, including, without limitation, the election of
      Directors, even if their interests may conflict with those of other
      shareholders. It could also have the effect of delaying or preventing a change
      in control of or otherwise discouraging a potential acquirer from attempting
      to
      obtain control of us. This could have a material adverse effect on the market
      price of our common stock or prevent our shareholders from realizing a premium
      over the then prevailing market prices for their shares of common
      stock.





We
      are
      Dependent on Key Personnel





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





Cumulative
      Voting is Not Available To Stockholders





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





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





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


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The
      inclusion of these provisions in the Articles may have the effect of reducing
      the likelihood of derivative litigation against Directors and officers, and
      may
      discourage or deter stockholders or management from bringing a lawsuit against
      Directors and officers for breach of their duty of care, even though such an
      action, if successful, might otherwise have benefited us and our stockholders.





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





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





**GENERAL
      INFORMATION**





We
      operate in two businesses in the adult entertainment industry:




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





2.
            We
                have extensive Internet activities.





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


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





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





Beginning
      in fiscal 2002 and continuing through fiscal 2006, we greatly reduced our usage
      of promotional pricing for membership fees for our adult entertainment web
      sites. This reduced our revenues from these web sites.




We
      performed our annual evaluation on goodwill impairment as of September 30,
      2006.
      We determined that the goodwill related to the acquisition of Bobby’s Novelty,
      Inc. was impaired and charged $79,841 against operating expenses.





**CRITICAL
      ACCOUNTING POLICIES**





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





Accounts
      and Notes Receivable





Accounts
      receivable trade is primarily comprised of credit card charges, which are
      generally converted to cash in two to five days after a purchase is made. The
      Company’s accounts receivable other is comprised of employee advances and other
      miscellaneous receivables. The long-term portion of notes receivable are
      included in other assets in the accompanying consolidated balance sheets. The
      Company recognizes interest income on notes receivable based on the terms of
      the
      agreement and based upon management’s evaluation that the notes receivable and
      interest income will be collected. The
      Company recognizes allowances for doubtful accounts or notes when, based on
      management judgment, circumstances indicate that accounts or notes receivable
      will not be collected. The $70,000 due from Taurus Entertainment as of September
      30, 2006 and 2005 was collateralized by 3,000,000 shares of Taurus Entertainment
      (now known as "Bluestar Health, Inc."). The Company foreclosed on the
      collateralized shares in August 2006. As such, the Company presently owns the
      shares and has the ability to sell them in the open market. As of September
      30,
      2006, the value of the shares totals approximately $150,000. As the amount
      due
      has been fully collateralized since the note receivable agreement was entered
      and the Company believes such collateral will fully satisfy such amount due,
      no
      allowance has been provided nor is deemed necessary as of September 30, 2006
      and
      2005. The Company intends to achieve collectibility either through repurchase
      of
      the shares by Bluestar Health, Inc. or by selling the shares in the open market
      or in a private transaction.


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Inventories





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





Marketable
      Securities





Marketable
      securities at September 30, 2006 and 2005 consist of common stock. Statement
      of
      Financial Accounting Standards (“SFAS”) No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* ,
      requires certain investments be recorded at fair value or amortized cost. The
      appropriate classification of the investments in marketable equity is determined
      at the time of purchase and re-evaluated at each balance sheet date. As of
      September 30, 2006 and 2005, the Company’s marketable securities were classified
      as available-for-sale, which are carried at fair value, with unrealized gains
      and losses reported as other comprehensive income within the stockholders’
equity section of the accompanying consolidated balance sheets. The cost of
      marketable equity securities sold is determined on a specific identification
      basis. The fair value of marketable equity securities is based on quoted market
      prices. There have been no realized gains or losses related to marketable
      securities for the year ended September 30, 2006. Marketable securities held
      at
      September 30, 2006 and 2005 have a cost basis of approximately $13,000.





Property
      and Equipment





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


29
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Goodwill
      and Intangible Assets





In
      June
      2001, the FASB issued SFAS No. 142, *Goodwill
      and Other Intangibles Assets* ,
      which
      addresses the accounting for goodwill and other intangible assets. Under SFAS
      No. 142, goodwill and intangible assets with indefinite lives are no longer
      amortized, but reviewed on an annual basis for impairment. The Company adopted
      SFAS No. 142 effective October 1, 2001. The Company’s annual evaluation was
      performed as of September 30, 2006, based on a projected discounted cash flow
      method using a discount rate determined by management to be commensurate with
      the risk inherent in the current business model. The Company determined that
      the
      goodwill related to the acquisition of Bobby’s Novelty, Inc. was impaired and
      charged $79,841 against operating expenses. All of the Company’s goodwill and
      intangible assets relate to the nightclub segment. Definite lived intangible
      assets are amortized on a straight-line basis over their estimated lives. Fully
      amortized assets are written-off against accumulated amortization.





Revenue
      Recognition





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





The
      Company recognizes revenue for VIP memberships in accordance with Staff
      Accounting Bulletin No. 104, *Revenue
      Recognition,* by
      deferring membership revenue and recognizing over the estimated membership
      usage
      period. Management estimates that the weighted average useful lives for
      memberships are 12 and 24 months for annual and lifetime memberships,
      respectively. The Company does not track membership usage by type of membership,
      however it believes these lives are appropriate and conservative, based on
      management’s knowledge of its client base and membership usage at the clubs.





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





Advertising
      and Marketing





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


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Income
      Taxes





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





Stock
      Options





At
      September 30, 2006, the Company has stock options outstanding, which are
      described more fully in Note H of the consolidated financial statements. The
      Company accounts for its stock options under the recognition and measurement
      principles of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations. The following table illustrates the effect on net
      income and earnings per share if the Company had applied the fair value
      recognition provisions of SFAS No. 123, *Accounting
      for Stock-Based Compensation,* to
      stock-based employee compensation.





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





**Year
                Ended September 30,****2006**
            
            **2005**Net
                income (loss), as reported
            
            $
            1,752,714
            
            $
            (215,148
            )Less
                total stock-based employee compensation expense determined under
                the fair
                value based method for all awards
            
            
            (611,408
            )
            
            (549,165
            )Pro
                forma net income (loss)
            
            $
            1,141,306
            
            $
            (764,313
            )Earnings
                (loss) per share:Basic
                - as reported
            
            $
            0.38
            
            $
            (0.05
            )Diluted
                - as reported
            
            $
            0.35
            
            $
            (0.05
            )Basic
                - pro forma
            
            $
            0.25
            
            $
            (0.19
            )Diluted
                - pro forma
            
            $
            0.23
            
            $
            (0.19
            )


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Impact
      of Recently Issued Accounting Standards





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





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




**RESULTS
      OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE
      FISCAL YEAR ENDED SEPTEMBER 30, 2005**





For
      the
      fiscal year ended September 30, 2006, we had consolidated total revenues of
      $24,487,215, compared to consolidated total revenues of $14,824,407 for the
      year
      ended September 30, 2005. The consolidated total revenues for the period ending
      September 30, 2005 did not include revenues from discontinued operations in
      the
      amount of $672,265. This was an increase of $9,662,808 or 65.18%. The increase
      in total revenues was primarily due to revenues generated in our new clubs,
      increases in revenues from our existing clubs, and an increase in revenues
      from
      our New York location as it has a full twelve months of operations in fiscal
      2006 compared to only less than one month in fiscal 2005. Revenues from
      nightclub operations for same-location same-period increased by 25.12% and
      for
      Internet businesses by 1.91%.





Our
      income from continuing operations before minority interest for the year ended
      September 30, 2006 was $1,721,377 compared to a loss of $368,313 for the year
      ended September 30, 2005. The increase in income from continuing operations
      was
      primarily due to the increase in revenues from our existing clubs and from
      our
      New York location as it has a full twelve months of operations in fiscal 2006
      compared to only less than one month in fiscal 2005, offset by a loss of
      approximately $330,000 from our newly acquired clubs. Our net income from
      continuing operations for nightclub operations was $4,268,436 for the year
      ended
      September 30, 2006 compared with $1,721,264 for the year ended September 30,
      2005. Our net income from operations for our Internet businesses was $138,351
      for the year ended September 30, 2006 compared with $114,501 for the year ended
      September 30, 2005. Our income from continuing operations for our nightclub
      operations for the same-location-same-period increased by 51.26%. Our net income
      for our Internet operations for the same-web-site-same-period increased by
      20.83%.


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Our
      cost
      of goods sold for the year ended September 30, 2006 was 11.91% of total revenues
      compared to 12.59% of related revenues for the year ended September 30, 2005.
      The decrease was due primarily to the overall reduction in cost of goods sold
      in
      our club and internet operations. Our cost of goods sold for the nightclub
      operations for the year ended September 30, 2006 was 12.17% of our total
      revenues from club operations compared to 12.87% for the year ended September
      30, 2005. We continued our efforts to achieve reductions in cost of goods sold
      of the club operations through improved inventory management. We are continuing
      a program to improve margins from liquor and food sales and food service
      efficiency. Our cost of sales from our Internet operations for the year ended
      September 30, 2006 was 4.10% compared to 7.55% of related revenues for the
      year
      ended September 30, 2005. We have implemented measures to reduce expenses in
      our
      Internet operations.





Our
      payroll and related costs for the year ended September 30, 2006 were $7,081,660
      compared to $5,200,976 for the year ended September 30, 2005. The increase
      was
      primarily due to the increase in payroll in our New York club as it has a full
      twelve months of operations in fiscal 2006 compared to only less than one month
      in fiscal 2005 and in opening new clubs. Our payroll for our nightclub
      operations for same-location-same-period increased by 14.26%. The increase
      was
      primarily due to increases in payroll in our Minnesota, Sports Cabaret, and
      Onyx
      Houston clubs due to increases in revenues. Our payroll for Internet operations
      increased by 15.33%. We believe that our labor and management staff levels
      are
      at appropriate levels.





Our
      other
      general and administrative expenses for the year ended September 30, 2006 were
      $11,498,862 compared to $7,458,721 for the year ended September 30, 2005. The
      increase was primarily due to the increase in taxes & permits, rent, legal
& professional, utilities, insurance, and advertising & marketing
      expenses from opening new locations, from our existing clubs, and from our
      New
      York location as it has a full twelve months of operations in fiscal 2006
      compared to only less than one month in fiscal 2005. Other selling, general
      and
      administrative expenses for same-location-same-period for the nightclub
      operations increased by 18.70%. The increase was primarily due to the increase
      in taxes & permits, rent, legal & professional, utilities, insurance,
      and advertising & marketing expenses. Other selling, general and
      administrative expenses for Internet operations decreased by 4.84%.





Our
      interest expense for the year ended September 30, 2006 was $1,057,020 compared
      to $699,678 for the year ended September 30, 2005. The increase was primarily
      due to the increase in debt in relation to the purchase and renovation of New
      York club. We have increased our long term debt to $13,920,733 as of September
      30, 2006 compared to debt of $13,246,836 as of September 30,
      2005.


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**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      September 30, 2006, we had a deficit in working capital of $2,264,101 compared
      to $2,047,725 as of September 30, 2005. Because of the large volume of cash
      we
      handle, stringent cash controls have been implemented. The decrease was
      primarily due to increases in current portion of long term debt and accrued
      expenses, offset by a decrease in accounts payable and increase in cash and
      cash
      equivalent. At September 30, 2006, our cash and cash equivalents were $854,932
      compared to $480,330 at September 30, 2005.





Our
      depreciation for the year ended September 30, 2006 was $1,001,513 compared
      to
      $573,706 for the year ended September 30, 2005. Our amortization for the year
      ended September 30, 2006 was $47,734 compared to $16,760 for the period ended
      September 30, 2005.





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




Years
                ended September 30,2006
            
            2005Net
                cash provided by operating activities
            
            $
            2,725,770
            
            $
            2,090,030Net
                cash used in investing activities
            
            
            (3,110,840
            )
            
            (6,307,508
            )Net
                cash provided by financing activities
            
            
            759,672
            
            
            4,801,197Net
                cash used in discontinued operations
            
            
            ---
            
            
            (378,632
            )Net
                increase in cash and cash equivalent
            
            $
            374,602
            
            $
            205,087





Net
      cash
      provided by operating activities in the year ended September 30, 2006 was
      $2,725,770 compared to $2,090,030 for the year ended September 30, 2005. The
      increase in cash provided by operating activities was primarily due to the
      increase in net income.





We
      used
      $3,110,840 of cash in investing activities for the year ended September 30,
      2006
      compared to $6,307,508 for the year ended September 30, 2005. $759,672 of cash
      was provided in financing activities for the year ended in September 30, 2006
      compared to $4,801,197 for the year ended September 30, 2005.





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





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


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





Debt
      Financing:




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





We
      entered into a promissory note on January 18, 2005, for $5,125,000 bearing
      simple interest at the rate of 4.0% per annum with a balloon payment at the
      end
      of five years, part of which is convertible to restricted shares of our common
      stock at prices ranging from $4.00 to $7.50 per share. As of September 30,
      2006,
      $1,925,000 of the principal had been converted into 350,000 shares of our
      restricted common stock.





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





On
      June
      17, 2005, we borrowed $100,000 from an unrelated individual at an annual
      interest rate of 11% over 10 year term.





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





In
      January 2006, we paid off our borrowing with Voice Media.


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On
      February 6, 2006, we issued a Convertible Debenture (the “Debenture”) to an
      unrelated investment group for the principal sum of $1,000,950 bearing interest
      at the rate of 10% per annum, with a maturity date of February 1, 2009. Under
      the terms of the Debenture, we are required to make three quarterly interest
      payments beginning May 1, 2006. Thereafter, we are required to make nine equal
      quarterly principal and interest payments. At any time after 366 days from
      the
      date of issuance of this Debenture, we have the right to redeem the Debenture
      in
      whole or in part during the term of the Debenture. At the election of the
      holder, the holder has the right at any time to convert all or any portion
      of
      the principal or interest amount of the Debenture into shares of our common
      stock at a rate of $4.75 per share, which approximates the closing price of
      our
      stock on February 6, 2006. The proceeds of the Debenture was used to **** payoff
      certain debt and increase working capital. As of June 30, 2006, the holder
      had
      elected to convert $22,938 of interest into 4,829 shares of restricted common
      stock.





In
      March
      2006, we paid off our borrowing from an unrelated individual on the property
      in
      Brazoria County.





On
      August
      24, 2006, our subsidiary, RCI Debit Services, Inc., acquired 99% of the
      ownership interest in an adult entertainment cabaret known as “Centerfolds”
located at 5418 Brewster Street, San Antonio, Texas. Additionally, under the
      terms of the transaction, our subsidiary, RCI Holdings, Inc. acquired 100%
      of
      the interest in the improved real property upon which Centerfolds is located.
      The total purchase price for the business and real property was $2,900,000.
      Under terms of the agreement, we paid the owners of the club and property
      $600,000 in cash at the time of closing and signed promissory notes for the
      remaining balance. In addition, certain members of the current ownership
      structure entered a five-year covenant not to compete with us.





Financing
      from related parties:





On
      June
      17, 2005, we borrowed $160,000 from a shareholder at an annual interest rate
      of
      12% over 3 year term.





On
      July
      22, 2005, we entered into a secured convertible debenture with a greater than
      10% shareholder for a principal sum of $660,000, which includes the loan on
      June
      17, 2005, in the amount of $160,000. The term is for three years and the
      interest rate is 12% per annum. The debenture matures on August 1, 2008. We
      also
      issued 50,000 warrants at $3.00 per share in relation to this debenture. The
      debenture is secured by our ownership in Citation Land, LLC and RCI Holdings,
      Inc., both of which are wholly owned subsidiaries.





On
      April
      28, 2006, we entered into convertible debentures with three shareholders, one
      of
      which is a greater than 10% shareholder, for a principal sum of $825,000. The
      term is for two years and the interest rate is 12% per annum. At the election
      of
      the holders, the holders have the right to convert (subject to certain
      limitations) all or any portion of the principal amount of the debentures into
      shares of our common stock at a rate of $6.55 per share, which approximates
      the
      closing price of our stock on April 28, 2006. The debentures provide, absent
      shareholder approval, that the number of shares of our common stock that may
      be
      issued by us or acquired by the holders upon conversion of the debentures shall
      not exceed 19.99% of the total number of issued and outstanding shares of our
      common stock. $600,000 of the debentures is secured by our property located
      at
      9009 Airport Blvd., Houston, Texas. The proceeds of the debentures were used
      for
      the acquisition of Joint Ventures, Inc.


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





Contractual
      obligations and commitments :





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





Operating
                Lease
            
            Debt(1)
            
            Total2007
            
            $
            974,847
            
            $
            2,278,315
            
            $
            3,253,1622008
            
            
            998,914
            
            
            5,017,328
            
            
            6,016,2422009
            
            
            884,114
            
            
            1,252,296
            
            
            2,136,4102010
            
            
            653,882
            
            
            662,122
            
            
            1,316,0042011
            
            
            654,091
            
            
            1,065,905
            
            
            1,719,996Thereafter
            
            
            7,999,663
            
            
            3,644,767
            
            
            11,644,430$
            12,165,511
            
            $
            13,920,733
            
            $
            26,086,244





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





We
      are
      not aware of any other event or trend that would potentially affect liquidity.
      In the event such a trend develops, we believe our working capital and capital
      expenditure requirements will be adequately met by cash flows from operations.
      In our opinion, working capital is not a true indicator of our financial status.
      Typically, businesses in our industry carry current liabilities in excess of
      current assets because businesses in our industry receive substantially
      immediate payment for sales, with nominal receivables, while inventories and
      other current liabilities normally carry longer payment terms. Vendors and
      purveyors often remain flexible with payment terms, providing businesses in
      our
      industry with opportunities to adjust to short-term business down turns. We
      consider the primary indicators of financial status to be the long-term trend
      of
      revenue growth, the mix of sales revenues, overall cash flow, and profitability
      from operations and the level of long-term debt.


37
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The
      following table presents a summary of such indicators:





%
            
            
            
            %Years
                ended September 30,
            
            2006
            
            increase
            
            2005
            
            increase
            
            2004Sales
                of alcoholic beverage
            
            $
            8,781,635
            
            
            61.69
            
            $
            5,431,049
            
            
            1.63
            
            $
            5,343,858Sales
                of food and merchandise
            
            
            2,651,868
            
            
            57.09
            
            
            1,688,043
            
            
            6.71
            
            
            1,581,851Service
                revenues
            
            
            11,442,371
            
            
            72.52
            
            
            6,632,201
            
            
            13.56
            
            
            5,839,759Internet
                revenues
            
            
            801,395
            
            
            1.74
            
            
            787,617
            
            
            1.09
            
            
            796,353Other
            
            
            809,946
            
            
            104.27
            
            
            396,497
            
            
            33.67
            
            
            296,613Total
                revenues
            
            $
            24,487,215
            
            
            65.18
            
            $
            14,824,407
            
            
            6.97
            
            $
            13,858,434Net
                cash provided by operating activities
            
            
            2,725,770
            
            
            
            
            
            2,090,030
            
            
            
            
            
            736,308Net
                income (loss)
            
            
            1,752,714
            
            
            
            
            
            (215,148
            )
            
            
            
            
            775,253Long
                term debt
            
            
            13,920,733
            
            
            
            
            
            13,246,836
            
            
            
            
            
            3,693,560





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





Share
      repurchase





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





**IMPACT
      OF INFLATION**





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





**SEASONALITY**





Our
      nightclub operations are affected by seasonal factors. Historically, we have
      experienced reduced revenues from April through September with the strongest
      operating results occurring during October through March. Our experience
      indicates that there are no seasonal fluctuations in our Internet
      activities.


38
 *Table
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**GROWTH
      STRATEGY**





We
      believe that our nightclub operations can continue to grow organically and
      through careful entry into markets and demographic segments with high growth
      potential. Our growth strategy is: (a) to open new clubs after careful market
      research, (b) to acquire existing clubs in locations that are consistent with
      our growth and income targets and which appear receptive to the upscale club
      formula we have developed, as is the case with the acquisition of the New York
      club and clubs in Charlotte, South Houston, San Antonio and Austin, (c) to
      form
      joint ventures or partnerships to reduce start-up and operating costs, with
      us
      contributing equity in the form of our brand name and management expertise,
      (d)
      to develop new club concepts that are consistent with our management and
      marketing skills, and/or (e) to acquire real estate in connection with club
      operations, although some clubs may be in leased premises.





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





During
      fiscal 2005, we acquired two existing nightclub operations for a total cost
      of
      $8,775,000. These acquisitions were funded primarily through indebtedness,
      $8,862,000, and issuance of our restricted common stocks, $675,000. Part of
      the
      indebtedness was used for renovation of the clubs. During fiscal 2006,
      $1,925,000 of the indebtedness was converted into 350,000 shares of our
      restricted common stock. These nightclub operations had total revenues of
      approximately $7,400,000 and $1,100,000 during fiscal 2006 and 2005,
      respectively, and net income of approximately $635,000 during fiscal 2006 and
      net loss of approximately $983,000 during fiscal 2005.





We
      continue to evaluate opportunities to acquire new nightclubs and anticipate
      acquiring new locations that fit our business model as we have done in the
      past.





We
      also
      expect to continue to grow our Internet profit centers. We plan to focus on
      high-margin Internet activities that leverage our marketing skills while
      requiring a low level of start-up cost and ongoing operating costs and refine
      and tune our Internet sites for better positioning in organic search rankings
      amongst the major search providers.  We will restructure affiliate programs
      to provide higher incentives to our current affiliates to better promote our
      Internet sites, while actively seeking new affiliates to send traffic to our
      Internet sites.





The
      acquisition of additional clubs and/or internet operations will require us
      to
      obtain additional debt or issuance of our common stock, or both. There can
      be no
      assurance that we will be able to obtain additional financing on reasonable
      terms in the future, if at all, should the need arise. An inability to obtain
      such additional financing could have an adverse effect on our growth strategy.


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**ITEM
                7.**
            **FINANCIAL
                STATEMENTS**





The
      information required by this Item 7 is included in this report beginning on
      page
      F-1.








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





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








**ITEM
                8A.**
            **CONTROLS
                AND PROCEDURES**





As
      of the
      end of the period of this report, our principal executive and principal
      financial officer carried out an evaluation of the effectiveness of the design
      and operation of our disclosure controls and procedures. This evaluation was
      carried out under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer. Based on
      that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures are effective in timely alerting
      them to material information required to be included in the Company’s periodic
      reports to the Securities and Exchange Commission. During the fourth fiscal
      quarter, there were no changes in our internal control over financial reporting
      that has materially affected, or is reasonably likely to materially affect
      the
      small business issuer’s internal control over financial reporting.








**ITEM
                8B.**
            **OTHER
                INFORMATION**





None.








**PART
      III**





**ITEM9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                SECTION
                16(A) OF THE EXCHANGE ACT**





**DIRECTORS
      AND EXECUTIVE OFFICERS**





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


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Name
            Age
            PositionEric
                S. Langan
            38
            Director,
                Chairman, Chief Executive Officer, President and Principal Financial
                OfficerTravis
                Reese
            37
            Director
                and V.P.-Director of TechnologyRobert
                L. Watters
            55
            DirectorAlan
                Bergstrom
            61
            DirectorSteven
                Jenkins
            49
            Director





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





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





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





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


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





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




**COMMITTEES
      OF THE BOARD OF DIRECTORS**





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





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


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





We
      have a
      Compensation Committee whose members are Robert Watters, Alan Bergstrom and
      Steven L. Jenkins. Decisions concerning executive officer compensation for
      the
      fiscal year ended September 30, 2006, were made by the Compensation Committee.
      The primary purpose of the Compensation Committee is to evaluate and review
      the
      compensation of executive officers.





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





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





**CODE
      OF ETHICS**





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








**ITEM
                10.**
            **EXECUTIVE
                COMPENSATION**





The
      following table reflects all forms of compensation for services to us for the
      fiscal years ended September 30, 2006, 2005 and 2004 of certain executive
      officers. **** No
      other
      executive officer of ours received compensation that exceeded $100,000 during
      fiscal 2005. Mr. Langan is Chairman of the Board, a Director, Chief Executive
      Officer, President and Chief Financial Officer. Mr. Reese is Director and
      V.P.-Director of Technology.


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**SUMMARY
      COMPENSATION TABLE**





Annual
                Compensation
            
            Long
                Term CompensationAwards
            
            PayoutsName
                and
              PrincipalPosition
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Other
              Annual
              Compen-
              sation
                (1)
              ($)
            
            Restricted
              Stock
              Awards
              ($)
            
            Securities
              Underlying
              Options/
              SARs
              (#)
            
            LTIP
              Payouts
              ($)
            
            All
                Other
              Compen-
              sation
              ($)Eric
                Langan2006
            
            $
            395,300
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            5,000
            
            
            -0-
            
            
            -0-2005
            
            $
            344,100
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            5,000
            
            
            -0-
            
            
            -0-2004
            
            $
            326,038
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            280,000
            
            
            -0-
            
            
            -0-Mr.
              Langan is our Chairman, a Director, Chief Executive Officer, President
              and Chief Financial Officer.Travis
                Reese2006
            
            $
            167,201
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            5,000
            
            
            -0-
            
            
            -0-2005
            
            $
            165,531
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            5,000
            
            
            -0-
            
            
            -0-2004
            
            $
            161,000
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            55,000
            
            
            -0-
            
            
            -0-


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


__________________________________


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








**OPTION/SAR
      GRANTS IN LAST FISCAL YEAR (Individual Grants)**





Number
                of
            
            Percent
                of TotalSecurities
            
            Options/SARsUnderlying
            
            Granted
                ToOptions/SARs
            
            Employees
                In
            
            Exercise
                of
            
            ExpirationName
            
            Granted
            
            Fiscal
                Year
            
            Base
                Price
            
            Date#
            
            %
            
            $/shareEric
                Langan
            
            
            5,000
                shares (1
            )
            
            12.50
            %
            $
            6.75
            
            
            5/31/2011Travis
                Reese
            
            
            5,000
                shares (1
            )
            
            12.50
            %
            $
            6.75
            
            
            5/31/2011





___________________________________


(1)
      These
      options were granted to Messrs. Langan and Reese for serving in their capacity
      as Directors. A total of 17,500 stock options were exercised by Messrs. Langan
      and Reese during the fiscal year ended September 30, 2006.


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**AGGREGATED
      OPTION/SAR EXERCISES IN**


**LAST
      FISCAL YEAR AND FY-END OPTION/SAR VALUES**





Name
            
            Shares
              Acquired
                On
              Exercise
              #
            
            Value
              Realized
              $
            
            Number
                Of Unexercised
              Securities
                Underlying
              Options/SARs
              At
                FY-End
              Exercisable/
              Unexercisable
              #
            
            Value
                of Unexercised
              In-The-Money
                Options/
              SARs
                At FY-End
              Exercisable/
              Unexercisable
              $Eric
                Langan
            
            
            5,000
                (1
            )
            $
            21,500
            
            
            390,000
                / 5,000
            
            $
            1,141,600
                / $ 0Travis
                Reese
            
            
            12,500
                (1
            )
            $
            52,219
            
            
            65,000
                / 5,000
            
            $
            190,850
                / $ 0





___________________________________


(1)  A
      total
      of 17,500 stock options were exercised by these persons during the fiscal year
      ended September 30, 2006





**DIRECTOR
      COMPENSATION**





We
      do not
      currently pay any cash directors' fees, but we pay the expenses of our directors
      in attending board meetings. In May 31, 2006, we issued 10,000 options to each
      Director who is a member of our audit committee and 5,000 options to our other
      Directors. These options have a strike price of $6.75 per share and expire
      in
      May 2011.





**EMPLOYMENT
      AGREEMENTS**





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





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





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


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**ITEM11.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**





The
      following table sets forth certain information at December 15, 2006, with
      respect to the beneficial ownership of shares of Common Stock by (i) each person
      known to us who owns beneficially more than 5% of the outstanding shares of
      Common Stock, (ii) each of our directors, (iii) each of our executive officers
      and (iv) all of our executive officers and directors as a group. Unless
      otherwise indicated, each stockholder has sole voting and investment power
      with
      respect to the shares shown. As of December 15, 2006, there were 5,334,515
      shares of common stock outstanding.





Name/Address
            Number
                of shares
            Title
                of class
            Percent
                of Class(10)Eric
                S. Langan
              505
                North Belt, Suite 630
              Houston,
                Texas 77060
            1,189,865(1)
            Common
                stock
            22.3%Robert
                L. Watters
              315
                Bourbon Street
              New
                Orleans, Louisiana 70130
            35,000(2)
            Common
                stock
            0.7%Steven
                L. Jenkins
              16815
                Royal Crest Drive
              Suite
                160
              Houston,
                Texas 77058
            10,000(3)
            Common
                stock
            0.2%Travis
                Reese
              505
                North Belt, Suite 630
              Houston,
                Texas 77060
            74,775(4)
            Common
                stock
            1.4%Alan
                Bergstrom
              904
                West Avenue, Suite 100
              Austin,
                Texas 78701
            25,000(5)
            Common
                stock
            0.5%All
                of our Directors and Officers as a Group of five persons
            1,334,640(6)
            Common
                stock
            25.1%E.
                S. Langan. L.P.
              505
                North Belt, Suite 630
              Houston,
                Texas 77060
            578,632
            Common
                stock
            10.9%Ralph
                McElroy
              1211
                Choquette
              Austin,
                Texas, 78757
            728,913(7)
            Common
                stock
            13.7%Blair
                Sanford
              One
                Market Street Suite 3750
              San
                Francisco, CA 94105
            494,557(8)
            Common
                stock
            9.3%Jeffrey
                Benton
              47
                Summit Ave.
              Summit,
                NJ
            283,115(9)
            Common
                stock
            5.3%


_____________________________





(1)
      Mr.
      Langan has sole voting and investment power for 321,233 shares that he owns
      directly. Mr. Langan has shared voting and investment power for 578,632 shares
      that he owns indirectly through E. S. Langan, L.P. Mr. Langan is the general
      partner of E. S. Langan, L.P. This amount also includes options to purchase
      up
      to 290,000 shares of common stock that are presently exercisable.





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


46
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(3)
      Includes options to purchase up to 10,000 shares of common stock that are
      presently exercisable.





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





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





(6)
      Includes options to purchase up to 415,000 shares of common stock that are
      presently exercisable.





(7)
      Includes 678,913 shares of common stock and 50,000 warrants to purchase shares
      of common stock that are presently exercisable at $3.00 per share.  This
      number specifically excludes shares underlying two convertible debentures
      totaling $1,260,000 which convertible at prices of $3.00 ($660,000) and $6.55
      ($600,000), subject to adjustment under certain conditions.  The terms of
      both debentures provide, absent shareholder approval, that the number of shares
      of our common stock that may be issued to or acquired by Mr. McElroy upon
      conversion of any debenture shall not exceed 19.99% of the total number of
      issued and outstanding shares of our common stock.





(8)
      Includes 298,686 shares of common stock held by Burlingame Equity Investors,
      LP,
      40,540 shares of common stock held by Burlingame Equity Investors II, LP, and
      155,331 shares of common stock held by Burlingame Equity Investors (Offshore)
      Ltd. Mr. Blair Sanford is the managing member of Burlingame Asset Management
      LLC, which is the general partner of Burlingame Equity Investors, LP, Burlingame
      Equity Investors II, LP, and Burlingame Equity Investors (Offshore)
      Ltd.





(9)
      Includes 61,851 shares of common stock held individually, 210,726 shares of
      common stock held indirectly by Fairfield Investment Group LLC that are issuable
      upon the conversion of a convertible debenture, and 10,538 held indirectly
      by
      Fairfield Investment Group LLC. Mr. Jeffrey Benton is the Managing Director
      of
      Fairfield Advisors and has investment decision and voting authority for this
      entity.




(10)
      These percentages exclude treasury shares in the calculation of percentage
      of
      class.





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





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








**ITEM
                12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**





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





In
      May
      2002, we loaned $100,000 to Eric Langan who is our Chief Executive Officer.
      The
      promissory note is unsecured, bears interest at 11% and is amortized over a
      period of ten years. The note contains a provision that in the event Mr. Langan
      leaves the Company for any reason, the note immediately becomes due and payable
      in full. The balance of the note was $70,208 at September 30, 2006 and is
      included in other assets in our balance sheet.


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





On
      April
      28, 2006, we entered into convertible debentures with three shareholders, one
      of
      which is a greater than 10% shareholder, for a principal sum of $825,000. The
      term is for two years and the interest rate is 12% per annum. At the election
      of
      the holders, the holders have the right to convert (subject to certain
      limitations) all or any portion of the principal amount of the debentures into
      shares of our common stock at a rate of $6.55 per share, which approximates
      the
      closing price of our stock on April 28, 2006. The debentures provide, absent
      shareholder approval, that the number of shares of our common stock that may
      be
      issued by us or acquired by the holders upon conversion of the debentures shall
      not exceed 19.99% of the total number of issued and outstanding shares of our
      common stock. The shares of Common Stock underlying the principal amount of
      the
      debentures had piggyback registration rights and were registered with SEC in
      June 2006. The proceeds of the debentures were used for the acquisition Joint
      Ventures, Inc.





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


48
 *Table
            of Contents*




**ITEM
                13.**
            **EXHIBITS**





Exhibit
      14 - Code of Ethics.





Exhibit
      21- Subsidiaries of the Registrant.





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





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






**ITEM
                  14.**
              **PRINCIPAL
                  ACCOUNTING FEES AND
                  SERVICES**





The
      following table sets forth the aggregate fees paid or accrued for professional
      services rendered by Whitley Penn LLP for the audit of our annual financial
      statements for fiscal year 2006 and fiscal year 2005 and the aggregate fees
      paid
      or accrued for audit-related services and all other services rendered by Whitley
      Penn LLP for fiscal year 2006 and fiscal year 2005.




2006
            
            2005Audit
                fees
            
            $
            97,768
            
            $
            137,529Audit-related
                fees
            
            
            16,210
            
            
            8,106Tax
                fees
            
            
            3,850
            
            
            12,550All
                other fees
            
            
            -
            
            
            -Total
            
            $
            117,828
            
            $
            158,185





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




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




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




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


49
 *Table
          of Contents*


**SIGNATURES**





In
      accordance with the requirements of Section 13 of 15(d) of the Exchange Act,
      the
      Registrant has caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized, on December 27, 2006.








Rick's
                Cabaret International, Inc./s/
                Eric S. LanganBy:
                Eric S. LanganDirector,
                Chief Executive Officer,
              President
                and Chief Financial Officer








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





Signature
            
            Title
            
            Date/s/
                Eric S. LanganEric
                S. Langan
            
            Director,
                Chief Executive Officer, President and Chief Financial
                Officer
            
            December
                27, 2006/s/
                Travis ReeseTravis
                Reese
            
            Director
                and V.P.-Director of Technology
            
            December
                27, 2006/s/
                Robert L. WattersRobert
                L. Watters
            
            Director
            
            December
                24, 2006/s/
                Alan BergstromAlan
                Bergstrom
            
            Director
            
            December
                26, 2006/s/
                Steven JenkinsSteven
                Jenkins
            
            Director
            
            December
                22, 2006




50
 *Table
          of Contents*


**RICK’S
        CABARET INTERNATIONAL, INC.**
  
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 
 **Years
        Ended September 30, 2006 and 2005**
    **Table
        of Contents**
 
 
 
 Report
                  of Independent Registered Public Accounting Firm
              F-2Audited
                  Consolidated Financial Statements:Consolidated
                  Balance Sheets
              F-3Consolidated
                  Statements of Operations
              F-4Consolidated
                  Statements of Changes in Stockholders’ Equity
              F-5Consolidated
                  Statements of Cash Flows
              F-6Notes
                  to Consolidated Financial Statements
              F-8
 F
              -
              1
 *Table
              of Contents*
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Board of Directors and Stockholders of
 Rick’s
        Cabaret International, Inc.
 
 
 We
        have
        audited the accompanying consolidated balance sheets of Rick’s Cabaret
        International, Inc. and subsidiaries, as of September 30, 2006 and 2005,
        and the
        related consolidated statements of operations, changes in stockholders’ equity,
        and cash flows for the years then ended. These financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. An audit includes consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company's internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of Rick’s Cabaret
        International, Inc. and subsidiaries as of September 30, 2006 and 2005, and
        the
        consolidated results of their operations and their cash flows for the years
        then
        ended in conformity with accounting principles generally accepted in the
        United
        States of America.
 
 
 */s/
        Whitley Penn LLP*
 Dallas,
        Texas
 December
        8, 2006
 
 F
              -
              2
 *Table
              of Contents*
 **RICK'S
          CABARET INTERNATIONAL, INC.**
 
 **CONSOLIDATED
          BALANCE SHEETS**
  **September
                    30,****2006**
                
                **2005****Assets**Current
                    assets:Cash
                    and cash equivalents
                
                $
                854,932
                
                $
                480,330Accounts
                    receivable:Trade
                
                
                192,385
                
                
                310,692Other,
                    net
                
                
                186,554
                
                
                118,872Marketable
                    securities
                
                
                22,245
                
                
                28,919Inventories
                
                
                291,623
                
                
                257,626Prepaid
                    expenses and other current assets
                
                
                140,428
                
                
                87,991Total
                    current assets
                
                
                1,688,167
                
                
                1,284,430Property
                    and equipment, net
                
                
                17,423,843
                
                
                13,416,755Other
                    assets:Goodwill
                    and indefinite lived intangibles
                
                
                10,505,452
                
                
                9,836,560Definite
                    lived intangibles, net
                
                
                525,076
                
                
                126,262Other
                
                
                460,337
                
                
                365,011Total
                    other assets
                
                
                11,490,865
                
                
                10,327,833Total
                    assets
                
                $
                30,602,875
                
                $
                25,029,018**Liabilities
                    and Stockholders' Equity**Current
                    liabilities:Accounts
                    payable
                
                $
                554,979
                
                $
                1,034,508Accrued
                    liabilities
                
                
                1,118,974
                
                
                852,865Current
                    portion of long-term debt
                
                
                2,278,315
                
                
                1,349,894Line-of-credit
                
                
                -
                
                
                94,888Total
                    current liabilities
                
                
                3,952,268
                
                
                3,332,155Other
                    long-term liabilities
                
                
                299,701
                
                
                193,648Long-term
                    debt-related party
                
                
                1,386,909
                
                
                -Long-term
                    debt
                
                
                10,255,509
                
                
                11,896,942Total
                    liabilities
                
                
                15,894,387
                
                
                15,422,745Commitments
                    and contingencies
                
                
                -
                
                
                -Minority
                    interest
                
                
                -
                
                
                31,337Temporary
                    equity - Common stock, subject to put rights (160,000 and 180,000
                    shares,
                    respectively)
                
                
                800,000
                
                
                675,000Permanent
                    stockholders' equity:Preferred
                    stock, $.10 par, 1,000,000 shares authorized, none
                    outstanding
                
                
                -
                
                
                -Common
                    stock, $.01 par, 15,000,000 shares authorized, 5,805,275 and
                    5,040,678
                    shares issued, respectively
                
                
                58,053
                
                
                50,407Additional
                    paid-in capital
                
                
                15,586,233
                
                
                12,331,367Accumulated
                    other comprehensive income
                
                
                8,898
                
                
                15,572Accumulated
                    deficit
                
                
                (450,916
                )
                
                (2,203,630
                )15,202,268
                
                
                10,193,716Less
                    908,530 shares of common stock held in treasury, at cost
                
                
                1,293,780
                
                
                1,293,780Total
                    stockholders' equity
                
                
                13,908,488
                
                
                8,899,936Total
                    liabilities and stockholders' equity
                
                $
                30,602,875
                
                $
                25,029,018
 See
            accompanying notes to consolidated financial statements.
 F
            -
            3
 *Table
            of Contents*
 
 **RICK'S
        CABARET INTERNATIONAL, INC.**
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  **Year
                  Ended September 30,****2006**
              
              **2005**Continuing
                  operations:Revenues:Sales
                  of alcoholic beverages
              
              $
              8,781,635
              
              $
              5,431,049Sales
                  of food and merchandise
              
              
              2,651,868
              
              
              1,688,043Service
                  revenues
              
              
              11,442,371
              
              
              6,632,201Internet
                  revenues
              
              
              801,395
              
              
              787,617Other
              
              
              809,946
              
              
              285,497Total
                  revenues
              
              
              24,487,215
              
              
              14,824,407Operating
                  expenses:Cost
                  of goods sold
              
              
              2,915,312
              
              
              1,865,630Salaries
                  and wages
              
              
              7,081,660
              
              
              5,200,976Other
                  general and administrative:Taxes
                  and permits
              
              
              3,074,577
              
              
              1,985,989Charge
                  card fees
              
              
              485,342
              
              
              229,397Rent
              
              
              1,150,338
              
              
              558,435Legal
                  and professional
              
              
              865,111
              
              
              685,291Advertising
                  and marketing
              
              
              1,176,277
              
              
              752,866Depreciation
                  and amortization
              
              
              1,049,247
              
              
              590,466Insurance
              
              
              420,450
              
              
              218,343Utilities
              
              
              621,051
              
              
              392,589Other
              
              
              2,576,628
              
              
              2,045,345Goodwill
                  impairment
              
              
              79,841
              
              
              -Total
                  operating expenses
              
              
              21,495,834
              
              
              14,525,327Income
                  from continuing operations
              
              
              2,991,381
              
              
              299,080Other
                  income (expense):Interest
                  income
              
              
              25,796
              
              
              33,434Interest
                  expense
              
              
              (1,057,020
              )
              
              (699,678
              )Loss
                  on sales of assets
              
              
              (68,134
              )
              
              -Other
              
              
              (170,646
              )
              
              (1,149
              )Income
                  (loss) from continuing operations before minority interest
              
              
              1,721,377
              
              
              (368,313
              )Minority
                  interest
              
              
              31,337
              
              
              9,472Income
                  (loss) from continuing operations
              
              
              1,752,714
              
              
              (358,841
              )Discontinued
                  operations:Loss
                  from discontinued operations
              
              
              -
              
              
              (148,294
              )Gain
                  on sale of a subsidiary
              
              
              -
              
              
              291,987Income
                  from discontinued operations
              
              
              -
              
              
              143,693Net
                  income (loss)
              
              $
              1,752,714
              
              $
              (215,148
              )Basic
                  and diluted earnings (loss) per share:Income
                  (loss) from continuing operations
              
              $
              0.38
              
              $
              (0.09
              )Income
                  from discontinued operations
              
              $
              -
              
              $
              0.04Net
                  income (loss), basic
              
              $
              0.38
              
              $
              (0.05
              )Net
                  income (loss), diluted
              
              $
              0.35
              
              $
              (0.05
              )Weighted
                  average number of common shares outstanding:Basic
              
              
              4,640,499
              
              
              3,937,565Diluted
              
              
              5,065,962
              
              
              3,937,565
 
 See
        accompanying notes to consolidated financial statements.
  F
              -
              4
 *Table
              of Contents*
  **RICK'S
        CABARET INTERNATIONAL, INC.**
 
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN PERMANENT STOCKHOLDERS' EQUITY**
 
 **YEARS
        ENDED SEPTEMBER 30, 2006 and 2005**
  **Accumulated****Common
                  Stock**
              
              **Additional**
              
              **Other**
              
              
              
              **Treasury
                  Stock**
              
              **Total****Number**
              
              
              
              **Paid-In**
              
              **Comprehensive**
              
              **Accumulated**
              
              **Number**
              
              
              
              **Stockholders'****of
                  Shares**
              
              **Amount**
              
              **Capital**
              
              **Income**
              
              **Deficit**
              
              **of
                  Shares**
              
              **Amount**
              
              **Equity**Balance
                  at September 30, 2004
              
              
              4,608,678
              
              $
              46,087
              
              $
              11,273,149
              
              $
              109,002
              
              $
              (1,988,482
              )
              
              908,530
              
              $
              (1,293,780
              )
              $
              8,145,976Shares
                  issued
              
              
              612,000
              
              
              6,120
              
              
              1,624,762
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,630,882Stock
                  warrants issued
              
              
              -
              
              
              -
              
              
              106,656
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              106,656Reclassification
                  of temporary equity - common stock subject to put rights
              
              
              (180,000
              )
              
              (1,800
              )
              
              (673,200
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (675,000
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (215,148
              )
              
              -
              
              
              -
              
              
              (215,148
              )Change
                  in available-for-sale securities
              
              
              -
              
              
              -
              
              
              -
              
              
              (93,430
              )
              
              -
              
              
              -
              
              
              -
              
              
              (93,430
              )Comprehensive
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (308,578
              )Balance
                  at September 30, 2005
              
              
              5,040,678
              
              
              50,407
              
              
              12,331,367
              
              
              15,572
              
              
              (2,203,630
              )
              
              908,530
              
              
              (1,293,780
              )
              
              8,899,936Shares
                  issued
              
              
              744,597
              
              
              7,446
              
              
              3,326,210
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,333,656Beneficial
                  conversion
              
              
              -
              
              
              -
              
              
              53,856
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              53,856Change
                  in temporary equity - common stock subject to put rights
              
              
              20,000
              
              
              200
              
              
              (125,200
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (125,000
              )Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,752,714
              
              
              -
              
              
              -
              
              
              1,752,714Change
                  in available-for-sale securities
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,674
              )
              
              -
              
              
              -
              
              
              -
              
              
              (6,674
              )Comprehensive
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,746,040Balance
                  at September 30, 2006
              
              
              5,805,275
              
              $
              58,053
              
              $
              15,586,233
              
              $
              8,898
              
              $
              (450,916
              )
              
              908,530
              
              $
              (1,293,780
              )
              $
              13,908,488
  See
        accompanying notes to consolidated financial statements.
 F
              -
              5
 *Table
              of Contents*
  **RICK'S
        CABARET INTERNATIONAL, INC.**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  **Year
                  Ended September 30,****2006**
              
              **2005****(Revised,
                  see****Cash
                  flows from operating activities:**
              
              
              
              **Note
                  C)**Income
                  (loss) from continuing operations
              
              $
              1,752,714
              
              $
              (358,841
              )Adjustments
                  to reconcile income (loss) from continuing operations to net cash
                  provided
                  by operating activities:Depreciation
              
              
              1,001,513
              
              
              573,706Amortization
              
              
              47,734
              
              
              16,760Bad
                  debts
              
              
              -
              
              
              75,995Goodwill
                  impairment
              
              
              79,841
              
              
              -Beneficial
                  conversion
              
              
              20,944
              
              
              -Common
                  stock issued for interest payment
              
              
              47,962
              
              
              -Amortization
                  of note discount
              
              
              35,552
              
              
              5,925Loss
                  on sales of assets
              
              
              68,134
              
              
              -Minority
                  interests
              
              
              (31,337
              )
              
              (9,472
              )Deferred
                  rent
              
              
              106,053
              
              
              173,600Common
                  stock issued for professional services
              
              
              -
              
              
              27,120Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (27,224
              )
              
              (179,583
              )Inventories
              
              
              (3,777
              )
              
              (24,880
              )Prepaid
                  expenses and other current assets
              
              
              (155,919
              )
              
              975,432Accounts
                  payable and accrued liabilities
              
              
              (216,420
              )
              
              814,268Net
                  cash provided by operating activities
              
              
              2,725,770
              
              
              2,090,030**Cash
                  flows from investing activities:**Acquisitions
                  of business, net of cash acquired
              
              
              (1,497,641
              )
              
              (2,650,000
              )Proceeds
                  from sale of discontinued operations
              
              
              -
              
              
              550,000Purchases
                  of property and equipment
              
              
              (1,641,735
              )
              
              (4,242,368
              )Note
                  receivable payments
              
              
              28,536
              
              
              34,860Net
                  cash used in investing activities
              
              
              (3,110,840
              )
              
              (6,307,508
              )**Cash
                  flows from financing activities:**Proceeds
                  from sale of common stock
              
              
              560,694
              
              
              928,762Proceeds
                  from long-term debt
              
              
              1,863,065
              
              
              4,762,000Payments
                  on long-term debt
              
              
              (1,569,199
              )
              
              (889,565
              )Payments
                  on line-of-credit
              
              
              (94,888
              )
              
              -Net
                  cash provided by financing activities
              
              
              759,672
              
              
              4,801,197**Cash
                  flows from discontinued operations:**Net
                  cash provided by operating activities
              
              
              -
              
              
              200,042Net
                  cash used in investing activities
              
              
              -
              
              
              (402,585
              )Net
                  cash used in financing activities
              
              
              -
              
              
              (176,089
              )Net
                  cash used in discontinued operations
              
              
              -
              
              
              (378,632
              )Net
                  increase in cash and cash equivalents
              
              
              374,602
              
              
              205,087Cash
                  and cash equivalents at beginning of year
              
              
              480,330
              
              
              275,243Cash
                  and cash equivalents at end of year
              
              $
              854,932
              
              $
              480,330**Supplemental
                  Disclosures of Cash Flow Information**Cash
                  paid during the year for interest
              
              $
              1,045,441
              
              $
              695,962
  See
        accompanying notes to consolidated financial statements.
 F
              -
              6
 *Table
              of Contents*
  **RICK'S
        CABARET INTERNATIONAL, INC.**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (continued)**
  **Non-cash
        transactions:**
 
 During
        the year ended September 30, 2005, the Company purchased a 9,000 square foot
        office building for $512,739, payable with a $86,279 cash at closing and
        a
        $426,460 fifteen-year promissory note, bearing interest at 7%.
 
 During
        the year ended September 30, 2005, the Company purchased a club in New York
        for
        $7,775,000, payable with $2,500,000 cash at closing and a five-year secured
        convertible promissory note, bearing interest at 4%, in the amount of
        $5,125,000, and transaction costs of $150,000.
 
 During
        the year ended September 30, 2005, 12,000 shares of restricted common stock
        were
        issued as compensation pursuant to a consulting agreement for a total value
        of
        $27,120, and were issued as part of the transaction costs related to the
        club in
        New York.
 
 During
        the year ended September 30, 2005, the Company purchased a club in Charlotte
        for
        $1,000,000, payable with a $325,000 seven-year secured promissory note, bearing
        interest at 7%, and 180,000 shares of stock valued at $675,000.
 
 During
        the year ended September 30, 2006, the Company purchased property located
        at
        9009 Airport Blvd., Houston for $1,300,000, payable with $500,000 cash at
        closing and 160,000 shares of restricted common stock.
 
 During
        the year ended September 30, 2006, the seller of the New York club converted
        $1,925,000 of principal from the related promissory note into 350,000 shares
        of
        restricted common stock.
 
 During
        the year ended September 30, 2006, the holder of a convertible debenture
        converted $47,962 of interest owed into 10,097 shares of restricted common
        stock.
 
 During
        the year ended September 30, 2006, the Company purchased a club in San Antonio
        for $2,900,000, payable with $600,000 cash at closing and four promissory
        notes
        totaling $2,300,000.
   See
        accompanying notes to consolidated financial statements.
  F
            -
            7
 *Table
            of Contents*
 
 **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30, 2006 and 2005**
  **A. 
        Nature of Business**
 
 Rick’s
        Cabaret International, Inc. (the “Company”) is a Texas corporation incorporated
        in 1994. The Company currently owns and operates nightclubs that offer live
        adult entertainment, restaurant, and bar operations. These nightclubs are
        located in Houston, Austin and San Antonio, Texas, as well as Minneapolis,
        Minnesota, Charlotte, North Carolina, and New York, New York. The Company
        also
        owns and operates several adult entertainment Internet websites. The Company’s
        corporate offices are located in Houston, Texas.
   **B. 
        Summary of Significant Accounting Policies**
 
 A
        summary
        of the Company’s significant accounting policies consistently applied in the
        preparation of the accompanying consolidated financial statements
        follows:
 
 **Basis
        of Accounting**
 
 The
        accounts are maintained and the consolidated financial statements have been
        prepared using the accrual basis of accounting in accordance with accounting
        principles generally accepted in the United States of America.
 
 **Principles
        of Consolidation**
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries. Significant intercompany accounts and transactions have been
        eliminated in consolidation.
 
 **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect certain reported amounts in the financial
        statements and accompanying notes. Actual results could differ from these
        estimates and assumptions.
 
 **Cash
        and Cash Equivalents**
 
 The
        Company considers all highly liquid investments with a maturity of three
        months
        or less when purchased to be cash equivalents. At September 30, 2006 and
        2005,
        the Company had no such investments. The Company maintains deposits primarily
        in
        one financial institution, which may at times exceed amounts covered by
        insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”).
        At September 30, 2006 and 2005, the uninsured portion of these deposits
        approximated $54,000 and $27,000, respectively. The Company has not incurred
        any
        losses related to its cash on deposit with financial
        institutions.
  F
            - 8
 *Table
            of Contents*
  **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **B. 
        Summary of Significant Accounting Policies - continued**
 
 **Accounts
        and Notes Receivable**
 
 Accounts
        receivable trade is primarily comprised of credit card charges, which are
        generally converted to cash in two to five days after a purchase is made.
        The
        Company’s accounts receivable other is comprised of employee advances and other
        miscellaneous receivables. The long-term portion of notes receivable are
        included in other assets in the accompanying consolidated balance sheets.
        The
        Company recognizes interest income on notes receivable based on the terms
        of the
        agreement and based upon management’s evaluation that the notes receivable and
        interest income will be collected. The Company recognizes allowances for
        doubtful accounts or notes when, based on management judgment, circumstances
        indicate that accounts or notes receivable will not be collected. The $70,000
        due from Taurus Entertainment as of September 30, 2006 and 2005 was
        collateralized by 3,000,000 shares of Taurus Entertainment (now known as
        "Bluestar Health, Inc."). The Company foreclosed on the collateralized shares
        in
        August 2006. As such, the Company presently owns the shares and has the ability
        to sell them in the open market. As of September 30, 2006, the value of the
        shares totals approximately $150,000. As the amount due has been fully
        collateralized since the note receivable agreement was entered and the Company
        believes such collateral will fully satisfy such amount due, no allowance
        has
        been provided nor is deemed necessary as of September 30, 2006 and 2005.
        The
        Company intends to achieve collectibility either through repurchase of the
        shares by Bluestar Health, Inc. or by selling the shares in the open market
        or
        in a private transaction.
 
 **Marketable
        Securities**
 
 Marketable
        securities at September 30, 2006 and 2005 consist of common stock. Statement
        of
        Financial Accounting Standards (“SFAS”) No. 115, *Accounting
        for Certain Investments in Debt and Equity Securities* ,
        requires certain investments be recorded at fair value or amortized cost.
        The
        appropriate classification of the investments in marketable equity is determined
        at the time of purchase and re-evaluated at each balance sheet date. As of
        September 30, 2006 and 2005, the Company’s marketable securities were classified
        as available-for-sale, which are carried at fair value, with unrealized gains
        and losses reported as other comprehensive income within the stockholders’
equity section of the accompanying consolidated balance sheets. The cost
        of
        marketable equity securities sold is determined on a specific identification
        basis. The fair value of marketable equity securities is based on quoted
        market
        prices. There has been no realized gains or losses related to marketable
        securities for the year ended September 30, 2006. Marketable securities held
        at
        September 30, 2006 and 2005 have a cost basis of approximately $13,000.
 
 **Inventories**
 
 Inventories
        include alcoholic beverages, food, and Company merchandise. Inventories are
        carried at the lower of cost, average cost, which approximates actual cost
        determined on a first-in, first-out (“FIFO”) basis, or market.
  F
            - 9
 *Table
            of Contents*
  **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **B. 
        Summary of Significant Accounting Policies - continued**
 
 **Property
        and Equipment**
 
 Property
        and equipment are stated at cost. Provisions for depreciation and amortization
        are made using straight-line rates over the estimated useful lives of the
        related assets and the shorter of useful lives or terms of the applicable
        leases
        for leasehold improvements. Buildings have estimated useful lives ranging
        from
        31 to 40 years. Furniture, equipment and leasehold improvements have estimated
        useful lives between five and ten years. Expenditures for major renewals
        and
        betterments that extend the useful lives are capitalized. Expenditures for
        normal maintenance and repairs are expensed as incurred. The cost of assets
        sold
        or abandoned and the related accumulated depreciation are eliminated from
        the
        accounts and any gains or losses are charged or credited in the accompanying
        statement of operations of the respective period.
 
 **Goodwill
        and Intangible Assets**
 
 In
        June
        2001, the FASB issued SFAS No. 142, *Goodwill
        and Other Intangibles Assets* ,
        which
        addresses the accounting for goodwill and other intangible assets. Under
        SFAS
        No. 142, goodwill and intangible assets with indefinite lives are no longer
        amortized, but reviewed on an annual basis for impairment. The Company adopted
        SFAS No. 142 effective October 1, 2001. The Company’s annual evaluation was
        performed as of September 30, 2006, based on a projected discounted cash
        flow
        method using a discount rate determined by management to be commensurate
        with
        the risk inherent in the current business model. The Company determined that
        the
        goodwill related to the acquisition of Bobby’s Novelty, Inc. was impaired and
        charged $79,841 against operating expenses. All of the Company’s goodwill and
        intangible assets relate to the nightclub segment. Definite lived intangible
        assets are amortized on a straight-line basis over their estimated lives.
        Fully
        amortized assets are written-off against accumulated amortization.
 
 **Revenue
        Recognition**
 
 The
        Company recognizes revenue from the sale of alcoholic beverages, food and
        merchandise and services at the point-of-sale upon receipt of cash, check,
        or
        credit card charge.
 
 The
        Company recognizes revenue for VIP memberships in accordance with Staff
        Accounting Bulletin No. 104, *Revenue
        Recognition,* by
        deferring and recognizing over the estimated membership usage period. Management
        estimates that the weighted average useful lives for memberships are 12 and
        24
        months for annual and lifetime memberships, respectively. The Company does
        not
        track membership usage by type of membership, however it believes these lives
        are appropriate and conservative, based on management’s knowledge of its client
        base and membership usage at the clubs.
 
 The
        Company recognizes Internet revenue from monthly subscriptions to its online
        entertainment sites when notification of a new or existing subscription and
        its
        related fee are received from the third party hosting company or from the
        credit
        card company, usually two to three days after the transaction has occurred.
        The
        monthly fee is not refundable. The Company recognizes
        Internet auction revenue when payment is received from the credit card as
        revenues are not deemed estimable nor collection deemed probable prior to
        that
        point.
  F
            - 10
 *Table
            of Contents*
  **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **B. 
        Summary of Significant Accounting Policies - continued**
  **Advertising
        and Marketing**
 
 Advertising
        and marketing expenses are primarily comprised of costs related to public
        advertisements and giveaways, which are used for promotional purposes.
        Advertising and marketing expenses are expensed as incurred and are included
        in
        operating expenses in the accompanying consolidated statements of
        operations.
 
 **Income
        Taxes**
 
 Deferred
        income taxes are determined using the liability method in accordance with
        SFAS
        No. 109, *Accounting
        for Income Taxes* .
        Deferred tax assets and liabilities are recognized for the future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases. Deferred tax assets and liabilities are measured using enacted tax
        rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. The effect on deferred
        tax
        assets and liabilities of a change in tax rates is recognized in income in
        the
        period that includes the enactment date. In addition, a valuation allowance
        is
        established to reduce any deferred tax asset for which it is determined that
        it
        is more likely than not that some portion of the deferred tax asset will
        not be
        realized.
 
 **Comprehensive
        Income**
 
 The
        Company reports comprehensive income in accordance with the provisions of
        SFAS
        No. 130, *Reporting
        Comprehensive Income* .
        Comprehensive income consists of net income and gains (losses) on
        available-for-sale marketable securities and is presented in the consolidated
        statements of changes in stockholders’ equity.
 
 **Earnings
        Per Common Share**
 
 The
        Company computes earnings per share in accordance with SFAS No. 128, *Earnings
        Per Share* .
        SFAS
        No. 128 provides for the calculation of basic and diluted earnings per share.
        Basic earnings per share includes no dilution and is computed by dividing
        income
        available to common stockholders by the weighted average number of common
        shares
        outstanding for the period. Diluted earnings per share reflect the potential
        dilution of securities that could share in the earnings of the Company.
 
 Potential
        common stock shares consist of shares that may arise from outstanding dilutive
        common stock warrants (the number of which is computed using the “treasury stock
        method”) and from outstanding convertible debentures (the number of which is
        computed using the “if converted method”). Diluted EPS considers the potential
        dilution that could occur if the Company’s outstanding common stock warrants and
        convertible debentures were converted into common stock that then shared
        in the
        Company’s earnings (as adjusted for interest expense, that would no longer occur
        if the debentures were converted).
  F
            - 11
 *Table
            of Contents*
  **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **B. 
        Summary of Significant Accounting Policies - continued**
  Net
        earnings applicable to common stock and the weighted - average number of
        shares
        used for basic and diluted earnings per share computations are summarized
        in the
        table that follows:
 
 2006
              
              2005Basic
                  earnings (loss) per share:Net
                  earnings (loss) applicable to common stockholders
              
              $
              1,752,714
              
              $
              (215,148
              )Average
                  number of common shares outstanding
              
              
              4,640,499
              
              
              3,937,565Basic
                  earnings (loss) per share
              
              $
              0.38
              
              $
              (0.05
              )Diluted
                  earnings per share:Net
                  earnings (loss) for diluted EPS computation
              
              $
              1,752,714
              
              $
              (215,148
              )Average
                  number of common shares outstanding:Common
                  shares outstanding
              
              
              4,640,499
              
              
              3,937,565Potential
                  dilutive shares resulting from exercise of warrants and options
                  (1)
              
              
              425,463
              
              
              ---Potential
                  dilutive shares resulting from conversion of debentures (2)
              
              
              ---
              
              
              ---Total
                  average number of common shares outstanding used for
                  dilution
              
              
              5,065,962
              
              
              3,937,565Diluted
                  earnings per share
              
              $
              0.35
              
              $
              (0.05
              )
 
 (1)
        All
        outstanding warrants and options were considered for the EPS
        computation.
 (2)
        Convertible debentures (principal and accrued interest) outstanding at September
        30, 2006 and 2005 totaling $2,502,633 and $660,000, respectively, were
        convertible into common stock at a price of $4.75 and $6.55 per share in
        2006
        and $3.00 per share in 2005, but none were dilutive in 2006 or 2005 (based
        on
        average balances outstanding).
 
 **Fair
        Value of Financial Instruments**
 
 In
        accordance with the reporting requirements of SFAS No. 107, *Disclosures
        About Fair Value of Financial Instruments* ,
        the
        Company calculates the fair value of its assets and liabilities which qualify
        as financial instruments under this statement and includes this additional
        information in the notes to consolidated financial statements when the fair
        value is different than the carrying value of these financial instruments.
        The
        estimated fair value of accounts receivable, accounts payable and accrued
        liabilities approximate their carrying amounts due to the relatively short
        maturity of these instruments. The carrying value of short and long-term
        debt
        also approximates fair value since these instruments bear market rates of
        interest. None of these instruments are held for trading
        purposes.
  F
            - 12
 *Table
            of Contents*
  **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **B. 
        Summary of Significant Accounting Policies - continued**
  **Stock
        Options**
 
 At
        September 30, 2006, the Company has stock options outstanding, which are
        described more fully in Note H. The Company accounts for its stock options
        under
        the recognition and measurement principles of Accounting Principles Board
        (“APB”) Opinion No. 25, *Accounting
        for Stock Issued to Employees,* and
        related Interpretations. The following table illustrates the effect on net
        income and earnings per share if the Company had applied the fair value
        recognition provisions of SFAS No. 123, *Accounting
        for Stock-Based Compensation,* to
        stock-based employee compensation.
 
 The
        following presents pro forma net income and per share data as if a fair value
        accounting method had been used to account for stock-based
        compensation:
  **Year
                  Ended September 30,****2006**
              
              **2005**Net
                  income (loss), as reported
              
              $
              1,752,714
              
              $
              (215,148
              )Less
                  total stock-based employee compensation expense determined under
                  the fair
                  value based method for all awards
              
              
              (611,408
              )
              
              (549,165
              )Pro
                  forma net income (loss)
              
              $
              1,141,306
              
              $
              (764,313
              )Earnings
                  (loss) per share:Basic
                  - as reported
              
              $
              0.38
              
              $
              (0.05
              )Diluted
                  - as reported
              
              $
              0.35
              
              $
              (0.05
              )Basic
                  - pro forma
              
              $
              0.25
              
              $
              (0.19
              )Diluted
                  - pro forma
              
              $
              0.23
              
              $
              (0.19
              )
  **Impact
        of Recently Issued Accounting Standards**
 
 In
        December 2003, the Financial Accounting Standards Board (“FASB”) issued
        interpretation 46R (“FIN 46R”), a revision to interpretation 46 (“FIN 46”), *Consolidation
        of Variable Interest Entities* .
        FIN 46R
        clarifies some of the provisions of FIN 46 and exempts certain entities from
        its
        requirements. FIN 46R was effective at the end of the first interim period
        ending after March 15, 2004. The adoption of FIN 46 and FIN 46R did not have
        a
        material impact on the Company’s consolidated financial
        statements.
  F
            - 13
 *Table
            of Contents*
  **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **B.
        Summary of Significant Accounting Policies - continued**
  In
        December 2004, the FASB issued SFAS 123R, *Share-Based
        Payment* ,
        which
        is a revision of SFAS 123, *Accounting
        for Stock-Based Compensation,* and
        supersedes APB Opinion 25, *Accounting
        for Stock Issued to Employees* .
        SFAS
        123R focuses primarily on share-based payments for employee services, requiring
        these payments to be recorded using a fair-value-based method. The use of
        APB
        25’s intrinsic value method of accounting for employee stock options has been
        eliminated. As a result, the fair value of stock options granted to employees
        in
        the future will be required to be expensed. The impact on the results of
        operations of the Company will be dependent on the number of options granted
        and
        the fair value of those options. For the Company, SFAS 123R will be effective
        beginning October 1, 2006.
  **Reclassifications**
 
 Certain
        prior year amounts have been reclassified to conform to the current year
        presentation.
 
 
 **C.
        Cash Flow Statement Revision**
 
 The
        Company has separately disclosed in the accompanying consolidated statements
        of
        cash flows the operating, investing, and financing portions of the cash flows
        attributable to its discontinued operations, which in the prior year was
        reported on a combined basis in a single amount. As a result, the accompanying
        consolidated cash flow statement for fiscal 2005 has been labeled as
        revised.
 
 
 **D. 
        Property and Equipment**
 
 Property
        and equipment consisted of the following:
 
 **September
                  30,****2006**
              
              **2005**Buildings
                  and land
              
              $
              12,833,136
              
              $
              9,531,112Leasehold
                  improvements
              
              
              4,704,245
              
              
              4,099,666Furniture
              
              
              1,204,757
              
              
              939,550Equipment
              
              
              2,916,686
              
              
              2,079,895Total
                  property and equipment
              
              
              21,658,824
              
              
              16,650,223Less
                  accumulated depreciation
              
              
              4,234,981
              
              
              3,233,468Property
                  and equipment, net
              
              $
              17,423,843
              
              $
              13,416,755
 
 For
        the
        years ended September 30, 2006 and 2005, the Company capitalized approximately
        $5,000 and $128,000, respectively, of interest to property and equipment
        in
        leasehold improvements.
  F
            - 14
 *Table
            of Contents*
  **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **E. 
        Goodwill and Intangible Assets**
  Goodwill
        and intangible assets consisted of the following:
 
 **September
                    30,****2006**
                
                **2005**Indefinite
                    useful lives:Goodwill
                
                
                
                
                $
                2,774,742
                
                $
                1,898,926Licenses
                
                
                
                
                
                7,730,710
                
                
                7,937,634AmortizationPeriodDefinite
                    useful lives:Discounted
                    leases
                
                
                18
                    & 6 years
                
                
                146,569
                
                
                43,022Non-compete
                    agreements
                
                
                5
                    years
                
                
                440,000
                
                
                100,000Less
                    accumulated amortization
                
                
                
                
                
                (61,493
                )
                
                (16,760
                )Total
                    goodwill and intangible assets
                
                
                
                
                $
                11,030,528
                
                $
                9,962,822
 Future
        amortization expense related to definite lived intangible assets subject
        to
        amortization at September 30, 2006 for each of the years in the five-year
        period
        ending September 30, 2011 and thereafter is 2007 - $106,074, 2008 - $106,074,
        2009 - $106,074, 2010 - $91,074, 2011 - $70,241, and thereafter -
        $45,539.
 
 Goodwill
        and indefinite lived intangible assets primarily consist of sexually oriented
        business licenses in New York and North Carolina, which were obtained as
        part of
        the acquisitions. These licenses are the result of zoning ordinances, thus
        are
        valid indefinitely, subject to filing annual renewal applications, which
        are
        done at minimal costs to the Company. As cash flows are expected to continue
        indefinitely, in accordance with SFAS No. 142, *Goodwill
        and Other Intangible Assets* ,
        the
        licenses are determined to have indefinite useful lives. The discounted cash
        flow method of income approach was used in calculating the value of these
        licenses in a business combination.
  F
            - 15
 *Table
            of Contents*
  **RICK’S
        CABARET INTERNATIONAL, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **F. 
        Long-term Debt**
 
 **September
                  30,****2006**
              
              **2005**Notes
                  payable at 9%, mature February 2008
              
              
              *
              
              $
              1,941,917
              
              $
              2,035,303Notes
                  payable at 12%, mature March 2026
              
              
              *
              
              
              139,157
              
              
              140,802Note
                  payable at 9%, matures March 2006
              
              
              *
              
              
              -
              
              
              289,308Note
                  payable with imputed interest at 7%, matures January 2006,
                  unsecured
              
              
              
              
              
              -
              
              
              214,649Notes
                  payable at 11%, mature August 2015
              
              
              *
              
              
              1,256,580
              
              
              1,335,338Notes
                  payable at 10%, mature December 2014 and January 2015
              
              
              *
              
              
              2,816,666
              
              
              2,868,224Note
                  payable at 7%, matures October 2012, collateralized by assets of
                  RCI
                  Entertainment North Carolina, Inc.
              
              
              
              
              
              290,915
              
              
              325,000Note
                  payable at 7.5%, matures August 2011
              
              
              *
              
              
              1,604,886
              
              
              -Note
                  payable at 12%, matures March 2007
              
              
              *
              
              
              400,000
              
              
              -Note
                  payable at 12%, matures February 2007
              
              
              *
              
              
              200,000
              
              
              -Convertible
                  note payable to related party at 12%, matures August 2008, collaterized
                  by
                  shares of Citation Land LLC and RCI Holdings, Inc.
              
              
              
              
              
              561,909
              
              
              559,720Convertible
                  note payable at 4%, matures May 2010, collateralized by assets
                  of RCI
                  Entertainment New York, Inc.
              
              
              
              
              
              2,444,282
              
              
              5,042,362Convertible
                  notes payable to related party at 12%, mature April 2008
              
              
              *
              
              
              825,000
              
              
              -Convertible
                  note payable at 10%, matures February 2009, unsecured
              
              
              
              
              
              1,000,950
              
              
              -Note
                  payable at 7%, matures December 2019
              
              
              *
              
              
              396,478
              
              
              414,057Note
                  payable at 4.9%, matures December 2010, collateralized by an
                  equipment
              
              
              
              
              
              29,826
              
              
              -Note
                  payable at 8.99%, matures October 2007, collateralized by a
                  vehicle
              
              
              
              
              
              12,167
              
              
              22,523Total
                  debt
              
              
              
              
              
              13,920,733
              
              
              13,246,836Less
                  current portion
              
              
              
              
              
              2,278,315
              
              
              1,349,894Total
                  long-term debt
              
              
              
              
              $
              11,642,418
              
              $
              11,896,942* Collateralized
                by
                real estate
 F
              - 16
 *Table
              of Contents*
 **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **F. 
          Long-term Debt - continued**
 In
        June,
        July and November 2004, the Company borrowed $100,000, $100,000, and $900,000,
        respectively, from an unrelated individual at the rate of 11% per annum for
        a 10
        year term. These borrowings were an addition to a previous note. During fiscal
        year 2006, the monthly payment of principal and interest of the new borrowing
        is
        $15,034, and $3,445 for the old note. The notes are secured by properties
        located at 3501 Andtree, Austin and at 5718 Fairdale, Houston, Texas. The
        money
        received from this new financing was used for the acquisition and renovation
        of
        the New York club.
 
 On
        November 15, November 17, and December 30, 2004, the Company borrowed $590,000,
        $1,042,000, and $1,270,000, respectively, from a financial institution at
        an
        annual interest rate of 10% over a 10 year term. The monthly payments of
        principal and interest are $5,694, $10,056, and $12,256, respectively. The
        notes
        are secured by our properties located at 2023 Sable Lane, San Antonio, 410
        N.
        Sam Houston Pkwy. E. and 3113 Bering Drive, Houston, Texas. The money received
        from this financing was used for the acquisition and renovation of the New
        York
        club.
 
 In
        December 2004, as a part of the purchase of a 9,000 square-foot office building,
        the Company obtained a fifteen year promissory note, secured by the
        building, in the amount of $426,460 with interest at 7%.
  As
        part
        of the purchase of the North Carolina club, the Company issued 180,000 shares
        of
        the Company’s common stock valued at $3.75 per share and entered into a seven
        year promissory note in the amount of $325,000 bearing interest at the rate
        of
        7% per annum. The note is payable with an initial payment due November 1,
        2005,
        of interest only for the period of time from the date of closing until October
        31, 2005, plus a principal reduction payment in the amount of $3,009.
        Thereafter, RCI Entertainment North Carolina, Inc., the Company’s subsidiary,
        will make eighty-three (83) successive equal monthly payments commencing
        December 1, 2005, of principal and interest in the amount of $4,905 until
        paid
        in full. The note is secured by the assets of RCI Entertainment North Carolina,
        Inc. Pursuant to the terms of the note, on or after November 1, 2005, the
        holder
        shall have the right, but not the obligation, to have the Company purchase
        from
        the holder 4,285 shares per month, calculated at a price per share equal
        to
        $3.75 until the holder has received a total of $1,000,000 from the sale of
        the
        shares less the amount of the note. At the Company’s election during any given
        month, the Company may either buy the monthly shares or, if the Company elects
        not to buy the monthly shares from the holder, then the holder shall sell
        the
        monthly shares in the open market. Any deficiency between the amount which
        the
        holder receives from the sale of the monthly shares and the value of the
        shares
        shall be paid by the Company within three (3) days of the date of sale of
        the
        monthly shares during that particular month. The Company’s obligation to
        purchase the monthly shares from the holder shall terminate and cease at
        such
        time as the holder has received a total of $1,000,000 from the sale of the
        shares, less the amount of the note. This obligation was satisfied on May
        11,
        2006 when all shares had been sold for more than $675,000.
 F
              - 17
 *Table
              of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **F. 
          Long-term Debt - continued**
 On
        July
        22, 2005, the Company entered into a secured convertible debenture with a
        greater than 10% shareholder for a principal sum of $660,000. The debenture
        is
        convertible into 220,000 shares of the Company’s common stock at a conversion
        price of $3.00 per share at the option of the holder (subject to certain
        limitations). The term is for three years and interest rate is at 12% per
        annum.
        The debenture matures on August 1, 2008. The Company also issued 50,000
        detachable warrants at $3.00 per share in relation to this debenture. The
        warrants are exercisable at any time within the period beginning on July
        22,
        2005 and expiring on July 22, 2008. The value of the discount on note payable
        was estimated to be $106,656 at the date of grant using a Black-Scholes
        option-pricing model with the following assumptions:
 
 Volatility
              
              
              138
              %Expected
                  life
              
              
              3
                  yearsExpected
                  dividend yield
              
              
              -Risk
                  free rate
              
              
              4.31
              %
 
 For
        the
        year ended September 30, 2006 and 2005, the Company recorded $35,552 and
        $5,925,
        respectively, of interest expense. The debenture is  secured
        by the Company’s ownership in Citation Land, LLC and RCI Holdings, Inc., both
        are wholly owned subsidiaries of the Company.
 
 The
        Company has accounted for this transaction under Emerging Issues task Force
        (“EITF”) Issue No. 00-27, *Application
        of Issue No. 98-5 to Certain Convertible Instruments* .
        The
        value of the embedded beneficial conversion feature on the note payable was
        estimated to be $53,856, which was calculated using the EITF Issue No. 98-5
        model. For the years ended September 30, 2006 and 2005, the Company recorded
        $20,944 and $0, respectively, of interest expense related to the value of
        the
        embedded beneficial conversion feature.
 
 As
        a part
        of the purchase the New York club, the Company obtained a $5.125 million
        promissory note bearing simple interest at the rate of 4.0% per annum with
        a
        balloon payment at the end of five years. $2,000,000 of the principal amount
        of
        the promissory note is convertible into shares of restricted common stock
        at
        prices ranging from $4.00 to $7.50 per share. As of September 2006 and 2005,
        $1,925,000 and $0 of principal was converted into 350,000 and 0 shares of
        the
        Company’s restricted common stock, respectively.
 
 On
        February 6, 2006, the Company issued a Convertible Debenture (the “Debenture”)
        to an unrelated investment group for the principal sum of $1,000,950 bearing
        interest at the rate of 10% per annum, with a maturity date of February 1,
        2009.
        Under the terms of the Debenture, the Company is required to make three
        quarterly interest payments beginning May 1, 2006. Thereafter, the Company
        is
        required to make nine equal quarterly principal and interest payments. At
        any
        time after 366 days from the date of issuance of this Debenture, the Company
        has
        the right to redeem the Debenture in whole or in part during the term of
        the
        Debenture. At the election of the holder, the holder has the right at any
        time
        to convert all or any portion of the principal or interest amount of the
        Debenture into shares of the Company’s common stock at a rate of $4.75 per
        share, which approximates the closing price of the Company’s stock on February
        6, 2006. The proceeds of the Debenture was used to **** payoff
        certain debt and increase working capital. As of September 30, 2006 and 2005,
        the holder had elected to convert $47,961 and $0, of interest into 10,097
        and 0
        shares of the Company’s restricted common stock, respectively.
  F
            - 18
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **F. 
          Long-term Debt - continued**
 On
        April
        28, 2006, the Company entered into convertible debentures with three
        shareholders, one of which is a greater than 10% shareholder, for a principal
        sum of $825,000. The term is for two years and the interest rate is 12% per
        annum. At the election of the holders, the holders have the right to
        convert (subject to certain limitations) all or any portion of the principal
        amount of the debentures into shares of the Company’s common stock at a rate of
        $6.55 per share, which approximated the closing price of the Company’s stock on
        April 28, 2006. The debentures provide, absent shareholder approval, that
        the
        number of shares of the Company’s common stock that may be issued by the Company
        or acquired by the holders upon conversion of the debentures shall not exceed
        19.99% of the total number of issued and outstanding shares of the Company’s
        common stock. $600,000 of the debentures is secured by the Company’s property
        located at 9009 Airport Blvd., Houston, Texas. The proceeds of the debentures
        were used for the acquisition of Joint Ventures, Inc.
 
 On
        August
        24, 2006, as part of the purchase of a club in San Antonio, Texas (formerly
        known as “Centerfolds”), the Company obtained three promissory notes: a $400,000
        note bearing simple interest at the rate of 12% per annum and maturing March
        2007, $200,000 note bearing interest at the rate of 12% per annum maturing
        February 2007, and $1,700,000 note bearing interest at the rate of 7.5% with
        a
        balloon payment at end of five years. These notes payable are secured by
        the
        real estate.
  Future
        maturities of long-term debt consist of the following:
 
 2007
              
              $
              2,278,3152008
              
              
              5,017,3282009
              
              
              1,252,2962010
              
              
              662,1222011
              
              
              1,065,905Thereafter
              
              
              3,644,767Total
                  maturities of long-term debt
              
              $
              13,920,733
   **G. 
        Income Taxes**
 
 Income
        tax expense for the years presented differs from the “expected” federal income
        tax expense computed by applying the U.S. federal statutory rate of 34% to
        earnings before income taxes for the years ended September 30, as a result
        of
        the following:
 
 **2006**
              
              **2005**Computed
                  expected tax expense (benefit)
              
              $
              595,923
              
              $
              (73,151
              )State
                  income taxes
              
              
              52,581
              
              
              (6,454
              )Deferred
                  tax asset valuation allowance
              
              
              (648,504
              )
              
              79,605Total
                  income tax expense
              
              $
              -
              
              $
              -
 F
              - 19
 *Table
              of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **G. 
          Income Taxes - continued**
 The
        significant components of the Company’s deferred tax assets and liabilities at
        September 30 are as follows:
 
 **2006**
              
              **2005**Deferred
                  tax assets (liabilities):Goodwill
              
              $
              (329,713
              )
              $
              (138,150
              )Property
                  and equipment
              
              
              (243,220
              )
              
              (254,788
              )Net
                  operating losses
              
              
              549,390
              
              
              949,266Unrealized
                  gain on marketable securities
              
              
              (3,292
              )
              
              (5,762
              )Other
              
              
              225,684
              
              
              78,664Valuation
                  allowance
              
              
              (198,849
              )
              
              (629,230
              )$
              -
              
              $
              -
 
 The
        Company has established a valuation allowance to fully reserve the deferred
        tax
        assets at September 30, 2006 and 2005 due to the uncertainty of the timing
        and
        amounts of future taxable income. At September 30, 2006, the Company had
        net
        operating loss carryforwards of approximately $1,485,000, which expire in
        2017
        through 2026.
   **H. 
        Stock Options**
 
 In
        1995,
        the Company adopted the 1995 Stock Option Plan (the “1995 Plan”) for employees
        and directors. In August 1999, the Company adopted the 1999 Stock Option
        Plan
        (the “1999 Plan”) (collectively, “the Plans”). The options granted under the
        Plans may be either incentive stock options, or non-qualified options. The
        Plans
        are administered by the Board of Directors or by a compensation committee
        of the
        Board of Directors. The Board of Directors has the exclusive power to select
        individuals to receive grants, to establish the terms of the options granted
        to
        each participant, provided that all options granted shall be granted at an
        exercise price equal to at least 85% of the fair market value of the common
        stock covered by the option on the grant date and to make all determinations
        necessary or advisable under the Plans.
 F
              - 20
 *Table
              of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **H. 
          Stock Options - continued**
 Following
          is a summary of options for the years ended September 30:
 **2006**
              
              **Weighted
                  Average Exercise Price**
              
              **2005**
              
              **Weighted
                  Average Exercise Price**Outstanding
                  at beginning of year
              
              
              878,000
              
              $
              2.47
              
              
              908,000
              
              $
              2.39Granted
              
              
              40,000
              
              
              6.75
              
              
              90,000
              
              
              2.80Forfeited
              
              
              -
              
              
              -
              
              
              (50,000
              )
              
              2.49Exercised
              
              
              (190,500
              )
              
              2.55
              
              
              **(**70,000
              )
              
              2.21Outstanding
                  at end of year
              
              
              727,500
              
              $
              2.70
              
              
              878,000
              
              $
              2.47Exercisable
                  at end of year
              
              
              662,500
              
              $
              2.45
              
              
              583,000
              
              $
              2.40Weighted-average
                  remaining contractual life
              
              
              2.54
                  years
              
              
              
              
              
              2.84
                  years
 
 As
        of
        September 30, 2006, the range of exercise prices for outstanding options
        was
        $1.40 -$6.75.
 
 The
        Company has elected to follow APB No. 25 and related interpretations in
        accounting for its employee stock options because the alternative fair value
        accounting provided for under SFAS No. 123, *Accounting
        for Stock Based Compensation* ,
        requires the use of option valuation models that were not developed for use
        in
        valuing employee stock options. See footnote B for related
        disclosures.
 
 Under
        APB
        No. 25, no compensation expense is recorded when the exercise price of the
        Company’s employee stock option equals the fair value of the underlying stock on
        the date of grant. Compensation equal to the intrinsic value of employee
        stock
        options is recorded when the exercise price of the stock option is less than
        the
        fair value of the underlying stock on the date of grant. Any resulting
        compensation is amortized to expense over the remaining vesting periods of
        the
        options on a straight-line basis. For the years ended September 30, 2006
        and
        2005, no amounts were recorded to compensation expense related to stock options
        issued to employees.
 
 Information
        regarding pro forma net income is required by SFAS 123, and has been determined
        as if the Company had accounted for its employee stock options under the
        fair
        value method of SFAS No. 123. The fair value of these options was estimated
        at
        the date of grant using a Black-Scholes option-pricing model using the following
        weighted average assumptions:
  F
            - 21
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **H. 
          Stock Options - continued**
 **2006**
              
              **2005**Volatility
              
              
              132
              %
              
              137
              %Expected
                  lives
              
              
              3
                  years
              
              
              3
                  yearsExpected
                  dividend yield
              
              
              -
              
              
              -Risk
                  free rates
              
              
              5.04
              %
              
              4.31
              %
 
 The
        Black-Scholes option valuation model was developed for use in estimating
        the
        fair value of traded options, which have no vesting restrictions and are
        fully
        transferable. In addition, option valuation models require the input of highly
        subjective assumptions including the expected stock price volatility. Because
        changes in the subjective input assumptions can materially affect the fair
        value
        estimate, in management's opinion, the existing models do not necessarily
        provide a reliable single measure of the fair value of its employee stock
        options.
 
 
 **I. 
        Commitments and Contingencies**
 
 **Leases**
 
 The
        Company leases certain equipment and facilities under operating leases, of
        which
        rent expense was approximately $1,150,000 and $558,000 for the years ended
        September 30, 2006 and 2005, respectively.
 
 Rent
        expense for the Company’s operating leases, which generally have escalating
        rentals over the term of the lease, is recorded using the straight-line method
        over the initial lease term whereby an equal amount of rent expense is
        attributed to each period during the term of the lease, regardless of when
        actual payments are made. Generally, this results in rent expense in excess
        of
        cash payments during the early years of a lease and rent expense less than
        cash
        payments in the later years. The difference between rent expense recognized
        and
        actual rental payments is recorded as other long-term liabilities in the
        consolidated balance sheets.
 
 Future
        minimum annual lease obligations as of September 30, 2006 are as
        follows:
 
 2007
              
              $
              974,8472008
              
              
              998,9142009
              
              
              884,1142010
              
              
              653,8822011
              
              
              654,091Thereafter
              
              
              7,999,663Total
                  future minimum lease obligations
              
              $
              12,165,511
 F
              - 22
 *Table
              of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **I. 
          Commitments and Contingencies - continued**
 **Legal
        Matters**
 
 Sexually
        Oriented Business Ordinance of Houston, Texas
 
 In
        January 1997, the City Council of the City of Houston passed a comprehensive
        new
        Ordinance regulating the location of and the conduct within Sexually Oriented
        Businesses (the “Ordinance”). The Ordinance established new minimum distances
        that Sexually Oriented Businesses may be located from schools, churches,
        playgrounds and other sexually oriented businesses. There were no provisions
        in
        the Ordinance exempting previously permitted sexually oriented businesses
        from
        the effect of the new Ordinance. In 1997, the Company was informed that one
        of
        its Houston locations at 3113 Bering Drive failed to meet the requirements
        of
        the Ordinance and accordingly the renewal of its business license at the
        location was denied.
 
 The
        Ordinance provided that a business which was denied a renewal of its operating
        permit due to changes in distance requirements under the Ordinance would
        be
        entitled to continue in operation for a period of time (the “Amortization
        Period”) if the owner were unable to recoup, by the effective date of the
        Ordinance, its investment in the business that was incurred through the date
        of
        the passage and approval of the Ordinance.
 
 The
        Company filed a request with the City of Houston requesting an extension
        of time
        during which operations at the north Houston facility could continue under
        the
        Amortization Period provisions of the Ordinance since the Company was unable
        to
        recoup its investment prior to the effective date of the Ordinance. An
        administrative hearing was held by the City of Houston to determine the
        appropriate Amortization Period to be granted to the Company. At the Hearing,
        the Company was granted an amortization period that has since been reached.
        The
        Company has the right to appeal any decision of the hearing official to the
        district court in the State of Texas.
 
 In
        May
        1997, the City of Houston agreed to defer implementation of the Ordinance
        until
        the constitutionality of the entire Ordinance was decided by court trial.
        In
        February 1998, the U.S. District Court for the Southern District of Texas,
        Houston Division, struck down certain provisions of the Ordinance, including
        the
        provision mandating a 1,500 foot distance between a club and schools, churches
        and other sexually oriented businesses, leaving intact the provision of the
        750
        foot distance as it existed prior to the Ordinance.
 
 The
        City
        of Houston has appealed the District Court’s rulings with the Fifth Circuit
        Court of Appeals. In the event that the City of Houston is successful in
        the
        appeal, the Company could be out of compliance and such an outcome could
        have an
        adverse impact on the Company’s future. The Company’s nightclub in the south
        Houston location has a valid permit/license that expired in December 2006.
        The
        permits for the north Houston location and the Bering Drive location have
        expired.
 
 There
        are
        other provisions in the Houston, Texas Ordinance, such as provisions governing
        the level of lighting in a sexually oriented business, the distance between
        a
        customer and dancer while the dancer is performing in a state of undress
        and
        provisions regarding the licensing of dancers and club managers that were
        upheld
        by the court which may be detrimental to the Company’s business. The Company, in
        concert with other sexually oriented businesses, are appealing those aspects
        of
        the Ordinance.
  F
            - 23
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **I. 
          Commitments and Contingencies - continued**
 In
        November 2003, a three judge panel from the Fifth Circuit Court of Appeals
        published their Opinion which affirmed the Trial Court’s ruling regarding
        lighting levels, customer and dancer separation distances and licensing of
        dancers and staff. The Court of Appeals, however, did not follow the Trial
        Court’s ruling regarding the distance from which a club may be located from a
        church or school. The Court of Appeals held that a distance measurement of
        1,500
        feet would be upheld upon a showing by the City of Houston that its claims
        that
        there were alternative sites available for relocating clubs could be
        substantiated. The case was remanded for trial on the issues of the alternative
        sites.
 
 There
        are
        other technical issues, which could additionally bear upon the location of
        the
        clubs, which were not decided at the trial level during the initial phase
        of the
        case. It is anticipated that these technical issues will be joined in the
        Trial
        Court. The City has not sought to modify any of the terms of the injunction
        against enforcement of any location provision of the Ordinance.
 
 The
        appeals process as it relates to the Court’s rulings in 1998 has been exhausted.
        Under the holding of the Fifth Circuit Court of Appeals, the City of Houston
        has
        the burden of proof to show that, under the distance measurements contained
        in
        the 1997 ordinance, there are alternate sites available for relocation. The
        trial commenced on December 4, 2006. A decision from the Trial Court is not
        anticipated until some time in 2007. In the event the City of Houston can
        meet
        its burden and prevails at trial, we would appeal that ruling. The effect
        of any
        potential adverse ruling on our operations in Houston is unknown. An adverse
        ruling would affect all sexually oriented businesses in Houston. In that
        event,
        we would change our method of operations to require our entertainers to wear
        latex and bikini bottoms. While management believes this potential change
        will
        not have a meaningful effect on our operations, as the effect would be to
        all
        similarly situated businesses, the effect is unknown. It is possible an adverse
        ruling may allow for additional competition in the Houston market.
 
 **Other
        Legal Matters**
 
 On
        October 6, 2006, a lawsuit was filed in the 224 th Judicial
        District Court of Bexar County, Texas under Cause No. 2006-CI-15656 and styled *Edward
        Jimenez, et al v. Rick’s Cabaret International, Inc., et al* .
        This is
        a wrongful death and personal injury cause of action against two individuals,
        based upon negligence theories, and against the Company and the Company’s
        co-defendants, all of which are now subsidiaries of the Company, based upon
        alleged “dram shop” violations, arising out of a two-vehicle collision on August
        1, 2006. The collision occurred prior to the Company acquiring Spiros Partners
        Ltd. Spiros Partners Ltd. owns and operates the Company’s Rick’s San Antonio.
        Plaintiffs include the parents - one of whom was driving - of the two juvenile
        decedents, one of the decedent’s minor siblings and another minor child, both of
        whom were also passengers in the car that was struck by the allegedly
        intoxicated defendant driver. Plaintiffs are seeking unspecified damages
        for
        past and future physical pain and suffering, mental anguish, physical
        impairment, loss of companionship and consortium, funeral and medical expenses,
        property damages, and exemplary damages.
  F
            - 24
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  I. 
        Commitments and Contingencies - continued
 Management
          believes that the Company is not liable for any of the damages and that
          they are
          covered by the “safe harbor” provision set forth in Section 106.14 of the Texas
          Alcoholic Beverage Code, which provides that certain compliant establishments
          are not liable for the acts of their patrons. There does exist insurance
          coverage for this claim, although this insurance does not cover any exemplary
          damages awarded, nor those amounts beyond its limits. Management has denied
          any
          liability for this accident and is vigorously defending the lawsuit, which
          is
          presently in the beginning stages of the discovery process, a preliminary
          motion
          to dismiss two of the Company’s subsidiaries having been denied.
 On
        June
        2, 2006, a lawsuit was filed in the 131st Judicial District Court of
        Bexar County, Texas under Cause No. 2006-CI-08592 and styled *Richard P.
        Branson v. Spiros Partners, Ltd. dba The Penthouse Club*. This action
        occurred prior to the Company acquiring Spiros Partners Ltd. Spiros Partners
        Ltd. owns and operates the Company’s Rick’s San Antonio. This was a fraud,
        assault, abuse of process, invasion of privacy and slander action based upon
        the
        plaintiff’s allegation that the Club intentionally took advantage of and
        assaulted him while he was there on July 3, 2004, then subsequently was
        responsible for his malicious prosecution by the Bexar County District Attorney.
        Plaintiff sought unspecified damages for past and future physical pain and
        suffering, mental anguish, physical disability, financial injury and exemplary
        damages.
 
 Management
        does not believe that it is liable for any of the damages. There was no
        insurance coverage for the acts complained of by the plaintiff. Management
        denied any liability for these allegations and vigorously defended the lawsuit.
        On December 13, 2006, the defendant’s motion for summary judgment (based upon
        the plaintiff having no evidence to support any of his contentions) was granted
        in full. The plaintiff has 30 days to appeal.
 
 On
        April
        7, 2004, a lawsuit was filed in the 80 th Judicial
        District Court of Harris County, Texas, styled Cause No. 2004-18510, *Charity
        Renee Stevens, et al. vs. Lazaro Ernesto Alfonso, et al* .
        This is
        a wrongful death and personal injury action against two individuals based
        on
        negligence theories and five entertainment establishments including the Company
        based on alleged “dram shop” violations arising from a two-car collision.
        Plaintiffs have also sued Ford Motor Company under a theory of products
        liability. Plaintiffs include the children of the decedents, a minor passenger
        and the mothers of the decedents. Plaintiffs are seeking unspecified damages
        including physical pain and suffering, mental anguish, pecuniary loss, past
        and
        future loss of companionship and consortium, loss of mental and intellectual
        function, past and future physical impairment, reduction in earning capacity,
        increased education costs and expenses including funeral and medical costs.
        Subsequent to fiscal year end, on December 11, 2006 (subject to court’s
        approval), the case was settled, which the Company recorded as other
        expense in the September 30, 2006 statement of operations.
 
 One
        of
        the Company’s locations is currently being investigated by the Equal Employment
        Opportunity Commission (“EEOC”) as the result of two (2) complaints which were
        filed with the EEOC by former employees. The complaints are that male employees
        were used to replace female employees in certain positions at the particular
        club location. The Company has provided the EEOC with the materials and
        information requested. The Company has fully cooperated with the investigation.
        A finding by the EEOC is not anticipated until 2007.
  F
            - 25
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **I. 
          Commitments and Contingencies - continued**
  For
          all
          the above legal matters, no contingent reserves as liabilities have been
          recorded in the accompanying balance sheets as such potential losses are
          not
          deemed probable or estimable, other than the case discussed as settled
          on
          December 11, 2006.
 
 
 **J. 
        Line-of-credit**
 
 At
        September 30, 2005, the Company had available a $94,888 unsecured line-of-credit
        with a bank. Interest was payable monthly on the outstanding balance at a
        floating rate of prime plus 1.5% (8.25% at September 30, 2005). During fiscal
        year 2006, the line-of-credit was paid off and was not renewed.
 
 
 **K. 
        Segment Information**
 
 The
        following information is presented in accordance with SFAS No. 131, *Disclosures
        about Segments of an Enterprise and Related Information.* The
        Company is engaged in adult night clubs and adult entertainment websites
        (“Internet”). The Company has identified such segments based on management
        responsibility and the nature of the Company’s products, services and costs.
        There are no major distinctions in geographical areas served as all operations
        are in the United States. The Company measures segment profit (loss) as income
        (loss) from operations. Total assets are those assets controlled by each
        reportable segment.
 F
              - 26
 *Table
              of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
 **K.
        Segment Information - continued**
  The
          following table sets forth certain information about each segment’s financial
          information for the year ended September 30:
 **2006**
              
              **2005**Business
                  segment sales:Night
                  clubs
              
              $
              23,683,627
              
              $
              14,708,159Internet
              
              
              803,588
              
              
              788,513Discontinued
                  operations
              
              
              -
              
              
              (672,265
              )$
              24,487,215
              
              $
              14,824,407Business
                  segment operating income:Night
                  clubs
              
              $
              5,321,937
              
              $
              2,283,535Internet
              
              
              130,512
              
              
              114,500General
                  corporate
              
              
              (2,461,068
              )
              
              (2,098,955
              )Discontinued
                  operations
              
              
              -
              
              
              -$
              2,991,381
              
              $
              299,080Business
                  segment capital expenditures:Night
                  clubs
              
              $
              3,590,917
              
              $
              4,763,060Internet
              
              
              7,353
              
              
              58,153General
                  corporate
              
              
              1,478,466
              
              
              516,500Discontinued
                  operations
              
              
              ---
              
              
              (28,693
              )$
              5,076,736
              
              $
              5,309,020Business
                  segment depreciation and amortization:Night
                  clubs
              
              $
              875,342
              
              $
              455,690Internet
              
              
              32,920
              
              
              34,231General
                  corporate
              
              
              140,985
              
              
              122,277Discontinued
                  operations
              
              
              -
              
              
              (21,732
              )$
              1,049,247
              
              $
              590,466Business
                  segment assets:Night
                  clubs
              
              $
              23,670,618
              
              $
              19,037,102Internet
              
              
              112,092
              
              
              99,148General
                  corporate
              
              
              6,820,165
              
              
              5,892,768Discontinued
                  operations
              
              
              -
              
              
              -$
              30,602,875
              
              $
              25,029,018
 F
              - 27
 *Table
              of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
 **L.
        Common Stock**
  On
        October 11, 2005, 10,000 stock options were exercised by one of the Company’s
        directors for proceeds of $21,300. In January 2006, 54,000 stock options
        were
        exercised by the Company’s employees for proceeds of $138,240 and in February
        2006, 10,000 stock options were exercised by one of the Company’s directors for
        $25,400. Also, 30,000 shares of the Company’s common stock were sold to a
        non-employee for $75,000 in January 2006. In March 2006, a non-employee
        exercised 25,000 stock options for $64,063 and the seller of the New York
        club
        converted $675,000 of principal from the related promissory note into 150,000
        shares of restricted common stock. In April 2006, the Company issued 160,000
        shares of common stock valued at $800,000 pursuant to the purchase of a building
        located at 9009 Airport Blvd., Houston, Texas. The seller of the New York
        club
        converted $900,000 of principal from the related promissory note into 150,000
        shares of restricted common stock in April and May 2006. During the months
        of
        May and June 2006, 27,500 stock options were exercised by the Company’s
        employees and directors for proceeds of $63,981. On June 8, 2006, the Company
        issued 4,829 shares of common stock for $22,938 interest owed. In July 2006,
        4,000 and 10,000 stock options were exercised by an employee and a director
        of
        the Company for proceeds of $10,250 and $28,000, respectively. Also, the
        seller
        of the New York club converted $350,000 of principal from the related promissory
        note into 50,000 shares of restricted common stock. On August 1, 2006, the
        Company issued 5,268 shares of common stock for $25,023 interest owed. In
        August
        2006, 29,000 stock options were exercised by two employees of the Company
        for
        proceeds of $72,210. In September 2006, 25,000 stock options were exercised
        by
        one of the Company’s employees for proceeds of $62,250.
   **M. 
        Related Party Transactions**
 
 In
        May
        2002, the Company loaned $100,000 to Eric Langan, Chief Executive Officer
        of the
        Company. The note is unsecured, bears interest at 11% and is amortized over
        a
        period of ten years. The note contains a provision that in the event Mr.
        Langan
        leaves the Company for any reason, the note immediately becomes due and payable
        in full. The balance of the note was approximately $70,000 and $79,000 at
        September 30, 2006 and 2005, respectively, and is included in other assets
        in
        the accompanying consolidated balance sheets.
 
 On
        July
        22, 2005, the Company entered into a secured convertible debenture with a
        greater than 10% shareholder for a principal sum of $660,000. The debenture
        is
        convertible into 220,000 shares of the Company’s common stock at a conversion
        price of $3.00 per share at the option of the holder (subject to certain
        limitations). The term is for three years and interest rate is at 12% per
        annum.
        The debenture matures on August 1, 2008. The Company also issued 50,000
        detachable warrants at $3.00 per share in relation to this debenture. The
        warrants are exercisable at any time within the period beginning on July
        22,
        2005 and expiring on July 22, 2008. The value of the discount on note payable
        was estimated to be $106,656 at the date of grant using a Black-Scholes
        option-pricing model with the following assumptions:
 
 Volatility
              
              
              138
              %Expected
                  life
              
              
              3
                  yearsExpected
                  dividend yield
              
              
              -Risk
                  free rate
              
              
              4.31
              %
 
 For
        the
        year ended September 30, 2006 and 2005, the Company recorded $35,552 and
        $5,925,
        respectively, of interest expense. The debenture is  secured
        by the Company’s ownership in Citation Land, LLC and RCI Holdings, Inc., both
        are wholly owned subsidiaries of the Company.
  F
            - 28
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  M. 
        Related Party Transactions - continued
 
 The
        Company has accounted for this transaction under Emerging Issues task Force
        (“EITF”) Issue No. 00-27, *Application of Issue No. 98-5 to Certain
        Convertible Instruments*. The value of the embedded beneficial conversion
        feature on the note payable was estimated to be $53,856, which was calculated
        using the EITF Issue No. 98-5 model. For the years ended September 30, 2006
        and
        2005, the Company recorded $20,944 and $0, respectively, of interest expense
        related to the value of the embedded beneficial conversion feature. The shares
        of Common Stock underlying the principal amount of the Debenture and the
        Warrants had piggyback registration rights and became registered with SEC
        on
        September 1, 2005.
 
 On
        April
        28, 2006, the Company entered into convertible debentures with three
        shareholders, one of which is a greater than 10% shareholder, for a principal
        sum of $825,000. The term is for two years and the interest rate is 12% per
        annum. At the election of the holders, the holders have the right to convert
        (subject to certain limitations) all or any portion of the principal amount
        of
        the debentures into shares of the Company’s common stock at a rate of $6.55 per
        share, which approximated the closing price of the Company’s stock on April 28,
        2006. The debentures provide, absent shareholder approval, that the number
        of
        shares of the Company’s common stock that may be issued by the Company or
        acquired by the holders upon conversion of the debentures shall not exceed
        19.99% of the total number of issued and outstanding shares of the Company’s
        common stock. $600,000 of the debentures is secured by the Company’s property
        located at 9009 Airport Blvd., Houston, Texas. The shares of Common Stock
        underlying the principal amount of the debentures had piggyback registration
        rights and were registered with SEC in June 2006. The proceeds of the debentures
        were used for the acquisition of Joint Ventures, Inc.
 
 
 **N. 
        Employee Retirement Plan**
 
 The
        Company sponsors a Simple IRA plan (the “Plan”), which covers all of the
        Company’s corporate employees. The Plan allows the corporate employees to
        contribute up to the maximum amount allowed by law, with the Company making
        a
        matching contribution of 3% of the employee’s salary. Expenses related to
        matching contributions to the Plan approximated $39,000 and $28,000 for the
        years ended September 30, 2006 and 2005, respectively.
 
 
 **O. 
        Acquisitions and Dispositions**
 
 On
        September 30, 2004, the Company entered into a Stock Purchase Agreement with
        an
        unrelated third party, whereby the Company sold all of its 510 shares of
        common
        stock of RCI Ventures, Inc. for $15,000 cash and a $235,000 note receivable
        bearing interest at a rate of 6% over a five year period. The monthly payment
        related to this note receivable is $4,453. In May 2006,
        the
        note receivable was restructured into a note receivable with principal of
        $230,000, interest rate of 7.5% over a ten year period. The monthly payment of
        the restructured note is $2,730.14. As a part of the transaction, Trumps,
        Inc.,
        a wholly-owned subsidiary of the Company, and Tantric Enterprises, Inc.,
        a
        wholly-owned subsidiary of RCI Ventures, Inc., entered into a five year lease
        agreement for the property located at 5718 Fairdale, Houston, Texas. The
        Company
        has recorded a $163,739 deferred gain related to this transaction for the
        year
        ended September 30, 2004. The gain will be recognized upon collection of
        the
        note receivable. The
        deferred gain is netted against the note receivable, included in other assets
        in
        the accompanying balance sheet.
  F
            - 29
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **O.
            Acquisitions and Dispositions - continued**
 
 On
          January 18, 2005, the Company’s wholly-owned subsidiary, RCI Entertainment New
          York, Inc., a New York corporation ("RCI New York") completed the acquisition
          of
          Peregrine Enterprises, Inc. (“Peregrine”), which operated the Paradise Club in
          Midtown Manhattan, New York (50 West 33rd Street). Peregrine owns and operates
          an adult entertainment cabaret located in midtown Manhattan. The cabaret
          club is
          located near the Empire State Building and Madison Square Garden, and is
          less
          than 10 blocks from Times Square.  The
          total
          consideration was for $7.775 million for the assets and stock of the former
          Paradise Club, which had operated on the site for more than a decade. The
          transaction consisted of $2.5 million in cash and $5.125 million in a promissory
          note bearing simple interest at the rate of 4.0% per annum with a balloon
          payment at the end of five years and transaction costs of $150,000. The
          Promissory Note is payable commencing 151 days after closing as follows:
          (a) the
          payment of $58,333.33 per month for twenty-four (24) consecutive months;
          (b) the
          payment of $63,333.33 for twenty-four (24) consecutive months; (c) the
          payment
          of $68,333.33 for twelve (12) consecutive months; and (d) a lump sum payment
          of
          the remaining balance to be paid on the sixty-first (61st) month. $2,000,000
          of
          the principal amount of the Promissory Note is convertible into shares
          of
          restricted common stock at prices ranging from $4.00 to $7.50 per share.
          The
          parties also entered into a Stock Pledge Agreement and Security Agreement
          to
          secure the Promissory Note. The results of operations of the club are included
          in the Company’s consolidated statement of operations from January 18,
          2005.
 
 The
        following information summarizes the final determination of the purchase
        price
        allocation.
 
 Current
                  assets
              
              $
              150,000Discounted
                  lease
              
              
              43,022Non-compete
                  agreement
              
              
              100,000License
              
              
              7,481,978Net
                  assets acquired
              
              $
              7,775,000
 
 The
        following unaudited pro forma information presents the results of operations
        as
        if the acquisition had occurred as of the beginning of the immediate preceding
        period. Peregrine’s operations are for the calendar year 2004. The pro forma
        information is not necessarily indicative of what would have occurred had
        the
        acquisition been made as of such periods, nor is it indicative of future
        results
        of operations. The pro forma amounts give effect to appropriate adjustments
        for
        the fair value of the assets acquired, amortization of intangibles and interest
        expense.
  F
            - 30
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **O.
            Acquisitions and Dispositions - continued**
 **2005**Revenues
              
              $
              15,310,407Net
                  income (loss) from continuing operations
              
              
              (638,841
              )Net
                  income (loss)
              
              
              (495,148
              )Net
                  income (loss) per share - basic
              
              $
              (0.13
              )
 
 On
        March
        31, 2005, the Company completed the sale of one of its clubs known as ‘Rick’s
        South’ to MBG Acquisition LLC for cash $550,000. In connection with the sale,
        the Company recorded a gain of $291,987. The club’s business was accounted for
        as a discontinued operation under accounting principles generally accepted
        in
        the United States of America, and therefore, the club’s results of operations
        and cash flows have been removed from the Company’s consolidated results of
        continuing operations and cash flows for the year ended September 30,
        2005.
 
 On
        June
        10, 2005, the Company’s wholly-owned subsidiary, RCI Entertainment North
        Carolina, Inc., a North Carolina corporation ("RCI North Carolina") completed
        the acquisition of a 30,000 square foot nightclub in Charlotte, North Carolina.
        The name of the club had been changed from ‘The Manhattan Club’ (5300 Old
        Pineville Road) to ‘Rick's Cabaret’. The purchase price of the transaction was
        $1,000,000 through the issuance of 180,000 shares of restricted common stock
        valued at $675,000 and a seven-year promissory note of $325,000, bearing
        interest at a rate of 7% per annum. The nature of the restrictions on the
        shares
        of common stock are that the shares were to be registered with the SEC for
        re-sale within thirty days after closing of the acquisition. The 180,000
        shares
        were valued at $3.75 per share, which approximated the average market price
        within a few days before and after the announcement of the acquisition in
        accordance with EITF No. 99-12, *Determination
        of the Measurement Date for the Market Price of Acquirer Securities Issued
        in a
        Purchase Business Combination* .
        The
        note is secured by liens upon the assets of and hereafter acquired assets
        of RCI
        Entertainment (North Carolina), Inc. The results of operations of the club
        are
        included in the Company’s consolidated statement of operations from February 1,
        2005, when the Company assumed risk of loss for the club’s operations under a
        management agreement.
 
 Pursuant
        to the terms of the note, on or after November 1, 2005, the holder shall
        have
        the right, but not the obligation to have the Company purchase from the holder
        4,285 shares per month, calculated at a price per share equal to $3.75 until
        the
        holder has received a total of $1,000,000 from the sale of the shares less
        the
        amount of the note. At the Company’s election during any given month, the
        Company may either buy the monthly shares or, if the Company elects not to
        buy
        the monthly shares from the holder, then the holder shall sell the monthly
        shares in the open market. Any deficiency between the amount which the holder
        receives from the sale of the monthly shares and the value of the shares
        shall
        be paid by the Company within three (3) days of the date of sale of the monthly
        shares during that particular month. The Company’s obligation to purchase the
        monthly shares from the holder shall terminate and cease at such time as
        the
        holder has received a total of $1,000,000 from the sale of the shares, less
        the
        amount of the note.
  F
            - 31
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **O.
            Acquisitions and Dispositions - continued**
 As
        of
        September 30, 2005, the 180,000 shares of restricted common stock were
        classified on the consolidated balance sheet as temporary equity in accordance
        with EITF Topic D-98, *Classification
        and Measurement of Redeemable Securities* .
        This
        obligation was satisfied on May 11, 2006 when all shares had been sold for
        more
        than $675,000.
 
 Proforma
        results of operations have not been provided, as the amounts were not deemed
        material to the consolidated financial statements. The transaction follows
        the
        Company’s growth strategy.
 
 The
        following information summarizes the final determination of the purchase
        price
        allocation.
 
 Current
                  assets
              
              $
              111,752Property
                  & equipment
              
              
              640,192Licenses
              
              
              455,656Other
                  assets
              
              
              5,020Current
                  liabilities assumed
              
              
              (212,620
              )Net
                  assets acquired
              
              $
              1,000,000
 
 On
        July
        12, 2005, the Company organized RCI Dating Services, Inc. (“RCI Dating”), which
        operates as an addition to the Company’s internet operations, to acquire
        CouplesClick.net from ClickMatch LLC (“ClickMatch").  The Company
        transferred its ownership in CouplesTouch.com to RCI Dating and as a result
        of
        the transaction the Company obtained an 85% interest in RCI Dating with the
        other 15% owned by ClickMatch.
 
 On
        April
        5, 2006, the Company’s wholly owned subsidiary, RCI Holdings, Inc. completed the
        acquisition of real property located at 9009 Airport Blvd., Houston, Texas
        where
        the Company currently operates Rick’s Sports Cabaret (previously Hummers Sports
        Bar and XTC South clubs). Pursuant to the terms of the agreement, the Company
        paid a total purchase price of $1,300,000, which consisted of $500,000 in
        cash
        and 160,000 shares of the Company’s restricted common stock. The purchase price
        of $1,300,000 was determined to be the fair value of the real property based
        on
        the nature of the restrictions of the shares issued in the transaction. As
        part
        of the transaction, the Company agreed to file a registration statement for
        the
        resale of such restricted common stock within 45 days after the closing.
        The
        registration statement became effective on June 23, 2006. Additionally, nine
        months after the filing of the registration statement, the Seller has the
        right,
        but not the obligation, to have the Company buy the shares at a price of
        $5.00
        per share at a rate of no more than 10,000 shares per month until such time
        as
        the Seller receives a total of $800,000 from the sale of such shares.
        Alternatively, the Seller has the option to sell such shares in the open
        market.
        As of September 30, 2006, the 160,000 shares of restricted common stock were
        classified on the consolidated balance sheet as temporary equity in accordance
        with EITF Topic D-98, *Classification
        and Measurement of Redeemable Securities* .
        The
        transaction was the result of arms-length negotiations between the parties.
 
 On
        May 9,
        2006, the Company purchased Joint Ventures, Inc., an operator of an adult
        nightclub in South Houston, Texas, formerly known as Dreamers Cabaret &
Sports Bar located at 802 Houston Blvd. The purchase price of $840,000 was
        paid
        in cash. In
        anticipation of this acquisition, on April 28, 2006, the Company borrowed
        $825,000 under convertible debentures. The club, located in a Houston
        suburb, has been converted to an XTC Cabaret.
  F
            - 32
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
   **O.
            Acquisitions and Dispositions - continued**
 
 The
          following information summarizes the final determination of the purchase
          price
          allocation:
 
 Current
                  assets
              
              $
              7,720Property
                  & equipment
              
              
              390,000Discounted
                  lease
              
              
              103,548Non-compete
                  agreement
              
              
              90,000License
              
              
              248,732Net
                  assets acquired
              
              $
              840,000
 
 Proforma
        results of operations have not been provided, as the amounts were not deemed
        material to the consolidated financial statements. The transaction follows
        the
        Company’s growth strategy.
 
 On
        July
        7, 2006, the Company entered into a stock purchase agreement to acquire Texas
        S&I, Inc., a Texas corporation, for $125,000, consisting of $55,000 paid in
        cash at closing and $70,000 in a five year note payable bearing interest
        at a
        rate of 4% per annum. As of September 30, 2006, the note has been fully paid.
        Texas S&I, Inc. owned and operated Club Exotica in San Antonio. The Company
        has converted this club into “Club Onyx--San Antonio”.
 
 The
        following information summarizes the final determination of the purchase
        price
        allocation.
 
 Other
                  assets
              
              $
              7,500Property
                  & equipment
              
              
              117,500Net
                  assets acquired
              
              $
              125,000
 
 Proforma
        results of operations have not been provided, as the amounts were not deemed
        material to the consolidated financial statements. The transaction follows
        the
        Company’s growth strategy.
 
 On
        August
        24, 2006, the Company’s subsidiary, RCI Debit Services, Inc., acquired 99% of
        the ownership interest in an adult entertainment cabaret known as “Centerfolds”
located at 5418 Brewster Street, San Antonio, Texas. Additionally, under
        the
        terms of the transaction, the Company’s subsidiary, RCI Holdings, Inc. acquired
        100% of the interest in the improved real property upon which Centerfolds
        is
        located. The total purchase price for the business and real property was
        $2,900,000. Under terms of the agreement, the Company paid the owners of
        the
        club and property $600,000 in cash at the time of closing and signed promissory
        notes for the remaining balance. In addition, certain members of the current
        ownership structure entered into five-year covenants not to compete with
        the
        Company.
  F
            - 33
 *Table
            of Contents*
  **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
  **O.
          Acquisitions and Dispositions - continued**
 
 The
        following information summarizes the final determination of the purchase
        price
        allocation.
 
 Current
                  assets
              
              $
              22,500Property
                  & equipment
              
              
              2,127,500Non-compete
                  agreements
              
              
              250,000Goodwill
              
              
              500,000Net
                  assets acquired
              
              $
              2,900,000
 
 Proforma
        results of operations have not been provided, as the amounts were not deemed
        material to the consolidated financial statements. The transaction follows
        the
        Company’s growth strategy.
 
 
 **P. 
        Subsequent Events**
 
 On
        October 4, 2006, the seller of the New York club converted $75,000 of principal
        from the related promissory note into 10,000 shares of the Company’s common
        stock.
 
 On
        October 11, 2006, the Company sold its properties in Wise County for $165,000,
        which was the value of the properties included in the Company’s balance sheet at
        September 30, 2006 after recording an impairment charge of $68,134 on September
        2006.
 
 On
        October 12, 2006, the Company purchased a 51% ownership interest of Playmates
        Gentlemen’s Club LLC, an operator of an adult nightclub in Austin, Texas. The
        club is located at 8110 Springdale Street. The purchase price of $1,533,750
        was
        paid $500,000 cash at closing and 125,000 shares of the Company’s restricted
        common stock, valued at $8.27 per share in accordance with EITF 99-12. The
        club
        has been converted to a Rick’s Austin. As part of the agreement, twelve months
        after the closing date, the seller has the right, but not the obligation,
        to
        have the Company buy the shares at a price of $8.00 per share at a rate of
        no
        more than 5,000 shares per month until such time as the seller receives a
        total
        of $1,000,000 from the sale of such shares. Alternatively, the seller has
        the
        option to sell such shares in the open market. The transaction was the result
        of
        arms-length negotiations between the parties.
 
 In
        October and November 2006, 137,500 stock options were exercised by employees
        of
        the Company for total proceeds of $350,531.
 
 In
        November 2006, a holder of a convertible debenture converted $25,023 of interest
        owed into 5,269 shares of the Company’s restricted common stock.
  F
              - 34
 *Table
              of Contents*
 
 **RICK’S
          CABARET INTERNATIONAL, INC.**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS *(continued)***
 **P.
        Subsequent Events - continued**
  On
        November 9, 2006, the Company entered into convertible debentures with three
        shareholders for a principal sum of $600,000. The term is for two years and
        the
        interest rate is 12% per annum. At the election of the holders, the holders
        have
        the right to convert (subject to certain limitations) all or any portion
        of the
        principal amount of the debenture into shares of the Company’s common stock at a
        rate of $7.50 per share, which was higher than the closing price of the
        Company’s stock on November 9, 2006. The debenture provides, absent shareholder
        approval, that the number of shares of the Company’s common stock that may be
        issued by the Company or acquired by the holders upon conversion of the
        debenture shall not exceed 19.99% of the total number of issued and outstanding
        shares of the Company’s common stock. The proceeds of the debentures were used
        for the acquisition of a 51% ownership interest of Playmates Gentlemen’s Club
        LLC.
 
 On
        December 5, 2006, the Company foreclosed on a residential house due to
        non-payment of a note receivable to an unrelated third party. The approximate
        balance of the note receivable was $55,000 with property taxes owed of
        approximately $20,000. The house has an approximate appraised value of $90,000.
        As the amount due is believed to be collateralized no allowance has been
        provided nor is deemed necessary as of September 30, 2006.
 
 On
        December 14, 2006, the Company converted its Rick’s club in Charlotte, North
        Carolina into Club Onyx - Charlotte.
   F
        -
        35