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,
      2007


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





Commission
      File Number:   0-26958





RICK'S
      CABARET INTERNATIONAL,
      INC.


(Name
      of
      Small Business Issuer in Its Charter)





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








10959
      Cutten Road, Houston, Texas
      77066


(Address
      of Principal Executive Offices)





(281)
      397-6730


(Issuer’s
      Telephone Number)





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





Title
      Of
      Each Class       n/a


Name
      Of
      Each Exchange On Which Registered      
n/a





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





Title
      Of
      Each Class


Common
      Stock, $.01 Par
      Value





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





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





The
      Issuer's revenues for the year ended September 30, 2007 were
      $32,013,940.





The
      aggregate market value of Common Stock held by non-affiliates of the registrant
      at December 7, 2007, based upon the last reported sales prices on the NASDAQ
      Global Market of $23.32 was $104,132,218.





As
      of
      December 7, 2007, there were approximately 7,521,850 shares of Common Stock
      outstanding (excluding treasury shares).










TABLE
      OF CONTENTS








PART
                I
            
            Page
                No.Item
                1.
            Business
            1Item
                2.
            Properties
            6Item
                3.
            Legal
                Proceedings
            8Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            9PART
                IIItem
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small
                Business Issuer Purchases Of Equity Securities
            10Item
                6.
            Management's
                Discussion and Analysis or Plan of
                Operation
            11Item
                7.
            Financial
                Statements
            22Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            22Item
                8A.
            Controls
                and Procedures
            22Item
                8B.
            Other
                Information
            23PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of The Exchange Act
            23Item
                10.
            Executive
                Compensation
            25Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
                and  Related Stockholder Matters
            27Item
                12.
            Certain
                Relationships and Related
                Transactions
            28Item
                13.
            Exhibits
            29Item
                14.
            Principal
                Accountant Fees and Services
            29Signatures
            30


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
      fifteen adult nightclubs that offer live adult entertainment, restaurant and
      bar
      operations. Five of our clubs operate under the name "Rick's Cabaret"; one
      operates under the name of “New Orleans Nights”, which will be converted to
“Rick’s” once the ongoing renovation is completed; three operate under the name
“Club Onyx”, upscale venues that welcome all customers but cater especially to
      urban professionals, businessmen and professional athletes; four of the clubs
      operate under the name "XTC" and one club that operates as “Encounters”, and one
      club that operates as “ Tootsie’s”. Our nightclubs are in Houston, Austin, San
      Antonio, and Fort Worth, Texas; Charlotte, North Carolina; Minneapolis,
      Minnesota; New York, New York; and Miami Gardens, Florida. We also own and
      operate premiere adult entertainment Internet websites.





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





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




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




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




Compliance
      Policies/CreditCards.
      We review all credit card charges made by our customers. We have in place a
      formal policy requiring that all credit card charges must be approved, in
      writing, by management before any charges are accepted.


1
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          of
          Contents


Management
      is trained to review credit card charges to ensure that the only charges
      approved for payment are for food, drink and entertainment.




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





Controls.
      Operational
      and accounting controls are essential to the successful operation of a cash
      intensive nightclub and bar business. We have designed and implemented internal
      procedures and controls 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.





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
      operate a similar type club under the name of “New Orleans Nights” in Fort
      Worth, Texas. We are currently renovating the second floor of the building
      and
      plan to change the name to Rick’s once it is completed.  We also
      operate a similar nightclub under the name “Tootsie’s” in Miami Gardens,
      Florida.  We also operate two nightclubs in Houston and one in
      Charlotte, North Carolina, as “Club Onyx”, upscale venues that welcome all
      customers but cater especially to urban professionals, businessmen and
      professional athletes. Additionally, we own four nightclubs in San Antonio,
      Austin, and Houston, Texas that operate under the name XTC. We sold our New
      Orleans, Louisiana nightclub in March 1999, but it continues to use the name
      “Rick’s Cabaret” under a licensing agreement.


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          of
          Contents


RECENT
      NIGHTCLUB TRANSACTIONS





1.
            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.




2.
            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
                Encounters”.




3.
            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.  We have converted this club
                into “Rick’s Cabaret San Antonio”.




4.
            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
                Cabaret 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.





5.
            On
                April 23, 2007, we completed a transaction for the purchase of 100%
                of the
                outstanding common stock of W.K.C., Inc., a Texas corporation (the
                "Business"), which owned and operated an adult entertainment cabaret
                known
                as New Orleans Nights ("New Orleans Nights") located in Fort Worth,
                Texas.  Pursuant to the Stock Purchase Agreement, we acquired
                the Business for a total cash purchase price of $4,900,000.   In
                addition, RCI Holdings, Inc., our wholly owned subsidiary ("RCI"),
                entered
                into an Assignment of that certain Real Estate Sales Contract between
                the
                owner of the property and W.K.C., Inc. for the purchase of the real
                property located at 7101 Calmont, Fort Worth, Texas 76116 (the "Real
                Property") where New Orleans Nights is located for a total purchase
                price
                of $2,500,000, which consisted of $100,000 in cash and $2,400,000
                payable
                in a six year promissory note to the sellers which will accrue interest
                at
                the rate of 7.25% for the first two years, 8.25% for years three
                and four
                and 9.25% thereafter (the "Promissory Note").  The Promissory
                Note is secured by a Deed of Trust and Security
                Agreement.  Further, RCI entered into an Assignment and
                Assumption of Lease Agreement with the sellers to assume the lease
                agreement for the Real Property.  We are currently renovating
                the second floor of the building and plan to change the name to Rick’s
                once it is completed.





6.
            On
                May 10, 2007, we entered into a Licensing Agreement with Rick’s Buenos
                Aires Sociedad Anonima (“Licensee”), a corporation organized under the
                laws of Argentina.  Under the terms of the Licensing Agreement,
                we agreed to grant Licensee a license for use and exploitation of
                our
                logos, trademarks and service marks for the operation of an adult
                entertainment facility in the city of Buenos Aires, Argentina, and
                Latin
                America.  Pursuant to the agreement, Licensee agreed to pay us a
                royalty fee equal to 10% of gross revenues of Licensee’s business, net of
                any value added tax. No club has opened as of this time, but plans
                are for
                the location to open for business by the end of the second quarter
                of
                2008.





7.
            Subsequent
                to the end of the fiscal year, on November 30, 2007, we entered into
                a
                Stock Purchase Agreement for the acquisition of 100% of the issued
                and
                outstanding common stock of Stellar Management Corporation, a Florida
                corporation (the "Stellar Stock") and 100% of the issued and outstanding
                common stock of Miami Gardens Square One, Inc., a Florida corporation
                (the
                "MGSO Stock") which owns and operates an adult entertainment cabaret
                known
                as "Tootsie’s Cabaret" ("Tootsie’s") located at 150 NW 183rd Street, Miami
                Gardens, Florida 33169 (the "Transaction"). Pursuant to the Stock
                Purchase
                Agreement, we acquired the Stellar Stock and the MGSO Stock from
                Norman
                Hickmore ("Hickmore") and Richard Stanton ("Stanton") for a total
                purchase
                price of $25,000,000 payable $15,000,000 in cash and payable $10,000,000
                pursuant to two Secured Promissory Notes in the amount of $5,000,000
                each
                to Stanton and Hickmore (the "Notes"). The Notes will bear interest
                at the
                rate of 14% per annum with the principal payable in one lump sum
                payment
                on November 30, 2010. Interest on the Notes will be payable monthly,
                in
                arrears, with the first payment being due thirty (30) days after
                the
                closing of the Transaction. We cannot pre-pay the Notes during the
                first
                twelve (12) months; thereafter, we may prepay the Notes, in whole
                or in
                part, provided that (i) any prepayment by us from December 1, 2008
                through
                November 30, 2009, shall be paid at a rate of 110% of the original
                principal amount and (ii) any prepayment by the Company after November
                30,
                2009, may be prepaid without penalty at a rate of 100% of the original
                principal amount. The Notes are secured by the Stellar Stock and
                MGSO
                Stock under a Pledge and Security
                Agreement.




3
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          of
          Contents


Additionally,
      as part of the Transaction, we entered into Assignment to Lease Agreements
      with
      the landlord for the property where Tootsie’s is located. The underlying Lease
      Agreements for the property provide for an original lease term through June
      30,
      2014, with two option periods which give us the right to lease the property
      through June 30, 2034.  The terms and conditions of the transaction
      were the result of extensive arm's length negotiations between the
      parties.







BUSINESS
      ACTIVITIES--INTERNET ADULT
      ENTERTAINMENT WEB SITES





In
      1999,
      we began adult Internet website operations. Our xxxPassword.com
      website features adult content licensed through Voice Media, Inc. We added
      CouplesTouch.com in 2002 as a dating site catering to those in the swinging
      lifestyle. 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.com has approximately 10,000 items for sale at any
      given time. NaughtyBids.com offers third party webmasters an opportunity to
      create residual income from web surfers through the NaughtyBids Affiliate
      Program, which pays third party webmasters a percentage of every closing auction
      sale in which the buyer originally came from the affiliate webmaster's site.
      There are numerous auction sites on the Internet that offer adult products
      and
      erotica.





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. 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 withTaurus 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”).Weforeclosed on the collateralized
      shares inAugust
      2006.  As such,wepresently own the shares and
      havethe ability to sell them in the open
      market. As of September 30, 2007, the value of the shares totals approximately
      $450,000. As the amount due has been fully collateralized since the note
      receivable agreement was
      entered andwebelieve such collateral will fully
      satisfy such amount due, no allowance has been provided nor is deemed necessary
      as of September 30, 2007 and 2006.Weintend 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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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 two 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
      seven 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 nine
      blocks from Times Square. There are seven adult clubs in Austin and nine 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 Highway 130 (Austin
      By-pass). We anticipate a significant increase in traffic when the construction
      on Highway 130 is completed. Our Rick’s San Antonio is located at I-35 in the
      northern part of the city.  In Fort Worth, Texas, there are
      approximately four competitors.  In the Miami, Florida market, there
      are approximately 15 competitors.





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





GOVERNMENTAL
      REGULATIONS





We
      are
      subject to various federal, state and local laws affecting our business
      activities. In particular, in Texas the authority to issue a permit to sell
      alcoholic beverages is governed by the Texas Alcoholic Beverage Commission
      (“TABC”), which has the authority, in its discretion, to issue the appropriate
      permits. We presently hold a Mixed Beverage Permit and a Late Hour Permit.
      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.





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. In all states where we operate, management believes we are in
      compliance with applicable city, county, state or other local laws governing
      the
      sale of alcohol and sexually oriented businesses. (See “Legal Proceedings"
      herein.)





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, 2007, we had approximately 696 employees, of which 116 are in
      management positions, including corporate and administrative and Internet
      operations and approximately 580 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, 2007, we had independent contractor
      relationships with approximately 1,100 entertainers, who are self-employed
      and
      perform at our locations on a non-exclusive basis as independent contractors.
      Our entertainers in Minneapolis, Minnesota act as commissioned
      employees.  We believe that the adult entertainment industry standard
      of treating entertainers as independent contractors provides us with safe harbor
      protection to preclude payroll tax assessment for prior years. We have prepared
      plans that we believe will protect our profitability in the event that the
      sexually oriented business industry is required in all states to convert
      entertainers who are now independent contractors into
      employees.


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SHARE
      REPURCHASES





As
      of
      September 30, 2007, 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, 2007, the balance
      of
      the mortgage was $377,627. 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
      three locations of Rick's Cabaret (in Houston, San Antonio and Minneapolis),
      two
      Club Onyx locations in Houston, one “New Orleans Night” in Fort Worth, Texas,
      and two locations of XTC (in Austin and in San Antonio). In Houston, we own
      the
      property where a club known as “Iniquity” is located (previously “Club
      Encounters”),which is
      currently under lease to Iniquity LLC. We lease property for our XTC South
      (Houston), XTC North (Houston), Club Encounters (San Antonio), Rick’s
      Cabaret-New York, Club Onyx Charlotte, Rick’s Cabaret-Austin and Tootsie’s
      (Miami Gardens, Florida) locations.





CLUB
      PROPERTIES WE
      OWN:





1.
            Club
                Onyx, located on Bering
                Drive in Houston, has an aggregate 12,300 square feet ofspace. In
                December 2004, we paid
                off the old mortgage and obtained a new one withaninitial
                balance of $1,270,000 andaninterest
                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,
                2007, the balance of the mortgage was $1,208,957. During fiscal year
                2007,
                we paid $12,256 in monthly principal and interest payments. The monthly
                payment is calculated based on a 20 year amortization schedule. The
                last
                mortgage
                payment is due in
                2015.





2.
            The
                Rick's Cabaret, located on
                North Belt Drive in Houston, has 12,000 square feet of space. In
                November
                2004, we obtained a mortgage using this property as collateral. The
                principal balance of the new mortgage was $1,042,000, with
                an annual interest
                rate of 10% over a 10 year term. The money received from this new
                note was
                used to finance the acquisition of the New York club. As of September
                30,
                2007, the balance of the mortgage was $990,126. 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 September30, 2007,
                that we
                owe on the mortgage is $1,839,771 and the interest rate is 9%. We
                pay
                $22,732 in monthly principal and interest payments. The last mortgage
                payment is due in 2009 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 owe as of September 30, 2007 is $217,891 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 was $900,000, with an annual
                interest rate of 11% over a 10 year term. In June and July 2005,
                we
                obtained additional
                funds in the amount of
                $200,000. 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, 2007, the balance of the mortgage was $950,817. The
                last
                payments for both mortgages are due in
                2015.


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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 was $590,000, with an annual
                interest rate of 10% over a 10 year term. The money received from
                this new
                note was used to finance the acquisition and renovation of the New
                York
                club. As of September 30, 2007, the balance of this mortgage was
                $560,628.
                The monthly principal and interest payment is $5,694. The last mortgage
                payment is due in 2014.





6.
            TheSan
                Antonioproperty wherea
                club known as “Encounters”is located has8,000 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
                September 1, 2007,
                we began receiving a monthly
                lease payment in the amount of $5,500 for this
                space.





7.
            Our
                subsidiary, Citation Land
                LLC, owns a 350-acre ranch in Brazoria County, Texas. 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. 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
                September30,2006. 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 Club Onyx
                South (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
                commonstock.





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.





11.
            On
                April 23, 2007, in addition to the acquisition of 100% of the outstanding
                common stock of W.K.C., Inc., which owned and operated a cabaret
                known as
                ‘New Orleans Night’, RCI Holdings, Inc., our wholly owned subsidiary,
                entered into an Assignment of that certain Real Estate Sales Contract
                between the owner of the property and W.K.C., Inc. for the purchase
                of the
                real property located at 7101 Calmont, Fort Worth, Texas 76116 where
                New
                Orleans Nights is located for a total purchase price of $2,500,000,
                which
                consisted of $100,000 in cash and $2,400,000 payable in a six year
                promissory note to the sellers which will accrue interest at the
                rate of
                7.25% for the first two years, 8.25% for years three and four and
                9.25%
                thereafter.  The promissory note is secured by a Deed of Trust
                and Security Agreement.  Further, RCI Holdings, Inc. entered
                into an Assignment and Assumption of Lease Agreement with the sellers
                to
                assume the lease agreement for the Real Property.  We are
                currently renovating the second floor of the building and plan to
                change
                the name to Rick’s once it is
                completed.





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 was $8,000 until August 31, 2006,at which time
                the
                monthly base rent increased to
                $9,000.





2.
            We
                lease the property in New York
                City, New York, where our Rick’s
                Cabaret NYC is located. We
                assumed the existing lease, which will terminate in April 2023. The
                monthly rent was $41,469 until May 2007, at
                which time the monthly
                base rent increased 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 Club Onyx Charlotte is
                located.  We executed
                an
                amended lease in February 2007, which will terminate in February
                2017.  The monthly rent is $17,500 until February 2010, at which
                time the monthly base rent will increase to $18,500 until February
                2013,at
                which time the rent will
                escalate to $20,000
                until February 2017.





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





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


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





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






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.





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.  Our nightclub in our south
      Houston location had a valid temporary permit/license.  The permits
      for our north Houston location and our Bering Drive location have
      expired.





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 appealed the District Court’s rulings
      with the Fifth Circuit Court of Appeals.





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.





The
      trial
      commenced on December 4, 2006 and concluded on December 12, 2006.  The
      Trial Court rendered its judgment in favor of the City of Houston on January
      31,
      2007.  The Trial Court found that the City of Houston met its burden
      that there were sufficient alternate sites available to relocate all of the
      existing businesses in 1997.  The Trial Court found the 1997
      ordinance constitutional and enforceable.  Post-trial motions were
      heard and the relief sought, a stay against enforcement, was denied by the
      Trial
      Court.  An appeal to the Fifth Circuit Court of Appeals was
      timely filed.    The Fifth Circuit granted a stay
      pending appeal.  Oral argument was held before the Fifth Circuit Court
      of Appeals on August 7, 2007.  The Fifth Circuit Court of Appeals
      ruled in favor of the City of Houston in September 2007.  Pleadings
      have been filed seeking a stay against enforcement of the provisions of the
      ordinance with the United States Supreme Court in conjunction with the request
      that the United States Supreme Court hear an appeal of the Fifth Circuit Court
      of Appeals ruling.  Neither relief nor any indication of the Supreme
      Court’s position on the appeal has been received to date.





Additionally,
      we have filed on behalf of three of our club locations in Houston state court
      lawsuits seeking judicial review of the results of the amortization process
      contained within the Ordinance.  This process was abated in 1998 due
      to the possible multiplicity of court actions.  The final order by the
      Trial Court resulted in the termination of the abatement and allowed the
      amortization process to continue as provided in the
      Ordinance.  We are presently in discussions with the City of Houston
      to attempt to resolve this matter.   It is anticipated that
      further injunctive relief will be sought in the state court cases should it
      become necessary.  In the event all efforts to stop enforcement
      activity fail and the City of Houston elects to enforce the judgment, we, as
      well as every other similarly situated sexually oriented business located within
      the incorporated area of Houston, Texas, will have to either cease providing
      nude or semi-nude entertainment or develop alternate methods of
      operating.  In such event, we presently intend to clothe our
      entertainers in a manner to eliminate the need for licenses and to take such
      steps as to not be subject to SOB ordinance compliance.  Approximately
      23.7% of our club operation’s revenues for the twelve months ended September 30,
      2007 were in Houston, Texas.  The ruling could have a material adverse
      impact on our operations, but it is unknown at this time.





OTHER
      LEGAL
      MATTERS





On
      October 6, 2006, a lawsuit was filed in the 224th
      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, based upon
      an
      alleged “joint enterprise” theory and 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
      has denied any liability for this accident and is vigorously defending the
      lawsuit, which is presently in the discovery process with a motion for summary
      judgment (based upon there being no evidence to support any claim or contention
      against us) to be filed at the conclusion of the current phase of
      discovery.


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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
      Partner, Ltd. d/b/a The Penthouse Club. This incident underlying 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 appealed this judgment
      and
      we have responded. The case is pending before the 4th
      Court of Appeals
      in San Antonio, Texas.








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





We
      held
      our Annual Meeting of Shareholders on July 31, 2007.  Eric S. Langan,
      Robert L. Watters, Steven L. Jenkins, Alan Bergstrom, Travis Reese and Luke
      Lirot were nominated and elected as Directors with the following vote results
      at
      the shareholder meeting:




For
            
            
            WithheldEric
                S. Langan
            
            
            4,776,632
            
            
            
            589,158Robert
                L. Watters
            
            
            4,651,546
            
            
            
            714,244Steven
                L. Jenkins
            
            
            5,343,360
            
            
            
            22,430Alan
                Bergstrom
            
            
            5,339,840
            
            
            
            25,950Travis
                Reese
            
            
            4,775,517
            
            
            
            590,273Luke
                Lirot
            
            
            5,337,590
            
            
            
            28,200





At
      the
      Annual Meeting, the Shareholders ratified Whitley Penn LLP as the Company’s
      Independent Registered Public Accounting Firm for the fiscal year ending
      September 30, 2007, with the following vote results:





5,325,363
            Votes
                FOR Ratification23,160
            Votes
                AGAINST Ratification17,466
            Votes
                ABSTAINING





At
      the
      Annual Meeting, the Shareholders approved a Second Amendment to the Company’s
      1999 Stock Option Plan with the following vote results:





2,955,217
            Votes
                FOR Ratification646,656
            Votes
                AGAINST Ratification9,521
            Votes
                ABSTAINING





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





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





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


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PART
      II




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




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





COMMON
      STOCK PRICE
      RANGE





HIGH
            
            LOWFiscal
                2007First
                Quarter
            
            $
            8.88
            
            
            $
            5.27Second
                Quarter
            
            $
            11.04
            
            
            $
            6.21Third
                Quarter
            
            $
            9.75
            
            
            $
            8.26Fourth
                Quarter
            
            $
            12.49
            
            
            $
            7.89Fiscal
                2006First
                Quarter
            
            $
            3.86
            
            
            $
            2.93Second
                Quarter
            
            $
            6.20
            
            
            $
            3.76Third
                Quarter
            
            $
            7.40
            
            
            $
            5.30Fourth
                Quarter
            
            $
            7.97
            
            
            $
            6.08





On
      December 7, 2007, the last sales price for the common stock as reported on
      the
      NASDAQ Global Market was $23.32. On December 7, 2007, there were approximately
      3,512 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.





EQUITY
      COMPENSATION PLAN
      INFORMATION





The
      following table sets forth all equity compensation plans as of September 30,
      2007:





Plan
                category
            Number
                of securities to
                be
              issued
                upon exercise
                of
              outstanding
                options, warrants
              and
                rights
              
              (a)
            Weighted-average
              exercise
              price
                of
              outstandingoptions,
              warrants
                and
                rights
              
              (b)
            Number
                of
                securities
              remaining
                available
                for
              futureissuance
              under
                equity
              compensation
                plans
              (excluding
                securities
              reflectedin
                column
                (a))
              
              (c)Equity
                compensation plans approved by security holders
            545,000
            $3.61
            438,000


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EMPLOYEE
      STOCK OPTION
      PLANS





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





In
      August
      1999, we adopted the 1999 Stock Option Plan (the “1999 Plan”) with 500,000
      shares authorized to be granted and sold under the 1999 Plan. In August 2004,
      shareholders approved an Amendment to the 1999 Plan (the “Amendment”) which
      increased the total number of shares authorized to 1,000,000.  In July
      2007, shareholders approved an Amendment to the 1999 Plan (the “Amendment”)
      which increased the total number of shares authorized to
      1,500,000.  As of September 30, 2007, 545,000 stock options were
      outstanding under the 1999 Plan.





RECENT
      SALES OF UNREGISTERED
      SECURITIES





During
      the quarter ended September 30, 2007, we completed the following transactions
      in
      reliance upon exemptions from registration under the Securities Act of 1933,
      as
      amended (the "Act") as provided in Section 4(2) thereof. All certificates issued
      in connection with these transactions were endorsed with a restrictive legend
      confirming that the securities could not be resold without registration under
      the Act or an applicable exemption from the registration requirements of the
      Act. None of the transactions involved a public offering, underwriting discounts
      or sales commissions. We believe that each person was a “qualified” investor
      within the meaning of the Act and had knowledge and experience in financial
      and
      business matters, which allowed them to evaluate the merits and risks of our
      securities. Each person was knowledgeable about our operations and financial
      condition.





In
      August 2007, a holder of a
      convertible debenture converted $125,576 of principal and
      interest owed into
      26,437 shares of our restricted common stock.








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





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




FORWARD
      LOOKING STATEMENT AND
      INFORMATION





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


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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 Court rendered its judgment in favor of the City of Houston on January
      31, 2007.  The Trial Court found that the City of Houston met its
      burden that there were sufficient alternate sites available to relocate all
      of
      the existing businesses in 1997.  The Trial Court found the 1997
      ordinance constitutional and enforceable.  Post-trial motions were
      heard and the relief sought, a stay against enforcement, was denied by the
      Trial
      Court.  An appeal to the Fifth Circuit Court of Appeals was timely
      filed.    The Fifth Circuit granted a stay pending
      appeal.  Oral argument was held before the Fifth Circuit Court of
      Appeals on August 7, 2007.  The Fifth Circuit Court of Appeals ruled
      in favor of the City of Houston in September, 2007.  Pleadings have
      been filed seeking a stay against enforcement of the provisions of the ordinance
      with the United States Supreme Court in conjunction with the request that the
      United States Supreme Court hear an appeal of the Fifth Circuit Court of Appeals
      ruling.  Neither relief nor any indication of the Supreme Court’s
      position on the appeal has been received to date.  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. Approximately 23.7% of
      our
      club operation’s revenues for the twelve months ended September 30, 2007 were in
      Houston, Texas.  It is possible an adverse ruling may allow for
      additional competition in the Houston market.





In
      Texas,
      beginning January 1, 2008, our clubs will be subject to a new state law
      requiring a $5 surcharge for every club visitor.  A lawsuit has been
      filed by the Texas Entertainment Association, an organization to which we are
      a
      member, alleging the fee amounts to be an unconstitutional tax.  The
      tax could discourage certain potential customers from visiting our
      clubs.  Management is unaware of what impact, if any, the tax, if
      implemented, will have on our Texas operations.





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 revenue 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.
      States in which we operate may have laws which may limit the availability of
      a
      permit to sell alcoholic beverages or which may provide for suspension or
      revocation of a permit to sell alcoholic beverages in certain circumstances.
      The
      temporary or permanent suspension or revocations of any such permits would
      have a material adverse effect on the revenues, financial condition and results
      of operations of the Company.  In all states where we operate,
      management believes we are in compliance with applicable city, county, state
      or
      other local laws governing the sale of alcohol.





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




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





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





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





In
      addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
      effective internal controls for financial reporting and disclosure controls
      and
      procedures. In particular, commencing in fiscal 2008, we 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.


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Limitations
      on Protection of
      Service Marks





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





Anti-takeover
      Effects of
      Issuance of
      Preferred Stock





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





We
      Do Not Anticipate Paying
      Dividends onCommon Shares
      in the
      Foreseeable Future




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




Future
      Sales of Our Common
      Stock May Depress Our Stock Price




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




Our
      Stock Price Has Been
      Volatile and May Fluctuate in the Future




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




•
            our
                performance and
                prospects;


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


•
            sales
                by selling shareholders of
                shares issued or issuable in connection with
                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.





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 7, 2007, our Directors and executive officers and their respective
      affiliates collectively and beneficially owned approximately 17.33% 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.


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We
      are Dependent on Key
      Personnel





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





Cumulative
      Voting is Not
      Available To Stockholders





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





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





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





The
      inclusion of these provisions in the Articles may have the effect of reducing
      the likelihood of derivative litigation against Directors and officers, and
      may
      discourage or deter stockholders or 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, San Antonio, Texas, Minneapolis, Minnesota,
                and
                New York, New York, and a “New Orleans
                Night”in Fort Worth,
                Texas. We also
                own and operate three
                upscale venues that cater
                especially to urban professionals, businessmen and professional athletes
                called “Club
                Onyx”in Houston,
                Texas, and Charlotte, North Carolina.   We recently
                acquired “Tootsie’s”in Miami Gardens,
                Florida.  Additionally, we alsoown
                and operatea club known
                as“Encounters”in San Antonio,
                Texas.No
                sexual contact is permitted at any of our
                locations.


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2.
            We
                have extensive Internet
                activities.





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





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





Our
      nightclub revenues are derived from the sale of liquor, beer, wine, food,
      merchandise, cover charges, membership fees, independent contractors' fees,
      commissions from vending and ATM machines, valet parking and other products
      and
      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 2007, we greatly reduced our usage
      of promotional pricing for membership fees for our adult entertainment web
      sites. This reduced our revenues from these web sites.





CRITICAL
      ACCOUNTING
      POLICIES





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





Accounts
      and Notes
      Receivable





Trade
      accounts receivable 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, 2007
      and 2006 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, 2007, the
      value
      of the shares totals approximately $450,000. 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, 2007
      and
      2006. 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. In December 2006, the Company foreclosed on a
      residential house due to non-payment of a note receivable from an unrelated
      third party.  The balance of the note receivable was $
      55,175.  In June 2007, the Company foreclosed on the account and note
      receivable in the aggregate amount of approximately $240,000.  The net
      result of the transaction was that the Company wrote off the note and accounts
      and the related deferred gain and recorded $53,000 in furniture and equipment
      in
      the foreclosure.





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, 2007 and 2006 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, 2007 and 2006,
      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 a realized
      gain of $11,123 and $0 related to marketable securities for the years ended
      September 30, 2007 and 2006, respectively. Marketable securities held at
      September 30, 2007 and 2006 have a cost basis of approximately
      $13,000.


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Property
      and
      Equipment





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





Goodwill
      and Intangible
      Assets





In
      June
      2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles
      Assets, which
      addresses the accounting for goodwill and other intangible assets. Under SFAS
      No. 142, goodwill and intangible assets with indefinite lives are no longer
      amortized, but reviewed on an annual basis for impairment. The Company adopted
      SFAS No. 142 effective October 1, 2001. The Company’s annual evaluation was
      performed as of September 30, 2007, based on a projected discounted cash flow
      method using a discount rate determined by management to be commensurate with
      the risk inherent in the current business model. The Company determined that
      there is no goodwill impairment at September 30, 2007 and that the goodwill
      related to the acquisition of Bobby’s Novelty, Inc. was impaired at September
      30, 2006 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.





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





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


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The
      following presents pro forma net income and per share data for the year ended
      September 30, 2006 as if a fair value accounting method had been used to account
      for stock-based compensation:




Net
                income, as reported
            
            $
            1,752,714Less
                total stock-based employee compensation expense determined under
                the fair
                value based method for all awards
            
            
            (611,408)Pro
                forma net income
            
            $
            1,141,306Earnings
                per share:Basic
                - as reported
            
            $
            0.38Diluted
                - as reported
            
            $
            0.35Basic
                - pro forma
            
            $
            0.25Diluted
                - pro forma
            
            $
            0.23




Impact
      of Recently Issued
      Accounting Standards





In
      June
      2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
      Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income
      Taxes (FIN 48), to create a single model to address accounting for uncertainty
      in tax positions. FIN 48 clarifies the accounting for income taxes by
      prescribing a minimum recognition threshold a tax position is required to meet
      before being recognized in the financial statements. FIN 48 also provides
      guidance on derecognition, measurement, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. FIN 48 is effective
      for fiscal years beginning after December 15, 2006. The Company will adopt
      FIN
      48 as of October 1, 2007, as required. The cumulative effect of adopting FIN
      48
      will be recorded in retained earnings and other accounts as applicable. The
      Company believes that the adoption of FIN 48 will not have an effect on the
      Company's consolidated financial position, results of operations or cash
      flows.





RESULTS
      OF OPERATIONS FOR THE FISCAL
      YEAR ENDED SEPTEMBER 30, 2007 AS COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER
      30,
      2006





For
      the
      fiscal year ended September 30, 2007, we had consolidated total revenues of
      $32,013,940, compared to consolidated total revenues of $24,487,215 for the
      year
      ended September 30, 2006.  This was an increase of $7,526,725
      or 30.74%. The increase in total revenues was primarily due to revenues
      generated in our new clubs and increases in revenues from our existing clubs,
      especially from our New York location. Revenues from nightclub operations for
      same-location same-period increased by 11.80% and for Internet businesses
      decreased by 9.08%.





Our
      income before minority interest for the year ended September 30, 2007 was
      $2,863,501 compared to $1,721,377 for the year ended September 30, 2006. The
      increase in income from operations was primarily due to the increase in revenues
      from our existing clubs and from our New York and Fort Worth locations. Our
      income from nightclub operations (excluding corporate overhead) was $6,643,197
      for the year ended September 30, 2007 compared with $5,321,937 for the year
      ended September 30, 2006. Our income from operations for our Internet businesses
      (excluding corporate overhead) was $111,919 for the year ended September 30,
      2007 compared with $130,512 for the year ended September 30,
      2006.  Our income from operations for our nightclub operations for the
      same-location-same-period increased by 55.38%. Our income for our Internet
      operations for the same-web-site-same-period decreased by 53.80%.





Our
      cost
      of goods sold for the year ended September 30, 2007 was 12.61% of total revenues
      compared to 11.91% of related revenues for the year ended September 30, 2006.
      The increase was due primarily to the acquisitions of Rick’s clubs which have
      higher cost of goods sold and internet operations. Our cost of goods sold
      for the nightclub operations for the year ended September 30, 2007 was 12.75%
      of
      our total revenues from club operations compared to 12.17% for the year ended
      September 30, 2006. Cost of goods sold for same-location-same-period decreased
      to 10.78% for the year ended September 30, 2007 compared to 12.24% for the
      year
      ended September 30, 2006.  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, 2007 was 6.63% compared to 4.10%
      of
      related revenues for the year ended September 30, 2006.


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Our
      payroll and related costs for the year ended September 30, 2007 were $8,936,730
      compared to $7,081,660 for the year ended September 30, 2006. The increase
      was
      primarily due to the increase in payroll in our opening new clubs. Our payroll
      for our nightclub operations for same-location-same-period increased by 2.17%.
      The increase was primarily due to increases in payroll in our clubs due to
      increases in revenues. Our payroll for Internet operations increased by
      6.89%. 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, 2007 were
      $14,938,002 compared to $11,498,862 for the year ended September 30, 2006.
      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 had its second full year of operations. Other selling,
      general and administrative expenses for same-location-same-period for the
      nightclub operations increased by 2.68%. 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
      13.48%.





Our
      interest expense for the year ended September 30, 2007 was $1,335,713 compared
      to $1,057,020 for the year ended September 30, 2006. The increase was primarily
      due to the increase in debt in relation to the purchase of new clubs. We have
      increased our long term debt to $14,387,337 as of September 30, 2007 compared
      to
      debt of $13,920,733 as of September 30, 2006.





Our
      net
      income was $3,054,899 for the fiscal year ended September 30, 2007 compared
      to
      $1,752,714.  The increase in our net income was primarily a result of
      the factors discussed in the paragraphs above.





LIQUIDITY
      AND CAPITAL
      RESOURCES





As
      of
      September 30, 2007, we had a deficit in working capital of $1,030,472 compared
      to $2,264,101 as of September 30, 2006. Because of the large volume of cash
      we
      handle, stringent cash controls have been implemented. The decrease was
      primarily due to increases in cash and cash equivalents and accounts receivable,
      offset by increases in accrued expenses and current portion of
      long-term debt. At September 30, 2007, our cash and cash equivalents were
      $2,998,758 compared to $854,932 at September 30, 2006.





Our
      depreciation for the year ended September 30, 2007 was $1,438,158 compared
      to
      $1,001,513 for the year ended September 30, 2006. Our amortization for the
      year
      ended September 30, 2007 was $158,492 compared to $47,734 for the period ended
      September 30, 2006.





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




Years
                ended September 30,2007
            
            
            2006Net
                cash provided by operating activities
            
            $
            4,383,121
            
            
            $
            2,725,770Net
                cash used in investing activities
            
            
            (6,791,794
            )
            
            
            (3,110,840
            )Net
                cash provided by financing activities
            
            
            4,552,499
            
            
            
            759,672Net
                increase in cash and cash equivalent
            
            $
            2,143,826
            
            
            $
            374,602





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





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





Debt
      Financing:





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





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 topayoff certain debt
      and
      increase working capital. As of September 30, 2007, the holder had elected
      to
      convert $309,261 of principal and $92,491 of interest into 84,579 shares of
      restricted common stock.  Subsequent to the end of fiscal year, in
      November 2007, the holder elected to convert all remaining principal ($691,689)
      and accrued interest ($21,448) to date into 150,134 shares of the Company’s
      restricted common stock.


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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.





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





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





Financing
      from related
      parties:





On
      June
      17, 2005, we borrowed $160,000 from a shareholder at an annual interest rate
      of
      12% over a 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 is convertible until August 1,
      2008. The debenture matures on August 1, 2009 and bears interest at a rate
      of
      12% per annum. 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.  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
      debentures mature April 30, 2009 and bear interest at a rate of 12% per annum.
      At the election of the holders, the holders have the right to convert (subject
      to certain limitations) until April 30, 2008, all or any portion of the
      principal amount of the debentures into shares of our common stock at a rate
      of
      $6.55 per share, which approximates the closing price of our stock on April
      28,
      2006. The 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.





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 leases
      and
      debt obligations. The following table summarizes our contractual obligations
      and
      their aggregate maturities as well as future minimum rent
      payments:


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Operating
              Lease
            
            
            Debt(1)
            
            
            Total2008
            
            $
            1,280,914
            
            
            $
            3,291,154
            
            
            $
            4,572,0682009
            
            
            1,235,114
            
            
            
            3,887,800
            
            
            
            5,122,9142010
            
            
            1,218,882
            
            
            
            886,589
            
            
            
            2,105,4712011
            
            
            1,224,091
            
            
            
            1,371,917
            
            
            
            2,596,0082012
            
            
            1,196,103
            
            
            
            591,800
            
            
            
            1,787,903Thereafter
            
            
            9,847,060
            
            
            
            4,358,079
            
            
            
            14,205,139$
            16,002,164
            
            
            $
            14,387,339
            
            
            $
            30,389,503





(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,
      profitability from operations and the level of long-term debt.





The
      following table presents a summary of such indicators:


%
            
            
            
            
            
            %Years
                ended September 30,
            
            2007
            
            
            increase
            
            
            2006
            
            
            increase
            
            
            2005Sales
                of alcoholic beverage
            
            $
            12,111,348
            
            
            
            37.92
            
            
            $
            8,781,635
            
            
            
            61.69
            
            
            $
            5,431,049Sales
                of food and merchandise
            
            
            3,185,494
            
            
            
            20.14
            
            
            
            2,651,868
            
            
            
            57.09
            
            
            
            1,688,043Service
                revenues
            
            
            14,883,205
            
            
            
            30.07
            
            
            
            11,442,371
            
            
            
            72.52
            
            
            
            6,632,201Internet
                revenues
            
            
            730,629
            
            
            
            (8.83
            )
            
            
            801,395
            
            
            
            1.74
            
            
            
            787,617Other
            
            
            1,103,264
            
            
            
            36.21
            
            
            
            809,946
            
            
            
            104.27
            
            
            
            285,497Total
                revenues
            
            $
            32,013,940
            
            
            
            30.74
            
            
            $
            24,487,215
            
            
            
            65.18
            
            
            $
            14,824,407Net
                cash provided by operating activities
            
            $
            4,383,121
            
            
            
            
            
            
            $
            2,725,770
            
            
            
            
            
            
            $
            2,090,030Net
                income (loss)
            
            $
            3,054,899
            
            
            
            
            
            
            $
            1,752,714
            
            
            
            
            
            
            $
            (215,148
            )Long-term
                debt
            
            $
            14,387,339
            
            
            
            
            
            
            $
            13,920,733
            
            
            
            
            
            
            $
            13,246,836





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.


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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 market analysis,
      (b) to acquire existing clubs in locations that are consistent with our growth
      and income targets and which appear receptive to the upscale club formula we
      have developed, as is the case with the acquisition of the New York club and
      clubs in Charlotte, South Houston, San Antonio, Austin and Miami, (c) to form
      joint ventures or partnerships to reduce start-up and operating costs, with
      us
      contributing equity in the form of our brand name and management expertise,
      (d)
      to develop new club concepts that are consistent with our management and
      marketing skills, and/or (e) to acquire real estate in connection with club
      operations, although some clubs may be in leased premises, and/or (f) to enter
      into
      licensing agreements in strategic locations, as is the case with the license
      agreement with Rick’s Buenos Aires Sociedad Anonima in Argentina .





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





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





During
      fiscal 2005, we acquired two existing nightclub operations for a total cost
      of
      $8,775,000. These acquisitions were funded primarily through indebtedness of
      $8,862,000, and issuance of our restricted common stock valued at $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 $10,984,000, $7,400,000 and $1,100,000 during fiscal 2007, 2006
      and 2005, respectively, and net income of approximately $3,649,000 and $635,000
      during fiscal 2007 and 2006, respectively 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
      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 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.








ITEM
                7.
            FINANCIAL
                STATEMENTS





The
      information required by Item 7 is included in this report beginning on page
      31.








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 have materially affected, or are reasonably likely to materially affect
      our
      internal control over financial reporting.


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ITEM
                8B.
            OTHER
                INFORMATION





None.








PART
      III





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





DIRECTORS
      AND EXECUTIVE
      OFFICERS





Our
      Directors are elected annually and hold office until the next annual meeting
      of
      our stockholders or until their successors are elected and qualified. Officers
      are 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 six persons. The
      following table sets forth our Directors and executive officers:




Name
            Age
            PositionEric
                S. Langan
            39
            Director,
                Chairman, Chief Executive Officer, PresidentPhillip
                Marshall
            58
            Chief
                Financial OfficerTravis
                Reese
            38
            Director
                and V.P.-Director of TechnologyRobert
                L. Watters
            56
            DirectorAlan
                Bergstrom
            62
            DirectorSteven
                Jenkins
            50
            DirectorLuke
                Lirot
            51
            Director





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





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





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.





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


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Luke
      Lirot became a Director on July 31, 2007.  Mr. Lirot received his law
      degree from the University of San Francisco in 1986.  After serving as
      an intern in the San Francisco Public Defender’s Office in 1986, Mr. Lirot
      returned to Florida and established a private law practice where he continues
      to
      practice and specializes in adult entertainment issues. He is a past President
      of the First Amendment Lawyers’ Association and has actively participated in
      numerous state and federal legal matters.  Mr. Lirot does not
      currently own any securities of the Company.





COMMITTEES
      OF THE BOARD OF
      DIRECTORS





We
      have
      an Audit Committee of independent directors whose members are Robert L. Watters,
      Alan Bergstrom, Steven Jenkins and Luke Lirot. 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.





We
      have a
      Nominating Committee composed of independent directors Robert L. Watters, Alan
      Bergstrom, Steven L. Jenkins and Luke Lirot. In July 2004, the Board unanimously
      adopted a Charter with regard to the process to be used for identifying and
      evaluating nominees for director. The Charter establishes the independence
      of
      our Nominating Committee and sets forth the scope of the Nominating Committee's
      duties. 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, Steven
      L. Jenkins and Luke Lirot. Decisions concerning executive officer compensation
      for the fiscal year ended September 30, 2007, 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 during the fiscal
      year ending September 30, 2007.





CODE
      OF ETHICS





We
      have
      adopted a code of ethics for our Principal Executive and Senior Financial
      Officers, which was previously attached as Exhibit 14 to our Form 10-KSB for
      the
      fiscal year ending September 30, 2006.


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ITEM
                10.
            EXECUTIVE
                COMPENSATION





The
      following table reflects all forms of compensation for services to us for the
      fiscal years ended September 30, 2007 and 2006 of certain executive
      officers.




Summary
      Compensation
      Table





Name
                  and Principal Position
              Year
              
              Salary
                ($)
              
              
              Bonus
                ($)
              
              
              Stock
                  Awards
                ($)
              
              
              Option
                  Awards
                ($)
              
              
              Non-Equity
                  Incentive Plan Compensation
                ($)
              
              
              Nonqualified
                  Deferred Compensation Earnings
                ($)
              
              
              All
                  other compensation
                ($)
              
              
              Total
                ($)(a)
              (b)
              
              (c)
              
              
              (d)
              
              
              (e)
              
              
              (f)
              
              
              (g)
              
              
              (h)
              
              
              (i)
              
              
              (j)Eric
                  S. Langan,
              2007
              
              
              400,010
              
              
              
              40,000
              
              
              
              -0-
              
              
              
              19,125
              (1)
              
              
              -0-
              
              
              
              -0-
              
              
              
              10,115
              
              
              
              469,250President/CEO
              2006
              
              
              395,300
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              8,617
              (2)
              
              
              -0-
              
              
              
              -0-
              
              
              
              9,768
              
              
              
              413,685Phillip
                  Marshall, CFO
              2007
              
              
              50,481
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              4,725
              (5)
              
              
              -0-
              
              
              
              -0-
              
              
              
              1,212
              
              
              
              56,418Travis
                  Reese,
              2007
              
              
              178,308
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              23,900
              (3)
              
              
              -0-
              
              
              
              -0-
              
              
              
              5,274
              
              
              
              207,482VP/
                  Chief Technology Officer
              2006
              
              
              167,201
              
              
              
              -0-
              
              
              
              -0-
              
              
              
              8,617
              (4)
              
              
              -0-
              
              
              
              -0-
              
              
              
              4,782
              
              
              
              180,600





1
            Mr.
                Langan received 5,000 options
                to purchase shares of our common stock at an exercise price of $9.40
                as
                Director compensation.


2
            Mr.
                Langan received 5,000 options
                to purchase shares of our common stock at an exercise price of $6.75
                as
                Director compensation.


3
            Mr.
                Reese received 5,000 options
                to purchase shares of our common stock at an exercise price of $9.40
                as
                Director compensation.


4
            Mr.
                Reese received 5,000 options
                to purchase shares of our common stock at an exercise price of $6.75
                as
                Director compensation.


5.
            Mr.
                Marshall received 20,000 options to purchase shares of our common
                stock at
                an exercise price of $9.40 as
                compensation.





Outstanding
      Equity Awards at Fiscal
      Year End





OPTION
                AWARDS
            
            STOCK
                AWARDSName
            
            Number
                of
              Securities
              Underlying
              Unexercised
              Options
                (#)
              Exercisable
            
            
            Number
                of
              Securities
              Underlying
              Unexercised
              Options
                (#)
              Unexercisable
            
            
            Equity
              Incentive
              Plan
                Awards:
              Number
                of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
              (#)
            
            
            Option
              Exercise
              Price
                ($)
            
            Option
              Expiration
              Date
            
            Number
              of
                Shares
              or
                Units
              of
                Stock
              that
                have
              not
              Vested
              (#)
            
            
            Market
              Value
                of
              Shares
                or
              Units
                of
              Stock
              that
                have
              not
                Vested
              ($)
            
            
            Equity
              Incentive
              Plan
              Awards:
              Number
                of
              Unearned
              Shares,
              Units
                or
              Other
              Rights
                that
              have
                not
              Vested
              ($)
            
            
            Equity
              Incentive
              Plan
              Awards:
              Market
                or
              Payout
              Value
                of
              Unearned
              Shares,
              Units
                or
              Other
              Rights
              that
                have
              not
                Vested
              ($)(a)
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            (e)
            
            (g)
            
            
            (h)
            
            
            (i)
            
            
            (j)Eric
                S. Langan
            
            
            5,000
            
            
            
            0
            
            
            
            0
            
            
            
            1.40
            
            9/10/08
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            075,000
            
            
            
            0
            
            
            
            0
            
            
            
            2.20
            
            2/6/09
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            05,000
            
            
            
            0
            
            
            
            0
            
            
            
            2.54
            
            9/14/09
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0200,000
            
            
            
            0
            
            
            
            0
            
            
            
            2.49
            
            9/14/09
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            05,000
            
            
            
            0
            
            
            
            0
            
            
            
            2.80
            
            7/20/10
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            05,000
            
            
            
            
            
            
            
            0
            
            
            
            6.75
            
            5/31/11
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            05,000
            
            
            
            0
            
            
            
            9.40
            
            8/24/09
            
            
            5,000
            
            
            
            58,200
            
            
            
            0
            
            
            
            0Phillip
                Marshall
            
            
            0
            
            
            
            20,000
            
            
            
            0
            
            
            
            9.40
            
            8/24/12
            
            
            20,000
            
            
            
            232,800
            
            
            
            0
            
            
            
            0Travis
                Reese
            
            
            5,000
            
            
            
            0
            
            
            
            0
            
            
            
            2.54
            
            9/14/09
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            050,000
            
            
            
            0
            
            
            
            0
            
            
            
            2.49
            
            9/14/09
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            05,000
            
            
            
            0
            
            
            
            0
            
            
            
            2.80
            
            7/20/10
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            05,000
            
            
            
            
            
            
            
            0
            
            
            
            6.75
            
            5/31/11
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            05,000
            
            
            
            0
            
            
            
            9.40
            
            8/24/09
            
            
            5,000
            
            
            
            58,200
            
            
            
            0
            
            
            
            0


25
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DIRECTOR
      COMPENSATION





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





Name
            
            Fees
                Earned or
              Paid
                in Cash
              ($)
            
            
            Stock
                Awards
              ($)
            
            
            Option
                Awards
              ($)
            
            
            Non-Equity
              Incentive
                Plan
              Compensation
              ($)
            
            
            Nonqualified
              Deferred
              Compensation
                Earnings
              ($)
            
            
            All
                Other
              Compensation
              ($)
            
            
            Total
              ($)(a)
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (g)
            
            
            (h)Eric
                S. Langan
            
            
            -0-
            
            
            
            -0-
            
            
            $
            19,375
            (1)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            $
            19,375Travis
                Reese
            
            
            -0-
            
            
            
            -0-
            
            
            $
            24,150
            (2)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            $
            24,150Robert
                Watters
            
            
            -0-
            
            
            
            -0-
            
            
            $
            38,750
            (3)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            $
            38,750Alan
                Bergstrom
            
            
            -0-
            
            
            
            -0-
            
            
            $
            38,750
            (4)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            $
            38,750Steve
                Jenkins
            
            
            -0-
            
            
            
            -0-
            
            
            $
            38,750
            (5)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            $
            38,750Luke
                Lirot
            
            
            -0-
            
            
            
            -0-
            
            
            $
            4,283
            (6)
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            $
            4,283





1
            On
                August 24, 2007, Mr. Langan
                received 5,000 options to purchase shares of our common stock at
                an
                exercise price of $9.40 as Director compensation for the fiscal year
                ending September 30, 2008; these options will vest on August 24,
                2008.  Mr. Langan received 5,000 options in fiscal 2003, 280,000
                in fiscal 2004, 5,000 in fiscal 2005, and 5,000 in fiscal 2006, for
                a
                total of 295,000 options outstanding as of September 30,
                2007.


2
            On
                August 24, 2007, Mr. Reese
                received 5,000 options to purchase shares of our common stock at
                an
                exercise price of $9.40 as Director compensation for the fiscal year
                ending September 30, 2008; these options will vest on August 24,
                2008.  Mr. Reese received 5,000 options in fiscal 2003, 55,000
                in fiscal 2004, 5,000 in fiscal 2005, and 5,000 in fiscal 2006, for
                a
                total of 75,000 options outstanding as of September 30, 2007
                .


3
            On
                August 24, 2007, Mr. Watters
                received 10,000 options to purchase shares of our common stock at
                an
                exercise price of $9.40 as Director compensation for the fiscal year
                ending September 30, 2008; these options will vest on August 24,
                2008.  Mr. Watters received 10,000 options for each of the
                fiscal years 2003, 2004, 2005, 2006, and had 40,000 options outstanding
                as
                of September 30, 2007 .


4
            On
                August 24, 2007, Mr. Bergstrom
                received 10,000 options to purchase shares of our common stock at
                an
                exercise price of $9.40 as Director compensation for the fiscal year
                ending September 30, 2008; these options will vest on August 24,
                2008.  Mr. Bergstrom received 10,000 options for fiscal years
                2003, 2004, 2005 and 2006 and had 20,000 options outstanding as of
                September 30, 2007 .


5
            On
                August 24, 2007, Mr. Jenkins received 10,000 options to purchase
                shares of
                our common stock at an exercise price of $9.40 as Director compensation
                for the fiscal year ending September 30, 2008; these options will
                vest on
                August 24, 2008.  Mr. Jenkins received 10,000 options for fiscal
                years 2003, 2004, 2005 and 2006 and had 10,000 options outstanding
                as of
                September 30, 2007.


6
            On
                August 24, 200, Mr. Lirot received 10,000 options to purchase shares
                of
                our common stock at an exercise price of $9.40 as Director compensation
                for the fiscal year ending September 30, 2008; these options will
                vest on
                August 24, 2008.





EMPLOYMENT
      AGREEMENTS





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





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





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


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





The
      following table sets forth certain information at December 7, 2007, 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 7, 2007, there were 7,521,850 shares of common
      stock outstanding.





Name/Address
            
            Number
                of shares
            
            Title
                of class
            
            Percent
                of Class (9)Eric
                S. Langan
              10959
                Cutten Road
              Houston,
                Texas 77066
            
            
            1,194,865
            (1)
            Common
                stock
            
            
            15.3
            %Phillip
                K. Marshall
              10959
                Cutten Road
              Houston,
                Texas 77066
            
            
            0
            
            Common
                stock
            
            
            0
            %Robert
                L. Watters
              315
                Bourbon Street
              New
                Orleans, Louisiana 70130
            
            
            45,000
            (2)
            Common
                stock
            
            
            0.6
            %Steven
                L. Jenkins
              16815
                Royal Crest Drive
              Suite
                160
              Houston,
                Texas 77058
            
            
            10,000
            (3)
            Common
                stock
            
            
            0.1
            %Travis
                Reese
              10959
                Cutten Road
              Houston,
                Texas 77066
            
            
            74,775
            (4)
            Common
                stock
            
            
            1.0
            %Alan
                Bergstrom
              904
                West Avenue, Suite 100
              Austin,
                Texas 78701
            
            
            24,700
            (5)
            Common
                stock
            
            
            0.3
            %Luke
                Lirot
              2240
                Belleair Road, Suite 190
              Clearwater,
                GL 33764
            
            
            0
            
            Common
                stock
            
            
            0
            %All
                of our Directors and Officers as a Group of seven (7)
                persons
            
            
            1,349,340
            (6)
            Common
                stock
            
            
            17.3
            %E.
                S. Langan. L.P.
              10959
                Cutten Road
              Houston,
                Texas 77066
            
            
            578,632
            (1)
            Common
                stock
            
            
            7.7
            %JLF
                Asset Management/Jeff Feinberg
              2775
                Via D La Valle, Suite 204
              Del
                Mar, CA 92014
            
            
            993,479
            
            Common
                stock
            
            
            13.2
            %Estate
                of Ralph McElroy
              1211
                Choquette
              Austin,
                Texas, 78757
            
            
            1,040,516
            (7)
            Common
                stock
            
            
            14
            %Burlingame
                Asset Management/Blair Sanford
              One
                Market Street Suite 3750
              San
                Francisco, CA 94105
            
            
            464,757
            (8)
            Common
                stock
            
            
            6.2
            %





(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 295,000 shares of common stock that are presently exercisable.





(2)
      Includes options to purchase up to 40,000 shares of common stock that are
      presently exercisable.





(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.


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(6)
      Includes options to purchase up to 430,000 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 also includes shares of our common stock underlying two convertible
      debentures totaling $1,260,000 which are 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 the Estate of 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)
      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 $60,943 at September 30, 2007
      and
      is included in other assets in our consolidated balance sheet.  In
      November 2007, Mr. Langan paid the note in full.





On
      July
      22, 2005, we issued a Secured Convertible Debenture to Ralph McElroy, a greater
      than 10% shareholder, for the principal sum of $660,000.  The
      debenture matures on August 1, 2009 and bears interest at a rate of 12% per
      annum.  Under the terms of the Debenture, we were required to make
      monthly interest payments beginning September 1, 2005. We have the right to
      redeem the Debenture in whole or in part at any time during the term of the
      Debenture. The Estate of Mr. McElroy 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,
      until August 1, 2008.  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 Estate of Mr. McElroy upon conversion of the Debenture shall
      not
      exceed 19.99% of the total number of issued and outstanding shares of our common
      stock. 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 the SEC on September
      1,
      2005.   Mr. McElroy passed away in June 2007 and his estate is
      currently under settlement.





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





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.


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ITEM
                13.
            EXHIBITS





Exhibit
      21-
      Subsidiaries of the Registrant.





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





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





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





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







ITEM
                14.
            PRINCIPAL
                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 2007 and fiscal year 2006 and the aggregate fees
      paid
      or accrued for audit-related services and all other services rendered by Whitley
      Penn LLP for fiscal year 2007 and fiscal year 2006.




2007
            
            
            2006Audit
                fees
            
            $
            170,208
            
            
            $
            97,768Audit-related
                fees
            
            
            13,070
            
            
            
            16,210Tax
                fees
            
            
            30,170
            
            
            
            3,850All
                other fees
            
            
            -
            
            
            
            -Total
            
            $
            213,448
            
            
            $
            117,828





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.


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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 19, 2007.








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








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,
                Principal and Chief Executive Officer, and President
            
            December
                19, 2007/s/Phillip
                K. MarshallPhillip
                K. Marshall
            
            Chief
                Financial Officer and Principal
                Accounting
                Officer
            
            December
                19, 2007/s/
                Travis ReeseTravis
                Reese
            
            Director
                and V.P.-Director of Technology
            
            December
                19, 2007/s/
                Robert L. WattersRobert
                L. Watters
            
            Director
            
            December
                20, 2007/s/
                Alan BergstromAlan
                Bergstrom
            
            Director
            
            December
                19, 2007/s/
                Steven JenkinsSteven
                Jenkins
            
            Director
            
            December
                19, 2007/s/
                Luke Lirot
            
            Director
            
            December
                20, 2007Luke
                Lirot


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RICK’S
      CABARET INTERNATIONAL,
      INC.




CONSOLIDATED
      FINANCIAL
      STATEMENTS





Years
      Ended September 30, 2007 and 2006






Table
      of Contents







Report
                of Independent Registered Public Accounting Firm
            32Audited
                Consolidated Financial Statements:Consolidated
                Balance Sheets
            33Consolidated
                Statements of Operations
            34Consolidated
                Statements of Changes in Stockholders’ Equity
            35Consolidated
                Statements of Cash Flows
            36Notes
                to Consolidated Financial Statements
            38


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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. as of September 30, 2007 and 2006, 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. as of September 30, 2007 and 2006, and the consolidated
      results of operations and 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
      19, 2007


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RICK'S
      CABARET INTERNATIONAL,
      INC.





CONSOLIDATED
      BALANCE
      SHEETS




September
                30,2007
            
            
            2006AssetsCurrent
                assets:Cash
                and cash equivalents
            
            $
            2,998,758
            
            
            $
            854,932Accounts
                receivable:Trade
            
            
            557,295
            
            
            
            192,385Other,
                net
            
            
            218,746
            
            
            
            186,554Marketable
                securities
            
            
            33,368
            
            
            
            22,245Inventories
            
            
            368,557
            
            
            
            291,623Prepaid
                expenses and other current assets
            
            
            286,883
            
            
            
            140,428Total
                current assets
            
            
            4,463,607
            
            
            
            1,688,167Property
                and equipment, net
            
            
            21,365,415
            
            
            
            17,423,843Other
                assets:Goodwill
                and indefinite lived intangibles
            
            
            20,179,610
            
            
            
            10,505,452Definite
                lived intangibles, net
            
            
            698,584
            
            
            
            525,076Other
            
            
            368,544
            
            
            
            460,337Total
                other assets
            
            
            21,246,738
            
            
            
            11,490,865Total
                assets
            
            $
            47,075,760
            
            
            $
            30,602,875Liabilities
                and Stockholders'
                EquityCurrent
                liabilities:Accounts
                payable
            
            $
            493,499
            
            
            $
            554,979Accrued
                liabilities
            
            
            1,709,426
            
            
            
            1,118,974Current
                portion of long-term debt
            
            
            3,291,154
            
            
            
            2,278,315Total
                current liabilities
            
            
            5,494,079
            
            
            
            3,952,268Deferred
                tax liability
            
            
            4,391,499
            
            
            
            -Other
                long-term liabilities
            
            
            420,415
            
            
            
            299,701Long-term
                debt-related parties
            
            
            2,085,000
            
            
            
            1,386,909Long-term
                debt
            
            
            9,011,185
            
            
            
            10,255,509Total
                liabilities
            
            
            21,402,178
            
            
            
            15,894,387Commitments
                and contingencies
            
            
            -
            
            
            
            -Minority
                interest
            
            
            180,728
            
            
            
            -Temporary
                equity - Common stock, subject to put rights (215,000 and 160,000
                shares,
                respectively)
            
            
            1,450,000
            
            
            
            800,000Permanent
                stockholders' equity:Preferred
                stock, $.10 par, 1,000,000 shares authorized, none
                outstanding
            
            
            -
            
            
            
            -Common
                stock, $.01 par, 15,000,000 shares authorized, 6,903,354 and 5,805,275
                shares issued, respectively
            
            
            69,034
            
            
            
            58,053Additional
                paid-in capital
            
            
            22,643,596
            
            
            
            15,586,233Accumulated
                other comprehensive income
            
            
            20,021
            
            
            
            8,898Retained
                earnings (accumulated deficit)
            
            
            2,603,983
            
            
            
            (450,916
            )25,336,634
            
            
            
            15,202,268Less
                908,530 shares of common stock held in treasury, at cost
            
            
            1,293,780
            
            
            
            1,293,780Total
                stockholders' equity
            
            
            24,042,854
            
            
            
            13,908,488Total
                liabilities and stockholders' equity
            
            $
            47,075,760
            
            
            $
            30,602,875


See
      accompanying notes to consolidated
      financialstatements.


33
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RICK'S
      CABARET INTERNATIONAL,
      INC.





CONSOLIDATED
      STATEMENTS OF
      OPERATIONS




Year
                Ended September
                30,2007
            
            
            2006Revenues:Sales
                of alcoholic beverages
            
            $
            12,111,348
            
            
            $
            8,781,635Sales
                of food and merchandise
            
            
            3,185,494
            
            
            
            2,651,868Service
                revenues
            
            
            14,883,205
            
            
            
            11,442,371Internet
                revenues
            
            
            730,629
            
            
            
            801,395Other
            
            
            1,103,264
            
            
            
            809,946Total
                revenues
            
            
            32,013,940
            
            
            
            24,487,215Operating
                expenses:Cost
                of goods sold
            
            
            4,035,522
            
            
            
            2,915,312Salaries
                and wages
            
            
            8,739,859
            
            
            
            7,081,660Stock-based
                compensation
            
            
            196,871
            
            
            
            -Other
                general and administrative:Taxes
                and permits
            
            
            4,071,677
            
            
            
            3,074,577Charge
                card fees
            
            
            638,248
            
            
            
            485,342Rent
            
            
            1,494,005
            
            
            
            1,150,338Legal
                and professional
            
            
            1,124,856
            
            
            
            865,111Advertising
                and marketing
            
            
            1,325,367
            
            
            
            1,176,277Depreciation
                and amortization
            
            
            1,596,650
            
            
            
            1,049,247Insurance
            
            
            785,519
            
            
            
            420,450Utilities
            
            
            800,366
            
            
            
            621,051Other
            
            
            3,101,314
            
            
            
            2,576,628Goodwill
                impairment
            
            
            -
            
            
            
            79,841Total
                operating expenses
            
            
            27,910,254
            
            
            
            21,495,834Income
                from operations
            
            
            4,103,686
            
            
            
            2,991,381Other
                income (expense):Interest
                income
            
            
            58,394
            
            
            
            25,796Interest
                expense
            
            
            (1,335,713
            )
            
            
            (1,057,020
            )Loss
                on sales of assets
            
            
            -
            
            
            
            (68,134
            )Other
            
            
            37,134
            
            
            
            (170,646
            )Income
                before minority interest
            
            
            2,863,501
            
            
            
            1,721,377Minority
                interest
            
            
            427,844
            
            
            
            31,337Income
                before income taxes
            
            
            3,291,345
            
            
            
            1,752,714Income
                taxes
            
            
            236,446
            
            
            
            -Net
                income
            
            $
            3,054,899
            
            
            $
            1,752,714Basic
                and diluted earnings per share:Net
                income, basic
            
            $
            0.54
            
            
            $
            0.38Net
                income, diluted
            
            $
            0.50
            
            
            $
            0.35Weighted
                average number of common shares outstanding:Basic
            
            
            5,700,548
            
            
            
            4,640,499Diluted
            
            
            6,215,285
            
            
            
            5,065,962





See
      accompanying notes to consolidated financial statements.


34
 Table
          of
          Contents




RICK'S
      CABARET INTERNATIONAL,
      INC.





CONSOLIDATED
      STATEMENTS OF CHANGES IN
      PERMANENT STOCKHOLDERS' EQUITY





Years
      Ended September 30, 2007 and
      2006




Common
                  Stock
              
              
              
              
              
              
              
              
              
              
              
              Treasury
                  StockNumber of
                Shares
              
              
              Amount
              
              
              Additional
                Paid-In
                Capital
              
              
              Accumulated
                Other
                Comprehensive
                Income
              
              
              Retained
                Earnings
                (Accumulated
                Deficit)
              
              
              Number
                of
                  Shares
              
              
              Amount
              
              
              Total
                Stockholders’
                EquityBalance
                  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
              )
              
              
              13,908,488Shares
                  issued
              
              
              1,153,079
              
              
              
              11,531
              
              
              
              7,509,942
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,521,473Change
                  in temporary equity - common stock subject to put rights
              
              
              (55,000
              )
              
              
              (550
              )
              
              
              (649,450
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (650,000
              )Stock-based
                  compensation
              
              
              -
              
              
              
              -
              
              
              
              196,871
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              196,871Net
                  income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,054,899
              
              
              
              -
              
              
              
              -
              
              
              
              3,054,899Change
                  in available-for-sale securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,123
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,123Comprehensive
                  income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,066,022Balance
                  at September 30, 2007
              
              
              6,903,354
              
              
              $
              69,034
              
              
              $
              22,643,596
              
              
              $
              20,021
              
              
              $
              2,603,983
              
              
              
              908,530
              
              
              $
              (1,293,780
              )
              
              $
              24,042,854





See
      accompanying notes to consolidated financial statements.


35
 Table
          of
          Contents





RICK'S
      CABARET INTERNATIONAL,
      INC.





CONSOLIDATED
      STATEMENTS OF CASH
      FLOWS




Year
                Ended September
                30,2007
            
            
            2006Cash
                flows from operating
                activities:Net
                income
            
            $
            3,054,899
            
            
            $
            1,752,714Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            1,438,158
            
            
            
            1,001,513Amortization
            
            
            158,492
            
            
            
            47,734Bad
                debts
            
            
            26,777
            
            
            
            -Goodwill
                impairment
            
            
            -
            
            
            
            79,841Beneficial
                conversion
            
            
            17,952
            
            
            
            20,944Common
                stock issued for interest payment
            
            
            87,336
            
            
            
            47,962Amortization
                of note discount
            
            
            35,552
            
            
            
            35,552Loss
                on sales of assets
            
            
            -
            
            
            
            68,134Minority
                interests
            
            
            (427,844
            )
            
            
            (31,337
            )Deferred
                rent
            
            
            120,715
            
            
            
            106,053Deferred
                taxes (benefit)
            
            
            (200,364
            )
            
            
            -Stock
                compensation expense
            
            
            196,871
            
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (437,848
            )
            
            
            (27,224
            )Inventories
            
            
            (40,418
            )
            
            
            (3,777
            )Prepaid
                expenses and other current assets
            
            
            (96,386
            )
            
            
            (155,919
            )Accounts
                payable and accrued liabilities
            
            
            449,229
            
            
            
            (216,420
            )Net
                cash provided by operating activities
            
            
            4,383,121
            
            
            
            2,725,770Cash
                flows from investing
                activities:Acquisitions
                of businesses, net of cash acquired
            
            
            (5,572,245
            )
            
            
            (1,497,641
            )Proceeds
                from sale of assets
            
            
            9,695
            
            
            
            -Purchases
                of property and equipment
            
            
            (1,210,136
            )
            
            
            (1,641,735
            )Issuance
                of notes receivable
            
            
            (35,000
            )
            
            
            -Note
                receivable payments
            
            
            15,892
            
            
            
            28,536Net
                cash used in investing activities
            
            
            (6,791,794
            )
            
            
            (3,110,840
            )Cash
                flows from financing
                activities:Proceeds
                from sale of common stock
            
            
            5,345,500
            
            
            
            560,694Proceeds
                from stock options exercised
            
            
            665,471
            
            
            
            -Proceeds
                from long-term debt
            
            
            600,000
            
            
            
            1,863,065Payments
                on long-term debt
            
            
            (2,058,472
            )
            
            
            (1,569,199
            )Payments
                on line-of-credit
            
            
            -
            
            
            
            (94,888
            )Net
                cash provided by financing activities
            
            
            4,552,499
            
            
            
            759,672Net
                increase in cash and cash equivalents
            
            
            2,143,826
            
            
            
            374,602Cash
                and cash equivalents at beginning of year
            
            
            854,932
            
            
            
            480,330Cash
                and cash equivalents at end of year
            
            $
            2,998,758
            
            
            $
            854,932Supplemental
                Disclosures of
                Cash Flow InformationCash
                paid during the year for interest
            
            $
            1,176,204
            
            
            $
            1,045,441


See
      accompanying notes to consolidated
      financial statements.


36
 Table
          of
          Contents


RICK'S
      CABARET INTERNATIONAL,
      INC.





CONSOLIDATED
      STATEMENTS OF CASH FLOWS
      (continued)




Non-cash
      transactions:





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.





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





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





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





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





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





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










See
      accompanying notes to consolidated financial statements.


37
 Table
          of
          Contents


RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS





September
      30, 2007 and
      2006




A. 
Nature
      of
      Business





Rick’s
      Cabaret International, Inc. (the “Company”) is a Texas corporation incorporated
      in 1994. The Company currently owns and operates nightclubs that offer live
      adult entertainment, restaurant, and bar operations. These nightclubs are
      located in Houston, Austin, San Antonio and Fort Worth, Texas, as well as
      Minneapolis, Minnesota, Charlotte, North Carolina, New York, New York, and
      Miami
      Gardens, Florida. 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, 2007 and 2006,
      the Company had no such investments. The Company maintains deposits in several
      financial institutions, which may at times exceed amounts covered by insurance
      provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). At
      September 30, 2007 and 2006, the uninsured portion of these deposits
      approximated $569,000 and $54,000, respectively. The Company has not incurred
      any losses related to its cash on deposit with financial
      institutions.





Accounts
      and Notes
      Receivable





Trade
      accounts receivable 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, 2007 and 2006
      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, 2007, the
      value
      of the shares totals approximately $450,000. 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, 2007 and 2006. 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.  In December 2006, the Company foreclosed on
      a residential house due to non-payment of a note receivable from an unrelated
      third party.  The


38
 Table
          of
          Contents


RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)




B. 
Summary
      of Significant
      Accounting Policies - continued





balance
      of the note receivable was $55,175.  In June 2007, the Company
      foreclosed on the account and note receivable in the aggregate amount of
      approximately $240,000.  The net result of the transaction was that
      the Company wrote off the note and accounts and the related deferred gain and
      recorded $53,000 in furniture and equipment in the foreclosure.





Marketable
      Securities





Marketable
      securities at September 30, 2007 and 2006 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,
      2007 and 2006, the Company’s marketable securities were classified as
      available-for-sale, which are carried at fair value, with unrealized gains
      and
      losses reported as other comprehensive income within the stockholders’ equity
      section of the accompanying consolidated balance sheets. The cost of marketable
      equity securities sold is determined on a specific identification basis. The
      fair value of marketable equity securities is based on quoted market prices.
      There have been no realized gains or losses related to marketable
      securities for the years ended September 30, 2007 or 2006.  Marketable
      securities held at September 30, 2007 and 2006 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.





Property
      and
      Equipment





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





Goodwill
      and Intangible
      Assets





In
      June
      2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles
      Assets, which addresses the accounting for goodwill and other intangible
      assets. Under SFAS No. 142, goodwill and intangible assets with indefinite
      lives
      are no longer amortized, but reviewed on an annual basis for impairment. The
      Company adopted SFAS No. 142 effective October 1, 2001. The Company’s annual
      evaluation was performed as of September 30, 2007, based on a projected
      discounted cash flow method using a discount rate determined by management
      to be
      commensurate with the risk inherent in the current business model. The Company
      determined that there is no impairment for the year ended September 30, 2007
      and
      the goodwill related to the acquisition of Bobby’s Novelty, Inc. was impaired
      and charged $79,841 against operating expenses during the year ended September
      30, 2006. 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.


39
 Table
          of
          Contents


RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)




B. 
Summary
      of Significant
      Accounting Policies - continued





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.





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


40
 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:





2007
            
            
            2006Basic
                earnings per share:Net
                earnings applicable to common stockholders
            
            $
            3,054,899
            
            
            $
            1,752,714Average
                number of common shares outstanding
            
            
            5,700,548
            
            
            
            4,640,499Basic
                earnings per share
            
            $
            0.54
            
            
            $
            0.38Diluted
                earnings per share:Net
                earnings applicable to common stockholders
            
            $
            3,054,899
            
            
            $
            1,752,714Adj.
                to net earnings from assumed conversion of debentures (1)
            
            
            79,200
            
            
            
            -Adj.
                net earnings for diluted EPS computation
            
            $
            3,134,099
            
            
            $
            1,752,714Average
                number of common shares outstanding:Common
                shares outstanding
            
            
            5,700,548
            
            
            
            4,640,499Potential
                dilutive shares resulting from exercise of warrants and options
                (2)
            
            
            294,737
            
            
            
            425,463Potential
                dilutive shares resulting from conversion of debentures
                (3)
            
            
            220,000
            
            
            
            -Total
                average number of common shares outstanding used for
                dilution
            
            
            6,215,285
            
            
            
            5,065,962Diluted
                earnings per share
            
            $
            0.50
            
            
            $
            0.35




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


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


(3)
      Convertible debentures (principal and accrued interest) outstanding at September
      30, 2007 and 2006 totaling $2,788,217 and $2,502,633, respectively, were
      convertible into common stock at a price of $3.00 and $7.50 per share in 2007
      and $4.75 and $6.55 per share in 2006. 220,000 were dilutive in 2007, but none
      were dilutive in 2006 (based on average balances outstanding).





Fair
      Value of Financial
      Instruments





In
      accordance with the reporting requirements of SFAS No. 107, Disclosures
      About Fair Value of
      Financial Instruments, the Company calculates the fair value of its
      assets and liabilities which qualify as financial instruments under this
      statement and includes this additional information in the notes to consolidated
      financial statements when the fair value is different than the carrying value
      of
      these financial instruments. The estimated fair value of accounts receivable,
      accounts payable and accrued liabilities approximate their carrying amounts
      due
      to the relatively short maturity of these instruments. The carrying value of
      short and long-term debt also approximates fair value since these instruments
      bear market rates of interest. None of these instruments are held for trading
      purposes.





Stock
      Options





At
      September 30, 2007, the Company has stock options outstanding, which are
      described more fully in Note H.  The Company formerly accounted for
      its stock options under the recognition and measurement principles of Accounting
      Principles Board (“APB”) Opinion No. 25, Accounting
      for Stock Issued to Employees,and related Interpretations. Effective October 1, 2006, the Company
      adopted the fair value recognition provisions of SFAS No. 123R, Share-Based Payments, using
      the modified prospective application method.  Under this transition
      method, compensation cost recognized for the year ended September 30, 2007,
      includes the applicable amounts of: (a) compensation of all stock-based payments
      granted prior to, but not yet vested as of October 1, 2006 (based on the
      grant-date fair value estimated in accordance with the original provisions
      of
      SFAS No. 123 and previously presented in pro forma footnote disclosures), and
      (b) compensation cost for all stock-based payments granted subsequent to October
      1, 2006 based on the grant-date fair value estimated in accordance with the
      new
      provisions of SFAS No. 123R.  Results for periods prior to October 1,
      2006, have not been restated.  The compensation cost recognized for
      the year ended September 30, 2007 was $196,871, as a result of implementing
      SFAS
      No. 123R.  There were 252,500 stock option exercises for the year
      ended September 30, 2007.


41
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RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)




B. 
Summary
      of Significant
      Accounting Policies - continued





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 for
      the
      year ended September 30, 2006:




Net
                income, as reported
            
            $
            1,752,714Less
                total stock-based employee compensation expense determined under
                the fair
                value based method for all awards
            
            
            (611,408
            )Pro
                forma net income
            
            $
            1,141,306Earnings  per
                share:Basic
                - as reported
            
            $
            0.38Diluted
                - as reported
            
            $
            0.35Basic
                - pro forma
            
            $
            0.25Diluted
                - pro forma
            
            $
            0.23




Impact
      of Recently Issued Accounting
      Standards





In
      June
      2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
      Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income
      Taxes (FIN 48), to create a single model to address accounting for uncertainty
      in tax positions. FIN 48 clarifies the accounting for income taxes by
      prescribing a minimum recognition threshold a tax position is required to meet
      before being recognized in the financial statements. FIN 48 also provides
      guidance on derecognition, measurement, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. FIN 48 is effective
      for fiscal years beginning after December 15, 2006. The Company will adopt
      FIN
      48 as of October 1, 2007, as required. The cumulative effect of adopting FIN
      48
      will be recorded in retained earnings and other accounts as applicable. The
      Company believes that the adoption of FIN 48 will not have an affect on the
      Company's consolidated financial position, results of operations or cash
      flows.





Reclassifications





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





D. 
Property
      and
      Equipment





Property
                and equipment consisted of the
                following:





September
                30,2007
            
            
            2006Buildings
                and land
            
            $
            15,275,245
            
            
            $
            12,833,136Leasehold
                improvements
            
            
            5,974,183
            
            
            
            4,704,245Furniture
            
            
            1,404,259
            
            
            
            1,204,757Equipment
            
            
            4,365,930
            
            
            
            2,916,686Total
                property and equipment
            
            
            27,019,617
            
            
            
            21,658,824Less
                accumulated depreciation
            
            
            5,654,202
            
            
            
            4,234,981Property
                and equipment, net
            
            $
            21,365,415
            
            
            $
            17,423,843





For
      the
      years ended September 30, 2007 and 2006, the Company capitalized approximately
      $0 and $5,000 of interest to property and equipment in leasehold improvements,
      respectively.


42
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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
                30,2007
            
            
            2006Indefinite
                useful lives:Goodwill
            
            
            $
            7,280,179
            
            
            $
            2,774,742Licenses
            
            
            
            12,899,431
            
            
            
            7,730,710AmortizationPeriodDefinite
                useful lives:Discounted
                leases
            18
                & 6 years
            
            
            146,569
            
            
            
            146,569Non-compete
                agreements
            5
                years
            
            
            772,000
            
            
            
            440,000Less
                accumulated amortization
            
            
            
            (219,985
            )
            
            
            (61,493
            )Total
                goodwill and intangible assets
            
            
            $
            20,878,194
            
            
            $
            11,030,528




Future
      amortization expense related to definite lived intangible assets subject to
      amortization at September 30, 2007 for each of the years in the five-year period
      ending September 30, 2012 and thereafter is 2008 - $244,745, 2009 - $153,078,
      2010 - $138,078, 2011 - $114,245, 2012 - $20,972, and thereafter -
      $27,464.





Goodwill
      and indefinite lived intangible assets primarily consist of sexually oriented
      business licenses in New York, North Carolina, and Fort Worth, Texas, 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.


43
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RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)




F. 
Long-term
      Debt





September
                30,2007
            
            
            2006Notes
                payable at 9%, mature February 2008
            
            
            *
            
            
            $
            1,839,771
            
            
            $
            1,941,917Notes
                payable at 12%, paid off in 2007
            
            
            *
            
            
            
            -
            
            
            
            139,157Notes
                payable at 11%, mature August 2015
            
            
            *
            
            
            
            1,168,708
            
            
            
            1,256,580Notes
                payable at 10%, mature December 2014 and January 2015
            
            
            *
            
            
            
            2,759,711
            
            
            
            2,816,666Note
                payable at 7%, matures October 2012, collateralized by assets of
                RCI
                Entertainment North Carolina, Inc.
            
            
            
            
            
            
            251,158
            
            
            
            290,915Note
                payable at 7.5%, matures August 2011
            
            
            *
            
            
            
            1,187,301
            
            
            
            1,604,886Note
                payable at 12%, matures March 2007
            
            
            *
            
            
            
            -
            
            
            
            400,000Note
                payable at 12%, matures February 2007
            
            
            *
            
            
            
            -
            
            
            
            200,000Convertible
                note payable to related party at 12%, matures August 2009, collateralized
                by shares of Citation Land LLC and RCI Holdings, Inc.
            
            
            
            
            
            
            615,413
            
            
            
            561,909Convertible
                note payable at 4%, matures May 2010, collateralized by assets of
                RCI
                Entertainment New York, Inc.
            
            
            
            
            
            
            1,727,666
            
            
            
            2,444,282Convertible
                notes payable to related parties at 12%, mature April 2008
            
            
            *
            
            
            
            825,000
            
            
            
            825,000Convertible
                note payable at 10%, converted to common stock in November 2007,
                unsecured
            
            
            
            
            
            
            691,689
            
            
            
            1,000,950Note
                payable at 7%, matures December 2019
            
            
            *
            
            
            
            377,627
            
            
            
            396,478Note
                payable at 4.9%, matures December 2010, collateralized by
                equipment
            
            
            
            
            
            
            23,355
            
            
            
            29,826Note
                payable at 7.25%, matures May 2013
            
            
            *
            
            
            
            2,319,940
            
            
            
            -Notes
                payable to related parties at 12%, mature November 2009
            
            
            
            
            
            
            600,000
            
            
            
            -Note
                payable at 8.99%, matures October 2007, collateralized by a
                vehicle
            
            
            
            
            
            
            -
            
            
            
            12,167Total
                debt
            
            
            
            
            
            
            14,387,339
            
            
            
            13,920,733Less
                current portion
            
            
            
            
            
            
            3,291,154
            
            
            
            2,278,315Total
                long-term debt
            
            
            
            
            
            $
            11,096,185
            
            
            $
            11,642,418*
                Collateralized by real estate


44
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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 is convertible until August 1, 2008.  The debenture
      matures on August 1, 2009 and bears interest at a rate of 12% per annum. The
      debentures provide, absent shareholder approval, that the number of shares
      of
      the Company’s common stock that may be issued by the Company or acquired by the
      holders upon conversion of the debentures shall not exceed 19.99% of the total
      number of issued and outstanding shares of the Company’s common
      stock.  The 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
      years ended September 30, 2007 and 2006, the Company recorded $35,552 of
      interest expense each year. 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, 2007 and 2006, the Company recorded $17,952 and $20,944, respectively,
      of
      interest expense related to the value of the embedded beneficial conversion
      feature.





As
      a part
      of the purchase the New York club, the Company obtained a $5.125 million
      promissory note bearing simple interest at the rate of 4.0% per annum with
      a
      balloon payment at the end of five years. $2,000,000 of the principal amount
      of
      the promissory note is convertible into shares of restricted common stock at
      prices ranging from $4.00 to $7.50 per share. For the years
      ended  September 30, 2007 and 2006, $75,000 and $1,925,000 of
      principal was converted into 10,000 and 350,000 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 were used topay off certain debt
      and
      increase working capital. During the years ended September 30, 2007 and 2006,
      the holder had elected to convert $401,752 and $47,961 of principal and interest
      into 84,579 and 10,097 shares of the Company’s restricted common stock,
      respectively.  Subsequent to the end of fiscal year, in November 2007,
      the holder elected to convert all remaining principal ($691,689) and accrued
      interest ($21,448) to date into 150,134 shares of the Company’s restricted
      common stock.




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


45
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RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)




F. 
Long-term
      Debt -
      continued





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





On
      November 9, 2006, 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.





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




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





2008
            
            $
            3,291,1542009
            
            
            3,887,8002010
            
            
            886,5892011
            
            
            1,371,9172012
            
            
            591,800Thereafter
            
            
            4,358,079Total
                maturities of long-term debt
            
            $
            14,387,339





G. 
Income
      Taxes





The
      provision for income taxes consisted of the following for the years ended
      September 30, 2007 and 2006:





2007
            
            
            2006Current
            
            $
            436,810
            
            
            $
            -Deferred
            
            
            (200,364
            )
            
            
            -Total
                income tax expense
            
            $
            236,446
            
            
            $
            -





Income
      tax expense for the years presented differs from the “expected” federal income
      tax expense computed by applying the U.S. federal statutory rate of 34% to
      earnings before income taxes for the years ended September 30, as a result
      of
      the following:





2007
            
            
            2006Computed
                expected tax expense
            
            $
            1,119,057
            
            
            $
            595,923State
                income taxes
            
            
            32,913
            
            
            
            52,581Stock
                option disqualifying dispositions and other permanent
                differences
            
            
            (584,516
            )
            
            
            -Net
                operating loss carryforward
            
            
            (286,838
            )
            
            
            -Change
                in deferred tax valuation allowance
            
            
            (44,170
            )
            
            
            (648,504
            )Total
                income tax expense
            
            $
            236,446
            
            
            $
            -


46
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          of
          Contents


RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)




G. 
Income
      Taxes-
continued





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





2007
            
            
            2006Deferred
                tax assets (liabilities):Bad
                debts allowance
            
            $
            93,560
            
            
            $
            45,313Goodwill
                and indefinite lived intagibles
            
            
            (5,019,816
            )
            
            
            (329,713
            )Property
                and equipment
            
            
            481,172
            
            
            
            (243,220
            )Net
                operating losses
            
            
            154,679
            
            
            
            549,390Unrealized
                gain on marketable securities
            
            
            (7,008
            )
            
            
            (3,292
            )Other
            
            
            139,365
            
            
            
            180,371Valuation
                allowance
            
            
            (154,679
            )
            
            
            (198,849
            )Net
                deferred tax liabilities
            
            $
            (4,312,727
            )
            
            $
            -





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





2007
            
            
            2006Current
                assets
            
            $
            78,772
            
            
            $
            -Long-term
                liabilities
            
            
            (4,391,499
            )
            
            
            -Net
                deferred tax liabilities
            
            $
            (4,312,727
            )
            
            $
            -





The
      Company established a valuation allowance to fully reserve the deferred tax
      assets at September 30, 2006 due to the uncertainty of the timing and amounts
      of
      future taxable income. At September 30, 2007, the Company had net operating
      loss
      carryforwards related to subsidiaries not included in the Company’s consolidated
      income tax return of approximately $442,000, which expire in 2027 and have
      been
      fully reserved with a valuation allowance due to uncertainty of the timing
      and
      amounts of future taxable income of this subsidiary.





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




H. 
Stock
      Options





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


47
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          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:




Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term
                  
                  
                  Aggregate
                    Intrinsic
                    Value
                      at
                    September
                    30,
                      2007Outstanding
                      at October 1, 2005
                  
                  
                  878,000
                  
                  
                  $
                  2.47Granted
                  
                  
                  40,000
                  
                  
                  
                  6.75Forfeited
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (190,500
                  )
                  
                  
                  2.55Outstanding
                      at September 30,  2006
                  
                  
                  727,500
                  
                  
                  $
                  2.70Granted
                  
                  
                  70,000
                  
                  
                  
                  9.40Forfeited
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (252,500
                  )
                  
                  
                  2.58
                  
                  
                  
                  
                  
                  
                  $
                  1,551,236Outstanding
                      at September 30, 2007
                  
                  
                  545,000
                  
                  
                  $
                  3.61
                  
                  
                  
                  2.13
                  
                  
                  $
                  4,374,450Exercisable
                      at September 30, 2007
                  
                  
                  475,000
                  
                  
                  $
                  2.76
                  
                  
                  
                  2.03
                  
                  
                  $
                  4,217,650





As
      of
      September 30, 2007, the range of exercise prices for outstanding options was
      $1.40 -$9.40.





The
      Company has elected to follow APB No. 25 and related interpretations in
      accounting for its employee stock options until October 1, 2006, 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. As explained in Note B, in December 2004, the FASB
      issued SFAS No. 123R, Share-Based Payments,
      which is a revision of
      SFAS No. 123, Accounting
      for Stock-Based
      Compensation, and supersedes APB Opinion 25, Accounting for Stock
      Issued to
      Employees. SFAS No. 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 No. 123R became effective beginning October 1,
      2006.





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





The
      stock
      options above resulted in stock compensation of $219,170 and will be expensed
      as
      follows:  $18,025, $157,077 and $44,068 for the fiscal years ending
      September 30, 2007, 2008 and 2009, respectively.  Total unamortized
      stock compensation expense at September 30, 2007 was $201,145.





The
      fair
      value of options were estimated at the date of grant using a Black-Scholes
      option-pricing model using the following weighted average
      assumptions:




2007
            
            
            2006Volatility
            
            
            75
            %
            
            
            132
            %Expected
                lives
            
            2.38 years
            
            
            3
                yearsExpected
                dividend yield
            
            
            -
            
            
            
            -Risk
                free rates
            
            
            4.42
            %
            
            
            5.04
            %Expected
                forfeiture rate
            
            
            14
            %
            
            
            0
            %





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


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RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)





H. 
Stock
      Options –
continued





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 $1,494,000 and $1,150,000 for the years ended
      September 30, 2007 and 2006, 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, 2007 are as
      follows:





2008
            
            $
            1,280,9142009
            
            
            1,235,1142010
            
            
            1,218,8822011
            
            
            1,224,0912012
            
            
            1,196,103Thereafter
            
            
            9,847,060Total
                future minimum lease obligations
            
            $
            16,002,164




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.





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.  Our nightclub in our south
      Houston location had a valid temporary permit/license.  The permits
      for our north Houston location and our Bering Drive location have
      expired.





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 appealed the District Court’s rulings
      with the Fifth Circuit Court of Appeals.


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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.





The
      trial
      commenced on December 4, 2006 and concluded on December 12, 2006.  The
      Trial Court rendered its judgment in favor of the City of Houston on January
      31,
      2007.  The Trial Court found that the City of Houston met its burden
      that there were sufficient alternate sites available to relocate all of the
      existing businesses in 1997.  The Trial Court found the 1997 ordinance
      constitutional and enforceable.  Post-trial motions were heard and the
      relief sought, a stay against enforcement, was denied by the Trial
      Court.  An appeal to the Fifth Circuit Court of Appeals was timely
      filed.    The Fifth Circuit granted a stay pending
      appeal.  Oral argument was held before the Fifth Circuit Court of
      Appeals on August 7, 2007.  The Fifth Circuit Court of Appeals ruled
      in favor of the City of Houston in September, 2007.  Pleadings have
      been filed seeking a stay against enforcement of the provisions of the ordinance
      with the United States Supreme Court in conjunction with the request that the
      United States Supreme Court hear an appeal of the Fifth Circuit Court of Appeals
      ruling.  Neither relief nor any indication of the Supreme Court’s
      position on the appeal has been received to date.





Additionally,
      we have filed on behalf of three of our club locations in Houston state court
      lawsuits seeking judicial review of the results of the amortization process
      contained within the Ordinance.  This process was abated in 1998 due
      to the possible multiplicity of court actions.  The final order by the
      Trial Court resulted in the termination of the abatement and allowed the
      amortization process to
      continue as provided in the Ordinance.  We are presently in
      discussions with the City of Houston to attempt to resolve this
      matter.  It is anticipated that further injunctive relief will be
      sought in the state court cases should it become necessary.  In the
      event all efforts to stop enforcement activity fail and the City of Houston
      elects to enforce the judgment, we, as well as every other similarly situated
      sexually oriented business located within the incorporated area of Houston,
      Texas, will have to either cease providing nude or semi-nude entertainment
      or
      develop alternate methods of operating.  In such event, we presently
      intend to clothe our entertainers in a manner to eliminate the need for licenses
      and to take such steps as to not be subject to SOB ordinance
      compliance.  Approximately 23.7% of our club operation’s revenues for
      the twelve months ended September 30, 2007 were in Houston,
      Texas.  The ruling could have a material adverse impact on our
      operations, but it is unknown at this time.





Other
      Legal
      Matters





On
      October 6, 2006, a lawsuit was filed
      in the 224thJudicial District Court of Bexar
      County, Texas under Cause No. 2006-CI-15656 and styledEdward
      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, based upon an alleged “joint enterprise” theory and 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 has denied
      any liability for
      this accident and is vigorously defending the lawsuit, which is presently in
      the
      discovery process with a motion for summary judgment (based upon there being
      no
      evidence to support any claim or contention against us) to be filed at the
      conclusion of the current phase of discovery.





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
      Partner, Ltd. d/b/a 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 appealed
      this judgment and we have responded. The case is pending before the 4th
      Court of Appeals
      in San Antonio, Texas.


50
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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.




J. 
Segment
      Information





The
      following information is presented in accordance with SFAS No. 131, Disclosures about Segments
      of an
      Enterprise and Related
      Information. The Company is engaged in adult 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
      as income from operations. Total assets are those assets controlled by each
      reportable segment.





The
      following table sets forth certain information about each segment’s financial
      information for the years ended September 30:




2007
            
            
            2006Business
                segment sales:Night
                clubs
            
            $
            31,283,311
            
            
            $
            23,685,820Internet
            
            
            730,629
            
            
            
            801,395$
            32,013,940
            
            
            $
            24,487,215Business
                segment operating income:Night
                clubs
            
            $
            $6,643,197
            
            
            $
            $5,321,937Internet
            
            
            111,919
            
            
            
            130,512General
                corporate
            
            
            (2,651,430
            )
            
            
            (2,461,068
            )$
            4,103,686
            
            
            $
            2,991,381Business
                segment capital expenditures:Night
                clubs
            
            $
            $2,821,222
            
            
            $
            $3,590,917Internet
            
            
            2,146
            
            
            
            7,353General
                corporate
            
            
            2,686,103
            
            
            
            1,478,466$
            5,509,471
            
            
            $
            5,076,736Business
                segment depreciation and amortization:Night
                clubs
            
            $
            $1,341,346
            
            
            $
            $875,342Internet
            
            
            23,056
            
            
            
            32,920General
                corporate
            
            
            232,248
            
            
            
            140,985$
            1,596,650
            
            
            $
            1,049,247Business
                segment assets:Night
                clubs
            
            $
            $31,313,743
            
            
            $
            $23,670,618Internet
            
            
            110,871
            
            
            
            112,092General
                corporate
            
            
            11,066,937
            
            
            
            6,820,165$
            42,491,551
            
            
            $
            30,602,875




K.
      Common Stock




During
      the year ended September 30, 2006, the following common stock transactions
      occurred:





Stock
      options totaling 169,500 shares were exercised by employees and directors for
      proceeds of $421,631 and a non-employee exercised 25,000 stock options for
      $64,063.  Also, 30,000 shares of the Company’s common stock were sold
      to a non-employee for $75,000.  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 $1,925,000 of principal from the related promissory note
      into 350,000 shares of restricted common stock. The Company issued 10,097 shares
      of common stock for $47,961 interest owed.


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RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)








K. 
Common
      Stock –
Continued





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





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





L. 
Related
      Party
      Transactions





In
      May
      2002, the Company loaned $100,000 to Eric Langan, Chief Executive Officer of
      the
      Company. The note is unsecured, bears interest at 11% and is amortized over
      a
      period of ten years. The note contains a provision that in the event Mr. Langan
      leaves the Company for any reason, the note immediately becomes due and payable
      in full. The balance of the note was approximately $61,000 and $70,000 at
      September 30, 2007 and 2006, respectively, and is included in other assets
      in
      the accompanying consolidated balance sheets.  The note was paid off
      in full subsequent to September 30, 2007.





On
      July
      22, 2005, the Company entered into a secured convertible debenture with a
      greater than 10% shareholder for a principal sum of $660,000. The debenture
      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) until August 1, 2008.  The debenture matures on August 1,
      2009 and bears interest at a rate of 12% per annum. The debentures provide,
      absent shareholder approval, that the number of shares of the Company’s common
      stock that may be issued by the Company or acquired by the holders upon
      conversion of the debentures shall not exceed 19.99% of the total number of
      issued and outstanding shares of the Company’s common stock.  The
      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, 2007 and 2006, the Company recorded $35,552 of interest
      expense each year. 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, 2007 and 2006, the Company recorded $17,952 and $20,944, 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 the 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 debentures mature April 30, 2009 and bear interest at
      a
      rate of 12% per annum. At the election of the holders, the holders have the
      right to convert (subject to certain limitations) until April 30, 2008, all
      or
      any portion of the principal amount of the debentures into shares of the
      Company’s common stock at a rate of $6.55 per share, which approximated the
      closing price of the Company’s stock on April 28, 2006. The 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.


52
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          Contents


RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)





L. 
Related
      Party Transactions -
      Continued





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.





M. 
Employee
      Retirement
      Plan





The
      Company sponsors a Simple IRA plan (the “Plan”), which covers all of the
      Company’s corporate employees. The Plan allows the corporate employees to
      contribute up to the maximum amount allowed by law, with the Company making
      a
      matching contribution of 3% of the employee’s salary. Expenses related to
      matching contributions to the Plan approximated $39,000 and $39,000 for the
      years ended September 30, 2007 and 2006, respectively.





N. 
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 was netted against the note receivable, included in other assets in the
      accompanying consolidated balance sheet.  In June 2007, the Company
      foreclosed on the account and note receivable in the aggregate amount of
      approximately $249,000.  The net result of the transaction was that
      the Company wrote off the note and accounts and the related deferred gain and
      recorded $53,000 in furniture and equipment in the foreclosure.





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


53
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RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)








N. 
Acquisitions
      and
      Dispositions - Continued





The
      following information summarizes the 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.





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.





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 consolidated
      balance sheet at September 30, 2006 after recording an impairment charge of
      $68,134 .


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RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)




N.
      Acquisitions and Dispositions -
      continued




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





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





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





The
      results of operations of this acquired entity are included in the Company’s
      results of operations since November 10, 2006.





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





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





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





Net
                current assets
            
            $
            30,489Property
                and equipment
            
            
            2,968,126Non-compete
                agreement
            
            
            100,000Goodwill
            
            
            1,540,292SOB
                licenses
            
            
            4,401,512Deferred
                tax liability
            
            
            (1,540,292
            )Net
                assets acquired
            
            $
            7,500,127





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





The
      following unaudited pro forma information presents the results of operations
      as
      if the acquisition had occurred as of the beginning of the immediate preceding
      period.  WKC’s operations are for the calendar year
      2006.  The pro forma information is not necessarily indicative of what
      would have occurred had the acquisition been made as of such periods, nor is
      it
      indicative of future results of operations.  The pro forma amounts
      give effect to appropriate adjustments for the fair value of the assets
      acquired, amortization of intangibles and interest expense.


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RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)




N.
      Acquisitions and Dispositions -
      continued






2007
            
            
            2006Revenues
            
            $
            34,732,721
            
            
            $
            28,538,000Net
                income from continuing operations
            
            
            3,613,878
            
            
            
            2,356,000Net
                income
            
            
            3,613,878
            
            
            
            2,356,000Net
                income per share – basic
            
            $
            0.63
            
            
            $
            0.44Net
                income per share – diluted
            
            $
            0.58
            
            
            $
            0.41Weighted
                average shares outstanding – basic
            
            
            5,700,548
            
            
            
            5,316,000Weighted
                average shares outstanding - diluted
            
            
            6,215,285
            
            
            
            5,741,000





On
      May
      10, 2007, the Company entered into a Licensing Agreement with Rick’s Buenos
      Aires Sociedad Anonima (“Licensee”), a corporation organized under the laws of
      Argentina.  The Company agreed to grant Licensee a license for use and
      exploitation of the Company’s logos, trademarks and service marks for the
      operation of an adult entertainment facility in the city of Buenos Aires,
      Argentina, and Latin America.  Pursuant to the agreement, Licensee
      agreed to pay the Company a royalty fee equal to 10% of gross revenues of
      Licensee’s business, net of any value added tax.   No club has
      opened as of this time, but plans are for a location to open for business by
      the
      end of the second quarter of 2008.





P. 
Subsequent
      Events





In
      November 2007, the holder of a convertible debenture elected to convert all
      remaining principal ($691,689) and accrued interest ($21,448) to date under
      the
      debenture into 150,134 shares of the Company’s restricted common stock. See
      Note F.





In
      November 2007, Eric Langan, Chief Executive Officer of the Company paid off
      in
      full his note payable to the Company.  See Note L.





On
      November 19, 2007, the Company completed a private placement of equity
      securities solely to accredited investors.  Pursuant to the private
      placement, the Company issued 1,165,000 shares of the Company’s restricted
      common stock at a price of $14.00 per share for a total gross offering price
      of
      $16,310,000 with net proceeds of approximately $15,000,000 to the Company after
      expenses.  Pursuant to the terms of the transaction, the Company is
      obligated to file a registration statement no later than February 15,
      2008.  The offer and sale of the common stock was made pursuant to
      exemptions from the registration requirements of the Act pursuant to Section
      4(2) and Rule 506 of Regulation D promulgated thereunder. All of the offers
      and
      sales of the common stock were made exclusively to “accredited investors” (as
      such term is defined in Rule 501(a) of Regulation D) in offers and sales not
      involving a public offering.  The purchasers purchased the securities
      for their own account and not with a view towards or for resale. The private
      placement was conducted without general solicitation or
      advertising.





On
      October 17, 2007, the Company entered into a Purchase Agreement pursuant to
      the
      terms of which the Company’s subsidiary, RCI Entertainment (Philadelphia), Inc.
      (the “Purchaser”), will acquire from Vincent Piazza (“Seller”) 51% of the issued
      and outstanding shares of common stock (the “TEZ Shares”) of The End Zone, Inc.,
      a Pennsylvania corporation (the “TEZ”) which owns and operates “Crazy Horse Too
      Cabaret” (the “Club“) located at 2908 South Columbus Blvd., Philadelphia,
      Pennsylvania  19148 (the “Real Property”).  As part of the
      transaction, the Company’s subsidiary, RCI Holdings, Inc. (“RCI Holdings”) will
      acquire from Seller or the Piazza Family Limited Partnership (the “Partnership
      Seller”) 51% of the issued and outstanding partnership interest (the
“Partnership Interests”) in TEZ Real Estate, LP, a Pennsylvania limited
      partnership (the “Partnership”) and 51% of the issued and outstanding membership
      interest (the “Membership Interests”) in TEZ Management, LLC, a Pennsylvania
      limited liability company, which is the general partner of the Partnership
      (the
“General Partner”).  The Partnership owns the Real Property where the
      Club is located.  At closing, the Company will pay a purchase price of
      $3,500,000 payable in cash for the Partnership Interests and Membership
      Interests, and the Company will issue 225,000 shares of the Company’s restricted
      common stock (the “Rick’s Shares”) for the TEZ Shares.


56
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          of
          Contents


RICK’S
      CABARET INTERNATIONAL,
      INC.





NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS (continued)





P. 
Subsequent
      Events -
      Continued




Pursuant
      to the terms of the Purchase Agreement, on or after one year after the closing
      date, the Seller shall have the right, but not the obligation to have Rick’s
      purchase from Seller 10,000 Rick’s Shares per month (the “Monthly Shares”),
      calculated at a price per share equal to $10.00 (“Value of the Rick’s Shares”)
      until the Seller has received a total of $2,250,000 from the sale of the Rick’s
      Shares.  At the Company’s election during any given month, the Company
      may either buy the Monthly Shares or, if the Company elects not to buy the
      Monthly Shares from the Seller, then the Seller shall sell the Monthly Shares
      in
      the open market.  Any deficiency between the amount which the Seller
      receives from the sale of the Monthly Shares and the Value of the Rick’s Shares
      shall be paid by the Company within three (3) business days of the date of
      sale
      of the Monthly Shares during that particular month.  The Company’s
      obligation to purchase the Monthly Shares from the Seller shall terminate and
      cease at such time as the Seller has received a total of $2,250,000 from the
      sale of the Rick’s Shares and any deficiency.





Upon
      closing of the transaction, the Seller and the Partnership Seller will enter
      into a five-year agreement not to compete with the Company within a twenty
      (20)
      mile radius of the Club. Further, at closing the Purchaser and the Seller shall
      enter into a Shareholder’s Agreement relating to their ownership interest in
      TEZ; and RCI Holdings and the Partnership Seller shall enter into a First
      Amendment to Limited Partnership Agreement relating to the ownership of their
      partnership interests and a First Amendment to Operating Agreement relating
      to
      the ownership of their membership interests.  Further, at closing TEZ
      will enter into a new lease agreement with the Partnership giving it the right
      to lease the Real Property for twenty (20) years at $50,000 per
      month.  Finally, as part of the transaction, the Company will enter
      into a Lock-up/Leak-out Agreement with the Seller regarding the sale of the
      Rick’s Shares.





The
      Agreement provides for the transaction to close on or before seven (7) days
      after the approval of the transfer of the TEZ Shares to Purchaser by the
      Pennsylvania Liquor Control Board, but in no event later than January 15, 2008,
      contingent upon obtaining acceptable financing, transfer of all necessary
      licenses and permits, and other conditions to closing typical for transactions
      of this nature.





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




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






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