U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                     SECURITIES EXCHANGE ACT OF 1934 FOR THE
                       FISCAL YEAR ENDED DECEMBER 31, 1996

                         Commission File Number: 0-27006

                           MILLION DOLLAR SALOON, INC.
                 (Name of Small Business Issuer in Its Charter)


         Nevada                                                 13-3428657
 (State of Incorporation)                                     (IRS Employer
                                                            Identification No.)


                             6848 Greenville Avenue
                               Dallas, Texas 75231
          (Address of Principal Executive Offices, including Zip Code)

                                 (214) 691-6757
                (Issuer's Telephone Number, Including Area Code)

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

                                                          Name of Each Exchange
    Title of Each Class                                    on which Registered
    -------------------                                   ---------------------
           N/A                                                      N/A      

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

                               Title of Each Class
                               -------------------
                          Common Stock, $.001 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 issuer was required to file such reports),  and (ii) has
been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

     Check  if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of the  issuer's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]

     The  issuer's  revenues  for the fiscal year ended  December  31, 1996 were
$3,459,324. The aggregate market value of common stock held by non-affiliates of
the  issuer at March  25,  1997,  based  upon the  closing  bid price on The OTC
Electronic  Bulletin Board on said date, was  $1,414,950.  As of March 25, 1997,
there were 5,010,084 shares of the issuer's common stock outstanding.

                       Documents Incorporated by Reference

     No  documents,  other than  certain  exhibits,  have been  incorporated  by
reference into this report.




<PAGE>



                                TABLE OF CONTENTS


                                                                           PAGE
                                                                           ----
PART I

         Item 1.  Description of Business                                     3

         Item 2.  Properties                                                  9

         Item 3.  Legal Proceedings                                          10

         Item 4.  Submission of Matters to a Vote of Security-Holders        10


PART II

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

         Item 6.  Management's Discussion and Analysis of Plan of Operation  11

         Item 7.  Financial Statements                                       14

         Item 8.  Changes in and Disagreements With Accountants on 
                  Accounting and Financial Disclosure                        14
 

PART III

         Item 9.  Directors, Executive Officers, Promoters and Control
                  Persons; Compliance with Section 16(a) of The Exchange 
                  Act                                                        15

         Item 10. Executive Compensation                                     16

         Item 11. Security Ownership of Certain Beneficial Owners and
                  Management                                                 17

         Item 12. Certain Relationships and Related Transactions             17

         Item 13. Exhibits and Reports on Form 8-K                           18






                                       2
<PAGE>



                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Operations Prior to October 1995

     Million Dollar Saloon,  Inc. (the "Company") was  incorporated in the State
of  Nevada on  September  28,  1987 as  Goodheart  Ventures,  Inc.  The  Company
completed an offering of its securities in November 1988 and subsequently sought
potential business opportunities through either purchase,  acquisition or merger
transactions.  In 1991,  the Company  ceased filing reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").

     In connection with its business strategy,  the Company identified  entities
owned and/or controlled by the Donald G. and Nina Furrh family as candidates for
merger (the "Merger").  A special meeting of the Company's stockholders was held
on  September  22, 1995 for the purpose of approving  (a) a  one-for-12  reverse
split of the Company's  outstanding common stock, par value $.001 per share (the
"Common Stock"),  which was completed prior to the effective date of the Merger,
(b) the merger agreement with Million Dollar Saloon,  Inc., a Texas  corporation
("MDS-TX") and (c) amending the Company's Articles of Incorporation to authorize
(i) a class of  preferred  stock,  (ii) a change in the name of the Company from
Goodheart Ventures, Inc. to Million Dollar Saloon, Inc., (iii) the limitation of
the liability of the Company's  directors,  and (iv) the  indemnification of the
Company's  officers and directors  under certain  circumstances.  The Merger was
completed and deemed effective on October 5, 1995.

     MDS-TX was incorporated in the State of Texas on July 1, 1985, and remained
dormant until  September  1995. In September  1995,  MDS-TX acquired 100% of the
issued  and  outstanding  capital  stock  of  Furrh,  Inc.  ("Furrh"),  a  Texas
corporation organized in February 1974. Furrh owns and manages commercial rental
property  located  in  Dallas  County,   Texas.  Tempo  Tamers,  Inc.,  a  Texas
corporation organized in 1978 ("Tempo"),  is the sole subsidiary of Furrh. Tempo
operates  a lounge  and  entertainment  facility  in  Dallas,  Texas  under  the
registered trademark and trade name "The Million Dollar Saloon". Simultaneously,
MDS-TX acquired 100% of the issued and outstanding  capital stock of Corporation
Lex  ("Lex")  and Don,  Inc.  ("Don").  Lex, a Texas  corporation  organized  in
November 1984, owns and manages  commercial  rental  property  located in Dallas
County,  Texas.  Don, a Texas  corporation  organized in November 1973, owns and
manages commercial rental property located in Tarrant County, Texas.

     As a  result  of  the  Merger,  Furrh,  Lex  and  Don  became  wholly-owned
subsidiaries of the Company.  Tempo remains a wholly-owned  subsidiary of Furrh.
Unless otherwise  indicated,  the "Company"  refers to the Company,  each of its
wholly-owned subsidiaries and Tempo.

Overview of Current Operations

     The Company is based in Dallas,  Texas and currently  conducts  business in
two distinct areas:

          o    Owning and operating an adult cabaret.

          o    Owning and managing income producing commercial real estate.

Adult Cabaret

     Generally.  The Company,  through Tempo, owns and operates an adult cabaret
under the name "The Million Dollar  Saloon." The Million Dollar Saloon opened in
1982 with the intent of establishing a sophisticated  entertainment  environment
focused on attracting a professional  clientele. To enhance the club's appeal to
its target market, The Million Dollar Saloon offers  first-class  restaurant and
bar service  conducive to  attracting  businessmen  and  out-of-town  convention
clientele. The Company is currently exploring the expansion of the adult cabaret
segment of its business by  establishing  additional  Million  Dollar Saloons or
acquiring and operating similar facilities in selected cities. As of the date of
this report, no specific locations have been identified.



                                       3
<PAGE>


     Female Entertainment. The topless entertainers at The Million Dollar Saloon
must follow  management's  policy of high personal  appearance  and  personality
standards.  A performer's physical appearance and her ability to present herself
attractively and to converse  intelligently  with customers is very important to
management.  Management insists that the performers at The Million Dollar Saloon
be  experienced  dancers.  The  performers  dance on the main  stage or on small
stages  throughout the club. While their  performances  include topless dancing,
management  insists that  performers  wear elegant  attire when not dancing,  as
opposed to being scantily  dressed as in many other adult  cabarets.  Management
never  allows  full  nudity in the club.  Management  provides  performers  with
guidelines  for the manner of dress,  hairstyle,  makeup and  general  demeanor.
Guidelines are imposed to maintain a high standard of professionalism  among the
performers  and to ensure  that  they  always  maintain  a  pleasant,  congenial
demeanor.   Further,   management  evaluates  each  performer's  appearance  and
performance  on a  nightly  basis  and  advises  them if  their  dress,  makeup,
hairstyle, general appearance or demeanor does not meet the Company's standards.
Though these  policies have the effect of limiting the number of performers  who
are permitted to dance at The Million Dollar Saloon,  the Company  believes that
its policy of  maintaining  these high  standards  is in its best  interest  for
long-term market position. Entertainers who have performed at The Million Dollar
Saloon have been featured in various leading men's entertainment magazines.

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

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

     Food and Drink.  The  Company  believes  a key to the  success of a premier
adult  nightclub  is a quality,  first-class  bar and  restaurant  operation  to
complement  its adult  entertainment.  The Company  employs a full-time  Service
Manager who is in charge of  recruiting  and  training a  professional  waitress
staff and ensuring that each customer receives prompt and courteous service. The
Company  employs a Chef and a Bar Manager.  The Bar Manager is  responsible  for
stocking,  inventory control,  and scheduling of bar staff. The Company believes
that the  operation  of a first class  restaurant  and the  provision of premium
wine, liquor and beer are necessary to the operation of a premier adult cabaret.
The Company's  restaurant  operation is a full service  operation which provides
business lunch buffets and a full-scale  lunch and dinner menu service  offering
hot and cold appetizers,  salads, seafood, steak and other entrees. A variety of
premier  wines  are  offered  to  compliment  any  customer's  lunch  or  dinner
selection.



                                       4
<PAGE>

     Controls.   Operational  and  accounting  controls  are  essential  to  the
successful operation of a cash intensive nightclub and bar business. The Company
separates  management  personnel  from all cash  handling.  The  Company  uses a
combination of accounting and physical  inventory control mechanisms to ensure a
high  level  of  integrity  in  its  accounting  practices.   Computers  play  a
significant  role in capturing and analyzing a variety of information to provide
management with the information  necessary to efficiently manage and control the
nightclub.  Management  personnel  reconcile  deposits  of cash and credit  card
receipts  each  day to a daily  income  report.  Daily  computer  reports  alert
management of any variances from expected  financial results based on historical
norms.

     Atmosphere.  The Million Dollar Saloon  maintains a comfortable  atmosphere
through  its decor and other  customer  related  amenities.  The  furniture  and
furnishings  in The  Million  Dollar  Saloon  create  the  feeling of an upscale
restaurant.  The  sound  system  design  provides  quality  sound at  levels  so
conversations  can take  place.  The  Million  Dollar  Saloon  also  provides  a
companion light show and employs a sound and light engineer to upgrade, monitor,
and maintain the sound and light  systems.  Management  constantly  monitors the
environment  of The Million  Dollar  Saloon for  maintenance,  music  selection,
entertainer and waitress appearance, and all aspects of customer service.

     VIP Area. To emphasize  service for the  upper-end of the business  market,
the Company  maintains a VIP room  encompassing the upstairs area of The Million
Dollar  Saloon  facility.  The VIP  area is  opened  to  individuals  who pay an
increased  daily  admission  charge or  purchase  annual or  lifetime  admission
passes.  The VIP area  provides  a higher  level of luxury in its decor and more
personalized  services. The VIP area consists of approximately 1,800 square feet
for food and  entertainment  purposes and has an occupancy limit of 100 persons.
The downstairs club and dining area consists of approximately  4,500 square feet
for entertainment purposes and can accommodate 250 persons.

     Advertising and Promotion. The Company's marketing philosophy is to portray
The  Million  Dollar  Saloon  as a  premiere  adult  cabaret  providing  topless
entertainment in a sophisticated,  discreet  environment for its patrons.  Hotel
publications,  local radio,  cable  television,  newspapers,  billboards,  and a
variety of promotional  campaigns ensure that the public  recognizes The Million
Dollar Saloon name. The Company is a member of local business  organizations and
is accepted by the Dallas Convention & Visitor's Bureau.

Future Expansion

     The  Company has not  determined  the  precise  locations  or nature of its
future expansion, but it believes, based upon its experience, that opportunities
for  expansion  exist.  Management  is  presently  researching  the  gaming  and
theatrical production industries as areas for expansion.  The Company may expand
through the  acquisition  of sports bars and casual clubs that would not use the
trademark  "The  Million  Dollar  Saloon." In  determining  which  cities may be
suitable  locations  for  expansion,  a variety of factors  will be  considered,
including,  but  not  limited  to,  the  current  regulatory  environment,   the
availability  of sites  located in high traffic  commercial  areas  suitable for
conversion to The Million  Dollar Saloon style cabarets or sports bars or casual
clubs,  potential  competition  in  the  area,  current  market  conditions  and
profitability of other adult cabarets in the city.

Competition

     The adult  entertainment  nightclub  industry  is highly  competitive  with
respect  to  price,   service,   location,   and  the   professionalism  of  its
entertainment.  The Million Dollar Saloon competes with many locally-owned adult
cabarets in Dallas,  Texas,  certain of which may enjoy  recognition that equals
that of The  Million  Dollar  Saloon.  While  there  may be  local  governmental
restrictions on the location of a so-called "sexually oriented business",  there
are no barriers to entry into the adult cabaret  market.  There are in excess of
30 adult cabarets located in the Dallas,  Texas  metropolitan  area of which two
are in direct  competition  with the  Company.  The  Company  believes  that the
combination  of its existing name  recognition  and its  distinctive  and unique
entertainment  environment will allow the Company to effectively  compete within
this industry.



                                       5
<PAGE>

Governmental Regulations

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

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

     Beyond  various  regulatory  requirements  affecting  the sale of alcoholic
beverages,  the location of an adult cabaret is subject to  restriction  by city
ordinance.  The Company is subject to "The Sexually Oriented Business Ordinance"
(the  "Ordinance")  which  contains  prohibitions  on the  location  of an adult
cabaret.  The prohibitions deal generally with distance from schools,  churches,
and other sexually  oriented  businesses and contain  restrictions  based on the
percentage of residences within the immediate  vicinity of the sexually oriented
business.  The  granting  of a  Sexually  Oriented  Business  Permit  ("Business
Permit") is not subject to  discretion;  the Business  Permit must be granted if
the proposed operation satisfies the requirements of the Ordinance.  The Company
has held a Business  Permit since  passage of the city  ordinance.  The Business
Permit is valid for a period of one year and is renewable by  application of the
permit holder subject to a hearing. The Company has received positive support at
such hearings from business  associations,  nearby  businesses,  and residential
neighbors. The Company has not lost or been denied a Business Permit.

Trademarks

     "The Million Dollar Saloon" is a trademarked and recognized  name. The name
was acquired by purchase  before the opening of The Million Dollar  Saloon.  The
Company is aware of a possible  infringement upon the trademark by a facility in
Oklahoma  and  is  considering  remedial  action  if  warranted.   The  possible
infringement has not and is not expected to materially  affect operations of the
Company.

Employees and Independent Contractors

     As of  December  31,  1996,  the  Company had  approximately  70  full-time
employees,  of which 12 were in management  positions,  including  corporate and
administrative operations and approximately 58 were engaged in food and beverage
service,   including   bartenders   and   waitresses.    Entertainers   numbered
approximately  130 full and  part  time.  None of the  Company's  employees  are
represented  by a union and the Company  considers its employee  relations to be
good.

     In contrast to prevailing industry treatment of entertainers as independent
contractors,  the Company  classifies  its  entertainers  as employees  for both
federal income tax purposes and compliance with the Fair Labor Standards Act. By
classifying its entertainers as employees  subject to the income tax withholding
provisions  of the  Internal  Revenue  Code  and  under  the  Federal  Insurance
Contributions  Act and the Federal  Unemployment Tax Act, the Company avoids the
imposition of penalties for failure to comply with such requirements.


                                       6
<PAGE>


Insurance

     The  Company  maintains  insurance  in amounts it  considers  adequate  for
personal injury and property damage.  The Company does maintain  personal injury
liquor  liability  insurance  because the  Company  may be exposed to  potential
liabilities  that 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 the Company may 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  wrongfully  serves an  individual  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 the policy of the Company to require  that all servers of
alcohol,  including management,  be certified every two years as servers under a
training program approved by the TABC. 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.

Income Producing Commercial Real Estate

     The Company  owns three  income  producing  commercial  properties,  in fee
simple estate,  which house adult  entertainment  nightclubs in the  Dallas-Fort
Worth metroplex.  Management is of the opinion that all properties, owned and/or
leased are adequately covered by insurance. One facility is Company operated and
the other two are subject to long-term  lease  agreements  and operated by other
third-party operators.

     The  Company  operated  facility  is located at 6826  Greenville  Avenue in
Dallas,  Texas and houses The Million Dollar Saloon.  The facility consists of a
9,750 square foot building located on an approximate 25,500 square foot tract of
land fronting a major traffic  artery in North Central  Dallas.  The property is
owned  by  Furrh  and is  subject  to a lien  also  covering  the  other  leased
properties  incurred in connection  with a $750,000  long-term note payable to a
bank dated  September  22, 1995.  See  "Properties"  and Note F to the Company's
Financial Statements beginning on p. F-1 hereof.

     The remaining two properties are leased to unrelated  independent operators
which also operate adult entertainment nightclubs in the facilities.  All of the
properties are stand-alone structures and, accordingly, are 100% occupied with a
single  tenant  and,  at the  present  time,  are not  subject  to any plans for
renovation,  remodeling or other  significant  improvement.  All  properties are
physically  located in geographic  areas  suitable for their current use.  There
exist similar  properties  which could be similarly used in the same  geographic
area as the subject  properties.  The effective  rentals vary between  locations
because of desirability and attractiveness of locations. See "Properties."

Risk Factors

     Certain of the  statements  contained in this Annual  Report on Form 10-KSB
are forward  looking  statements  that  involve  risks and  uncertainties.  Such
statements  are subject to important  factors that could cause actual results to
differ materially, including the following risk factors:



                                       7
<PAGE>

     Risk of Adult Cabaret Operations.  The adult entertainment,  restaurant and
bar industry is a volatile  industry.  The industry tends to be sensitive to the
general  local  economy.   When  local  economic   conditions  are   prosperous,
entertainment  industry  revenues  increase,  conversely,  when  local  economic
conditions are unfavorable,  entertainment industry revenues decline.  Customers
who frequent adult cabarets generally follow trends in personal preferences. The
Company continuously  monitors trends in its customers' tastes and entertainment
preferences so that, if necessary,  it can change its operations and services to
accommodate the changes in trends. Any significant  decline in general corporate
conditions or the economy that affect  consumer  spending  could have a material
adverse  effect on the  Company's  business and upon an investment in the Common
Stock.

     Risk of Inadequate  Financial Controls.  A significant part of the revenues
earned by the Company through its adult  nightclub  operations will be collected
in cash by full and part-time  employees.  Comprehensive  financial controls are
required  to  minimize  the   potential   loss  of  revenue   through  theft  or
misappropriation  of cash. To the extent that these  controls are not structured
or executed properly,  significant cash revenues could be lost and profitability
of  the  Company  impaired.   The  Company  believes  that  it  has  implemented
significant  cash  controls,  including  separating  management  personnel  from
actually  handling cash and utilizing a combination  of accounting  and physical
inventory  control devices to deter theft and to ensure a high level of security
within its accounting practices and procedures.

     Competition  Within the  Industry.  The adult  topless  club  entertainment
business is highly competitive with respect to price, service,  location and the
professionalism  of entertainment.  The Million Dollar Saloon competes in Dallas
with a number of  locally-owned  adult  cabarets,  some of whose names may enjoy
recognition that equals that of The Million Dollar Saloon.  Although the Company
believes that it will compete  successfully,  there can be no assurance that the
Company will be able to maintain its high level of name recognition and prestige
within the  marketplace.  The Company's  success  depends on  maintaining a high
quality  of  female   entertainers  and  waitresses.   Competition  for  topless
entertainers  in the  adult  entertainment  business  is  intense.  The  lack of
availability of quality,  personable,  attractive  entertainers or the Company's
inability to attract and retain other key employees,  such as kitchen  personnel
and bartenders, could adversely affect the business of the Company.

     Management of Growth. For the Company to expand its business operations, it
must  continue to improve and expand the  expertise  of its  personnel  and must
attract, train and manage qualified managers and employees to oversee and manage
the expanded operations.

     It is the  intention  of the  Company to  potentially  expand its  existing
business   operations  by  opening   additional   topless  nightclubs  in  other
metropolitan  areas. The opening of additional  topless  nightclubs will subject
the Company to a variety of risks associated with rapidly growing companies.  In
particular,  the  Company's  growth  may  place  a  significant  strain  on  its
accounting  systems,   internal  controls,   and  oversight  of  its  day-to-day
operations.  Although  management  intends to ensure that its internal  controls
remain adequate to meet the demands of further growth, there can be no assurance
that its  systems,  controls  or  personnel  will be  sufficient  to meet  these
demands. Inadequacies in these areas could have a material adverse effect on the
Company's business, financial condition and results of operations.

     Permits Relating to the Sale of Alcohol and Operation of Sexually  Oriented
Business.  While the  Company  has never been the  subject of a protest  hearing
against the renewal of either its Permit or its Business Permit, there can be no
assurance that such a protest could not be made in the future,  nor can there be
any  assurance  that the Permit or the  Business  Permit would be granted in the
event such a protest  was made.  Other  states may have  similar  laws which may
limit the  availability  of a permit to sell  alcoholic  beverages  or operate a
sexually oriented business. The temporary or permanent suspension or revocations
of the Permit or the Business Permit or the inability to obtain permits in areas
of expansion  would have a material  adverse  effect on the revenues,  financial
condition and results of operations of the Company.

     Limitations  on Protection of Service  Marks.  Rights of the Company to the
trade name "The Million Dollar Saloon" were purchased.  No assurance steps taken
by  the   Company  to  protect   its  trade  name  will  be  adequate  to  deter
misappropriation of its protected  intellectual property rights.  Litigation may
be necessary in the future to protect the  Company's  rights from  infringement,
which may be costly and time consuming.  The loss of the  intellectual  property
rights owned or claimed by the Company could have a material  adverse  effect on
the Company.



                                       8
<PAGE>


ITEM 2.  PROPERTIES

     The Company  maintains its corporate  office at 6848  Greenville  Avenue in
Dallas,  Texas. The corporate office is comprised of approximately  2,700 square
feet and is subject to a monthly  rental payment of  approximately  $3,500 under
the terms of a lease agreement  which expires in October 1997.  Based on current
local market conditions and available  information,  management is of the belief
that it will  either be able to renew the  existing  lease  upon  expiration  or
relocate to a comparable location at a comparable cost.

     The Company owns three facilities,  in fee simple estate,  which operate as
adult cabarets in the Dallas-Fort Worth metroplex.  Management is of the opinion
that all  properties,  owned and/or leased are adequately  covered by insurance.
One  facility is Company  operated  and the other two are  subject to  long-term
lease agreements and operated by unrelated third-party operators.

     The  Company  operated  facility  is located at 6826  Greenville  Avenue in
Dallas,  Texas. The facility consists of a 9,750 square foot building located on
an approximate  25,500 square foot tract of land fronting a major traffic artery
in North Central  Dallas.  The property is subject to a lien covering two of the
remaining three properties incurred in connection with a $750,000 long-term note
payable to a bank dated September 22, 1995.

     The remaining two properties are leased to unrelated  independent operators
which also operate adult cabarets in these facilities. All of the properties are
stand-alone structures and, accordingly,  are 100% occupied with a single tenant
and,  at the  present  time,  are  not  subject  to any  plans  for  renovation,
remodeling or other  significant  improvement.  All  properties  are  physically
located in  geographic  areas  suitable for their  current use. The lease rental
amounts are based upon the  location and  physical  condition of the  respective
property.

     The  following  is  a  summary  of  the  terms,  conditions  and  operating
parameters of the two properties being leased from the Company:


<TABLE>
<CAPTION>
<S>                                                                            <C>
                                     
                                                             Owning Entity and Location/Address
                                             -------------------------------------------------------------------
                                                     Corporation Lex                        Don, Inc.
                                                 3021 Northwest Highway               3601 State Highway 157
                                                      Dallas, Texas                     Fort Worth, Texas
Square footage
  Building                                                8,550                               4,850
  Total tract                                            37,162                              60,398

Mortgages

Lease expiration                                        May 2002                           August 1998

Scheduled rentals                            $4,250 per week through 5/25/99     $3,250 per week through 8/15/95
                                                  $4,750 per week from                 $3,500 per week from
                                                 5/26/99 through 5/23/02             8/16/95 through 8/15/98

</TABLE>


                                       9
<PAGE>


<TABLE>
<CAPTION>
<S>                                                                                      <C>

Effective annual rental per square
   foot (total lease term)                             $       24.33                        $     32.14

Gross book basis (including land)                      $1,232,548                           $138,429

Net book basis (including land)                        $1,007,026                           $ 66,542

Federal income tax basis
   (excluding land)                                    $  675,342                           $128,429


Depreciation method and life                           SL-19 yrs.                          ACRS-15 yrs.

Ad valorem tax rate per $100 of
   valuation                                           $        2.59                        $      3.14

1996 Ad valorem taxes                                  $    9,235                           $  6,775


</TABLE>

------------------------
(*) exclusive of the 2.5% of gross liquor sales.

     Both  properties  are  subject  to a lien  incurred  in  connection  with a
$750,000  long-term  note payable to a bank dated  September 22, 1995.  The note
bears interest at 11.0% and is payable in monthly  installments of approximately
$16,369,  including  interest.  The final payment is due in September  2000. The
note may be  prepaid at any time and any  prepayment  must be  accompanied  by a
"yield maintenance fee" equal to 4% of the outstanding  balance if prepaid prior
to August 31, 1996; 3% if prepaid between September 1, 1996 and August 31, 1997;
2% if prepaid  between  September 1, 1997 and August 31, 1998; and 1% if prepaid
between  September  1, 1997 and August 31,  1999.  The proceeds of the loan were
used to  retire a  $712,000  mortgage  note  payable  with a payoff  balance  of
approximately  $288,000  and a  $105,000  mortgage  note  payable  with a payoff
balance of approximately $10,000.

ITEM 3.  LEGAL PROCEEDINGS

     The  Company  may from  time to time be a party to  various  legal  actions
arising in the ordinary  course of its  business.  The Company is not  currently
involved in any actions that it believes will have a material  adverse effect on
its results of operations or financial condition.

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

     During the fourth quarter of fiscal 1996,  there were no matters  submitted
to a vote of the security-holders, through solicitation of proxies or otherwise.



                                       10
<PAGE>


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     As of December  31,  1996,  the Company  had  approximately  570 holders of
record of its Common Stock.  Outstanding  shares of the  Company's  Common Stock
totaled  5,010,084.   The  Company's  transfer  agent  is  Securities   Transfer
Corporation, Dallas, Texas.

     The  Company's  Common Stock began trading on The OTC  Electronic  Bulletin
Board under symbol "MLDS" on January 29, 1996.  The  following  table sets forth
the  quarterly  average high and low closing bid prices per share for the Common
Stock.


                                                      Common Stock
              Fiscal Year Ended
              December 31, 1996                     High        Low
              -----------------                     ----        ---
               First Quarter(1)                     3.75        3.00
               Second Quarter                       3.13        3.00
               Third Quarter                        3.00        1.50
               Fourth Quarter                       1.75        1.50

-----------------------------
(1)  From January 29, 1996 to March 31, 1996.

     The source for the high and low bids  quotations is the National  Quotation
Bureau,  Inc. and does not reflect  inter-dealer  prices,  such  quotations  are
without retail mark-ups, mark-downs or commissions, and may not represent actual
transactions.

     During each quarter of 1996,  the Company's  Board of Directors  declared a
per share cash dividend as follows:  first quarter -- $0.03;  second  quarter --
$0.015;  third  quarter  --  $0.085;  and  fourth  quarter  -- $0.03.  The total
dividends paid or accrued amounted to approximately $450,908.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION

     The  following   discussion   should  be  read  in  conjunction   with  the
accompanying  financial  statements  and notes  thereto,  beginning  on page F-1
herein.  Further, all discussions relate to the continuing  operations of Furrh,
Lex and Don as wholly-owned subsidiaries of the Company.

Results of Operations

     Year Ended  December 31, 1996 versus  December 31, 1995. Bar and restaurant
revenues  increased by  approximately  $250,000 for the year ended  December 31,
1996  compared to the year ended  December 31, 1995.  This  increase  relates to
higher patronage of the facility and to the changes in entertainer  compensation
methods.  During 1995, the Company and its  competitors  changed their method of
entertainer  compensation.  As a result of this change, the Company  experienced
increased   entertainment  revenues  which  were  partially  offset  by  related
increases  in direct  labor costs.  Costs of sales  increased  by  approximately
$184,000  compared  to the same period in 1995.  Rental  revenues on leased real
estate were declined by  approximately  $36,000  during 1996 as compared to 1995
due to the  bankruptcy of a tenant of a rental  property.  Management  sold this
property for cash in February 1997.


                                       11
<PAGE>


     Operating  expenses declined by approximately  $305,000 in 1996 as compared
to 1995. The principal savings were experienced in reduced  management fees paid
in 1995 which were  discontinued  in  September  1995 as a result of the reverse
merger and  corporate  restructuring  transaction.  The Company has  experienced
expense  increases in interest  expense due to new notes taken out in the second
quarter of 1996 and the September 1995  corporate  restructuring.  Further,  the
Company has increased  depreciation and amortization expenses as a result of the
amortization   of  costs   incurred  for  the  reverse   merger  and   corporate
restructuring  in September  1995.  All direct rental  operating  costs remained
constant  during  the years  ended  December  31,  1996 and 1995  included  as a
component of general and administrative expenses.

     Net income increased by approximately  $392,000 from approximately $112,000
for the year ended  December  31, 1995 to  approximately  $505,000  for the year
ended December 31, 1996. The weighted-average  number of shares of the Company's
Common Stock has remained relatively constant yielding a comparable earnings per
share of $0.10 for the year ended  December  31,  1996 as  compared to $0.02 per
share for the year ended December 31, 1995.

     Year Ended December 31, 1995 versus  December 31, 1994. The Company derives
revenues from two principal  sources - bar and  restaurant  operations and rents
from leases on real property.  The Company  experienced an approximate  $263,000
increase  in gross  bar and  restaurant  revenues  to a total  of  approximately
$2,751,000  during the year  December  31,  1995 from  approximately  $2,488,000
during the year ended  December  31,  1994.  This  increase is  attributable  to
increased  patronage from local traffic and conventions in the Dallas-Ft.  Worth
Metroplex.  The Company's  real estate rental  operations  experienced a revenue
decrease of approximately $2,300 from approximately  $478,500 for the year ended
December  31, 1994 to  approximately  $476,200  for the year ended  December 31,
1995.  This  decrease was caused by financial  difficulties  of one tenant.  The
Company  has been able to  replace  this  tenant at  identical  lease  terms and
conditions.  The overall net total  revenues of the Company  increased  slightly
from  approximately   $1,573,000  for  the  year  ended  December  31,  1994  to
approximately $1,676,000 for the year ended December 31, 1995.

     Net bar and restaurant  direct  operating  costs have increased with direct
personnel  costs at  approximately  $1,048,000  versus $878,000 and purchases of
various  consumables and supplies at approximately  $502,000 versus $515,000 for
the year ended  December  31,  1995 and 1994,  respectively.  During  1995,  the
Company changed its method of compensating dancers from a "tip-based"  reporting
method to a method whereby dancers are paid a percentage of all reported service
charges  collected  for  individual  dances.  Under this change in  compensation
methodology,  the Company experienced  increased revenues,  which were offset by
related  increases in  entertainer  compensation.  Because of this  change,  the
Company  settles  with  each  entertainer  at the end of each  daily  shift  and
advances to the employee the pro-rata  estimated net compensation.  All advances
are reconciled and cleared during the Company's normal bi-weekly  payroll cycle.
At December  31,  1995,  the Company  experienced  an increase of  approximately
$46,600 in accounts receivable as a result of these advances.

     Overall operating expenses increased from approximately  $1,427,700 for the
year ended  December  31, 1994 to  approximately  $1,569,900  for the year ended
December 31, 1995. The largest  contributors  to this increase of  approximately
$129,000  was an  increase  in  management  fees  paid  to a  related  party  of
approximately  $100,000  prior to the merger of the  Company  and the  operating
subsidiaries  and an increase in employer payroll taxes related to the change in
entertainer compensation methods. Management fees paid to a related party ceased
effective  October  1, 1995 with the  merger of the  Company  and the  operating
subsidiaries.


                                       12
<PAGE>


     Additionally,  the reorganization of Furrh, Inc. and its subsidiary,  Tempo
Tamers,  Inc.,  Corporation  Lex and Don,  Inc.  with and  into  MDS-TX  and the
subsequent  merger with the Company provided a structure  whereby the cumulative
net  operating  loss of Furrh,  Inc.,  as of February 28, 1995, in the amount of
approximately  $400,000  became usable beyond a reasonable  doubt. As a separate
entity,  there was no assurance beyond a reasonable doubt that the net operating
loss carry forward would be utilizable by Furrh,  Inc. and its subsidiary,  and,
accordingly,  the deferred tax asset  related to this net  operating  loss carry
forward was fully reserved. Accordingly upon the consummation of the merger, the
Company retroactively  recognized a deferred tax asset, of approximately $76,000
as of December 31, 1995 to reflect the economic effect of the future utilization
of this loss carry forward for income tax purposes.  As a general rule,  the bar
and  restaurant  operations  experience  limited  seasonality  during the summer
months  of June,  July and  August  due to the lack of  convention  activity  in
Dallas,  Texas and the availability of other  recreational and vacation activity
by the patronage. No significant financial impact on the operations is caused by
this repetitive seasonal decline.

     During 1995,  the Company  advanced an  additional  approximate  $17,500 to
officers,   directors  and/or  stockholders,   pre-reverse  merger  between  the
operating companies and Goodheart. No advances are anticipated to be made by the
Company in future periods.  In September 1995, the two largest balances due from
stockholders were converted to separate  formalized notes bearing interest 5.65%
and mature in  September  1997.  The notes may be repaid with either cash or the
Company's  common stock held by the  respective  stockholder  at an  agreed-upon
value of $2.00 per share.  Both  stockholders  have adequate  share  holdings to
completely retire the debt, plus anticipated accrued interest,  at the scheduled
maturity  date.  It is the intent of these  stockholders  to liquidate the notes
with cash repayments.

Liquidity and Capital Resources

     Year Ended  December 31, 1996 versus  December 31, 1995. As of December 31,
1996, the Company had working capital of approximately  $(52,600) as compared to
approximately  $(32,300)  as of December  31,  1995.  The  Company has  achieved
positive cash flows from operations of approximately $579,000 for the year ended
December  31,  1996 as  compared to  approximately  $167,000  for the year ended
December 31, 1995.

     During April 1996,  the Company  executed a $500,000 note payable to a bank
and placed the proceeds into  certificates  of deposit as an additional  working
capital  reserve.  The note was  retired in October  1996 and  required  monthly
payments of interest only at an interest rate of 6.50%.

     Management  believes  that  working  capital  is  not a true  indicator  of
liquidity due to the cash nature of the bar and  restaurant  operations  whereby
all direct  operating  revenues and expenses are settled within five (5) working
days after  recognition.  The positive cash flows from  operations has primarily
been used, in prior  periods,  for the retirement of debt and  distributions  to
stockholders.  Acquisitions  of property and equipment  have been nominal during
the year ended December 31, 1996 and totaled  approximately $82,000 for Calendar
1995 and $11,000 for Calendar 1994. It is anticipated that no significant future
demands for capital  resources exist and only routine repairs and maintenance on
the  company-operated  facility will be necessary.  During  Calendar  1995,  the
majority of capital  expenditures  directly related to the exterior and interior
remodeling to modernize and update the overall  appearance and atmosphere of the
facility to maintain its quality and reputation  within the marketplace.  Due to
major  freeway  construction  in  the  vicinity  of  the  facility,   management
anticipates  that the  remodeled  facade  will  attract  additional  spontaneous
patronage  from  increases  in  traffic  caused by  freeway  diversions  and the
completion of a commuter rail system in close proximity to the Company  operated
facility.  Liquidity  requirements  mandated by future business  acquisitions or
expansions,  if any are specifically  identified or undertaken,  are not readily
determinable  at this  time as no  substantive  plans  have been  formulated  by
management.  However, management believes that all necessary cash liquidity will
be obtained from existing operations. Additionally, management is of the opinion
that there is additional potential availability of incremental mortgage debt and
the opportunity  for the sale of additional  common stock through either private
placements or secondary offerings.

     On  September  7,  1995,   concurrent  with  the  corporate   consolidation
previously discussed,  MDS-TX sold approximately 124,900 shares of unregistered,
restricted common stock (at $2.00 per share) to unrelated  third-party investors
raising $249,800.


                                       13
<PAGE>


     On  September  22, 1995,  MDS-TX  obtained a new  $750,000  long-term  note
payable to a bank in Dallas,  Texas.  The note  bears  interest  at 11.0% and is
payable in 60 equal installments of approximately  $16,369,  including interest.
The final payment is due in September  2000. The note may be prepaid at any time
and any prepayment must be accompanied by a "yield  maintenance fee" equal to 4%
of the  outstanding  balance if prepaid  prior to August 31, 1996; 3% if prepaid
between  September 1, 1996 and August 31, 1997; 2% if prepaid between  September
1, 1997 and August 31,  1998;  and 1% if prepaid  between  September 1, 1997 and
August 31,  1999.  The  proceeds  of the loan were used to retire  the  $712,000
mortgage  note  payable,  maturing in December  1995,  with a payoff  balance of
approximately $288,000 and the $105,000 mortgage note payable,  maturing in July
1996, with a payoff balance of approximately $10,000.

     On September 22, 1995, MDS-TX and the Estate of Donald G. Furrh (a majority
stockholder of all involved corporations, pre and post reorganization) exchanged
approximately  325,000 of MDS-TX  common  stock held by the Estate for  MDS-TX's
assumption of $650,000 in debts of the Estate (principally inheritance taxes and
related  professional  fees). Funds available from the new $750,000 note payable
and  the  proceeds  of the  stock  sales  on  September  7,  1995  were  used to
immediately retire the assumed debt.

     Because  of the large  volume  of cash  handled  by the bar and  restaurant
facility  personnel,  stringent  cash  controls  have  been  implemented  by the
Company.  These procedures have continually evolved since the facility opened in
1982 to take advantage of improving  technologies.  Management  believes that it
will be able to  duplicate  the  financial  controls  that exist at the existing
facility into future locations,  and that these controls will provide sufficient
safeguards to protect the interests of the Company.

     The  Company  treats  and has  consistently  treated  all  entertainers  as
employees  whereas  other  similar  facilities  may or may  have  treated  their
entertainers as independent  contractors.  One of the Company's  competitors has
been the  subject of  litigation  related  to this  issue and has had  judgments
entered against it by the U.S. Department of Labor.  Management believes that as
a result of its initial and  continuing  policies  and  procedures,  there is an
insignificant risk to both future operations and profitability for any potential
assessment of payroll and related taxes in the future by regulatory  authorities
which would have potentially a very significant financial and operational impact
if the Company treated all entertainers as independent contractors.

ITEM 7.  FINANCIAL STATEMENTS

     The  required  items are  presented  as a separate  section of this  report
beginning on Page F-1.

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

     There have been no changes in accountants since the Merger in 1995 nor have
there  been any  disagreements  with  accountants  on any  matter of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure.



                                       14
<PAGE>


                                    PART III

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

     The following table sets forth certain  information about the directors and
executive  officers of the  Company.  All  directors  of the Company hold office
until the next annual meeting of  stockholders  or until their  successors  have
been elected and qualified. Executive officers of the Company are elected by the
Board of Directors to hold office until their respective  successors are elected
and qualified.

     Name                     Age        Position(s)

     Nina Furrh                60        Chairman of the Board and President

     Bjorn Heyerdahl           56        Chief Executive Officer and Director

     Dewanna Ross              40        Corporate Secretary and Director

     Ronald W. Johnston        43        Chief Financial Officer and Director

     Sharon Furrh              48        Director

     Nina Furrh has served as President of the Furrh family  business  interests
since 1989.  Mrs. Furrh became  involved in the daily  operations of The Million
Dollar Saloon in September  1992.  Mrs.  Furrh directs the Company's  other real
estate holdings through Furrh Limited Partnership.

     Bjorn Heyerdahl has served as the Business Consultant and Financial Advisor
to the Furrh  family and Estate of Donald G. Furrh for the past five years.  His
duties have included  positioning  MDS-Texas to become a publicly-traded  entity
through the Merger.  Mr.  Heyerdahl's  prior history is that of chief  executive
officer and/or director of numerous  corporations  around the world in endeavors
as diversified as retail chain stores,  coal/diamond mining, car rental,  safari
ranches, plantations and film production.

     Dewanna Ross has served as  administrative  manager for the Furrh family of
companies  since  1976.  Ms. Ross was  responsible  for the  development  of the
corporate procedures,  including the hiring and training of corporate staff. Ms.
Ross has also  served as an officer  and  operator  of a private  club and as an
officer of other businesses.

     Sharon Furrh has served as Vice-President of Furrh since 1992. Sharon Furrh
has been involved as a design  consultant for The Million Dollar Saloon, in both
its original construction and in subsequent  remodelings.  Additionally,  Sharon
Furrh has been responsible for advertising,  promotions and public relations for
The Million Dollar Saloon.

     Ronald W.  Johnston,  CPA, has served as a consultant  to the Company since
September 1992. Mr. Johnston has been a certified  public  accountant in private
practice and a principal of his own firm since 1990. Mr. Johnston's current firm
serves a wide range of business and individual  clients.  Mr. Johnston currently
serves as a director of Crash Rescue Equipment Services, Inc., Dallas, Texas.


                                       15
<PAGE>


Compliance with Section 16(a) of the Exchange Act

     Section  16(a)  of the  Exchange  Act  requires  the  Company's  directors,
executive  officers  and persons  who own more than ten percent of a  registered
class of the  Company's  equity  securities  ("10%  holders"),  to file with the
Securities and Exchange  Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other equity  securities  of
the Company. Directors,  officers and 10% holders are required by SEC regulation
to furnish the Company  with copies of all of the  Section  16(a)  reports  they
file.

     Based  solely on a review of reports  furnished  to the  Company or written
representatives  from the Company's  directors and executive officers during the
fiscal year ended  December 31,  1996,  all Section  16(a)  filing  requirements
applicable  to its  directors,  officers  and 10%  holders  for such  year  were
complied with.

ITEM 10.  EXECUTIVE COMPENSATION

     The  following  Summary  Compensation  Table  sets  forth,  for  the  years
indicated,  all cash  compensation  paid,  distributed  or accrued for services,
including  salary and bonus amounts,  rendered in all capacities for the Company
to its President and Chief Executive Officer.  No other executive officer of the
Company  received  remuneration  in excess of  $100,000  during  the  referenced
periods. All other compensation related tables required to be reported have been
omitted as there has been no  applicable  compensation  awarded to, earned by or
paid to any of the Company's executive officers in any fiscal year to be covered
by such tables.


<TABLE>
<CAPTION>
<S>                                                                            <C>         <C>        <C>

                                                 Summary Compensation Table



                                          Annual Compensation      Long-Term Compensation
                                          -------------------      ----------------------
                                                                           Awards            Payouts
                                                                           ------            -------
                                                       Other      Restricted    Securities                 All
                                         Salary/       Annual        Stock      Underlying     LTIP       Other
   Name/Title                    Year      Bonus    Compensation    Awards     Options/SARs  Payouts   Compensation
   ----------                    ----      -----    ------------    ------     ------------  -------   ------------
   Nina Furrh, President         1996     $ -0-          NA           NA            NA          NA          2,150(1)
                                 1995    $ 61,200        NA           NA            NA          NA         58,500(1)
                                 1994    $ 66,000        NA           NA            NA          NA         14,850(1)
   Bjorn Heyerdahl, Chief        1996    $ 32,000        NA           NA            NA          NA          8,888(2)
      Executive Officer          1995    $ 44,000        NA           NA            NA          NA                NA
                                 1994    $ 36,000        NA           NA            NA          NA                NA


</TABLE>
------------------------------------------

(1)  Represents distributions from the Furrh Limited Partnership. See "Item 2 --
     Properties."
(2)  Represents  payment of an auto lease by the  Company for the benefit of Mr.
     Heyerdahl.

Director Compensation

     The Company  currently  pays a director  fee for  attending  scheduled  and
special  meetings of the Board of Directors.  The Company also pays the expenses
of all of its directors in attending board meetings.



                                       16
<PAGE>


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth certain  information  as of March 25, 1997,
with respect to the  beneficial  ownership of shares of Common Stock by (i) each
person who owns  beneficially  more than 5% of the outstanding  shares of Common
Stock,  (ii) each director of the Company,  (iii) each executive  officer of the
Company and (iv) all executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
<S>                                                                            <C>

                                                                                 Percentage of
Name(1)                                               Number of Shares(2)       Common Stock Owned
----                                                  -------------------       ------------------
Estate of Donald G. Furrh                                   180,776                   3.6%
Dona G. Furrh                                               682,476                  13.6%
Joshua Barrett Furrh                                        548,574                  10.9%
Nina J. Furrh                                             1,960,797                  39.1%
Bjorn Heyerdahl                                             500,001                  10.0%
Dewanna Ross                                                  4,000                      *
Ronald W. Johnston                                            1,500                      *
Officers and Directors as a group (4 persons)             2,466,298                  49.2%
                                                          ---------                  ----
Total                                                     3,878,124                  77.4%
                                                          =========                  ====
</TABLE>
-----------------------------------------
*Less than 1%.

(1)  The  mailing  address  for  each  of the  afore-referenced  is  care of the
     Company, 6848 Greenville Avenue, Dallas, Texas 75231.
(2)  Unless  otherwise  indicated,  the  persons  listed  have sole  voting  and
     investment powers with respect to all such shares.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On August 23, 1995,  Bjorn  Heyerdahl,  prior to becoming  Chief  Executive
Officer  and a  director  of the  Company,  acquired  12,000,000  shares  of the
Company's  pre-reverse  split restricted  Common Stock from  stockholders of the
Company for a consideration of $22,166.50.  After the one-for-12  reverse split,
Mr.  Heyerdahl  surrendered  500,000  shares to the  Company  as a result of the
Merger  negotiations  and his  negotiations to become Chief  Executive  Officer,
which  surrender  was  necessary  to  balance  ownership  between  the  existing
pre-Merger stockholders of the Company and the stockholders of MDS-TX.

     On  September  7,  1995,   MDS-TX   exchanged   3,925,000   shares  of  its
unregistered,  restricted  common  stock for 100% of the issued and  outstanding
stock of Furrh, Tempo, Lex and Don,  respectively.  All entities involved in the
exchange shared common ownership,  control, and management.  The purpose of this
transaction was to consolidate ownership of the entities prior to the Merger.

     On  September  7, 1995,  MDS-TX sold  124,900  shares of its  unregistered,
restricted common stock to outside third parties for an aggregate $249,800.  The
purpose of this transaction was to provide working capital prior to the Merger.

     The  parties  relied on  Section  4(2) of the  Securities  Act in that such
transactions  did not  involve a public  offering  and were thus exempt from the
registration  requirements of the Securities  Act. No underwriters  were used in
connection with the foregoing transactions.

     Furrh, Tempo, Lex and Don collectively paid Furrh Limited  Partnership,  an
entity related by ownership and  management,  management  fees of  approximately
$365,000 for the year ended December 31, 1995. Management fees ceased October 1,
1995 upon consummation of the Merger.



                                       17
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K


<TABLE>
<CAPTION>
<S>                                                                            <C>

(a)        Financial Statements and Exhibits                                           Page
           ---------------------------------                                           ----
           

     1.  Financial  Statements.  The  following  financial  statements  are
         ----------------------
         submitted as part of this report:
               
           Independent Auditor's Report ................................................ F-1
         
           Balance Sheets - December 31, 1996 and 1995 ................................. F-2
         
           Statements of Operations - Years Ended December 31, 1996 and 1995 ........... F-4
         
           Statements of Stockholders' Equity - Years Ended December 31, 1996 
              and 1995 ................................................................. F-5
         
           Statement of Cash Flows - Years Ended December 31, 1996 and 1995 ............ F-6
         
           Notes to Financial Statements ............................................... F-8


</TABLE>


     2.   Exhibits
          --------


         Exhibit
         Number                                 Description
         ------     ------------------------------------------------------------
          
          2.1*      Stock  Purchase  Agreement  dated  August  23,  1995  by and
                    between Art Beroff and Bjorn Heyerdahl.
          2.2*      Stock  Purchase  Agreement  dated  August  23,  1995  by and
                    between  Joseph  MacDonald,  Goodheart  Ventures,  Inc., and
                    Bjorn Heyerdahl.
          2.3*      Stock  Purchase  Agreement  dated  September  7, 1995 by and
                    among Million Dollar Saloon, Inc., Goodheart Ventures, Inc.,
                    and certain individuals.
          2.4*      Addendum and Modification to Stock Purchase  Agreement dated
                    September  19, 1995,  by and among  Million  Dollar  Saloon,
                    Inc., Goodheart Ventures, Inc., and certain individuals.
          2.5*      Stock  Exchange  Agreement  dated  September  7, 1995 by and
                    among Million Dollar Saloon, Inc., Goodheart Ventures, Inc.,
                    and J.M. Tibbals,  Trustee for Irrevocable  Equity Trust No.
                    1.
          2.6*      Addendum and Modification to Stock Exchange  Agreement dated
                    September  19, 1995,  by and among  Million  Dollar  Saloon,
                    Inc.,  Goodheart Ventures,  Inc., and J.M. Tibbals,  Trustee
                    for Irrevocable Equity Trust No. 1.
          2.7*      Agreement  and Plan of Merger  dated  October 5, 1995 by and
                    between  Million Dollar Saloon,  Inc., a Texas  corporation,
                    and Goodheart Ventures, Inc., a Nevada corporation.
          2.8**     Addendum and  Modification to Stock Purchase  Agreement made
                    and entered into the 7th day of September  1995 by and among
                    Million Dollar Saloon, Inc.,  Goodheart Ventures,  Inc., and
                    certain individuals dated October 31, 1995.
          3(i)*     Articles  of  Incorporation  of The  Company,  as amended to
                    date.



                                       18
<PAGE>


         Exhibit
         Number                                 Description
         ------     ------------------------------------------------------------
          
          3(ii)*    Bylaws of the Company.
          4.1*      Specimen Common Stock Certificate.
         10.1*      Leases of Properties.
         10.2*      Promissory  Note for $750,000  with Abrams  Centre  National
                    Bank dated September 22, 1995.
         21.1*      Subsidiaries of the Company.
         27.1       Financial Disclosure Schedule.

---------------------------
* Incorporated by reference to the Company's Form 10-SB filed December 26, 1995.

(b)       Reports on Form 8-K.

     No reports on Form 8-K were filed during the three  months  ended  December
31, 1996.


                                       19
<PAGE>


                                   SIGNATURES

     In accordance with Section 13 and 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned,  thereunto
duly authorized, on the 25th day of March, 1997.

                                       MILLION DOLLAR SALOON, INC.


                                       By: /s/ Nina J. Furrh
                                          -------------------------------------
                                           Nina J. Furrh, Chairman of the Board
                                           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:

<TABLE>
<CAPTION>
<S>                                                                            <C>

   Signature                                 Title                           Date
   ---------                                 -----                           ----

 /s/ Nina J. Furrh             Chairman of the Board, President and       March 25, 1997
-----------------------        Director
     Nina J. Furrh                     

 /s/ Bjorn Heyerdahl           Chief Executive Officer and Director       March 25, 1997
-----------------------
     Bjorn Heyerdahl

/s/ Dewanna Ross               Corporate Secretary and Director           March 25, 1997
-----------------------
    Dewanna Ross

/s/ Ronald W. Johnston         Chief Financial Officer and Director       March 25, 1997
-----------------------
    Ronald W. Johnston
 
/s/ Sharon Furrh               Director                                   March 25, 1997
-----------------------
    Sharon Furrh

</TABLE>








                                       20
<PAGE>
S. W. HATFIELD + ASSOCIATES
certified public accountants


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Shareholders
Million Dollar Saloon, Inc.

We have audited the consolidated  balance sheets of Million Dollar Saloon,  Inc.
and Subsidiaries (a Nevada corporation and Texas corporations,  respectively) as
of  December  31,  1996 and 1995,  and the related  consolidated  statements  of
income,  changes  in  shareholders'  equity,  and cash  flows for the years then
ended.  These  consolidated  financial  statements  are  the  responsibility  of
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Million
Dollar Saloon,  Inc. and  Subsidiaries  as of December 31, 1996 and 1995 and the
results  of its  operations  and its cash  flows  for the  years  then  ended in
conformity with generally accepted accounting principles.




                                                   S. W. HATFIELD + ASSOCIATES
Dallas, Texas
January 20, 1997



                                      F-1
<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1996 and 1995


                                     ASSETS

<TABLE>
<CAPTION>
<S>                                                                             <C>
                                                                     1996             1995
                                                                 ------------     -----------
CURRENT ASSETS
   Cash on hand and in bank                                      $    267,856     $   133,374
   Note receivable - current portion                                   21,011          19,660
   Accounts receivable
      Trade, net of allowance for doubtful accounts
         of $-0- and $-0-, respectively                                     -          63,653
      Prepaid Federal income taxes                                          -           8,520
   Inventory                                                           11,169           9,937
   Prepaid expenses                                                    37,718               -
                                                                   ----------      ----------

         Total current assets                                         337,754         235,144
                                                                   ----------      ----------


PROPERTY AND EQUIPMENT
   Buildings and related improvements                               1,969,411       1,994,730
   Furniture and equipment                                            762,095         755,680
   Vehicles                                                            52,728               -
                                                                  -----------      ----------
                                                                    2,784,234       2,750,410
   Less accumulated depreciation                                   (1,381,016)     (1,316,679)
                                                                  -----------      ----------
                                                                    1,403,218       1,433,731
   Land                                                               816,487         816,487
                                                                  -----------      ----------

         Net property and equipment                                 2,219,705       2,250,218
                                                                  -----------      ----------


OTHER ASSETS
   Note receivable - noncurrent portion                               126,219         145,423
   Accounts receivable from officers,
       shareholders and affiliates                                    764,576         715,525
   Organization costs, net of accumulated
      amortization of $19,673 and  $4,688,
      respectively                                                     55,255          70,240
   Loan costs, net of accumulated amortization
      of $7,902 and $1,580, respectively                               23,705          30,026
   Deferred tax asset                                                  61,500          76,160
   Other                                                               23,475           9,225
                                                                  -----------      ----------

         Total other assets                                         1,054,730       1,046,599
                                                                  -----------      ----------


TOTAL ASSETS                                                     $  3,612,189     $ 3,531,961
                                                                  ===========      ==========

</TABLE>

                                  - Continued -

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                      F-2
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS - CONTINUED
                           December 31, 1996 and 1995


                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
<S>                                                                             <C>

                                                                      1996             1995
                                                                  ------------     -----------
CURRENT LIABILITIES
   Current portion of long-term debt                             $   158,960      $   135,911
   Accounts payable
      Trade                                                           15,948           71,438
      Officers, shareholders and affiliates                                -            2,736
   Accrued liabilities                                                58,666           50,859
   Dividends payable                                                 150,303                -
   Tenant deposits                                                     6,500            6,500
                                                                  ----------       ----------

         Total current liabilities                                   390,377          267,444
                                                                  ----------       ----------


LONG-TERM LIABILITIES
   Long-term debt, net of current maturities                         512,423          623,193
   Deferred tax liability                                             94,569           90,213
                                                                  ----------       ----------

         Total liabilities                                           997,369          980,850
                                                                  ----------       ----------


COMMITMENTS AND CONTINGENCIES


SHAREHOLDERS' EQUITY
   Preferred stock - $0.001 par value.  5,000,000 shares
      authorized.  None issued and outstanding                            -                 -
   Common stock - $0.001 par value.  50,000,000 shares
      authorized.  5,010,084 and 5,000,084 issued and
      outstanding, respectively.                                      5,010             5,000
   Additional paid-in capital                                         9,990                 -
   Retained earnings                                              2,599,820         2,546,111
                                                                  ---------        ----------

         Total shareholders' equity                               2,614,820         2,551,111
                                                                  ---------        ----------

         TOTAL LIABILITIES AND
            SHAREHOLDERS' EQUITY                                 $3,612,189       $ 3,531,961
                                                                  =========        ==========

</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                      F-3
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                     Years ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
<S>                                                                             <C>
                                                                 1996                  1995
                                                            --------------        ------------
REVENUES
   Bar and restaurant sales                                  $3,019,148            $2,750,794
   Rental income                                                440,176               476,257
                                                             ----------             ---------
      Total revenues                                          3,459,324             3,227,051
                                                             ----------             ---------

COST OF SALES - BAR AND
   RESTAURANT OPERATIONS
   Direct labor                                               1,246,401             1,048,290
   Purchases                                                    488,512               502,450
                                                             ----------            ----------
      Total cost of sales                                     1,734,913             1,550,740
                                                             ----------            ----------

GROSS PROFIT                                                  1,724,411             1,676,311
                                                             ----------            ----------

OPERATING EXPENSES
   Salaries, wages and related expenses                         362,598               460,098
   Consulting, management and other
      professional fees                                         103,815               386,490
   Rental expenses, principally taxes                            26,514                53,496
   Interest expense                                              95,549                60,583
   Other operating expenses                                     563,348               497,505
   Depreciation and amortization                                112,113               111,732
                                                             ----------            ----------

         Total operating expenses                             1,263,937             1,569,904
                                                             ----------            ----------

INCOME FROM OPERATIONS                                          460,474               106,407

OTHER INCOME (EXPENSES)
   Interest income                                               63,169                43,501
                                                             ----------           -----------

INCOME BEFORE INCOME TAXES                                      523,643               149,908

INCOME TAX (EXPENSE) BENEFIT
   Currently payable                                                  -                 6,020
   Deferred                                                     (19,016)              (44,253)
                                                             ----------           -----------

NET INCOME     $   504,617                                  $   111,675
                ==========                                   ==========

Earnings per share of common stock outstanding              $      0.10          $       0.02
                                                             ==========           ===========

Weighted-average number of shares outstanding                 5,009,456             5,000,084
                                                             ==========           ===========

</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                      F-4
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                     Years ended December 31, 1996 and 1995


<TABLE>
<CAPTION>
<S>                                                                             <C>        <C>
                                                       
                                    Common Stock        Additional               Treasury     Total
                                    ------------         paid-in      Retained     stock    shareholders'
                                # Shares      Amount     capital      earnings    at cost     equity
                                --------      ------     -------      --------    -------     ------
Balances at
   January 1, 1995              5,082,425     $5,082     $204,583    $2,705,971 $(75,000)  $2,840,636

Effect of rounding on
   1 for 12 reverse split              93          -            -             -        -            -
Post-reverse merger
   putback of common
   stock by controlling
   shareholder                   (500,000)      (500)         500             -        -            -
Sale of common stock
   Pre- reverse merger to
      former controlling
      Goodheart shareholder       416,666        417        4,583             -        -        5,000
   Pre-reverse merger stock
      of Million Dollar
      Saloon, Inc. (Texas)        125,900        126      250,674             -        -      250,800
Purchase and retirement
   of treasury stock by
   Million Dollar Saloon,
   Inc. (Texas) (pre-merger)     (325,000)      (325)    (460,140)     (189,535)       -     (650,000)
Retirement of treasury stock
   held by Furrh, Inc. (pre-
   reverse merger)                      -          -            -       (75,000)  75,000            -
Issuance of common stock
   for payment of under-
   writing and merger costs       200,000        200      199,800             -        -      200,000
Offset of underwriting and
   merger costs                         -          -     (200,000)            -        -     (200,000)
Distributions to Furrh
   entities shareholders
   pre-reverse merger                   -          -            -        (7,000)       -       (7,000)
Net income for the year                 -          -            -       111,675        -      111,675
                                ---------    -------    ---------     ---------  -------    ---------

Balances at
   December 31, 1995            5,000,084      5,000            -     2,546,111        -    2,551,111

Stock issued for
   consulting fees                 10,000         10        9,990             -        -       10,000
Dividends declared
   during the year                      -          -            -      (450,908)       -     (450,908)
Net income for the year                 -          -            -       504,617        -      504,617
                                ---------    -------    ---------     ---------  -------    ---------

Balances at
   December 31, 1996            5,010,084   $  5,010   $    9,990    $2,599,820 $      -   $2,614,820
                                =========    =======    =========     =========  =======    =========

</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                      F-5
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S>                                                                            <C>           <C>

                                                                                 1996             1995
                                                                             ------------     -----------
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                  $504,617         $111,675
   Adjustments to reconcile net income to net cash
      provided by operating activities
         Depreciation and amortization                                          112,113          111,732
         Common stock issued for consulting fees                                 10,000                -
         Interest income from shareholders capitalized as principal             (51,787)
         Transitional effect of new accounting standard                               -         (115,775)
         Fair market value of building given in
            exchange for compensation                                                 -            3,244
         Deferred income taxes                                                   19,016          160,028
         (Increase) decrease in
            Accounts receivable - trade                                          63,653          (46,665)
            Prepaid income taxes                                                  8,520           (1,986)
            Inventory                                                            (1,232)              68
            Prepaid expenses                                                    (37,718)               -
            Loan costs                                                                -          (31,606)
            Organization costs                                                        -          (74,928)
            Deposits and other assets                                                 -                7
         Increase (decrease) in
            Accounts payable and other accrued liabilities                     _(47,685)          51,452
                                                                                -------         --------
Net cash provided by operating activities                                      _579,497          167,246
                                                                                -------         --------

CASH FLOWS FROM INVESTING ACTIVITIES
   Principal collections on note receivable                                      17,853           16,584
   Purchases of property and equipment                                           (6,815)         (82,108)
   Acquisition expenses paid                                                    (15,000)               -
   Cash advances to shareholders and affiliates                                _      -          (17,577)
                                                                                -------         --------
Net cash used in investing activities                                          _ (3,962)         (83,101)
                                                                                -------         --------

CASH FLOWS FROM FINANCING ACTIVITIES
   Principal funding on new long-term note payable                                    -          750,000
   Net activity on note payable to bank                                               -         (343,300)
   Payments on long-term debt                                                  (140,448)         (57,178)
   Repayment of advances from shareholders and affiliates                             -          (22,236)
   Sale of common stock                                                               -          255,800
   Purchase of treasury stock                                                         -         (650,000)
   Dividends paid                                                              (300,605)               -
   Cash distributions to shareholders - pre merger                             _      -           (7,000)
                                                                                -------        ---------
Net cash used in financing activities                                          (441,053)         (73,914)
                                                                               --------        ---------

INCREASE IN CASH AND CASH EQUIVALENTS                                           134,482           10,231

Cash and cash equivalents at beginning of year                                 _133,374          123,143
                                                                                -------        ---------

Cash and cash equivalents at end of year                                      $ 267,856       $  133,374
                                                                               ========        =========

</TABLE>

                                                           - Continued -

The  accompanying  notes are an integral  part of these  consoldiated  financial
statements.


                                      F-6
<PAGE>


                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                     Years ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
<S>                                                                            <C>          <C>
                                                                                 1996             1995
                                                                             ------------     -----------
SUPPLEMENTAL DISCLOSURES OF
   INTEREST AND INCOME TAXES PAID

      Interest paid on borrowings                                             $ 95,549          $60,583
                                                                               =======           ======

      Income taxes paid (refunded)                                            $ (8,520)         $(4,024)
                                                                               =======           ======


SUPPLEMENTAL SCHEDULE OF NON-CASH
   INVESTING AND FINANCING ACTIVITIES

      Acquisition of a vehicle with long-term debt                            $ 52,727         $      -
                                                                               =======          =======

      Declaration of fourth quarter dividend of $0.03 per share               $150,303         $      -
                                                                               =======          =======

</TABLE>


                                      F-7
<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995



NOTE A - BACKGROUND AND ORGANIZATION

Million  Dollar Saloon,  Inc.  (MDS-NV) was  incorporated  under the laws of the
State of Nevada on  September  28, 1987.  MDS-NV  completed a public sale of its
securities  on  November  10, 1988 with the  issuance  of 489,100  shares of its
common stock.  Additionally,  MDS-NV issued  2,934,600  warrants to purchase one
share of Class A common stock at $0.50 per share and one share of Class B common
stock at $0.75 per share.  No warrants  were  exercised by their holders and all
issued and outstanding warrants have expired.

MDS-NV was formed for the  purpose of seeking a suitable  merger or  acquisition
candidate.  MDS-NV's  activities  have consisted  principally of raising capital
and,  as  such,  was a  development  stage  company  prior  to the  transactions
discussed in succeeding paragraphs.

In August  1995,  MDS-NV  experienced  a change in  control  whereby  members of
management of Furrh, Inc. and its wholly-owned  subsidiary,  Tempo Tamers, Inc.,
Corporation Lex and Don, Inc. became the controlling shareholders of MDS-NV. The
shareholders  of all entities then reached an oral  agreement with whereby these
companies would become wholly-owned subsidiaries of MDS-NV.

On September 7, 1995, the shareholders of Furrh, Inc.,  Corporation Lex and Don,
Inc.  exchanged 100% of their issued and  outstanding  stock for a net aggregate
3,925,000  shares of Million Dollar Saloon,  Inc., a dormant Texas  corporation,
(MDS-TX) owned by the majority  shareholders  of the respective  companies.  The
purpose of this transaction was to consolidate the ownership of Furrh,  Inc. and
Tempo Tamers,  Inc.,  Corporation  Lex and Don,  Inc.  into a single  company to
facilitate the merger with MDS-NV.

MDS-TX  merged  with and  into  MDS-NV,  which  was  controlled  by  members  of
management of MDS-TX,  effective November 1, 1995. Goodheart Ventures, Inc. also
changed its corporate name to Million Dollar Saloon,  Inc.  (MDS-NV) on November
1, 1995.  Furrh,  Inc. and its  wholly-owned  subsidiary,  Tempo  Tamers,  Inc.,
Corporation  Lex and Don,  Inc.  remain as separate  operating  entities and are
wholly-owned subsidiaries of MDS-NV.

The combination of Furrh,  Inc. and its wholly-owned  subsidiary,  Tempo Tamers,
Inc.,  Corporation  Lex and Don, Inc. with MDS-TX and the  subsequent  merger of
MDS-TX with MDS-NV were  separately  accounted for in accordance with Accounting
Principles  Board  No.  16 -  "Business  Combinations",  Interpretation  #39 for
companies  under  common  control on an "as if  pooled"  basis.  The  historical
financial  statements  of all  involved  entities  have  become  the  historical
consolidated financial statements of MDS-NV.

Furrh,  Inc.  (Furrh) was  incorporated  under the laws of the State of Texas on
February 25, 1974. Furrh owns and manages  commercial rental property located in
Dallas  County,  Texas.  Furrh's  wholly-owned  subsidiary,  Tempo Tamers,  Inc.
(Tempo),  was incorporated under the laws of the State of Texas on July 3, 1978.
Tempo operates a lounge and entertainment  facility,  located in Dallas,  Texas,
under the  registered  trademark  and trade  name  "Million  Dollar  Saloon(R)".
Additionally,  Furrh  previously had two other  wholly-owned  subsidiaries,  Don
Investments,  Inc. and Tanfastic, Inc. All operations, assets and liabilities of
these two  companies  were closed  and/or  liquidated  prior to January 1, 1993.
Furrh and Tempo had a  February  28  year-end.  Concurrent  with the  previously
discussed  consolidation  and merger,  Furrh and Tempo changed their year-end to
December 31. The amounts utilized in the accompanying  financial statements have
been restated to the new year end of December 31.



                                      F-8
<PAGE>


                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE A - BACKGROUND AND ORGANIZATION - Continued

Corporation Lex (Lex) was  incorporated  under the laws of the State of Texas on
November 30, 1984. Lex owns and manages  commercial  rental property  located in
Dallas County, Texas. Lex has a December 31 year end.

Don,  Inc.  (Don)  was  incorporated  under  the  laws of the  State of Texas on
November 8, 1973. Don owns and manages  commercial  rental  property  located in
Tarrant County, Texas. Don has a December 31 year end.

MDS-NV  originally  had a year-end of August 31.  Concurrent  with the merger of
MDS-NV and MDS-TX,  MDS-NV  changed its year-end to December 31 to match that of
its acquired operating companies.

These  financial  statements  reflect  the books and  records of Million  Dollar
Saloon, Inc. (Nevada),  Million Dollar Saloon, Inc. (Texas),  Furrh, Inc., Tempo
Tamers,  Inc.,  Corporation  Lex and Don, Inc. for the years ended  December 31,
1996 and 1995, respectively. All significant intercompany transactions have been
eliminated in combination. The consolidated entities are referred to as Company.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Cash and Cash Equivalents

   For Statement of Cash Flows purposes,  the Company considers all cash on hand
   and in banks, including accounts in book overdraft positions, certificates of
   deposit and other  highly-liquid  investments with maturities of three months
   or less, when purchased, to be cash and cash equivalents.

   Cash  overdraft  positions  may occur  from time to time due to the timing of
   making bank deposits and releasing  checks,  in accordance with the Company's
   cash management policies.

2. Accounts Receivable and Revenue Recognition

   In the normal course of business,  the Company  extends  unsecured  credit to
   virtually  all of its  tenants  related  to rental  property  operations  and
   accepts  national  bankcards  as payment for goods and services in its lounge
   and  entertainment  facility.  Bankcard  charges  are  normally  paid  by the
   clearing  institution  within  three  to  fourteen  days  from  the  date  of
   presentation by the Company.  All lease rental payments are either due on the
   first  day of the month in  advance  for the month or on the first day of the
   week in arrears for the previous  corresponding  period.  All revenue sources
   are located either in Dallas or Tarrant County,  Texas. Because of the credit
   risk  involved,  management  has provided an allowance for doubtful  accounts
   which  reflects  its  opinion  of  amounts  which  will   eventually   become
   uncollectible. In the event of complete non-performance, the maximum exposure
   to the Company is the recorded amount of trade accounts  receivable  shown on
   the balance sheet at the date of non-performance.



                                      F-9

<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

3. Inventory

   Inventory consists of food and liquor consumables  necessary in the operation
   of Tempo's lounge and entertainment  facility.  These items are valued at the
   lower of cost or market using the first-in, first-out method of accounting.

4. Property and Equipment

   Property  and  equipment  is  recorded  at  cost  and  is  depreciated  on  a
   straight-line  basis,  over the  estimated  useful lives  (generally 10 to 40
   years)  of  the  respective  asset.   Major  additions  and  betterments  are
   capitalized and depreciated over the remaining  estimated useful lives of the
   related assets.  Maintenance,  repairs, and minor improvements are charged to
   expense as incurred.

5. Trademark rights

   Amounts  paid in  conjunction  with the  acquisition  and  retention of the
   trademark  "Million Dollar Saloon(R)" have been capitalized.  The life of the
   registration  is  twenty  years  from  its  affirmation  in 1988 and may be
   extended as allowed by applicable law at that point in time. This trademark
   has been  assigned  Registration  No.  1,509,636  by the U. S.  Patent  and
   Trademark  Office.  The Company amortizes the trademark over a 10-year life
   using the straight-line method.

6. Income Taxes

   Pre merger
   Furrh and Tempo file a  consolidated  Federal  Income Tax return using a year
   end of February  28. Lex files a separate  Federal  Income Tax return using a
   year  end  of  December  31.  Don  is  a  "Subchapter  S"  corporation   and,
   accordingly,  the  shareholders  of Don are  responsible  for  reporting  the
   revenues and expenses of this corporation.

   Effective  January  1,  1992,  Furrh  and  Lex  adopted  the  provisions  the
   provisions  of FASB  Statement  No. 109  "Accounting  for Income Taxes" which
   requires the asset and liability method of accounting for income taxes rather
   than the  deferred  method  previously  required.  At  December  31, 1994 the
   deferred tax asset and  deferred tax  liability  accounts,  as recorded  when
   material to the  financial  statements,  are entirely the result of temporary
   differences. No valuation allowance was provided against deferred tax assets.
   Temporary  differences represent differences in the recognition of assets and
   liabilities for tax and financial reporting purposes,  primarily  accumulated
   depreciation  and  amortization,  and  the  anticipated  utilization  of  net
   operating loss carryforwards.

   Post merger
   Effective September 7, 1995, concurrent with the merger of Furrh, Don and Lex
   into MDS-TX,  the change in control of these  operating  companies  created a
   short-year  Federal  Income Tax  return  from the  previously  noted year end
   through  September  7,  1995 for  Furrh,  Tempo  and Don.  Additionally,  Don
   forfeited  its  Subchapter  S  election,  effective  September  7, 1995.  All
   entities  except Lex will file a  consolidated  Federal Income Tax return for
   the period  September 7, 1995 through  December 31, 1995.  Lex will file as a
   separate  entity for Calendar 1995 and it is anticipated  will be included in
   the  consolidated  Federal Income Tax return for Calendar 1996 and all future
   periods.


                                      F-10
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

6. Income Taxes - continued

   Furrh  and  Tempo  have  consolidated  cumulative  net  operating  losses  of
   approximately  $399,000,  as reported on their  final  consolidated  separate
   company  return for the period  ended  September 7, 1995,  and  approximately
   $224,000  as of December  31,  1995,  for both  financial  reporting  and tax
   reporting  purposes  available to be carried forward to offset future taxable
   income.  In the event that these operating loss  carryforwards  are not used,
   they  will  begin to  expire  in 2008.  The  capacity  to  utilize  these net
   operating loss  carryforwards for periods after September 7, 1995, due to the
   corporate restructuring and mergers previously discussed,  created a deferred
   tax asset of approximately  $70,000 and $102,000, as of December 31, 1995 and
   1994,  respectively,  utilizing the anticipated marginal incremental tax rate
   of  34.0%.  Under the  requirements  of  Statement  of  Financial  Accounting
   Standards No. 109, the accounting for the reverse merger on an "as-if-pooled"
   basis causes the  retroactive  recognition  of the deferred tax asset in each
   respective accounting period presented. The cumulative prior period effect of
   this adjustment was an increase in retained earnings as of January 1, 1994 of
   approximately  $62,000.  The  respective  changes in the  deferred  tax asset
   account for the years ended  December  31, 1995 and 1994,  respectively,  are
   reflected  as a component  of deferred  income tax  (benefit)  expense in the
   Statement of Income.

   Additionally, the forfeiture of its Subchapter S election by Don at September
   7, 1995 created a deferred tax liability of approximately  $19,975  utilizing
   the anticipated  marginal incremental tax rate of 34.0%. Per the requirements
   of  Statement  of  Financial  Accounting  Standards  No. 109,  this amount is
   reflected  as a component  of deferred  income tax  (benefit)  expense in the
   Statement of Income for the year ended December 31, 1995.

   Further,  Furrh,  Tempo and Lex have cumulative  general  business tax credit
   carryforwards of approximately $60,000, as of December 31, 1996, available to
   offset future tax liabilities, which if not used, begin to expire in 2009.

7. Earnings (loss) per share

   Earnings  (loss) per share is computed by  dividing  consolidated  net income
   (loss) by the  composite  weighted-average  number of shares of common  stock
   outstanding during the year.

8. Pending Accounting Standards not yet adopted

   The Company has not adopted Statement of Financial Accounting Standard Number
   121  "Accounting  for the Impairment of Long-Lived  Assets and for Long-Lived
   Assets to be Disposed Of." The Company will adopt this standard for the first
   quarter of 1996 and anticipates no adverse impact on the financial statements
   upon the required implementation of this Standard.

   No other issued and unimplemented  accounting Standards are either applicable
   to the  Company  or will have a  material  adverse  impact  on the  financial
   statements when implemented.


                                      F-11
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995

<TABLE>
<CAPTION>
<S>                                                                             <C>

NOTE C - NOTE RECEIVABLE
                                                                      1996             1995
                                                                  ------------     -----------
$220,000 note receivable from an unrelated
   individual for the sale of real estate.  Interest
   at 8.00%.  Payable in monthly installments
   of approximately $2,669, including interest.
   Final payment due in July 2002.  Collateralized
   by real estate and improvements located in
   Dallas County, Texas                                             $147,230         $165,083

      Less current portion                                           (21,011)         (19,660)
                                                                     -------          -------

      Noncurrent portion                                            $126,219         $145,423
                                                                     =======          =======

Future maturities of the note receivable are as follows:            Year ending
                                                                   December 31,        Amount

                                                                     1997            $  21,011
                                                                     1998               23,059
                                                                     1999               24,973
                                                                     2000               27,045
                                                                   2001-2002            30,131
                                                                     Total           $ 126,219
                                                                                      ========
</TABLE>


NOTE D - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
<S>                                                                                  <C>


                                                     1996              1995           Estimated life
                                                 ------------      ------------       --------------
         Buildings and related improvements      $1,969,411        $1,994,730         15 - 40 years
         Furniture and equipment                    762,095           755,680           10 years
         Vehicle                                     52,728                 -            3 years
                                                  ---------         ---------
                                                  2,784,234         2,750,410
         Less accumulated depreciation           (1,381,016)       (1,316,679)
                                                  ---------         ---------
                                                  1,403,218         1,433,731
         Land                                       816,487           816,487
                                                  ---------         ---------
         Net property and equipment              $2,219,705        $2,250,218
                                                  =========         =========

</TABLE>

     Depreciation  expense  for the years ended  December  31, 1996 and 1995 was
     $90,056 and $104,177, respectively.


                                      F-12
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE E - ADVANCES TO/FROM OFFICERS, SHAREHOLDERS AND AFFILIATES

The  Company  has made net cash  advances  to  various  officers,  shareholders,
employees and affiliates  aggregating  approximately $764,600 and $715,500 as of
December  31,  1996 and  1995,  respectively  and  received  net  advances  from
officers,  shareholders and affiliates  aggregating  approximately  $2,700 as of
December 31, 1995.

In  September  1995,  the two largest  balances due from two  shareholders  were
converted  to formal notes  receivable  bearing  interest at 5.65%.  These notes
mature in September  1997 and all accrued  interest and principal is due at that
time.  The notes are  repayable  in either cash or in stock of the Company at an
agreed-upon  exchange rate of $2.00 per share.  Both  shareholders have adequate
share holdings to completely retire the debt, plus anticipated accrued interest,
at the  scheduled  maturity  date.  It is the  intent of these  shareholders  to
liquidate the notes with cash repayments.

All advances  receivable  are due upon demand and bear interest at the statutory
interest rate set by the Internal  Revenue Service for related party loans.  Due
to the life of the  respective  receivables,  these  amounts are  classified  as
non-current.


NOTE F - LONG-TERM DEBT

Long-term  debt  consists  of the  following  at  December  31,  1996 and  1995,
respectively:

<TABLE>
<CAPTION>
<S>                                                                              <C>
                                                                     1996             1995
                                                                 ------------     -----------

$750,000 note payable to a bank.  Interest
   at 11.0%.  Payable in monthly installments
   of approximately $16,369, including
   interest.  Final payment due in September
   2000.  Collateralized by real estate and
   improvements located in Dallas and
   Tarrant Counties, Texas.                                        $599,407         $721,469

$52,707  installment  note  payable  to a finance  company.  Payable  in monthly
   installments of  approximately  $1,111,  including  interest at 9.50%.  Final
   payment due in April 2001.
   Collateralized by a vehicle                                       47,072                -

$115,000 mortgage note payable to two individuals.
   Interest at 12.00%.  Payable in monthly installments
   of approximately $1,380, including interest.  Final
   payment due in September 1998.  Collateralized
   by real estate in Dallas County, Texas.                           24,904           37,635
                                                                   --------         --------

                                                                    671,383          759,104
      Less current portion                                         (158,960)        (135,911)
                                                                    -------          -------

      Long-term portion                                            $512,423         $623,193
                                                                    =======          =======


</TABLE>



                                      F-13
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE F - LONG-TERM DEBT - Continued

The  $750,000  note  payable  to a bank  may be  prepaid  at any  time  and  any
prepayment must be accompanied by a "yield  maintenance  fee" equal to 4% of the
outstanding  balance if prepaid prior to August 31, 1996; 3% if prepaid  between
September 1, 1996 and August 31, 1997; 2% if prepaid  between  September 1, 1997
and August 31, 1998; and 1% if prepaid between  September 1, 1997 and August 31,
1999.  The  proceeds  of this  loan were  used to  retire  a$712,000  short-term
mortgage  note  payable  with a payoff  balance of  approximately  $288,000  and
a$105,000 mortgage note payable with a payoff balance of approximately $10,000.

Current  maturities  of  long-term  maturities  as of  December  31, 1996 are as
follows:

                                  Year ending
                                 December 31,        Amount

                                   1997             $158,960
                                   1998              175,706
                                   1999              182,033
                                   2000              150,327
                                   2001                4,357
                                                     -------
                                  Total             $671,383


NOTE G - INCOME TAXES

As of September 7, 1995,  concurrent  with the  reorganization  of Furrh,  Inc.,
Corporation  Lex and Don,  Inc.  into  MDS-TX,  the  capacity to utilize the net
operating loss  carryforward of Furrh,  Inc.,  incurred through the September 7,
1995  reorganization  date became more  readily  determinable.  Accordingly,  in
accordance with Financial  Accounting Standards Board Statement No. 109, MDS-TX,
upon the acquisition of Furrh, Inc.,  recognized a deferred tax asset to reflect
the future  benefit  related to the expected  utilization  of this net operating
loss carryforward.  Further, based upon the accounting for the reverse merger on
an "as-if-pooled"  basis causes the retroactive  recognition of the deferred tax
asset in each  respective  accounting  period  presented.  The cumulative  prior
period  effect of this  adjustment  was an increase  in retained  earnings as of
January 1, 1994 of approximately $62,000. The respective changes in the deferred
tax asset account for the years ended December 31, 1996 and 1995,  respectively,
are  reflected as a component of deferred  income tax  (benefit)  expense in the
Statement of Income.

Additionally, the forfeiture of its Subchapter S election by Don at September 7,
1995 created a deferred tax  liability of  approximately  $19,975  utilizing the
anticipated  marginal  incremental  tax rate of 34.0%.  Per the  requirements of
Statement of Financial Accounting Standards No. 109, this amount is reflected as
a component of deferred income tax (benefit)  expense in the Statement of Income
for the year ended December 31, 1995.


                                      F-14
<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE G -  INCOME TAXES - Continued

The deferred  current tax asset and  non-current  deferred tax  liability on the
December  31,  1996  and  1995,  respectively,  balance  sheet  consists  of the
following:
<TABLE>
<CAPTION>
<S>                                                                              <C>              <C>


                                                                                   December 31,     December 31,
                                                                                      1996            1995
                                                                                   ---------         --------
                  Current deferred tax asset                                      $       -         $      -
                  Current deferred tax liability                                          -                -
                  Valuation allowance for current deferred tax asset                      -                -

                  Net current deferred tax asset                                  $       -         $      -
                                                                                   ========          =======

                  Non-current deferred tax asset                                  $  61,500         $ 76,160
                  Valuation allowance for non-current deferred tax asset           __     -          _     -
                                                                                     ------           ------
                  Net non-current deferred tax asset                              $  61,500         $ 76,160
                                                                                   ========          =======

                  Non-current deferred tax liability                              $ (94,569)        $(90,213)
                                                                                   ========          =======

</TABLE>


The  deferred  tax  asset  relates  to the  anticipated  future  utilization  of
cumulative net operating loss  carryforwards  and business tax credits of Furrh,
Inc.  and its  wholly-owned  subsidiary,  Tempo  Tamers,  Inc.  The  non-current
deferred  tax  liability  results from the usage of  statutory  accelerated  tax
depreciation and amortization methods.

The components of income tax expense  (benefit) for the years ended December 31,
1996 and 1995, respectively, are as follows:



                                                        1996             1995
                                                        ----             ----
                  Federal:
                    Current                          $      -         $(6,020)
                    Deferred                          (19,016)         44,253
                                                      (19,016)         38,233
                  State:
                    Current                                 -               -
                    Deferred                                -               -
                                                            -               -
                  Total                              $(19,016)        $38,233

The Company's income tax expense (benefit) for the years ended December 31, 1996
and 1995,  respectively,  differed from the statutory federal rate of 34 percent
as follows:

<TABLE>
<CAPTION>
<S>                                                                             <C>             <C>
                                                                                    1996           1995
                                                                                    ----           ----
Statutory rate applied to earnings (loss) before income taxes                     $178,039       $37,970
Increase (decrease) in income taxes resulting from:
     State income taxes                                                                  -             -
     Deferred income taxes                                                          (9,077)       44,253
     Effect of incremental tax brackets and
         utilization of net operating loss carryforwards                          (149,946)      (43,990)
                                                                                   -------        ------

Income tax expense                                                                $ 19,016       $38,233
                                                                                   =======        ======

</TABLE>


                                      F-15

<PAGE>


                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE G -  INCOME TAXES - Continued

Deferred  income  tax  expense  (benefit)  as of  December  31,  1996 and  1995,
respectively, consists of the following components:

<TABLE>
<CAPTION>
<S>                                                                              <C>               <C>

                                                                                    1996               1995
                                                                                    ----               ----
     Changes in deferred tax assets
         Effect of utilization of net operating loss carryforward                 $14,660            $25,840
     Changes in deferred tax liabilities
         Effect of forfeiture of Subchapter S
              status by Don, Inc.                                                       -             19,323
         Effect of differences in book and
              statutory tax depreciation methods                                    4,356                910
                                                                                   ------             ------

         Changes in deferred income tax accounts                                  $19,016            $44,253
                                                                                   ======             ======

</TABLE>

NOTE H - CAPITAL STOCK TRANSACTIONS

In  August  1995,  the  Board  of  Directors  of  Furrh,   Inc.,  prior  to  the
consolidation  of Furrh into  MDS-TX,  approved the  retirement  of 10 shares of
Furrh,  Inc.  treasury  stock  which was  purchased  in 1990 for  $75,000.  This
retirement  was accounted for as a reduction in the carrying value of issued and
outstanding  common stock at $10, which equals the par value of the shares and a
reduction  of retained  earnings of $74,990,  in  accordance  with the tenets of
Accounting Principles Board Opinion No. 6.

On September 7, 1995, the shareholders of Furrh,  Inc,  Corporation Lex and Don,
Inc.  collectively  exchanged 100% of the issued and  outstanding  stock in each
corporation for an aggregate 3,925,000 shares of Million Dollar Saloon,  Inc., a
dormant Texas  corporation,  (MDS-TX) owned by the majority  shareholders of the
Company.  The purpose of this  transaction  was to consolidate  the ownership of
Furrh,  Inc. and  Subsidiary,  Corporation  Lex and Don,  Inc. into a single new
company to facilitate the merger with a publicly-held  "shell" corporation.  The
operating  entities of Furrh,  Inc.  and its  subsidiary,  Tempo  Tamers,  Inc.,
Corporation Lex and Don, Inc.  became  wholly-owned  subsidiaries of MDS-TX.  No
cash was paid as consideration for this corporate consolidation.

Also, on September 7, 1995, concurrent with the corporate consolidation,  MDS-TX
sold  under  a  Stock  Purchase  Agreement   approximately   124,900  shares  of
unregistered,   restricted   common  stock  at  $2.00  per  share  to  unrelated
third-party investors (Shareholders) raising $249,800. These stock sale proceeds
were used to retire debts assumed in the acquisition of treasury stock discussed
in the following paragraph.

This Stock Purchase Agreement was amended on October 31, 1995. The Amended Stock
Purchase  Agreement  provides that the Shareholders are limited to selling 1/6th
of their  holdings per month during each 30-day period after the effective  date
of a  Form  SB-2  Registration  Statement  being  filed  by  the  Company.  This
restriction  would  terminate  six (6) months  after the  effective  date of the
Registration Statement.


                                      F-16
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE H - CAPITAL STOCK TRANSACTIONS - Continued

Further,   the  Amended   Stock   Purchase   Agreement   contains  the  language
"Shareholders  shall have the right to sell 1/6 of the Seller  Shares  that they
own during each  30-day  period  after the  effective  date of the  Registration
Statement in Form SB-2 for six (6) months.  If during any such 30-day period the
[Shareholder]  is  unable to  receive a market  price of $3.00 per share for the
Seller  Shares that they own,  then in such event the Company shall issue to the
[Shareholder] such number of additional shares (the "Additional  Shares") of the
Company's  Common Stock in order for the value of the Seller Shares owned by the
[Shareholder]  that they  attempted to sell during the 30-day period to be equal
to $3.00 per share.  If at any time  during any such  30-day  period the closing
market price of the Company's Common Stock equals or exceeds $3.00 per share for
five consecutive trading days and the [Shareholder] did not elect to sell any or
all of its shares subject to being sold during such period,  then in such event,
the obligation of the Company to issue  Additional  Shares shall terminate as to
those shares." The Amended Stock Purchase  Agreement  further  defines the venue
and methodology for determining the share price and it is the  understanding and
intent of the Company and the  Purchasers  that any  Additional  Shares shall be
issued  as  restricted   and   unregistered,   pursuant  to  Rule  144,  to  the
Shareholder(s).

Per the Amended Stock  Purchase  Agreement,  each 30-day period stands alone and
the obligation to issue Additional Shares is not cumulative.  This obligation to
issue Additional  Shares shall expire six (6) months after the effective date of
the Form SB-2 Registration Statement.

On  September  22,  1995,  MDS-TX  and  the  Estate  of Don  Furrh  (a  majority
shareholder  of  all  involved  corporations,   pre-  and   post-reorganization)
exchanged  approximately  325,000 of MDS-TX  common stock held by the Estate for
MDS-TX's assumption of $650,000 in debts of the Estate (principally  inheritance
taxes and related professional fees). Funds available from the new $750,000 note
payable  and the  proceeds  of the  September  7, 1995 stock  sales were used to
immediately retire the assumed debt. This treasury stock was immediately retired
by an action of the Board of Directors.  This  retirement was accounted for as a
reduction in the carrying value of issued and outstanding  common stock at $325,
which  equals the par value of the shares  issued in the  combination  of Furrh,
Inc. and MDS-TX and a reduction of additional  paid-in  capital of $649,675,  in
accordance with the tenets of Accounting Principles Board Opinion No. 6.

On September 22, 1995,  the  Shareholders  of MDS-NV  approved a  one-for-twelve
reverse stock split, all share amounts in the accompanying  financial statements
reflect the effects of this reverse stock split as of the beginning of the first
period presented.

Also on September 22, 1995, the  Shareholders  of MDS-NV  approved the merger of
MDS-NV with MDS-TX,  through the exchange of 4,050,900 post-reverse split shares
of common stock, representing 100% of the issued and outstanding common stock of
MDS-TX, for an equivalent number of shares of MDS-NV.

                                      F-17
<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE H - CAPITAL STOCK TRANSACTIONS - Continued

Concurrent with the merger  transaction,  the controlling  shareholder of MDS-NV
(pre-merger)  surrendered  500,000  post-reverse  split  shares  of  issued  and
outstanding  common  stock to the  company  with no  compensation  given for the
surrender.  The surrender resulted from the merger  negotiations with MDS-TX and
the controlling shareholder's  negotiations to become chief executive officer of
the Company.  Further,  the  transaction  was necessary to balance the ownership
percentages  between  the  existing  pre-merger  shareholders  of MDS-NV and the
shareholders  of MDS-TX.  The 500,000 shares were retired by action of the Board
of Directors immediately upon surrender. This transaction was accounted for with
an adjustment to the common stock and additional  paid-in  capital  accounts for
the par value of the surrendered shares.

In June  1995,  Furrh,  Inc.  entered  into  an  agreement  with a  professional
consulting  and  financial  services  firm whereby the  consultant  would assist
Furrh,  Inc.  with the  location of a suitable  publicly-owned  `shell'  company
merger candidate,  raising the requisite equity capital to consummate the merger
and  assist the  Company  in  becoming  a "fully  reporting"  company  under the
definition  of the  Securities  and  Exchange  Commission.  Furrh,  Inc. and the
consultant  have agreed that the  services  provided  will be paid with  200,000
shares of  post-merger  common stock in the resulting  public  company valued at
$200,000. This transaction is reflected in the accompanying financial statements
and was  accounted  for as a reduction  of paid-in  capital as a cost of selling
common stock of MDS-TX for an aggregate $249,800 and the facilitation of merging
MDS-TX into MDS-NV.

In January 1996, the Company issued  approximately  10,000 shares of restricted,
unregistered  common  stock  in  settlement  of  a  consulting  agreement.  This
transaction was valued at  approximately  $10,000,  which  approximates the fair
market value of the services.


NOTE I - COMMITMENTS AND CONTINGENCIES

The Company leases  commercial real estate on long-term  operating  leases.  The
leases require minimum monthly or weekly lease payments,  plus reimbursement for
annual  property  taxes.  Additionally,  certain of the leases also  require the
payment of percentage rent based on various percentages of specified gross sales
of the tenant, as defined in the respective lease agreement,  in addition to the
fixed minimum lease payments.  The respective tenants are responsible for normal
maintenance and repairs,  insurance and other direct operating  expenses related
to the property.

As of December 31, 1996,  future  minimum  non-cancelable  lease revenues are as
follows:

                               Year ending
                               December 31,         Amount
                                   1997           $  374,105
                                   1998              221,000
                                   1999              221,000
                                   2000              247,000
                                   2001              247,000
                                2002-2005             99,750

                                 Total            $1,409,855



                                      F-18

<PAGE>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE I - COMMITMENTS AND CONTINGENCIES - Continued

The Company is the subject of asserted claims of employment discrimination filed
with the Equal  Employment  Opportunity  Commission  ("EEOC").  The  Company has
responded to the charges of discrimination  and replied to all EEOC requests for
information.  The ultimate  outcome of these matters,  at this time, is unknown.
The Company is vigorously contesting each claim of discrimination.


NOTE J - NONMONETARY TRANSACTION

In May 1995, Don, Inc.  transferred  ownership of a small  residential  property
located  in  Dallas  County,  Texas  as a final  payment  in  lieu  of cash  for
compensation to an unrelated third-party upon the termination of services.  Don,
Inc. paid approximately $5,500 for the property in January 1979 and the property
had a book value of  approximately  $3,200,  which  approximated the fair market
value  of the  property,  at  the  date  of  transfer.  Accordingly,  due to the
condition and location of the transferred  property at the date of transference,
the transaction was accounted for at its historical recorded value and Don, Inc.
recognized a charge of approximately $3,200 at the date of transfer.


NOTE K - RELATED PARTY TRANSACTIONS

For the years ended December 31, 1996 and 1995,  respectively,  the Company paid
an aggregate of  approximately  $ - and  $365,338 to various  entities  owned or
controlled  by  Company   shareholders   for   management   fees  prior  to  the
aforementioned reverse merger.


NOTE L - SEGMENT INFORMATION

Selected  information  relating to the  Company's  segments  for the years ended
December 31, are as follows:

<TABLE>
<CAPTION>
<S>                                                                            <C>              <C>

                                                                                     1996              1995
                                                                                --------------    -------------
Revenues
     Bar and restaurant operations                                                $3,019,148        $2,750,794
     Rental real estate operations                                                   440,176           476,257
     General unallocated corporate matters                                                 -                 -

Operating profit (loss)
     Bar and restaurant operations                                                $  355,161        $  277,046
     Rental real estate operations                                                   427,367              (979)
     General unallocated corporate matters                                          (290,876)         (169,060)

Identifiable assets
     Bar and restaurant operations                                                $1,367,941        $1,133,315
     Rental real estate operations                                                 1,849,765         1,441,291
     General unallocated corporate matters                                           394,483           957,355


</TABLE>



                                      F-19
<PAGE>


                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1996 and 1995



NOTE L - SEGMENT INFORMATION - Continued

<TABLE>
<CAPTION>
<S>                                                                            <C>              <C>


                                                                                     1996             1995
                                                                                --------------   --------------
Depreciation and amortization
     Bar and restaurant operations                                                $   60,477        $   68,759
     Rental real estate operations                                                    29,377            42,973
     General unallocated corporate matters                                            22,259                 -

Capital expenditures
     Bar and restaurant operations                                                $    6,815        $   82,108
     Rental real estate operations                                                         -                 -
     General unallocated corporate matters                                            52,727                 -


</TABLE>


Costs and expenses of the segments are  specifically  identified  where possible
and are otherwise allocated.





                                      F-20
<PAGE>