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, 1997

                         Commission File Number: 0-27450

                           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, 1997 were
$3,569,784. The aggregate market value of common stock held by non-affiliates of
the issuer at  February  15,  1998,  based upon the closing bid price on The OTC
Electronic  Bulletin Board on said date,  was  approximately  $1,735,440.  As of
March 13,  1998,  there  were  5,409,451  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>
<CAPTION>

                                TABLE OF CONTENTS

<S>                                                                              <C>    

                                                                                 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..........  12

    Item 7.  Financial Statements...............................................  14

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


PART III

    Item 9.  Directors, Executive Officers, Promoters and Control Persons;
                  Compliance with Section 16(a) of the Exchange Act.............  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...................................  17


</TABLE>


                                       -2-

<PAGE>



                                     PART I

CAUTION REGARDING FORWARD-LOOKING INFORMATION

     This  annual  report  contains  certain   forward-looking   statements  and
information  relating to the Company (as hereinafter  defined) that are based on
the  beliefs of the Company or  management  as well as  assumptions  made by and
information currently available to the Company or management.  When used in this
document,  the words "anticipate,"  "believe," "estimate," "expect" and "intend"
and similar  expressions,  as they relate to the Company or its management,  are
intended to identify  forward-looking  statements.  Such statements  reflect the
current view of the Company  regarding  future events and are subject to certain
risks,  uncertainties  and  assumptions,  including the risks and  uncertainties
noted. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect,  actual results may vary materially from
those  described  herein  as  anticipated,   believed,  estimated,  expected  or
intended. In each instance,  forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.

ITEM 1.    DESCRIPTION OF BUSINESS

     Million Dollar Saloon,  Inc. (the "Company") was initially  incorporated in
the State of Nevada on  September  28,  1987 as  Goodheart  Ventures,  Inc.  The
Company was relatively  inactive from 1991 to 1995.  Since 1995, the Company has
sought potential business opportunities through either purchase,  acquisition or
merger transactions.

     In connection  with its business  strategy,  the Company in 1995 identified
the Million Dollar Saloon, Inc., a Texas corporation  ("MDS-TX"),  as a suitable
candidate for merger (the "MDS-TX  Merger").  In September  1995,  the Company's
stockholders   approved  (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 MDS-TX Merger,  (b) the merger
agreement with 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 MDS-TX 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 MDS-TX 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.

     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.



                                       -3-

<PAGE>



Adult Cabaret

     General. The Company,  through Tempo, owns and operates an adult cabaret in
Dallas,  Texas 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.

     Female  Entertainment.  The  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.  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  the  local   regulatory
environment, the availability of sites in high traffic commercial areas suitable
for  conversion  to The Million  Dollar  Saloon style  cabarets,  sports bars or
casual  clubs,   potential  competition  in  the  area,  market  conditions  and
profitability of other similar establishments in the target 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 three
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.

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


                                       -5-

<PAGE>



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"
of Dallas,  Texas (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  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.  On June 11, 1997,  the
City of Dallas  denied the  Company's  application  for a Business  Permit.  The
Company's  appeal of the  decision  was also  denied on January  22,  1998.  The
Company,  on February 2, 1998, obtained an injunction against the City of Dallas
prohibiting the City from deeming the Company's Business Permit as expired until
a trial on the merits  could be held,  which trial is  scheduled  to commence on
June 12, 1998. See "Legal Proceedings."

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,  1997,  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,  they are 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.

Insurance

     The  Company  maintains  insurance  in amounts it  considers  adequate  for
personal injury and property damage.  The Company also maintains personal injury
liquor  liability  insurance  since 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

                                      -6-

<PAGE>

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 an  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 which house
adult  entertainment  nightclubs in the  Dallas-Fort  Worth  geographic  region.
Management  is of the opinion  that all  properties  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  non-affiliated  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 in connection  with a $750,000  long-term  note,  dated September 22,
1995,  payable  to a lending  institution.  See  "Properties"  and Note F to the
Company's Financial Statements beginning on page 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.  All  properties  are  physically  located in  geographic  areas
suitable for their current use. There exist  facilities which could be similarly
used in the same  geographic  area as the  Company's  properties.  The effective
rentals vary between  locations  because of desirability and  attractiveness  of
locations. See "Properties."

     The  Company  is  currently  seeking  additional   financing  from  private
investors to provide funds for  acquisitions  and  renovation  and remodeling of
existing  facilities.  There is no  assurance  that the Company  will be able to
obtain such financing or, if obtained, that it will be on favorable terms to the
Company.

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:

     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.

     Risk of Inadequate  Financial Controls.  A significant part of the revenues
earned by the Company through its adult cabaret  operations is 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

                                      -7-


<PAGE>

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,
Texas 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 be able to 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.

     Dependence  upon  Company's  Ability to Manage  Growth and  Expansion.  The
Company's  ability to manage its growth,  if any, will require it to continue to
improve  and  expand its  management,  operational  and  financial  systems  and
controls.  Any  measurable  growth  in the  Company's  business  will  result in
additional demands on its management,  administrative,  operation, financial and
technical resources.  There can be no assurance that the Company will be able to
successfully  address these additional  demands.  There also can be no assurance
that the Company's  operating and financial  control systems will be adequate to
support its future  operations  and  anticipated  growth.  Failure to manage the
Company's  growth  properly  could  have a  material  adverse  effect  upon  the
Company's business,  financial condition and results of operations.  The Company
may also seek  potential  acquisitions  that  could  complement  or  expand  the
Company's  business.  In the event the Company  were to identify an  appropriate
acquisition  candidate,  there is no assurance that the Company would be able to
successfully  negotiate,  finance  or  integrate  such  acquired  properties  or
businesses into current operations. Furthermore, such an acquisition could cause
a diversion of management's time and resources. There can be no assurance that a
given acquisition,  when consummated,  would not materially adversely effect the
Company's business and results of operations.  See "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

     Permits Relating to the Sale of Alcohol and Operation of Sexually  Oriented
Business.  The Company has never been the subject of a protest  hearing  against
the renewal of its Permits.  However,  on June 11, 1997,  and again on appeal on
January 22, 1998,  the City of Dallas  denied the  Company's  application  for a
Business Permit.  The Company on February 2, 1998 obtained an injunction against
the City of Dallas to  prevent  the City from  deeming  the  Company's  existing
Business  Permit as expired  until a trial on the merits  was  completed,  which
trial is scheduled for June 1998.  There can be no assurance  that protests will
not be made in the  future,  nor can  there be any  assurance  that  any  future
Permits or Business Permits will be granted in the event any future protests are
made.  Other state and local  governments  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
Company's  Permits 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.  See "Legal
Proceedings."

     Limitations  on Protection of Service  Marks.  Rights of the Company to the
trade name "The Million Dollar Saloon" were purchased. No assurance can be given
that 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  timeconsuming.   The  loss  of  the
intellectual  property  rights  owned or  claimed  by the  Company  could have a
material adverse effect on the Company.

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 1998.  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.


                                      -8-

<PAGE>


     The Company owns three  facilities  which operate as adult  cabarets in the
Dallas-Fort  Worth  geographic  region.  Management  is of the opinion  that all
properties 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 this and two
additional  properties  in  connection  with a $750,000  long-term  note,  dated
September 22, 1995, payable to a lending institution.

     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.
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  Company  is  currently  seeking  additional   financing  from  private
investors to provide funds for  acquisitions  and  renovation  and remodeling of
existing  facilities.  There is no  assurance  that the Company  will be able to
obtain such financing or, if obtained, that it will be on favorable terms to the
Company.

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

<TABLE>

<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                                            (1)                              (1)
Lease expiration                                  May 2002                         August 1998
Scheduled rentals                       $4,250 per week through 5/25/99       $3,500 per week from    
                                        $4,750 per week from 5/26/99         8/16/95 through 8/15/98  
                                               through 5/23/02              
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)                   $989,466                          $63,667
Federal income tax basis
   (excluding land)                               $221,298                         $128,429
Depreciation method and life                     SL-19 yrs.                      ACRS-15 yrs.
Ad valorem tax rate per $100 of valuation           $2.56                            $3.10
1997 Ad valorem taxes                              $9,100                           $6,478

</TABLE>

--------------------
(1)  Both  properties  are  subject  to a lien  incurred  in  connection  with a
     $750,000  long-term note,  dated  September 22, 1995,  payable to a lending
     institution.  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 2%
     if prepaid between  September 1, 1997 and August 31, 1998 and 1% if prepaid
     between September 1, 1998 and August 31, 1999.

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.

     During 1996,  the Company was the subject of asserted  claims of employment
discrimination filed with the Equal Employment  Opportunity Commission ("EEOC").
The Company responded to the charges of  discrimination  and replied to all EEOC
requests  for  information.  The  Company  vigorously  contested  each  claim of


                                      -9-

<PAGE>

discrimination.  During the second  quarter of 1997,  the  statutory  period for
filing of  administrative  claims or litigation passed with no action instigated
by either  the EEOC or the  individuals  making  the  employment  discrimination
assertions.  However,  there can be no  assurance  that the Company  will not be
subject to future claims by the EEOC or any other governmental agencies relating
to its employees or operation of its business.

     In May 1997, the Company filed an  application  with the City of Dallas for
renewal of its Business Permit.  On June 11, 1997, the City of Dallas denied the
application  for said permit as the City contended  that the Company's  location
was located  within 1,000 feet of a residence  district,  as  prohibited by city
ordinance.  The  Company  in turn  filed a  request  for an  exemption  from the
locational restrictions contending (i) the location of the Million Dollar Saloon
did not have a  detrimental  effect on nearby  properties  or is contrary to the
public safety or welfare, (ii) the granting of the exemption did not violate the
spirit or intent of the city  ordinance  and (iii) the  location  of the Million
Dollar Saloon did not  downgrade  the property  values or quality of life in the
adjacent  areas.  On January 22, 1998,  an appeal was heard by the City's Permit
and License Appeals Board,  with the Company's  appeal being denied.  On January
23, 1998, the Company filed suit in the District  Court of Dallas County,  298th
Judicial District, under Cause No. DV98-00614 (the "Lawsuit"), alleging that the
City of Dallas improperly denied the Company's application for a Business Permit
in light of the exemptions  afforded  under Dallas City Code ss. 41A-14.  In the
Lawsuit, the Company also sought injunctive relief in order to restrain the City
of Dallas  from  enforcing  the  Sexually  Oriented  Business  Code  against the
Company. On January 23, 1998, the Company received a temporary restraining order
against  the City of  Dallas  such that the City  could not treat the  Company's
Business Permit as expired. Subsequently, on February 2, 1998, the court entered
a temporary  injunction ordering that the City of Dallas desist and refrain from
treating the Company's Business Permit as expired until a trial on the merits of
the matter could be held, with said trial being scheduled for June 12, 1998.

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

     During  the fourth  quarter of fiscal  1997,  the  Company  held its annual
shareholders  meeting.  The  following  matters were  submitted to a vote of the
security-holders, through solicitation of proxies or otherwise:

     Election of  Directors.  On the matter of the  election of  directors,  the
following nominees received the following votes for election and were elected as
directors of the Company:


                    Nominee                         For            Withheld
     --------------------------------          -------------    --------------

     Nina J. Furrh                               2,986,096         102,000
     Bjorn Heyerdahl(1)                          2,986,096         102,000
     Dewanna Ross                                2,986,096         102,000
     Ronald W. Johnston                          2,986,096         102,000
     Sharon Furrh                                2,986,096         102,000
-------------------------
(1)  Mr.  Heyerdahl  resigned  as an  officer  and  director  of the  Company in
     February 1998. He continues to serve the Company as a business  consultant.
     He will be responsible for locating and evaluating  potential  domestic and
     international  acquisition  opportunities for the Company.  He will be paid
     fees from time to time based on performance and as approved by the Board of
     Directors. See "Part III - Item 9. Directors, Executive Officers, Promoters
     and Control Persons; Compliance with Section 16(a) of the Exchange Act."

     Ratification of Selection of Accountants.  On the matter of ratification of
the selection of S.W. Hatfield & Associates as independent public accountants of
the Company for fiscal 1997, the Company's  stockholders  approved the selection
as follows:


                                       Votes
       -------------------------------------------------------------------------

            For                       Against                    Abstain
       -----------------  --------------------------  --------------------------

         2,983,881                     4,200                     100,015

                                      -10-

<PAGE>



                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     As of December  31,  1997,  the Company  had  approximately  651 holders of
record of its Common Stock.  Outstanding  shares of the  Company's  Common Stock
totaled  5,409,451.   The  Company's  transfer  agent  is  Securities   Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248.

     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 range of high and low closing bid prices per share for the Common  Stock for
the periods indicated.



                                                       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


           Fiscal Year Ended
           December 31, 1997  
     -------------------------------                    
     First Quarter                                $1.50          $0.88
     Second Quarter                               $2.00          $1.00
     Third Quarter                                $1.25          $1.06
     Fourth Quarter                               $1.06          $0.75


           Fiscal Year Ended
           December 31, 1998  
     -------------------------------
     First Quarter (through March 4, 1998)        $0.75          $0.63

-------------
(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 1997 and 1996,  the  Company's  Board of  Directors
declared a per share cash dividend as follows:



                     Period                       1997           1996    
               ---------------------------- -------------  -------------
               First Quarter                    $0.040         $0.030
               Second Quarter                    0.020          0.015
               Third Quarter                     0.015          0.015
               Fourth Quarter                    0.010          0.030
                                                 -----          -----
               Total per share                  $0.085         $0.090
                                                ======         ======

     Total dividends declared during 1997 and 1996 were  approximately  $433,054
and $450,908, respectively.



                                      -11-


<PAGE>


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

Caution regarding forward-looking information

     This  annual  report  contains  certain   forward-looking   statements  and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to  the  Company  or  management.   When  used  in  this  document,   the  words
"anticipate,"   "believe,"   "estimate,"   "expect"  and  "intend"  and  similar
expressions,  as they relate to the Company or its  management,  are intended to
identify forward-looking statements. Such statements reflect the current view of
the  Company   regarding  future  events  and  are  subject  to  certain  risks,
uncertainties  and  assumptions,  including the risks and  uncertainties  noted.
Should  one or more of  these  risks or  uncertainties  materialize,  or  should
underlying assumptions prove incorrect,  actual results may vary materially from
those  described  herein  as  anticipated,   believed,  estimated,  expected  or
intended. In each instance,  forward-looking information should be considered in
light of the accompanying meaningful cautionary statements hereof.

     The  following   discussion   should  be  read  in  conjunction   with  the
accompanying  financial  statements  and notes  thereto,  beginning  on page F-1
herein.

Results of Operations

     Year ended  December 31, 1997 as compared to year ended  December 31, 1996.
Bar and restaurant  operations increased by approximately  $100,000 for the year
ended December 31, 1997 as compared to the year ended December 31, 1996.  During
the  second  quarter  of  1997,  management  instituted  new  controls  over bar
inventories and the Company experienced  increased traffic due to the completion
and  opening  of a new  mass  transit  rail  station  near the  Company's  adult
entertainment operation. This increase was mitigated by lower convention traffic
in the Dallas-Ft.  Worth geographic  region during 1997, which is one of the key
factors  contributing to the Company's patronage numbers.  Additionally,  due to
scheduled   increases,   the  Company   experienced  higher  rental  incomes  of
approximately $10,000 during 1997 as compared to the prior year.

     Cost of sales increased by approximately $24,000 during 1997 as compared to
1996.  This  increase is related to increased  sales  impacting  variable  costs
related to  consumable  inventories,  supplies and related  State excise  taxes.
Gross  profit  percentages  increased  slightly to 52.1% for 1997 as compared to
49.9% for 1996. This increase  relates  directly to the new management  controls
over  bar  inventories.  The cost of sales  as a  percentage  of total  sales is
anticipated by management to remain stable for future periods.

     General and  administrative  expenses  increased by  approximately  $36,000
during  1997 as  compared  to  1996.  This  increase  relates  to  increases  in
advertising  and  marketing  expenses to attract  locally  derived  patronage to
offset the decline in convention and business  meeting driven traffic in Dallas,
Texas during  1997.  These  expenses  increased in 1997 as compared to 1996 as a
result  of  increased   legal  and   accounting   fees  related  to  preliminary
investigations of potential merger and/or  acquisition  candidates.  The Company
has not identified any suitable merger or acquisition  candidates as a result of
the preliminary investigations.  Management continues to monitor its expenditure
levels to achieve optimum financial results.

     Net income  before  income  taxes,  excluding the gain on the sale of fixed
assets of  approximately  $48,500,  was  approximately  $659,600 for 1997 versus
approximately   $523,600  for  1996.  After-tax  net  income  has  decreased  by
approximately $84,000 as a direct result of the utilization of all net operating
loss and  business tax credit  carryforwards  on the  Company's  1996 income tax
calculation.  Overall earnings per share of  approximately  $0.08 per share were
achieved for 1997 as compared to approximately $0.10 per share for 1996.

     Year ended  December 31, 1996 as compared to year ended  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


                                      -12-

<PAGE>


offset by related  increases in direct labor costs.  Costs of sales increased by
approximately  $184,000  in 1996  compared  to the same  period in 1995.  Rental
revenues on leased real estate 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.

     Operating  expenses declined by approximately  $305,000 in 1996 as compared
to 1995.  The principal  savings were  experienced in reduced  management  fees,
which were discontinued in September 1995 as a result of the MDS-TX Merger.  The
Company  has  experienced   increases  in  interest  expense  due  to  increased
indebtedness  incurred  in the second  quarter  of 1996 and the  MDS-TX  Merger.
Further, the Company had increased  depreciation and amortization  expenses as a
result of the  amortization of costs incurred for the MDS-TX Merger.  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.

Seasonality

     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.

Liquidity and Capital Resources

     As of December 31, 1997, the Company had working  capital of  approximately
$17,400 as compared to $(52,600) at December  31,  1996.  The Company  generated
positive cash flows from  operations of  approximately  $430,000 for 1997 versus
approximately $580,000 for 1996.

     The  Company  is  currently  seeking  additional   financing  from  private
investors to provide funds for  acquisitions  and  renovation  and remodeling of
existing  facilities.  There is no  assurance  that the Company  will be able to
obtain such financing or, if obtained, that it will be on favorable terms to the
Company.

     The Company  anticipates  the  continuance  of dividend  payments  and paid
approximately $529,000 during 1997, including  approximately $78,000 declared in
the fourth  quarter of 1996.  Further,  the  Company  declared a fourth  quarter
dividend in 1997 of approximately $54,000 which was paid in January 1998.

     Future operating liquidity, debt service and dividend payments are expected
to be sustained from continuing 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  shares of  Common  Stock
through either private placements or secondary offerings.

     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  were nominal  during the
year ended  December 31, 1997.  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. 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, if the Company is
successful in obtaining  additional financing from private investors through the
issuance of debt and/or equity  securities,  it intends to use a portion of such
proceeds,  if  any,  for  renovation  and  remodeling  costs  for  its  existing
facilities.  Management believes that such expenses, if renovation of facilities
is undertaken,  will range from $500,000 to $750,000.  Management  believes that
all necessary cash liquidity,  other than renovation expenses,  will be obtained
from existing operations.

                                      -13-

<PAGE>


     Because  of the large  volume  of cash  handled  by the bar and  restaurant
facility  personnel,  stringent  cash  controls  have  been  implemented  by the
Company.  Management  believes  that it will be able to duplicate  the financial
controls  implemented at the existing facility into future  locations,  and that
these  controls will provide  sufficient  safeguards to protect the interests of
the Company.

Year 2000 Modifications

     The  Company  is  currently  reviewing  its  computer  systems  in order to
evaluate  necessary  modifications  for the  year  2000.  The  Company  does not
currently  anticipate  that it will incur material  expenditures to complete any
such modifications.

Other Matters

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 130, Reporting  Comprehensive Income ("SFAS
130") which  established  standards for reporting and  displaying  comprehensive
income and its components (revenues,  expenses,  gains and losses) in a full set
of general purpose financial  statements.  SFAS 130 requires that all items that
are  required to be  recognized  under  accounting  standards as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence as other  financial  statements.  SFAS 130 is effective for
years  beginning  after  December  15, 1997.  The Company does not  anticipate a
material impact to its consolidated  financial  statements upon adoption of this
standard.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  Disclosures  About  Segments  of an
Enterprise and Related Information ("SFAS 131") which establishes  standards for
the way public business  enterprises are to report  information  about operating
segments in annual financial statements and requires those enterprises to report
selected  information  about  operating  segments in interim  financial  reports
issued to  shareholders.  It also  establishes  the  related  disclosures  about
products and services,  geographic areas and major customers.  SFAS 131 replaces
the "industry  segment" concept of Financial  Accounting  Standard No. 14 with a
"management approach" concept as the basis for identifying  reportable segments.
SFAS 131 is effective  for  financial  statements  for periods  beginning  after
December 15,  1997.  The Company  does not  anticipate a material  impact to its
consolidated financial statements upon adoption of this standard.

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 MDS-TX Merger nor have
there  been any  disagreements  with  accountants  on any  matter of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure.

                                    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.

<TABLE>

<S>                                                                             <C>   
             Name            Age                  Position(s)
     ------------------------------------------------------------------------------------------------

     Nina J. Furrh(1)             61     Chairman of the Board, Chief Executive Officer and President


                                      -14-


<PAGE>


     Dewanna Ross                 42     Chief Operating Officer, Vice President of Operations, Secretary,
                                         Treasurer and Director
     Ronald W. Johnston           44     Vice President of Finance, Chief Financial Officer and Director
     Sharon Furrh                 49     Vice President of Planning and Development and Director

</TABLE>

----------------------
(1)  On February 28, 1998, Bjorn Heyerdahl  resigned as Chief Executive  Officer
     and a director of the Company.  Nina J. Furrh,  on February  28, 1998,  was
     elected as Chief Executive Officer to replace Mr. Heyerdahl.  Mr. Heyerdahl
     will  continue  to serve the Company as a business  consultant.  He will be
     responsible   for   locating   and   evaluating   potential   domestic  and
     international  acquisition  opportunities for the Company, and will be paid
     fees from time to time based on performance and as approved by the Board of
     Directors.

     Nina J. Furrh  served as  President  of Furrh  since 1989 and has served as
Chairman of the Board and President of the Company since 1995. In February 1998,
Mrs. Furrh was elected the Chief  Executive  Officer of the Company.  Mrs. Furrh
became involved in the daily operations of The Million Dollar Saloon in December
1988.  Mrs.  Furrh directs the overall  operations and policy of the Company and
its real estate holdings.

     Dewanna Ross has served as  administrative  manager for the Furrh family of
companies  since  1976.  Ms. Ross has served as an officer and a director of the
Company  since 1995.  In February  1998,  Ms. Ross was elected  Chief  Operating
Officer by the Board of Directors.  She is responsible for the daily  operations
of the Company and is principally  responsible for supervision of the management
staff of The Million Dollar Saloon.  She is also responsible for the development
of  corporate  procedures  and  policies,  including  the hiring and training of
corporate staff.

     Sharon Furrh has served as  Vice-President of Furrh since 1992. Since 1995,
Ms. Furrh has been a director of the  Company.  In October  1997,  Ms. Furrh was
elected  Vice  President  of Planning  and  Development.  Sharon  Furrh has been
involved as a design  consultant  for The  Million  Dollar  Saloon,  in both its
original construction and in subsequent remodelings. Additionally, Ms. Furrh has
been  responsible  for  advertising,  promotions  and public  relations  for The
Million Dollar Saloon and other related Company businesses.  Sharon Furrh is the
daughter in law of Nina J. Furrh.

     Ronald W.  Johnston,  CPA, has served as a consultant to the Furrh business
entities since  September  1992. Mr. Johnston has served as a director and Chief
Financial  Officer of the Company since 1995. In October 1997, Mr.  Johnston was
elected as a Vice President of Finance of the Company. Mr. Johnston only devotes
such  portion  of his  time as is  necessary  to  perform  his  duties  as Chief
Financial  Officer.  Mr.  Johnston  has been a certified  public  accountant  in
private  practice  and a principal  of his own  accounting  firm in Dallas since
1990.  Mr.  Johnston's  accounting  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.

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
representations  from the Company's  directors and executive officers during the
fiscal year ended  December 31,  1997,  all Section  16(a)  filing  requirements
applicable to its directors and officers for such year were complied  with.  The
Company has been unable to confirm that certain of its 10% holders,  who are not
also  officers or directors  of the Company,  have  satisfied  their  respective
filing  requirements  under  Section  16(a).  The Company is making  appropriate
inquiries  to ensure  that all 10%  holders  have  complied  with the  reporting
requirements of Section 16(a).

ITEM 10.  EXECUTIVE COMPENSATION


                                      -15-


<PAGE>

     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.  The table below does not  reflect  dividend  payments  received by the
President and Chief Executive  Officer.  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>
                               Summary Compensation Table

                             Annual Compensation        Long-Term Compensation                              
                           -----------------------    --------------------------

                                                                Awards            Payouts                  
                                                      --------------------------  -------   
<S>                                                                             <C>           <C>       <C>   
                                                        Other       Restricted    Securities              All       
                                         Salary/       Annual        Stock       Underlying    LTIP      Other
         Name/Title            Year      Bonus       Compensation   Awards      Options/SARs  Payouts   Compensation
---------------------------    ----      --------    -------------  ----------- ------------  -------   ------------
Nina J. Furrh, President(3)    1997      $-0-           NA            NA            NA           NA      $  -0-(1)
                               1996      $-0-           NA            NA            NA           NA      $2,150(1)
                               1995      $61,200        NA            NA            NA           NA      $58,500(1)
Bjorn Heyerdahl, Chief         1997      $-0-           NA            NA            NA           NA      $13,340(2)
   Executive Officer(3)        1996      $32,000        NA            NA            NA           NA      $ 8,888(2)
                               1995      $44,000        NA            NA            NA           NA             NA
</TABLE>
---------------------
(1)  Represents distributions from the Furrh Limited Partnership.
(2)  Represents  payment of an auto lease by the  Company for the benefit of Mr.
     Heyerdahl.
(3)  Mr.  Heyerdahl  resigned  as an  officer  and  director  of the  Company in
     February 1998. Nina J. Furrh was appointed  Chief Executive  Officer of the
     Company to replace Mr. Heyerdahl upon his  resignation.  Mr. Heyerdahl will
     continue  to  serve  the  Company  as a  business  consultant.  He  will be
     responsible   for   locating   and   evaluating   potential   domestic  and
     international  acquisition  opportunities  for the Company,  and he will be
     paid fees from time to time based on  performance  and as  approved  by the
     Board of Directors.

Director Compensation

     The Company does not currently  pay a director fee for attending  scheduled
and  special  meetings  of the  Board of  Directors.  The  Company  does pay the
expenses of all of its directors in attending board meetings.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT

     The following table sets forth certain information as of February 15, 1998,
with respect to the  beneficial  ownership of shares of Common Stock by (i) each
person who owns beneficially more than five percent 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>
<S>                                                                              <C>     
                                                                                 Percentage of      
                 Name(1)                           Number of Shares(2)           Common Stock Owned
     ----------------------------------------------------------------------------------------------
     Estate of Donald G. Furrh                           180,776                       3.3%
     Dona G. Furrh                                       582,476                      10.8%
     Joshua Barrett Furrh Trust(3)                       521,474                       9.6%
     Nina J. Furrh(4)                                  1,883,297                      34.8%
     Bjorn Heyerdahl                                     500,001                       9.2%
     Dewanna Ross(4)                                       4,000                       *
     Ronald W. Johnston(4)                                 1,987                       *
     Officers and Directors as a group (4 persons)     1,889,284                      34.9%
                                                       ---------                      ----
</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.


                                      -16-


<PAGE>


(3) Sharon Furrh,  Vice President of Planning and  Development and a director of
the  Company,  is the trustee of the Joshua  Barrett  Furrh Trust and has voting
power over the shares of Common Stock of the Company.
(4) Officers and directors of the Company.  See "Part III -- Item 9.  Directors,
Executive  Officers,  Promoters,  and Control  Persons;  Compliance with Section
16(a) of the Exchange Act."

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There were no  material  transactions  between  the  Company and any of its
officers, directors, principal stockholders or their affiliates during 1997.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<S>                                                                             <C>                  <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-2
            Consolidated Balance Sheets - December 31, 1997 and 1996.............................     F-3
            Consolidated Statements of Income - Years Ended December 31, 1997 and
                     1996........................................................................     F-5
            Consolidated Statements of Changes in Stockholders' Equity - Years Ended                  F-6
                     December 31, 1997 and 1996..................................................
            Consolidated Statements of Cash Flows - Years Ended December 31, 1997 and
                     1996........................................................................     F-7
            Notes to Consolidated Financial Statements...........................................     F-9


</TABLE>

     















                                                 -17-

<PAGE>


<TABLE>
<S>                                                                             <C>     

     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 dated September 7,
                   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.

         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 with the SEC on
     December 26, 1995. SEC File No. 0-27450.

(b)  Reports on Form 8-K.

     No reports on Form 8-K were filed during the three  months  ended  December
31, 1997.

</TABLE>




                                      -18-

<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 16th day of March, 1998.

                                 MILLION DOLLAR SALOON, INC.


                                 By: /s/ Nina J. Furrh
                                     -------------------------------------------
                                     Nina J. Furrh, Chairman of the Board, Chief
                                     Executive Officer and President
<TABLE>
<CAPTION>


     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:


<S>                                                                             <C>          <C>    

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

              /s/ Nina J. Furrh              Chairman of the Board, Chief Executive           March 16, 1998
-----------------------------------------    Officer, President and Director
Nina J. Furrh                                

              /s/ Dewanna Ross               Chief Operating Officer, Vice President of       March 16, 1998
-----------------------------------------    Operations, Secretary, Treasurer and Director
Dewanna Ross                                 

           /s/ Ronald W. Johnston            Vice President of Finance, Chief Financial       March 16, 1998
-----------------------------------------    Officer and Director
Ronald W. Johnston                           

              /s/ Sharon Furrh               Vice President of Planning and Development       March 16, 1998
-----------------------------------------    and Director
Sharon Furrh                                  

</TABLE>


                                      -19-

<PAGE>


                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                        Page
                                                                        ----
Report of Independent Certified Public Accountants                       F-2

Consolidated Financial Statements

   Consolidated Balance Sheets as of December 31, 1997 and 1996          F-3

   Consolidated Statements of Income
      for the years ended December 31, 1997 and 1996                     F-5

   Consolidated Statements of Changes in Shareholders' Equity
      for the years ended December 31, 1997 and 1996                     F-6

   Consolidated Statements of Cash Flows
      for the years ended December 31, 1997 and 1996                     F-7

   Notes to Consolidated Financial Statements                            F-9


















                                                                            F-1

<PAGE>


S. W. HATFIELD + ASSOCIATES
certified public accountants

Members:   American Institute of Certified Public Accountants
               SEC Practice Section
               Information Technology Section
           Texas Society of 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,  1997 and 1996,  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, 1997 and 1996 and the
results  of its  operations  and its cash  flows  for the  years  then  ended in
conformity with generally accepted accounting principles.



                                             /s/ S.W. HATFIELD + ASSOCIATES
                                                 --------------------------
                                                S. W. HATFIELD + ASSOCIATES
Dallas, Texas
January 29, 1998

                      Use our past to assist your future sm

           P. O. Box 820392 o Dallas, Texas 75382-0392 o 214-342-9635
        9236 Church Road, Suite 1040 o Dallas, Texas 75231 o 800-244-0639
                  214-342-9601 (fax) o SWHCPA@aol.com (e-mail)



                                                                            F-2

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996


                                     ASSETS
                                     ------
                                                          1997           1996
CURRENT ASSETS                                       -----------    -----------
   Cash on hand and in bank                          $   149,952    $   267,856
   Note receivable - current portion                      22,604         21,011
   Prepaid Federal income taxes receivable                37,248           --
   Inventory                                              16,097         11,169
   Prepaid expenses                                       73,544         37,718
                                                     -----------    -----------

      Total current assets                               299,445        337,754
                                                     -----------    -----------


PROPERTY AND EQUIPMENT
   Buildings and related improvements                  1,955,132      1,969,411
   Furniture and equipment                               757,110        762,095
   Vehicles                                               52,728         52,728
                                                     -----------    -----------
                                                       2,764,970      2,784,234
   Less accumulated depreciation                      (1,475,570)    (1,381,016)
                                                     -----------    -----------
                                                       1,289,400      1,403,218
   Land                                                  741,488        816,487
                                                     -----------    -----------

      Net property and equipment                       2,030,888      2,219,705
                                                     -----------    -----------


OTHER ASSETS
   Note receivable - noncurrent portion                  105,442        126,219
   Accounts receivable from officers,
       shareholders and affiliates                       805,684        764,576
   Organization costs, net of accumulated
      amortization of $34,658 and                                      $19,673,
      respectively                                        40,270         55,255
   Loan costs, net of accumulated amortization
      of $14,222 and 7,902, respectively                  17,384         23,705
   Deferred tax asset                                       --           61,500
   Other                                                   7,725         23,475
                                                     -----------    -----------

      Total other assets                                 976,505      1,054,730
                                                     -----------    -----------


TOTAL ASSETS                                         $ 3,306,838    $ 3,612,189
                                                     ===========    ===========


                                  - Continued -


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                            F-3

<PAGE>

<TABLE>

<CAPTION>
                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS - CONTINUED
                           December 31, 1997 and 1996


                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------

<S>                                                                             <C>    
                                                               1997         1996
                                                           -----------  -----------   
     
CURRENT LIABILITIES                       
   Current portion of long-term debt                       $  163,288   $  158,960
   Accounts payable - trade                                    22,571       15,948
   Accrued liabilities                                         35,622       58,666
   Dividends payable                                           54,095      150,303
   Tenant deposits                                              6,500        6,500
                                                           ----------   ----------

      Total current liabilities                               282,076      390,377
                                                           ----------   ----------


LONG-TERM LIABILITIES
   Long-term debt, net of current maturities                  334,872      512,423
   Deferred tax liability                                      98,936       94,569
                                                           ----------   ----------

      Total liabilities                                       715,884      997,369
                                                           ----------   ----------


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.  5,409,451 and 5,010,084 issued and
      outstanding, respectively                                 5,409        5,010
   Additional paid-in capital                                    --          9,990
   Retained earnings                                        2,585,545    2,599,820
                                                           ----------   ----------

      Total shareholders' equity                            2,590,954    2,614,820
                                                           ----------   ----------


TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                 $3,306,838   $3,612,189
                                                           ==========   ==========

</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 INCOME
                     Years ended December 31, 1997 and 1996


                                                      1997           1996
                                                 -----------    -----------
REVENUES
   Bar and restaurant sales                      $ 3,119,557    $ 3,019,148
   Rental income                                     450,227        440,176
                                                 -----------    -----------
      Total revenues                               3,569,784      3,459,324
                                                 -----------    -----------

COST OF SALES - BAR AND
   RESTAURANT OPERATIONS
   Direct labor                                    1,163,949      1,246,401
   Purchases                                         546,971        488,512
                                                 -----------    -----------
      Total cost of sales                          1,710,920      1,734,913
                                                 -----------    -----------

GROSS PROFIT                                       1,858,864      1,724,411
                                                 -----------    -----------

OPERATING EXPENSES
   Salaries, wages and related expenses              318,106        362,598
   Consulting, management and other
      professional fees                              143,206        103,815
   Rental expenses, principally taxes                 67,327         26,514
   Interest expense                                   62,342         95,549
   Other operating expenses                          597,073        563,348
   Depreciation and amortization                     111,729        112,113
                                                 -----------    -----------
         Total operating expenses                  1,299,783      1,263,937
                                                 -----------    -----------

INCOME FROM OPERATIONS                               559,081        460,474

OTHER INCOME (EXPENSES)
   Gain on sale of property and equipment             48,498           --
   Interest income                                    52,065         63,169
                                                 -----------    -----------

INCOME BEFORE INCOME TAXES                           659,644        523,643

INCOME TAX (EXPENSE) BENEFIT
   Currently payable                                (173,342)          --
   Deferred                                          (65,866)       (19,016)
                                                 -----------    -----------

NET INCOME                                       $   420,436    $   504,617
                                                 ===========    ===========

Earnings per share of common stock outstanding         $0.08          $0.10
                                                       =====          =====

Weighted-average number of shares outstanding      5,073,392      5,009,456
                                                 ===========    ===========

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                            F-5

<PAGE>

<TABLE>
<CAPTION>


                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                     Years ended December 31, 1997 and 1996



                                                              Additional                      Total
                                         Common Stock          paid-in        Retained     shareholders'
                                   # shares        Amount      capital         earnings       equity
                                 -----------  -----------    -----------    -----------    -----------
<S>                                                                             <C>        <C>    
Balances at                      
   January 1, 1996               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                    --             --             --         (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

Shares issued under terms of
   1996 private placement
   related to selling price
   guarantees                      403,116            403           (403)          --             --

Acquisition and retirement
   of treasury stock                (3,749)            (4)        (9,587)        (1,656)       (11,247)

Dividends declared                    --             --             --         (433,055)      (433,055)

Net income for the year               --             --             --          420,436        420,436
                               -----------    -----------    -----------    -----------    -----------

Balances at
   December 31, 1997             5,409,451    $     5,409    $      --      $ 2,585,545     $2,590,954
                               ===========    ===========    ===========    ===========    ===========

</TABLE>



The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                            F-6

<PAGE>


<TABLE>
<CAPTION>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1997 and 1996


                                                                         1997         1996
                                                                      -----------  -----------
<S>                                                                                <C>    

CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                         $ 420,436    $ 504,617
   Adjustments to reconcile net income to net cash
      provided by operating activities
         Depreciation and amortization                                  111,729      112,113
         Gain on sale of property and equipment                         (48,498)        --
         Common stock issued for consulting fees                           --         10,000
         Interest income from shareholders capitalized as principal     (40,564)     (51,787)
         Deferred income taxes                                           65,866       19,016
         (Increase) decrease in
            Accounts receivable - trade                                    --         63,653
            Prepaid income taxes                                        (37,248)       8,520
            Inventory                                                    (4,928)      (1,232)
            Prepaid expenses                                            (35,826)     (37,718)
            Deposits and other assets                                    15,000         --
         Increase (decrease) in
            Accounts payable and other accrued liabilities              (16,422)     (47,685)
                                                                      ---------    ---------
Net cash provided by operating activities                               429,545      579,497
                                                                      ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES
   Principal collections on note receivable                              19,184       17,853
   Proceeds from sale of property and equipment                         149,374         --
   Purchases of property and equipment                                   (1,731)      (6,815)
   Acquisition expenses paid                                               --        (15,000)
   Cash advances to shareholders and affiliates                            (544)        --
                                                                      ---------    ---------
Net cash used in investing activities                                   166,283       (3,962)
                                                                      ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES
   Payments on long-term debt                                          (173,223)    (140,448)
   Purchase of treasury stock                                           (11,247)        --
   Dividends paid                                                      (529,262)    (300,605)
                                                                      ---------    ---------
Net cash used in financing activities                                  (713,732)    (441,053)
                                                                      ---------    ---------

INCREASE IN CASH AND CASH EQUIVALENTS                                  (117,904)     134,482

Cash and cash equivalents at beginning of year                          267,856      133,374
                                                                      ---------    ---------

Cash and cash equivalents at end of year                              $ 149,952    $ 267,856
                                                                      =========    =========
</TABLE>


                                  - Continued -

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                            F-7

<PAGE>


<TABLE>
<CAPTION>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                     Years ended December 31, 1997 and 1996

<S>                                                                             <C>  

                                                               1997         1996
                                                            ---------    ---------
 SUPPLEMENTAL DISCLOSURES OF
   INTEREST AND INCOME TAXES PAID

      Interest paid on borrowings                           $  62,342    $  95,549
                                                            =========    =========

      Income taxes paid (refunded)                          $ 210,590    $  (8,520)
                                                            =========    =========


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 $0.01
         and $0.03 per share, respectively                  $  54,095    $ 150,303
                                                            =========    =========


</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                                                            F-8

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996



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

In  September  1995,  MDS-NV  experienced  a change in control  and  completed a
reverse  merger   transaction   with  Million  Dollar  Saloon,   Inc,  (a  Texas
corporation) and its wholly-owned subsidiaries, Furrh, Inc., Tempo Tamers, Inc.,
Corporation  Lex and Don, Inc. All of the  wholly-owned  subsidiaries of Million
Dollar Saloon, Inc. became the wholly-owned operating 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  reverse
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 an adult entertainment lounge and restaurant facility, located in
Dallas,  Texas,  under the registered  trademark and trade name "Million  Dollar
Saloon(R)".

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.

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.

These  financial  statements  reflect  the books and  records of Million  Dollar
Saloon, Inc., Furrh, Inc., Tempo Tamers, Inc., Corporation Lex and Don, Inc. for
the years  ended  December  31,  1997 and 1996,  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.


                                                                            F-9

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996



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.

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 5 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.


                                                                            F-10

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

6. Income Taxes

   The Company files a  consolidated  Federal Income Tax return and utilizes the
   asset and liability  method of accounting for income taxes.  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.

7. Earnings per share

   Earnings  per share is computed by  dividing  consolidated  net income by the
   composite  weighted-average  number of shares  of  common  stock  outstanding
   during the year. As of December 31, 1997 and 1996,  the Company has no issued
   and  outstanding  securities,  options  or  warrants  that  would  be  deemed
   potentially dilutive in the current and future periods.

8. Accounting Standards issued and pending adoption

   In June 1997, the Financial  Accounting Standards Board released Statement of
   Financial  Accounting  Standards No. 130, "Reporting  Comprehensive  Income",
   (SFAS130)   which   established   standards  for  reporting  and   displaying
   comprehensive  income  and its  components  (revenues,  expenses,  gains  and
   losses)  in a full  set of  general  purpose  financial  statements.  SFAS130
   requires that all items that are required to be recognized  under  accounting
   standards  as components  of comprehensive  income be reported in a financial
   statement  that is  displayed  with the same  prominence  as other  financial
   statements. SFAS130 is effective for years beginning after December 15, 1997.
   The  Company  does not  anticipate  a  material  impact  from this  change in
   presentation of its consolidated  financial  statements upon adoption of this
   standard.

   In June 1997, the Financial  Accounting Standards Board released Statement of
   Financial  Accounting  Standards No. 131,  "Disclosures  About Segments of an
   Enterprise and Related  Information",  (SFAS131)  which  establishes  revised
   standards for the method in which public  business  enterprises are to report
   information about operating segments in their annual financial statements and
   requires those  enterprises to report  selected  information  about operating
   segments in interim financial reports issued to shareholders.  This statement
   also revises the related disclosures about products and services,  geographic
   areas and major customers.  SFAS131  replaces the "industry  segment" concept
   established  in  Statement  of  Financial  Accounting  Standard No. 14 with a
   "management  approach"  concept  as  the  basis  for  identifying  reportable
   segments.  SFAS131 is effective for financial  statements for years beginning
   after December 31, 1997 and for interim periods  presented after December 31,
   1998. The Company does not  anticipate a material  impact from this change in
   disclosure   presentation  in  its  consolidated  financial  statements  upon
   adoption of this standard.


                                                                            F-11

<PAGE>


<TABLE>

<CAPTION>

                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996



NOTE C - NOTE RECEIVABLE

<S>                                                                 <C>           <C> 
                                                                    1997          1996
                                                                  -----------  -----------
$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                                           $128,046      $147,230

      Less current portion                                         (22,604)      (21,011)
                                                                  --------      --------   
      Noncurrent portion                                          $105,442      $126,219
                                                                  ========      ========

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

                                                                  1998           $22,604
                                                                  1999            24,480
                                                                  2000            26,512
                                                                  2001            28,712
                                                                  2002            25,738
                                                                                --------

                                                                  Total         $128,046
                                                                                ========
</TABLE>


NOTE D - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 1997 and 1996:

                                          1997           1996     Estimated life
                                    ------------    ------------  --------------
Buildings and related improvements   $ 1,955,132    $ 1,969,411    15 - 40 years
Furniture and equipment                  757,110        762,095    10 years
Vehicle                                   52,728         52,728    3 years
                                     -----------    -----------
                                       2,764,970      2,784,234
Less accumulated depreciation         (1,475,570)    (1,381,016)
                                     -----------    -----------
                                       1,289,400      1,403,218
Land                                     741,488        816,487
                                     -----------    -----------
Net property and equipment           $ 2,030,888    $ 2,219,705
                                     ===========    ===========

Depreciation  expense for the years ended December 31, 1997 and 1996 was $89,672
and $90,056, respectively.



                                                                            F-12

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996



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 $805,680 and $764,600 as of
December 31, 1997 and 1996, respectively

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  1998 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 nature of the respective receivables, these amounts are classified in the
accompanying financial statements as non-current.

NOTE F - LONG-TERM DEBT

Long-term  debt  consists  of the  following  at  December  31,  1997 and  1996,
respectively:


                                                             1997         1996
                                                          ---------    ---------
$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.                                $462,862    $599,407

$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                               35,298      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.  Paid in
   full during 1997 in relation to a sale of the
   underlying assets                                           --        24,904
                                                         
                                                            498,160     671,383
      Less current portion                                 (163,288)   (158,960)
                                                            -------     -------

      Long-term portion                                    $334,872    $512,423
                                                           ========    ========



                                                                            F-13

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996



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 2% if
prepaid between September 1, 1997 and August 31, 1998; and 1% if prepaid between
September 1, 1998 and August 31, 1999.

Current  maturities  of  long-term  maturities  as of  December  31, 1997 are as
follows:

                                                Year ending
                                               December 31,            Amount

                                                   1997               $163,288
                                                   1998                182,033
                                                   1999                151,064
                                                   2000                  1,775
                                                                      --------

                                                   Total              $498,160
                                                                       =======

NOTE G - INCOME TAXES

The deferred  current tax asset and  non-current  deferred tax  liability on the
December  31,  1997  and  1996,  respectively,  balance  sheet  consists  of the
following:

<TABLE>

<S>                                                            <C>               <C>
                                                                December 31,     December 31,
                                                                     1997            1996

     Non-current deferred tax asset                               $      -         $61,500
     Valuation allowance for non-current deferred tax asset              -               -
                                                                  --------          ------

     Net non-current deferred tax asset                           $      -         $61,500
                                                                  ========          ======


     Non-current deferred tax liability                           $(98,936)        $(94,569)
                                                                  ========           ======

</TABLE>

The  deferred  tax  asset  related  to the  anticipated  future  utilization  of
cumulative  net operating loss and business tax credit  carryforwards  of Furrh,
Inc. and its  wholly-owned  subsidiary,  Tempo  Tamers,  Inc. As of December 31,
1997,  all  carryforwards  have  been  totally  utilized  by  the  Company.  The
non-current   deferred  tax  liability  results  from  the  usage  of  statutory
accelerated tax depreciation and amortization methods.


                                                                            F-14

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996


<TABLE>
<CAPTION>

NOTE G - INCOME TAXES - Continued

The components of income tax expense  (benefit) for the years ended December 31,
1997 and 1996, respectively, are as follows:

<S>                                                                                <C>          <C> 
                                                                                     1997         1996
                                                                                   ---------    ---------

                  Federal:
                    Current                                                        $ 173,342    $    --
                    Deferred                                                          65,866      (19,016)
                                                                                   ---------    ---------
                                                                                     239,208      (19,016)
                                                                                   ---------    ---------
                  State:
                    Current                                                             --           --
                    Deferred                                                            --           --
                                                                                   ---------    ---------
                  Total                                                            $ 239,208    $ (19,016)
                                                                                   =========    =========

The Company's income tax expense (benefit) for the years ended December 31, 1997
and 1996,  respectively,  differed from the statutory federal rate of 34 percent
as follows:
                                                                                      1997         1996
                                                                                   ---------    --------
Statutory rate applied to earnings (loss) before income taxes                      $ 224,279    $ 178,309
Increase (decrease) in income taxes resulting from:
     State income taxes                                                                 --           --
     Deferred income taxes                                                            65,866       (9,077)
     Effect of incremental tax brackets and
         utilization of net operating loss carryforwards                             (50,937)    (149,946)
                                                                                   ---------    ---------

Income tax expense                                                                 $ 239,208    $  19,016
                                                                                   =========    =========

Deferred  income  tax  expense  (benefit)  as of  December 31, 1997 and 1996,
respectively, consists of the following components:
                                                                                      1997         1996
                                                                                   ---------    ---------
     Changes in deferred tax assets
         Effect of utilization of net operating loss
              and business tax credit carryforwards                                $  61,500    $  14,660
     Changes in deferred tax liabilities
         Effect of differences in book and
              statutory tax depreciation methods                                       4,366        4,356
                                                                                   ---------    ---------

         Changes in deferred income tax accounts                                   $  65,866    $  19,016
                                                                                   =========    =========
</TABLE>



                                                                            F-15

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996



NOTE H - CAPITAL STOCK TRANSACTIONS

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.

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.

During 1997,  the Company issued an additional  403,116 shares of  unregistered,
restricted common stock in final settlement of all obligations under the Amended
Stock Purchase  Agreement without additional  compensation to the Company.  This
transaction was accounted for as a reallocation  of the initial  proceeds of the
Stock Purchase Agreement.


                                                                            F-16

<PAGE>



                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996



NOTE H - CAPITAL STOCK TRANSACTIONS - Continued

In June 1997,  the Company  purchased  and retired an aggregate  3,949 shares of
issued  and  outstanding  common  stock  for  approximately  $11,247  cash.  The
retirement  was accounted for as a reduction in the carrying value of issued and
outstanding  common stock at approximately $4, which equals the par value of the
shares, a reduction of additional paid-in capital of approximately  $9,587 and a
reduction  of retained  earnings  of $1,656,  in  accordance  with the tenets of
Accounting Principles Board Opinion No. 6.

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

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, 1997, future minimum  non-cancellable lease
revenues are as follows:

                                                   Year ending
                                                  December 31,         Amount

                                                      1998           $  221,000
                                                      1999              221,000
                                                      2000              247,000
                                                      2001              247,000
                                                      2002               99,750
                                                                       --------

                                                      Total          $1,188,855
                                                                     ==========

NOTE J - CONTINGENCIES

On January 22, 1998,  the City of Dallas,  Texas Permit and License Panel (City)
denied a request by the  Company  for an  exemption  from  Section  41-AC of the
Dallas,  Texas City Code.  As a result of this  action by the City,  the Company
filed litigation against the City in the 298th Judicial District Court in Dallas
County, Texas. The Case is labeled 98-00614-M, "Tempo Tamers, Inc. d/b/a Million
Dollar Saloon v. City of Dallas". On January 23, 1998, the Company was granted a
Temporary  Restraining  Order allowing the Company to maintain the operations of
its adult entertainment  facility in Dallas, Texas and prohibiting the City from
recognizing the Company's  operating license as "expired".  Further, on February
2,  1998,  the  Company  was  granted  a  Temporary  Injunction  in this  matter
addressing  items  similar in nature to the points  discussed  in the  Temporary
Restraining  Order.  The trial on the merits of this litigation is scheduled for
June 12, 1998 and is reviewed under the substantive evidence rule.

The Company is of the opinion that it will prevail in this matter based upon the
merits of the case and  anticipates  no material  impact to its  operations as a
result of this litigation.

                                                                            F-17

<PAGE>


                  MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>


NOTE J - SEGMENT INFORMATION

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

<S>                                                         <C>                 <C> 
                                                                1997              1996
                                                             ---------         ---------
Revenues
     Bar and restaurant operations                          $3,119,557        $3,019,148
     Rental real estate operations                             450,227           440,176
     General unallocated corporate matters                           -                 -

Operating profit (loss)
     Bar and restaurant operations                            $377,393          $355,161
     Rental real estate operations                             338,814           427,367
     General unallocated corporate matters                    (157,126)         (290,876)

Identifiable assets
     Bar and restaurant operations                          $1,008,969        $1,367,941
     Rental real estate operations                           1,288,179         1,849,765
     General unallocated corporate matters                      77,735           394,483

Depreciation and amortization
     Bar and restaurant operations                             $79,385           $60,477
     Rental real estate operations                              21,047            29,377
     General unallocated corporate matters                      11,297            22,259

Capital expenditures
     Bar and restaurant operations                              $1,731            $6,815
     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-18