Item 2. Management's Discussion and Analysis or Plan of Operations.

The following discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto included in this quarterly report.

FORWARD LOOKING STATEMENT AND INFORMATION

The Company is including the following cautionary statement in this Form 10-QSB to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Certain statements in this Form 10-QSB are forward-looking statements. Words such as "expects," "believes," "anticipates," "may," and "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties are set forth below. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectation, beliefs or projections will result, be achieved, or be accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause material adverse affects on the Company's financial condition and results of operations: the risks and uncertainties relating to our Internet operations, the impact and implementation of the sexually oriented business ordinances in the jurisdictions where our facilities operate, competitive factors, the timing of the openings of other clubs, the availability of acceptable financing to fund corporate expansion efforts, and the dependence on key personnel. The Company has no obligation to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances.

GENERAL

We presently conduct our business in two different areas of operation:

1. We own and operate upscale adult nightclubs serving primarily businessmen and professionals. Our nightclubs offer live adult entertainment, restaurant and bar operations. We own and operate seven adult nightclubs under the name "Rick's Cabaret" and "XTC" in Houston, Austin and San Antonio, Texas, and Minneapolis, Minnesota. We also own and operate a sports bar called "Hummers" and an upscale venue that caters especially to urban professionals, businessmen and professional athletes called "Club Onyx" in Houston. No sexual contact is permitted at any of our locations.

2. We have extensive internet activities.

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AS COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2003

For the three months ended December 31, 2004, the Company had consolidated total revenues of $3,668,857 compared to consolidated total revenues of $3,852,033 for the three months ended December 31, 2003, a decrease of $183,176. The decrease in total revenues was primarily due to the sale of our subsidiary in the amount of $136,162, decrease in overall revenues generated by the Company's club businesses in the amount of $33,500, and a decrease of $13,514 by the Company's internet business. The decrease in overall revenues of the Company's club businesses was due to the impact of a presidential election month in November, which resulted in a 13.74% decrease in total revenues for the month, and a new competitive club opening and severe weather in Minneapolis. Total revenues for same-location-same-period of club operations decreased to $3,329,426 for the three months ended December 31, 2004 from $3,512,125 for same period ended December 31, 2003, or by 5.20%. Management has developed and implemented a strategy to regain the market share in the Minneapolis location.

The cost of goods sold for the three months ended December 31, 2004 was 12.85% of total revenues compared to 13.21% for the three months ended December 31, 2003. The decrease was due primarily to the reduction in costs of maintaining our internet operations and an addition of XTC club, which has low cost of goods sold. The cost of goods sold for the club operations for the three months ended December 31, 2004 was 13.33% of total revenues compared to 13.39% for the three months ended December 31, 2003. We continue our efforts to achieve reductions in cost of goods sold of the club operations through improved inventory management. We continue a program to improve margins from liquor and food sales and food service efficiency. The cost of goods sold from our internet operations for the three months ended December 31, 2004 was 4.16% compared to 10.09% for the three months ended December 31, 2003. The cost of goods sold for same-location-same-period of club operations for the three months ended December 31, 2004 was 13.85%, compared to 13.30% for the same period ended December 31, 2003.

Payroll and related costs for the three months ended December 31, 2004 were $1,343,538 compared to $1,287,987 for the three months ended December 31, 2003. The increase was primarily due to the increase in payroll in opening a new club and corporate activities. Payroll for same-location-same-

period of club operations decreased to $995,549 for the three months ended December 31, 2004 from $1,055,377 for the same period ended December 31, 2003. Management has implemented labor cost reduction methods and currently believes that its labor and management staff levels are appropriate.

Other general and administrative expenses for the three months ended December 31, 2004 were $1,775,216 compared to $1,747,685 for the three months ended December 31, 2003. The increase was due primarily to an increase in direct operating expenses, utilities, accounting, and depreciation from opening new locations and legal, financing, and traveling costs due to the acquisition of New York club. The total cost related to the acquisition of the New York club is estimated to be $90,000.

Interest expense for the three months ended December 31, 2004 was $93,767 compared to $86,165 for the three months ended December 31, 2003. The increase was primarily due to the increase in the Company's long-term debts as a result of acquiring the New York club. As of December 31, 2004, the balance of long term debt was $7,721,861 compared to $3,951,179 a year earlier.

Net income for the three months ended December 31, 2004 was a deficit of $6,485 compared to a net income of $239,256 for the three months ended December 31, 2003. The decrease in net income was primarily due to the decrease in the Company's club business and an increase of certain expenses related to the acquisition of the New York club. Net income for same-location-same-period of club operations decreased to $534,595 for the three months ended December 31, 2004 from $597,963 for same period ended December 31, 2003, or by 10.60%.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2004, the Company had a working capital of $3,756,588 compared to a working capital of $464,218 at September 30, 2004. The increase in working capital was primarily due to an increase in cash from new long-term debts, and other current assets offset by decreases in accounts payable, accrued liabilities and marketable securities. The value of available-for-sale marketable securities decreased by $44,491, primarily due to market price fluctuation.

Net cash used by operating activities in the three months ended December 31, 2004 was $194,879 compared to net cash provided of $168,834 for the three months ended December 31, 2003. The decrease in cash provided by operating activities was primarily due to a decrease in net income, accounts payable, and accrued expenses and an increase in other current assets.

The Company used $58,883 and $48,582 of cash in investing activities and provided $3,413,791 and used $75,156 of cash in financing activities during the three months ended December 31, 2004 and 2003, respectively.

The Company's need for capital historically was a result of construction or acquisition of new clubs, renovation of older clubs, and investments in technology. The Company has utilized capital to repurchase its common stock as part of the Company's share repurchase program.

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

On November 15 and 17, 2004, the Company borrowed $590,000 and $1,042,000, respectively, from a financial institution at an annual interest rate of 10% over a 10 year term. The monthly payment of principal and interest are $5,694 and $10,056, respectively. On November 30, 2004, the Company borrowed $900,000 from an unrelated individual at an 11% annual interest rate over a 10 year term. The monthly payment of principal and interest is $9,290. On December 30, 2004, the Company borrowed $1,270,000 from a financial institution at an annual interest rate of 10% over a 10 year term. The monthly payment of principal and interest is $12,256. The money received from this financing is used for the acquisition and renovation of New York club.

In the opinion of management, working capital is not a true indicator of the financial status. Typically, businesses in the industry carry current liabilities in excess of current assets because the business receives substantially immediate payment for sales, with nominal receivables, while accounts payable and other current liabilities normally carry longer payment terms. Vendors and purveyors often remain flexible with payment terms providing businesses with opportunities to adjust to short-term business down turns. The Company considers the primary indicators of financial status to be the long-term trend of revenue growth and mix of sales revenues, overall cash flow, profitability from operations and the level of long-term debt.

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

In the event the sexually oriented business industry is required in all states to convert the entertainers who perform at our locations, from being independent contractors to employee status, we have prepared alternative plans that we believe will protect our profitability. We believe that the industry standard of treating the entertainers as independent contractors provides sufficient safe harbor protection to preclude payroll tax assessment for prior years.

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

SEASONALITY

Our nightclub operations are significantly affected by seasonal factors. Historically, we have experienced reduced revenues from April through September with the strongest operating results occurring during October through March. Our experience to date indicates that there does not appear to be a seasonal fluctuation in our Internet activities.

GROWTH STRATEGY

The Company believes that its club operations can continue to grow organically and through careful entry into markets and demographic segments with high growth potential. Upon careful market research, we may open new clubs. As is the case with the acquisition of the New York club, we may acquire existing clubs in locations that are consistent with our growth and income targets, and which

appear receptive to the upscale club formula we have developed. We may form joint ventures or partnerships to reduce start-up and operating costs, with our Company contributing assets in the form of our brand name and management expertise. We may also develop new club concepts that are consistent with our management and marketing skills. We may also acquire real estate in connection with club operations, although some clubs may be in leased premises.

We also expect to continue to grow our Internet profit centers and plan to focus in the future on high-margin activities that leverage our marketing skills while requiring a low level of start-up expense and ongoing operating costs.