<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION 
                             WASHINGTON, D.C. 20549

                             ----------------------


                                  FORM 10-QSB

X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
-  ACT OF

_  FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 1996

                                       OR

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
   ACT OF 1934 FOR THE TRANSITION PERIOD FROM              TO

                         COMMISSION FILE NUMBER 1-13068

                                  IRATA, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


              TEXAS                               76-0366015
   (STATE OR OTHER JURISDICTION OF              (IRS EMPLOYER
    INCORPORATION OR ORGANIZATION)            IDENTIFICATION NO.)



8554 KATY FREEWAY, SUITE 100, HOUSTON, TEXAS            77024
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)            (ZIP CODE)



       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 467-4300

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes X    No
                                    ---     ---

  At February 14, 1997 there were 6,434,215 shares of Class A Common Stock, par
value $0.10 per share, outstanding and 1,500,000 shares of Class B Common Stock,
par value $0.01 per share, outstanding.
<PAGE>
 
                                  IRATA, INC.

                              INDEX TO FORM 10-QSB

                    FOR THE QUARTER ENDED DECEMBER 31, 1996
 
Part I Financial Information (unaudited)
 
     Item 1. Financial Statements
 
        Statement of Operations...................   2
 
        Balance Sheet.............................   3
 
        Statement of Cash Flows...................   5
 
        Notes to Financial Statements.............   6
 
     Item 2. Management's Discussion and Analysis 
       of Financial Condition and Results of
       Operations.................................   8

 
Part II Other Information
 
     None
 
Signatures........................................  10
<PAGE>
 
                                  IRATA, INC.
                           STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE> 
<CAPTION> 

                                                 Three Months Ended                      Six Months Ended
                                                    December 31,                            December 31, 
                                             -----------------------------          ------------------------------
                                                 1995             1996                  1995              1996
                                             -----------------------------          ------------------------------
<S>                                          <C>                <C>                 <C>                 <C> 
Revenues:
  Booth Services..........................   $1,985,115         $1,256,312          $4,103,673          $3,083,963
  Booth Sales.............................           --              7,500                  --               7,500
                                             ----------         ----------          ----------          ----------
Total revenues............................    1,985,115          1,263,812           4,103,673           3,091,463
Cost of booth services:
  Site rent...............................      718,514            482,527           1,458,144           1,174,295
  Route labor.............................      189,164            151,610             415,151             331,780
  Equipment depreciation..................      260,587            263,009             499,936             510,304
  Consumables.............................      175,025            127,286             341,462             316,371
  Freight and re-installation costs.......       91,516             92,701             149,346             165,969
  Loss on disposal of property &
    equipment.............................       25,730             29,213             141,666              87,116
  Other costs of service..................       56,764             34,815              93,993              76,593
                                             ----------         ----------          ----------          ----------
Total cost of booth services..............    1,517,300          1,181,161           3,099,698           2,662,428
Cost of booths sold.......................           --              7,454                  --               7,454
                                             ----------         ----------          ----------          ----------
Gross profit..............................      467,815             75,197           1,003,975             421,581
Selling, general and administrative
  expenses:
  Salaries and wages......................      282,247            276,163             574,526             514,255
  Professional fees.......................       75,333             55,671             156,818             251,683
  Insurance...............................       41,942             49,277              75,484              69,410
  Marketing...............................       24,294             18,242              58,461              27,848
  Travel and entertainment................       20,136             12,012              23,545              18,639
  Depreciation and amortization...........        9,350             13,755              17,444              25,139
  Personal property and franchise taxes...        4,979             45,145               4,979              75,022
  Office expense..........................       62,339             78,436             133,560             148,784
  Bad debt................................           --              5,000               4,824               5,000
                                             ----------         ----------          ----------          ----------
Total selling, general and administrative
  expenses................................      520,620            553,701           1,049,641           1,135,780
                                             ----------         ----------          ----------          ----------
Operating (loss)..........................      (52,805)          (478,504)            (45,666)           (714,199)
Other income (expense):
  Interest expense........................      (67,211)           (67,920)           (135,085)           (130,844)
  Financing costs.........................      (67,842)           (72,404)           (136,341)           (140,246)
  Interest income.........................           66              3,150                 232               3,150
  Other, net..............................        1,781             29,120               3,202              30,456
                                             ----------         ----------          ----------          ----------
Total other income (expense)..............     (133,206)          (108,054)           (267,992)           (237,484)
                                             ----------         ----------          ----------          ----------
Net (loss)................................   $ (186,011)        $ (586,558)         $ (313,658)         $ (951,683)
                                             ==========         ==========          ==========          ==========
Net loss per share........................   $    (0.07)        $    (0.12)         $    (0.12)         $    (0.26)
                                             ==========         ==========          ==========          ==========
Weighted average number of common or
  equivalent shares outstanding...........    2,544,318          4,694,344           2,544,318           3,622,208
                                             ==========         ==========          ==========          ==========

</TABLE> 

                            See accompanying notes.

                                       2
<PAGE>
 
                                  IRATA, INC.
                                 BALANCE SHEET
                                  (UNAUDITED)

                                     ASSETS

                                                        DECEMBER 31,
                                                            1996
                                                        -------------
Current assets:
  Cash................................................  $   248,921
  Accounts receivable-trade,
   net of $15,000 allowance...........................      376,251
  Accounts receivable-other...........................       28,770
  Consumable inventory................................      240,079
  Prepaids and other currents assets..................      122,734
                                                        -----------
        Total current assets..........................    1,016,755

Property and equipment, at cost:
  Equipment-Booths....................................    6,131,886
  Components and hardware.............................      642,099
  Furniture, fixtures and equipment...................      268,428
                                                        -----------
                                                          7,042,413
  Accumulated depreciation............................   (2,069,571)
                                                        -----------
        Total property and equipment, net.............    4,972,842

Other assets:
  Deferred loan costs, net............................      379,985
  Other, net..........................................      102,304
                                                        -----------
                                                            482,289
                                                        -----------
        Total assets..................................  $ 6,471,886
                                                        ===========

                                       3
<PAGE>
 
                                  IRATA, INC.
                           BALANCE SHEET (CONTINUED)
                                  (UNAUDITED)

                      LIABILITIES AND STOCKHOLDERS' EQUITY



                                                        DECEMBER 31,
                                                            1996
                                                        -----------
Current liabilities:
  Trade accounts payable..............................  $   284,934
  Sales and use tax payable...........................      191,419
  Site rents payable..................................       11,573
  Other accrued liabilities...........................      254,516
                                                        -----------
        Total current liabilities.....................      742,442

Long-term debt........................................    2,247,639

Commitments

Stockholders' equity:
  Preferred stock, $1 par value:
        100,000 shares authorized, zero issued........           --
  Class A common stock, $.10 par value:
        20,000,000 shares authorized, 6,294,215
          issued and outstanding......................      629,421
  Class B common stock, $.01 par value:
        1,500,000 shares authorized, issued and
          outstanding.................................       15,000
  Additional paid-in-capital..........................    8,124,630
  Accumulated deficit.................................   (5,287,246)
                                                        -----------
        Total stockholders' equity....................    3,481,805
                                                        -----------
        Total liabilities and stockholders' equity....  $ 6,471,886
                                                        ===========

                            See accompanying notes.


                                       4
<PAGE>
 
                                  IRATA, INC.
                            STATEMENT OF CASH FLOWS
                                  (UNAUDITED)

                                                      SIX MONTHS ENDED
                                                        DECEMBER 31,
                                                ---------------------------
                                                     1995            1996
                                                ---------------------------
Operating activities
  Net (loss)..................................  $  (313,658)    $  (951,683)
  Adjustments to reconcile net loss to net
    cash provided (used) by operating
    activities:
  Depreciation and amortization...............      517,380         535,443
  Financing costs.............................      136,341         140,245
  Loss on disposal of property and equipment..      141,666          87,116
  Stock awards................................        6,829         (28,702)
  Net book value of booths sold...............           --           7,454
  Changes in operating assets
    and liabilities:
  Accounts receivable-trade...................     (178,274)         96,336
  Accounts receivable-other...................       10,579         (18,585)
  Other current assets........................       26,852         (81,287)
  Other assets................................      (99,914)        (50,819)
  Accounts payable............................      348,109        (240,361)
  Sales and use tax payable...................      230,550        (373,527)
  Site rents payable..........................      159,000        (123,445)
  Other accrued liabilities...................     (149,388)         92,602
                                                -----------     -----------
Net cash provided (used) by operating
  activities..................................      836,072        (909,213)


Investing activities
  Purchases of property and equipment.........   (1,135,850)       (248,326)
                                                -----------     -----------
Net cash used in investing activities.........   (1,135,850)       (248,326)


Financing activities
  Proceeds from Private Placement, net........           --       1,232,108
  Proceeds from Loan Agreement, net...........      315,000              --
  Proceeds from short-term notes..............       96,000              --
  Principal payments on short-term notes......      (93,947)             --
                                                -----------     -----------
Net cash provided by financing activities.....      317,053       1,232,108
                                                -----------     -----------

Net (decrease) increase in cash and cash
  equivalents.................................       17,275          74,569
Cash and cash equivalents at
  beginning of year...........................      186,052         174,352
                                                -----------     -----------
Cash and cash equivalents at end of period....  $   203,327     $   248,921
                                                ===========     ===========

                            See accompanying notes.

                                       5
<PAGE>
 
                                  IRATA, INC.

                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Organization

  IRATA, Inc. (the "Company") was incorporated March 22, 1992 under the laws
of the State of Texas, for the purpose of acquiring and operating Video Foto
booths throughout the United States in shopping malls, theme parks, discount
stores and high traffic areas. The booths produce a black and white computer
generated, laser printed image superimposed on a variety of background options.

  The accompanying unaudited interim financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information in footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and
regulations. The accompanying unaudited interim financial statements reflect all
adjustments which the Company considers necessary for a fair presentation of the
results of operations for the interim periods covered and for the financial
condition of the Company at the date of the interim balance sheet. All such
adjustments (except as otherwise disclosed herein) are of a normal recurring
nature. Results for the interim periods are not necessarily indicative of
results for the year.

 Revenue Recognition

  The Company recognizes booth services revenue as photos are produced by the
booth. Location owners where booths are sited are paid a fixed rental,
percentage of net revenues or a combination thereof, which is recorded as site
rent. The independent service contractor is also paid a fixed commission,a
percentage based upon the net revenues generated by the Booths serviced by him,
or a combination thereof, which is recorded as route labor.

  The Company recognizes booth sales revenue as of the booth delivery date. Cost
of booths sold includes the undepreciated cost of the booth and direct expenses
related to the sale.

 Statement of Cash Flows

   Supplemental disclosures of cash flow information are as follows:

                                                   1995     1996
                                                   ----     ----  
        Interest paid                             132,000  131,000
        Taxes paid                                     --       --
        Reduction of Sales and Use Taxes Payable       --   55,000       


 Property and Equipment

  Property and equipment is recorded at cost. Expenditures for major additions
and improvements are capitalized while minor replacements, maintenance and
repairs which do not improve or extend the life of such assets are expensed as
incurred. Depreciation is provided using the straight line method over the
estimated useful lives of the various classes of assets, as follows:
 
                                         ESTIMATED
                                        ------------
                                        USEFUL LIFE
                                        ------------
   Booths.............................  5 to 7 Years
   Furniture, Fixtures and Equipment..  3 to 7 Years

  Components and hardware consist of parts used to construct and repair booths.
No depreciation is provided on new parts until they are installed into a booth
and that booth is placed into service.

                                       6
<PAGE>
 
                                  IRATA, INC.

                   NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
                                  (UNAUDITED)

2.   STOCKHOLDERS' EQUITY

  Private Placement

  On January 8, 1997, the Company completed a private placement of 3,245,000
shares of Class A Common Stock and 3,245,000 Private Placement Warrants. The
private placement was sold in $25,000 units consisting of 50,000 shares of Class
A Common Stock and 50,000 Private Placement Warrants. Net proceeds to the
Company were approximately $1,275,000.

  Each Private Placement Warrant will be exerciseable for a period of three
years after the initial closing date into one share of common stock at an
exercise price equal to $1.00 per share during the first two years and $1.50 per
share thereafter. The Warrants will be protected against dilution upon the
occurrence of certain events, including, but not limited to, sales of shares of
common stock for less than fair market value, certain dividends, split-ups,
reclassifications, and asset sales. The Company has agreed to register for
resale the shares issued at closing and the shares issued or issuable upon
exercise of the Warrants under the Securities Act of 1933, on or prior to
December 31, 1996, subject to certain lock-up provisions. If the registration is
not declared effective by March 1, 1997, then the Company will issue to each
investor 5,000 shares for each unit. 

  Trade Payable Agreement

  In connection with the Trade Payable Agreement, effective November 1, 1996,
the Company issued 268,223 shares of Class A Common Stock to fourteen creditors
in settlement of approximately $850,000 in past due obligations.

Other

  Dominion Investment Corporation, an affiliate of J.T. Trotter, a principal 
shareholder, C.W. Moody, Jr., also a principal shareholder, and George V. Kane, 
Jr. loaned the Company $160,000 in December 1995 and were issued notes in the 
principal amount of $160,000 and warrants to purchase 22,733 shares of Class A 
Common Stock at an exercise price of $2.81. On November 1, 1996, the notes and 
the warrants were exchanged for 320,000 shares of Class A Common Stock and 
320,000 Private Placement Warrants. In November 1996, Robert R. Salyard, a 
director of the Company, exchanged $22,500 in unpaid consulting fees for 45,000 
shares of Class A Common Stock and 45,000 Private Placement Warrants.

3.  SUBSEQUENT EVENTS

  On February 6, 1997, Fish Construction, Inc., a trade creditor, commenced an
action against the Company in the 240th Judicial District Court in and for Fort
Bend County, Texas.  The action, which seeks compensatory damages of $174,074,
alleges that the Company has breached the terms of an agreement between the
Company and the plaintiff for the supply of booths to the Company.  The Company
is vigorously defending the action.  Although the outcome of any litigation is
subject to uncertainty, the Company believes, based upon information currently
available to it, that the action is without merit, and that it will be able to
successfully conclude this litigation.  However, an adverse ruling against the
Company with respect to this litigation could have a material adverse effect on
the Company and its financial condition.

  On February 18, 1997 a Registration Statement on Form SB-2, filed with The
Securities and Exchange Commission on January 28, 1997 (File No. 333-20559), was
declared effective. This occurrence fulfills the Company's agreement to register
for resale the shares of Class A Common Stock issued at the closing of the
Private Placement and the shares issued or issuable upon exercise of the
Warrants under the Securities Act of 1933.

                                       7
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

  The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto, and is qualified in its entirety by the
foregoing and by other more detailed financial information appearing elsewhere.

  Irata, Inc. (the "Company") has developed and operates a computerized version
of the traditional self-service photo booth. The Company's photo booths are
operated under the trade name Video Foto. Video Foto booths provide consumers
with traditional black and white photos with a variety of souvenir, novelty, and
amusement options, utilizing computer imaging technology, a laser printing
device, and other computer hardware and software. Photo product options include
traditional prints ranging in size up to 8" x 10", and novelty items such as
"wanted" posters, newspaper front pages, photo greeting cards, and photo
calendars.

  In July 1996, the Company began the final phase of its color Video Foto booth 
development project, a next generation product design. This development effort 
included booth size and shape configuration, hardware component selection, and 
software systems design. Out of this effort, the Company successfully completed 
its first prototype color photo booth and displayed it at the International 
Arcade & Amusement Parks Association annual convention in November 1996. The 
Company commenced shipment of the first ten color booths in mid February, 1997.

  The Company's strategy is to grow the Company by placing on location a
steadily increasing number of additional Video Foto booths.  The Company is also
attempting to maximize average revenue per booth by placing them in locations
that meet the Company's criteria.  At December 31, 1996, the Company had 684
Video Foto booths in operation.  Booths are generally placed on a revenue-
sharing basis, with the Company retaining responsibility for operational,
service, and product costs. The Company now intends to begin producing and
operating color video photo booths.  The Company's continued growth and capacity
for production and operation of  photo booths will depend on its ability to
obtain additional financing, through operations or outside funding.  There can
be no assurance that additional financing will be available.

RESULTS OF OPERATIONS

 Three Months Ended December 31, 1995 Compared to Three Months Ended December
31, 1996

  Revenues. Revenues decreased 37% from $1,985,115 for the three month period
ended December 31, 1995 to $1,263,812 for the three month period ended December
31, 1996. The decrease in revenues was primarily attributable to 80 fewer booths
on location and attrition in revenue at booths installed for more than one year.

  Cost of Services. Cost of services, as a percent of revenue, increased from
76% to 94% for the three months ended December 31, 1995 and 1996, respectively.
The two largest booth operating costs, site rent and route labor, increased from
46% to 50% of revenue. The decline in revenue at certain mall locations with
fixed monthly rents and guaranteed route contractor payments caused the increase
as a percentage of revenue. Equipment depreciation, a fixed expense, increased
from 13% to 21% of revenue, again, due to the decline in revenues.
 
  Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses were $520,620 and $553,701 for the quarters ending
December 31, 1995 and 1996, respectively. This increase was primarily
attributable to $45,145 in personal property taxes on booths for calendar year
1996.

  Other Expense. Interest expense and financing costs were $135,053 and $140,324
for the three months ended December 31, 1995 and 1996, respectively. These
expenses are attributable to the $3,500,000 line of credit loan.

  Net Operating Results. For the three months ended December 30, 1996 the
Company realized a net loss of $586,558 versus a net loss of $186,011 for the
three months ended December 31, 1995. This difference is attributable to the
lower revenues and reduced gross profit in 1996.

                                       8
<PAGE>
 
 Six Months Ended December 31, 1995 Compared to Six Months Ended December 31,
1996

  Revenues. Revenues decreased 25% from $4,103,673 for the six month period
ended December 31, 1995 to $3,091,463 for the six month period ended December
31, 1996. The decrease in revenues was primarily attributable to 48 fewer booths
on location and attrition in revenue at booths installed for more than one year.

  Cost of Services. Cost of services, as a percent of revenue, increased from
76% to 86% for the six months ended December 31, 1995 and 1996, respectively.
Site rent expense as a percentage of revenue increased to 38% in 1996 from 36%
in 1995 for two reasons. First, the number of theme park locations, which have a
50% site rent percentage, increased at a greater rate than locations with lower
rent factors. Second, revenues at certain mall locations with fixed monthly
rents decreased causing the site rent expense to increase as a percentage of
revenue. Equipment depreciation, a fixed expense, increased from 12% to 17% of
revenue, again, due to the decline in revenues.

  Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses were $1,049,641 and $1,135,780 for the six month period
ending December 31, 1995 and 1996, respectively. This increase was primarily
attributable to $55,000 in personal property taxes on booths for calendar year
1996 and a $115,000 increase in professional fees related to restructuring
activities.

  Other Expense. Interest expense and financing costs were $271,426 and $271,090
for the six months ended December 31, 1995 and 1996, respectively. These
expenses are attributable to the $3,500,000 line of credit loan.

  Net Operating Results. For the six months ended December 30, 1996 the Company
realized a net loss of $951,683 versus a net loss of $313,658 for the six months
ended December 31, 1995. This difference is attributable to the lower revenues
and reduced gross profit in 1996.

 

LIQUIDITY AND CAPITAL RESOURCES

  For the six months ended December 31, 1996 net cash used in operating
activities was $909,213 as compared to $836,072 cash provided by operating
activities for the six months ended December 31, 1995. Net cash used in 1996 is
primarily due to reductions in accounts payable, sales and use tax payable, and
site rents payable to mall locations. The net cash provided in 1995 is primarily
attributable to increases in current liabilities.

  The net proceeds from the Private Placement of approximately $1,275,000
allowed the Company to settle all past due oligations to creditors including
sales and use taxes. As a result, the Company had positive working capital of
$275,000 at December 31, 1996. In addition, the proceeds from the Private
Placement were used to fund the final phase of the Company's color Video Foto
booth project and to construct 25 color photo booths which will be placed in
mall and theme park locations beginning February 1997. Additional color booths
will be funded from operations or new outside financing. Other than the purchase
of new color booths, the Company does not expect to have any significant capital
expenditures for the foreseeable future.

                                       9
<PAGE>
 
                                   SIGNATURES

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                  Irata, Inc.



                                  By:                 /s/ Lance P. Wimmer
                                    --------------------------------------
                                                          Lance P. Wimmer
                                                             President

Dated: February 18, 1997



                                      10