SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                            -------------------------

                                   FORM 10-KSB

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998

                         Commission File No.: 000-19318

                               SPARTA FOODS, INC.
           (Name of Small Business Issuer as specified in its charter)

            Minnesota                                        41-1618240
 (State or other jurisdiction of                            (IRS Employer
 incorporation or organization)                          Identification Number)

              1565 First Avenue N.W., New Brighton, Minnesota 55112
               (Address of principal executive offices)(Zip Code)

         Issuer's telephone number, including area code: (612) 697-5500

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                     Common Stock, $.0l par value per share

Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
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 herein, and will not be contained, to the best of
Registrant'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. [  ]

Issuer's revenues for its most recent fiscal year: $14,963,157

The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of December 11, 1998 was approximately $5,667,936 based upon the
average high and low bid prices of the Registrant's Common Stock on such date.

There were 7,841,045 shares of Common Stock, $.0l par value, outstanding as of
December 11, 1998.
                            -------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Documents incorporated by reference pursuant to Rule 12b-23: Portions of the
Registrant's Proxy Statement for its 1999 Annual Meeting are incorporated by
reference into Items 9, 10, 11 and 12 of Part III.

Transitional Small Business Disclosure Format (check one).  Yes [   ]  No [ X ]


<PAGE>



                                      INDEX


Description                                                                Page

PART I.......................................................................2

   ITEM 1. DESCRIPTION OF BUSINESS...........................................2
   ITEM 2. DESCRIPTION OF PROPERTY...........................................8
   ITEM 3. LEGAL PROCEEDINGS.................................................8
   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............8

PART II......................................................................9

   ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........9
   ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........10
   ITEM 7. FINANCIAL STATEMENTS.............................................15
   ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
           FINANCIAL DISCLOSURE.............................................35

PART III....................................................................35

   ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND 
           CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE 
           EXCHANGE ACT.....................................................35
   ITEM 10. EXECUTIVE COMPENSATION..........................................36
   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..36
   ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................37
   ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................37




<PAGE>


                                                
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

         Sparta Foods, Inc. ("Sparta" or the "Company") manufactures a broad
line of Mexican food products which include corn and flour tortillas and stone
ground and corn flour tortilla chips which are distributed under the Company's
own brand names. The Company also markets salsas and picante sauces and barbecue
sauce. The Company's brand names and products include Cruz, La Canasta and La
Campana Paradiso tortillas, La Canasta tortilla chips and La Canasta and Chapala
salsas and picante sauces.

         The Company's branded retail products are sold in supermarkets located
primarily in the Midwestern United States. The Company also produces its retail
products primarily for food distributors, including Crystal Farms Refrigerated
Distribution Company which distributes its products to retail stores in 28
states and Marigold Foods, Inc. which distributes its products in 7 states. In
addition, the Company supplies its products to restaurants and other food
service establishments through distributors that include Catalina Specialty
Foods, Inc., Alliant Food Service, Inc., Sysco Corporation and U.S. Food
Service, Inc. The Company places significant emphasis on the development of the
food service market and is currently an approved supplier to such restaurants as
McDonald's, Chili's, Perkins, Friendly's and Carlos O'Kelly.

         The Company is capitalizing on the significant growth in the sale of
tortilla products which has occurred in the United States over the past decade.
In 1996 tortillas sales in the United States were approximately $2.5 billion and
according to the Tortilla Industry Association, a not-for-profit organization,
tortilla sales are estimated to reach $4.0 billion by the year 2000. Management
believes that this growth is partially a result of Mexican food products
becoming less ethnic due to strong general consumer acceptance. This is
evidenced by the large number of non-Mexican restaurants currently offering such
Mexican items as nachos, chips and salsa, fajitas, quesadillas, burritos and
taco salads and non-Mexican items such as tortilla wraps.

Business Strategy

         Sparta's goal is to become one of the premier manufacturing companies
of high quality tortillas nationwide. The Company plans to grow the business by
expanding its retail grocery and foodservice sales. In connection with its
retail grocery products, Sparta intends to focus on the refrigerated tortilla as
the primary product and selectively expand the distribution of this product in
new geographic areas, such as the midwest, east and southeast regions of the
United States, where Sparta believes it can establish a significant market
position. In connection with Sparta's foodservice products, Sparta intends to
target its sales to chain foodservice operators and expand geographically into
expected high growth markets. Sparta believes it is well positioned to continue
to capitalize on the expected growth in tortilla sales nationwide. Sparta plans
to grow its sales internally, through joint ventures or acquisitions of
compatible manufacturing facilities or regional brands and through the
development of new distribution relationships.

<PAGE>


Industry and Market

         Sales of Mexican-style food products such as corn and flour tortillas,
corn chips and salsas have increased substantially over the past decade in the
United States, through both restaurants and retail stores. Tortillas are
becoming increasingly popular as evidenced by their use in restaurant foods such
as fajitas, burritos, enchiladas, quesadillas, taco salads, and, most recently,
"wraps". According to a Tortilla Industry Association study, sales of tortillas
in the United States were approximately 2.5 billion in 1996 and are expected to
reach 4.0 billion by the year 2000.

         The increase in past sales may be partially attributable to the growth
in the United States Hispanic population. However, the Company's management
believes that Mexican-style food products have become less "ethnic" and now
enjoy a greater consumer acceptance, as illustrated by the fact that non-Mexican
restaurants feature Mexican-style foods on their menus.

Products and Marketing

         General. The food products manufactured and/or marketed by the Company
include whole and pre-cut corn and flour tortillas (including die-cut, hand
stretched and press flour tortillas), stone ground corn and corn flour tortilla
chips and salsas (including picante sauces) for distribution to retail food
stores and food service establishments. The Company also manufactures or markets
products for other food distributors to be sold under their own private labels
using the customer's or the company's proprietary recipes. During the fiscal
years ended September 30, 1998, 1997 and 1996, the percentage of sales of
tortillas, tortilla chips, barbecue sauces, salsas and all other products as
compared to all sales of the Company were as follows:

<TABLE>
<CAPTION>

                                                                     Year Ended September 30,

Products                                                           1998              1997              1996
--------                                                           ----              ----              ----
<S>                                                                 <C>               <C>              <C>    
Tortillas                                                           79%               72%              70%
Corn tortilla chips                                                 15%               16%              17%
Barbecue sauces, salsas and all other products                       6%               12%              13%

</TABLE>


         The Company continually seeks to expand its product lines through the
development of new products for retail sale under the Company's own branded
labels and value-added products for the food service market. During fiscal 1998,
the Company began contracting with third party manufacturers to produce
barbecue, salsas and picante sauces previously manufactured by the Company.

         The Company distributes its products through distribution centers
primarily in the Midwestern United States. During the fiscal years ended

<PAGE>

September 30, 1998, 1997 and 1996, the Company's percentage of sales for
distribution to food service establishments, to retail stores under its own
brand names, and under private label, compared to total Company sales, were as
follows:

                            Year Ended September 30,

Market Segment                 1998                 1997                  1996
--------------                 ----                 ----                  ----
Food service
  establishments                58%                   54%                  54%
Branded retail                  35%                   32%                  29%
Private label and
  ingredients                    7%                   14%                  17%


         Food Service. The Company's products are currently served in
restaurants and other food service establishments and are approved for use in
the food service operations of such restaurants as McDonald's, Chili's, Carlos
O'Kelly, Friendly's and Perkins. Sales to Catalina Specialty Foods, Inc., a
distributor to McDonald's, accounted for approximately 12% of the Company's
sales in fiscal year 1998. The establishment of food service accounts with
restaurant chains, schools, in-plant feeders or other food service
establishments is initiated primarily through direct contact by the Company's
sales personnel or brokers. The Company pays food brokers a commission based
upon the percentage of the net sales of products sold. The Company is obligated
to pay such commission for as long as the broker continues to achieve specified
minimum sales. Sales to food service establishments are conducted through
distributors who carry product inventory at their distribution centers. These
distributors include Alliant Food Service, Inc., U.S. Food Services, Inc. and
Sysco Corporation, who on a combined basis accounted for approximately 35% of
the Company's food service sales in its fiscal year ended September 30, 1998.
The Company's distributors provide continued sales and service to the food
service customer, while the Company's direct sales personnel and brokers
continue to solicit new restaurant customers and act as coordinators between the
Company and the distributors.

         Branded Retail. The Company's branded retail products are sold to
retail grocery chains and independent stores through distributors, such as
Crystal Farms Refrigerated Distribution Company which distributes refrigerated
goods to retail stores in 28 states, Marigold Foods, Inc. which distributes
products in retail stores in 7 states and Bradley Distributing, Inc. which
distributes products to approximately 160 retail stores in the 13 county
Minneapolis/St. Paul metropolitan area. Sales to Crystal Farms Refrigerated
Distribution Company, accounted for approximately 25% of the Company's sales in
fiscal year 1998. The Company has a distribution agreement with Crystal Farms
Refrigerated Distribution Company, which expires in the year 2004. The Company's
products appear in such grocery chains as Cub Foods and Rainbow Foods and in
independent stores such as Byerly's and Lunds. Through its retail store
distributors, the Company often establishes incentives, such as volume sales
discounts, which are offered to encourage retail stores to prominently display
the Company's products. The Company also utilizes in-store demonstrations to
promote its retail products. The Company's distributors deal directly with the
retail stores in soliciting orders to be filled from local warehouses and assist
in arranging shelf space and implementing in-store promotions.

<PAGE>

         Private Label and Ingredients. During fiscal year 1998, the Company
ceased manufacturing salsas, picante sauces and barbecue and other sauces and
contracted with third parties to manufacture such products for the Company. The
Company markets the products under its own labels and private labels. During
fiscal year 1998 the Company ceased its manufacturing relationship with its
largest barbecue sauce customer which accounted for the decrease in sales under
Private Label and Ingredients as a percentage of total Company sales.

Manufacturing and Supplies

         The Company manufactures its products on 11 production lines at its
principal place of business located at 1565 First Avenue N.W., New Brighton,
Minnesota. These lines include: (i) a hand stretched flour tortilla line; (ii) a
die-cut flour tortilla line; (iii) five press flour tortilla lines; (iv) two
lines for the production of corn tortillas; and (v) two stone ground corn
tortilla chip lines.

         The principal ingredients for the Company's manufactured products are
corn, wheat flour, corn flour, corn and soybean oils. These ingredients may be
purchased by the Company from a number of sources and are generally readily
available under normal conditions. Samples of incoming ingredients are tested to
ensure that they meet the quality specifications dictated by the Company. The
Company has made contract purchases through the first half of 1999 of corn and
flour to secure consistency in price and quality and reasonable assurance of a
supply of product ingredients. Although the Company believes that such contracts
help reduce the risk of unexpected and unfavorable increases in raw material
prices, the Company may be required to purchase its raw materials at a higher
than current market price if current market prices fall below the Company's
contract price. The Company believes that termination of one or more of its raw
material contracts will not adversely affect its ability to control its raw
material costs as such contracts can be replaced. The Company regularly
maintains stores of corn, flour and other ingredients in sufficient quantities
at its plant to enable it to fulfill one to two weeks of normal production, and
cooking oil and other ingredients in sufficient quantities to fulfill three or
more weeks of production.

Competition

         The tortilla, tortilla chip, salsa and picante sauce industry in the
United States is comprised of a large number of small regional producers, many
of which have a limited line of products, and several dominant producers with
broad product lines.

         The Company estimates that its retail sales of tortillas give it
approximately a 54% share of the 13 county Minneapolis/St. Paul metropolitan
market, and that its principal competition comes from Resers Foods and Azteca
Foods, which supply much of the remaining market. The Company believes, based on
an independent consumer marketing study of the twelve primary consumer markets
in the Midwest, that it is the third largest seller of tortillas in the Midwest,
based upon its combined tortilla sales in 4 of the 12 markets in the Midwest.

<PAGE>

         The retail market for fried corn tortilla chips is dominated by Frito
Lay, which the Company believes is a market leader in the 13 county
Minneapolis/St. Paul area market and the national market. The Company also
competes with Old Dutch and Barrel O'Fun brands. The Company estimates that it
has less than a one percent share of the national corn tortilla chip market.
While national manufacturers of snack foods have established recognizable brands
such as Frito Lay, shipping costs for the light and bulky tortilla chips provide
the Company certain pricing advantages in the local market area. In marketing
its salsas and picante sauces for retail distribution, the Company competes with
such brands as Pace, Old El Paso, Frito Lay and Chi Chi's. The Company believes
that it currently has less than a one percent share of the national salsa
market.

         Many of the makers and distributors of these competing products for
retail distribution are better capitalized than the Company and have the
advantage of intensive local and national advertising programs as well as
greater brand name recognition. In addition, competition for shelf space at
retail food stores is intense. While the Company's management believes that the
quality of its products is good and that the retail prices for its products are
competitive, the Company's ability to obtain retail shelf space is primarily
dependent on its distributors and brokers.

         In marketing its products to food service establishments, the Company
is competing with a number of regional and national producers of Mexican-style
products, including BecLin Foods, Inc., Lake Park, Minnesota; Mexican Originals
(Tyson Foods, Inc.), Fayetteville, Arkansas; and Mission Foods, Inc., Los
Angeles, California. Most of these competitors are better capitalized than the
Company and have well established sales organizations. While the Company is a
major suppler of Mexican-style tortillas and tortilla chips to restaurants,
corporate cafeterias and schools in the states of Iowa, Minnesota, North Dakota,
South Dakota, and Wisconsin, competition will continue to be strong. While
competition outside the Minneapolis/St. Paul area is expected to be more
intense, the Company's management believes it will be able to compete in other
metropolitan area markets because of its ability to fulfill a distributor's
needs with a broad line of quality tortillas and tortilla chips which are
approved by selected restaurant chains.

Trademarks

         The principal trade names that the Company currently utilizes are CRUZ,
LA CAMPANA PARADISO and LA CANASTA in the retail sale of its tortillas; LA
CANASTA, in the retail sale of tortilla chips; and LA CANASTA and CHAPALA in the
retail sale of salsas. The Company also uses the trade name CRUZ in connection
with food service sales. Except as discussed below, all of these trade names or
their associated logos are believed to be owned by the company.

         The Company's CRUZ logo used in connection with tortillas is the
subject of a federal trademark registration which expires January 2000. The
Company's federal registration for the mark CRUZ used in connection with
tortillas expires January 2008. The mark CHAPALA used in connection with salsas
is the subject of a federal trademark registration which expires November 2004.
The Company owns a federal trademark registration for its MEXITOS logo used in
connection with tortillas, tortilla chips and hot sauce which expires May 2005.
All of the Company's trademark registrations are subject to renewal rights and
may terminate prior to their respective expiration dates due to cancellation,
disclaimer or surrender.

<PAGE>

         The Company's trademarks provide an identity between the Company and
its products. In the absence of federal trademark registrations, prior use of a
trademark may establish an exclusive right to its use in connection with the
sale of products in a particular market area. In addition, the above federal
trademark registrations provide rights in their respective marks throughout the
United States and create some legal presumptions should the registered trademark
be infringed.

         The mark LA CAMPANA PARADISO is licensed by the Company from an
affiliate of a former director of the Company. The license agreement expires
December 31, 1999 and currently requires the payment of three percent (3%) of
the gross sales of products sold under the LA CAMPANA PARADISO mark. The Company
is currently negotiating an extension of this license agreement and is
optimistic such an extension can be obtained, but there can be no assurance that
an extension can be negotiated on terms acceptable to the Company.

         Under concurrent use agreements, the Company may not use the LA CANASTA
mark or related logos in 14 western states and has assigned its rights to those
marks in those states to La Canasta Mexican Food Products, Inc. La Canasta
Mexican Food Products, Inc. is not affiliated with the Company but is an
affiliate of a principal shareholder and former director of the Company.

         There is no assurance that any of the trade names or other trademarks
used by the Company, whether or not registered, will be free from future
challenge by others as to prior use or as otherwise being unprotectable.

Government Regulation

         The Company is subject to licensing, regulation and periodic inspection
by various local, state and federal agencies, including those administering
health, sanitation, environmental, building, safety and fire laws and
regulations. These agencies include, but are not limited to the Minnesota
Department of Health, the U.S. Food and Drug Administration and the
Minneapolis/St. Paul, Minnesota Metropolitan Waste Control Commission. The
Company believes it is in substantial compliance with all applicable rules and
regulations of the above-referenced agencies. The costs associated with the
Company's compliance with environmental laws are minimal.

Personnel

         As of December 2, 1998 the Company employed a total of 143 persons. Of
these full-time employees, 5 serve in an executive capacity, 124 are engaged in
manufacturing, shipping, quality control and plant supervision, 7 are engaged in
sales and marketing, and 7 are engaged in administrative tasks. None of the
Company's employees are covered by a collective bargaining agreement. The
Company provides its employees with health, dental, disability and life
insurance programs. The Company's management believes that its relations with
its employees are good.


<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company currently leases an office and manufacturing facility
located at 1565 First Avenue N.W., New Brighton, Minnesota. It consists of a
total of 112,000 square feet, approximately 16,000 square feet of which is
office space and the remainder of which is devoted to manufacturing and dry,
freezer and refrigerated storage. The Company currently pays a base rent of
approximately $37,000 per month, plus taxes. The monthly base rent increases to
approximately $41,000 starting September 1, 2002 and increases again to
approximately $45,000 on September 1, 2007 until the end of the lease term on
August 31, 2012.

ITEM 3.  LEGAL PROCEEDINGS

         There are no material litigation or other legal proceedings pending
against the Company or any of its subsidiaries or any of their property.

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

         There were no matters submitted to a vote of shareholders of the
Company during the fourth quarter of 1998.



<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock is traded in the over-the-counter market
with prices quoted on the Nasdaq SmallCap Market under the symbol "SPFO."
Quotations in the following table represent inter-dealer prices, without retail
markup, markdown or commission, and do not necessarily represent actual
transactions.

<TABLE>
<CAPTION>


                                                                        Common Stock
                                         --------------------------------------------------------------------
Fiscal Quarter Ended                                   High Bid                           Low Bid
---------------------------------------- -------------------------------------- -----------------------------
<S>                                                       <C>                               <C>    
December 31, 1996                                         $1.500                            $0.875
March 31, 1997                                             1.250                             0.813
June 30, 1997                                              1.500                             0.750
September 30, 1997                                         2.000                             1.250

December 31, 1997                                         $1.938                            $1.500
March 31, 1998                                             1.719                             1.125
June 30, 1998                                              1.657                             1.375
September 30, 1998                                         1.500                             1.000

</TABLE>


         At December 11, 1998 the published high and low bid price for the
Company's Common Stock was $1.00 and $0.875 per share. At December 11, 1998,
there were issued and outstanding 7,841,045 shares of Common Stock of the
Company held by 182 shareholders of record. Record ownership includes ownership
by nominees who may hold for multiple owners.

         The Company has paid no dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future. The Company's
credit agreement precludes the Company from declaring or paying dividends on its
Common Stock without the creditor's approval.




<PAGE>


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

Overview

         La Canasta of Minnesota, Inc. ("La Canasta"), the predecessor of Sparta
Foods, Inc. (the "Company"), and now a wholly-owned subsidiary of the Company,
began producing limited volumes of hand stretched tortillas, corn tortillas and
corn tortilla chips shortly following its organization in 1981, primarily for
sale to restaurants. The Company was organized under the laws of the State of
Minnesota in 1988, originally under the name of "Sparta Corp." for the purposes
of raising capital for the acquisition of, or investment in, a business. In
January 1991, the Company acquired all of the outstanding capital stock of La
Canasta. Since 1991 the Company has completed acquisitions and secured new
broker and distributor relationships which has expanded its trademark retail
brands to include Cruz, Chapala, Mexitos and La Campana Paradiso, its retail
distribution network to include Crystal Farms Refrigerated Distribution Company,
Marigold Foods, Inc. and Bradley Distributing, Inc. and its food service
customers to include McDonald's, Perkins, Friendly's and Carlos O'Kelly
restaurants.

Results of Operations

Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended 
September 30, 1997

During fiscal 1998, the Company had net sales of $14,963,157, an increase of
$885,316, or 6%, compared to net sales of $14,077,841 in fiscal 1997. This
increase resulted primarily from higher sales volumes to existing restaurants
and distributors and by adding new customers in the foodservice industry as well
as expansion into new territories through the Company's primary retail
distributors, Crystal Farms Refrigerated Distribution Company and Marigold
Foods, Inc. This increase was offset by a reduction in private label sales due
to the loss of the Company's primary barbecue sauce customer.

Gross profit as a percentage of net sales for fiscal 1998 was 29% compared to
30% for fiscal 1997. This decrease was primarily due to additional manufacturing
costs incurred in the first and seconds quarters of fiscal 1998 associated with
the relocation of the Company to its new manufacturing facility in New Brighton,
Minnesota.

Selling, general and administrative expenses were $3,706,283 for fiscal 1998, an
increase of $496,485 or 15%, as compared to $3,209,798 in fiscal 1997. This
increase is the result of the net sales growth and also reflects higher levels
of selling expenses incurred during the year. The additional selling expenses
consisted of increased advertising and other expenditures to promote the
Company's retail product lines and increased staffing of sales personnel to
implement the Company's long-term sales growth objectives.

<PAGE>

Interest expense was $333,778 for fiscal 1998, an increase of $13,343 compared
to $320,435 in fiscal 1997. This increase is due primarily to higher levels of
bank borrowings during the first and second quarters of fiscal 1998 to finance
the cost of installing new manufacturing equipment. This was offset by a
reduction in bank and other borrowings beginning late in the second quarter and
continuing through the rest of fiscal 1998, resulting from the proceeds received
from the issuance of preferred stock and the sale of rental property.

The Company recorded other income of $159,077 during fiscal 1998 compared to
$106,807 in fiscal 1997. This income consists primarily of rental and interest
income. The growth in other income is due mainly to increased interest income
from the short-term investment of the Company's cash and cash equivalents during
the third and fourth quarters of fiscal 1998.

Income tax benefit was $265,000 for fiscal 1998 compared to an income tax
expense of $22,000 for fiscal 1997. The benefit is the result of reversing a
valuation allowance of approximately $400,000 on a deferred tax asset associated
with the Company's net operating loss carryforwards from prior years. The
valuation allowance was recorded in prior years due to the uncertainty of
generating sufficient future taxable income. Due to the Company's expectation
that it will be able to generate sufficient future taxable income, this
valuation allowance was eliminated during fiscal 1998. The benefit is offset by
a current year income tax expense resulting from the Company's Income before
income taxes of $429,496 during fiscal 1998.

Net income for fiscal 1998 was $694,496 compared to net income in fiscal 1997 of
$435,729 for the reasons set forth above.

Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996.

         During fiscal 1997, the Company had net sales of $14,077,841, an
increase of $1,415,022, or 11%, compared to net sales of $12,662,819 in fiscal
1996. This increase in net sales resulted primarily from new customers in the
foodservice industry as well as expansion into new territories through its
primary retail distributors, Crystal Farms Refrigerated Distribution Company and
Marigold Foods, Inc.

         Gross profit as a percentage of net sales for fiscal 1997 was 30%
compared to 27% for fiscal 1996. This increase in fiscal 1997 was primarily due
to more favorable operating efficiencies and significant cost savings achieved
by certain purchases of raw materials.

         Selling, general and administrative expenses were $3,209,798 for fiscal
1997, an increase of $241,229 or 8%, as compared to $2,968,569 in fiscal 1996.
Selling, general and administrative expenses as a percentage of net sales were
23% for both fiscal 1997 and 1996. A nonrecurring charge to operating income of
$375,126 was recorded in fiscal 1997 in connection with the Company's relocation
to New Brighton, Minnesota from St. Paul, Minnesota. This charge was comprised
of the unamortized portion of leasehold improvements at the Company's former
manufacturing facility in St. Paul and the moving charges incurred with this
relocation.

<PAGE>

         Interest expense was $320,435 for fiscal 1997, a decrease of $111,306
compared to $431,741 in 1996. This lower interest expense reflects primarily the
effect of interest rate reductions and lower levels of bank borrowings through
most of the fiscal year.

         The Company recorded other income of $106,807 during fiscal 1997
compared to $86,018 in fiscal 1996. This income results primarily from the
rental of the Company's Lakeville property. The Company has minimal income tax
expense due to the utilization of net operating loss carryforwards. The Company
reflected a valuation allowance on remaining net operating loss carryforwards of
approximately $2.1 million as realization was dependent on sufficient future
taxable income, which was not assured. Net income for fiscal 1997 was $435,729
compared to net income in fiscal 1996 of $105,307 for the reasons set forth
above.

Liquidity and Capital Resources

         The Company has financed its current activities primarily through cash
generated from its operations, bank and other debt and the issuance of
convertible preferred stock.

         Cash provided by operating activities during fiscal 1998 was $920,250
consisting principally of net income of $694,496, depreciation and amortization
of $752,118, and a decrease in inventories of $264,390 offset by an increase in
accounts receivable and prepaid expenses of $91,317, an increase in deferred
income tax assets of $270,000 and a decrease in accounts payable and accrued
expenses of $420,831. Cash provided by investing activities was $253,527
consisting principally of proceeds from the sale of rental property and the
utilization of restricted cash related to and offset by the purchase of property
and equipment in the Company's new manufacturing facility. Cash used in
financing activities was $43,122 consisting principally of $2,529,299 in
proceeds from the issuance of common stock due to certain warrant exercises and
the issuance of preferred stock through a private placement during the second
quarter, offset by repayments of $2,550,809 in short-term borrowings under the
Company's line of credit and mortgage-related long-term borrowings associated
with the rental property that was sold during the third quarter.

         At September 30, 1998, the Company had cash and cash equivalents of
$1,131,255 and working capital of $1,744,986. The Company believes that its bank
credit facilities and cash flow from operations will be sufficient to meet its
operating requirements through fiscal 1999.

Seasonality

         The Company has historically had higher sales in its third and fourth
fiscal quarters which end June 30, and September 30, respectively, than in its
first and second quarters. Management believes that this is a result of seasonal
consumption patterns with respect to the Company's food products, such as
consumption of higher volumes of tortilla chips and salsa during the summer
months. This seasonality may cause quarterly results of operations to fluctuate.



<PAGE>


Raw Material Cost Fluctuations

         The Company does not enter into futures contracts as defined by
Statements of the Financial Accounting Standards Board. It does, however, enter
into purchase orders for delayed delivery of raw materials, generally 30 days
for raw materials other than flour and corn. The Company enters into purchase
orders for delayed delivery of flour and corn for a period of 4-12 months,
depending on current pricing, to ensure the availability of the type of flour
and corn best suited for the Company's products. These purchase orders are
placed directly with the suppliers.

New Accounting Pronouncements

         In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. This
statement requires public enterprises to report selected information about
operating segments in annual and interim reports issued to shareholders. It is
effective for financial statements for fiscal years beginning after December 15,
1997, but it is not required to be applied to interim financial statements in
the initial year of its application. The statement will have no effect on the
Company's basic financial statements, but management is reviewing if additional
disclosures will be required.

Outlook

         The Company's plan in fiscal 1999 is to continue to grow the business
by increasing sales and expanding its presence in new geographic territories.
The Company plans to grow the business internally as well as through joint
ventures and/or acquisitions and through the development of new distribution
relationships. See Item One "Description of Business - Business Strategy."

         The Company relies on computer software and hardware systems to manage
its information and portions of its manufacturing. The Company is aware of the
computer software and hardware issues associated with the programming code in
existing computer software programs and non-information technology such as
micro-controllers found in computer hardware. The issue is whether systems will
properly recognize date sensitive information. Much of the computer software and
hardware in use today are unable to recognize a year that begins with "20"
instead of "19." Many computers will be unable to recognize the Year 2000 and,
as a result, could generate erroneous data or cause a computer to fail. Some
computer systems may begin to operate improperly sooner for failure to read
other dates such as September 9, 1999.

         The Company has completed an assessment of its exposure to the Year
2000 issue by evaluating its software and hardware systems. The Company's
assessment revealed that its exposure to the Year 2000 issue is nominal, and it
is currently upgrading its software and hardware systems to make such systems
Year 2000 compliant. The cost of such upgrade is expected to be less than
$10,000. In addition to evaluating its own systems, the Company has inquired of
its major customers and suppliers as to their exposure to the Year 2000 issue to

<PAGE>

determine the extent to which the Company is indirectly vulnerable to the Year
2000 issues from such customers and suppliers. Many of the Company's customers
and suppliers have responded that they believe they are or will be Year 2000
compliant. The Company plans to continue to assess its exposure to the Year 2000
issue and develop plans to address any developments associated with the Year
2000 issue that could have an adverse effect on the Company and its operations.

         Statements relating to the Company's (a) goals and business objectives
contained in the section entitled "Description of Business - Business Strategy;"
(b) Year 2000 assessment and its future growth contained in the Management's
Discussion and Analysis or Plan of Operations and (c) the President's statements
relating to management's optimism regarding the Company's future, its projected
growth potential, the ability of the Company's management team, operating and
administrative infrastructure to support more than $20 million in net sales for
fiscal year ended September 2002 and the intent to leverage the Company's brand
name strength contained in the President's Letter to Shareholders attached to
the Company's 1999 Annual Report to Shareholders are forward-looking statements
that involve a number of risks and uncertainties. Some of the factors that could
cause actual results to differ materially include but are not limited to (i)
seasonality of its sales and raw materials cost fluctuations, which are
discussed above; (ii) a decline in national sales growth of tortillas; (iii)
failure of the Company's sales force to achieve its annual sales objectives;
(iv) failure of the Company to continue to produce high quality tortillas; (v)
the inability of the Company to grow its business due to competitive factors;
and (vi) the loss of any significant customers or distributors. In addition, any
unforeseen expense of a material nature would materially and adversely affect
the Company's ability to grow its operations.


<PAGE>



ITEM 7.  FINANCIAL STATEMENTS


                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Sparta Foods, Inc.
New Brighton, Minnesota

We have audited the accompanying consolidated balance sheets of Sparta Foods,
Inc. and Subsidiary (the Company) as of September 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit 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 financial position of Sparta Foods, Inc.
and Subsidiary as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.




Minneapolis, Minnesota
November 12, 1998


<PAGE>



SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997

<TABLE>
<CAPTION>


ASSETS (Note 3)                                                                    1998               1997
--------------------------------------------------------------------------- ------------------- ------------------
<S>                                                                             <C>                 <C>    
Current Assets
    Cash and cash equivalents                                                   $ 1,131,255         $       600
    Accounts receivable, less allowances of $30,000 in 1998 and
        $49,500 in 1997 (Note 7)                                                    877,752             833,467
    Inventories:
        Finished goods                                                              436,784             566,212
        Raw materials and packaging                                                 396,396             531,358
    Prepaid expenses                                                                198,752             155,416
    Income tax receivable                                                             4,746               1,050
    Deferred tax asset (Note 6)                                                      43,000                   -
                                                                            ------------------- ------------------
                   Total current assets                                           3,088,685           2,088,103
                                                                            ------------------- ------------------

Property and Equipment (Note 2)                                                   9,045,342           7,488,786
    Less accumulated depreciation                                                 2,788,399           2,371,131
                                                                            ------------------- ------------------
                                                                                  6,256,943           5,117,655
                                                                            ------------------- ------------------

Other Assets
    Restricted cash (Note 3)                                                        242,059           1,893,967
    Goodwill, less accumulated amortization of  $85,404 and
        $72,564, respectively                                                       427,968             440,808
    Covenants not-to-compete, less accumulated amortization
        of $39,424 and $40,772, respectively                                         60,576              69,228
    Rental property held for resale, less accumulated depreciation                        -
        of $38,728 (Note 1)                                                                             906,422
    Deferred financing costs, less accumulated amortization of
        $64,778 and $54,518, respectively                                           133,256             132,460
    Deferred tax asset (Note 6)                                                     227,000                   -
    Other                                                                           284,698             248,702
                                                                            ------------------- ------------------
                                                                                  1,375,557           3,691,587
                                                                            =================== ==================
                                                                               $ 10,721,185        $ 10,897,345
                                                                            =================== ==================
See Notes to Consolidated Financial Statements.

</TABLE>


<PAGE>


<TABLE>
<CAPTION>


LIABILITIES AND STOCKHOLDERS' EQUITY                                                   1998               1997
------------------------------------------------------------------------------- ------------------- ------------------
<S>                                                                                <C>                 <C>    
Current Liabilities
    Note payable, bank (Note 3)                                                    $          -         $   834,209
    Current maturities of long-term debt                                                367,377             700,388
    Accounts payable:
        Trade                                                                           506,874             861,120
        Construction                                                                          -             428,315
    Accrued expenses                                                                    469,448             536,033
                                                                                ------------------- ------------------
                  Total current liabilities                                           1,343,699           3,360,065
                                                                                ------------------- ------------------



Long-Term Debt, less current maturities (Note 3)                                      2,667,623           4,051,212
                                                                                ------------------- ------------------


Commitments (Notes 4 and 5)


Stockholders' Equity (Note 8)
    Preferred stock, authorized 1,000,000 shares, $1,000 par value; issued and
        outstanding 2,500 shares and -0- shares in
        1998 and 1997, respectively                                                   2,500,000                   -
    Common stock; authorized 15,000,000 shares, $0.01 par value;
        issued and outstanding 7,037,172 and 6,765,758 shares
        in 1998 and 1997, respectively                                                   70,371              67,657
    Additional paid-in capital                                                        4,977,092           4,950,507
    Accumulated deficit                                                                (837,600)         (1,532,096)
                                                                                ------------------- ------------------
                                                                                      6,709,863           3,486,068
                                                                                =================== ==================
                                                                                   $ 10,721,185        $ 10,897,345
                                                                                =================== ==================

</TABLE>


<PAGE>



SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>

                                                                                   1998               1997
--------------------------------------------------------------------------- ------------------- ------------------
<S>                                                                            <C>                 <C>    
Net sales (Note 7)                                                             $ 14,963,157        $ 14,077,841
Cost of sales                                                                    10,652,677           9,821,560
                                                                            ------------------- ------------------
                  Gross profit                                                    4,310,480           4,256,281

Selling, general, and administrative expenses                                     3,706,283           3,209,798
Nonrecurring charge (Note 4)                                                              -             375,126
                                                                            ------------------- ------------------
                  Operating income                                                  604,197             671,357

Other income, net (Note 1)                                                          159,077             106,807
Interest expense                                                                   (333,778)           (320,435)
                                                                            ------------------- ------------------
                  Income before income taxes                                        429,496             457,729

Income tax benefit (expense) (Note 6)                                               265,000             (22,000)
                                                                            =================== ==================
                  Net income                                                      $ 694,496           $ 435,729
                                                                            =================== ==================



Net income                                                                        $ 694,496           $ 435,729
Preferred dividends                                                                 (75,000)                  -
                                                                            ------------------- ------------------
                  Net income available to common shareholders                     $ 619,496           $ 435,729
                                                                            =================== ==================

Earnings per share (Note 10)
    Basic                                                                   $          0.09     $          0.07
    Diluted                                                                            0.08                0.05

See Notes to Consolidated Financial Statements.

</TABLE>


<PAGE>



SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>


                                                                                       Preferred Stock
                                                                            --------------------------------------
                                                                            
                                                                            Shares Outstanding       Par Value
--------------------------------------------------------------------------- ------------------- ------------------
<S>                                                                                  <C>           <C>    
Balance, September 30, 1996                                                               -        $          -
    Common stock issued upon exercise of warrants and options,
        net of costs of $3,050                                                            -                   -
    Net income                                                                            -                   -
                                                                            ------------------- ------------------
Balance, September 30, 1997                                                               -                   -
    Preferred stock issued, net of costs of $158,735                                  2,500           2,500,000
    Common stock issued upon exercise of warrants and options                             -                   -
    Net income                                                                            -                   -
                                                                            =================== ==================
Balance, September 30, 1998                                                           2,500        $  2,500,000
                                                                            =================== ==================

See Notes to Consolidated Financial Statements.

</TABLE>



<PAGE>

<TABLE>
<CAPTION>



                    Common Stock                     Additional
            Shares                                    Paid-In                   Accumulated 
          Outstanding               Par Value         Capital                    Deficit                   Total
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
         <S>                  <C>                    <C>                    <C>                   <C>    

         6,679,049            $       66,790         $    4,911,070         $    (1,967,825)       $     3,010,035

            86,709                       867                 39,437                       -                 40,304
                 -                         -                      -                 435,729                435,729
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
         6,765,758                    67,657              4,950,507              (1,532,096)             3,486,068
                 -                         -               (158,735)                      -              2,341,265
           271,414                     2,714                185,320                       -                188,034
                 -                         -                      -                 694,496                694,496
========================= ====================== ======================= ====================== ======================
         7,037,172            $       70,371         $    4,977,092         $      (837,600)       $     6,709,863
========================= ====================== ======================= ====================== ======================


</TABLE>


<PAGE>



SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>

                                                                                   1998               1997
--------------------------------------------------------------------------- ------------------- ------------------
<S>                                                                               <C>              <C>    
Cash Flows From Operating Activities
    Net income                                                                    $ 694,496         $ 435,729
    Adjustments to reconcile net income to net cash provided by operating
    activities:
        Depreciation                                                                687,095           547,790
        Amortization                                                                 65,023            80,299
        Deferred income taxes                                                      (270,000)                -
        (Gain) loss on disposal of property and equipment                            (8,606)          294,213
        Changes in assets and liabilities:
           Accounts and income tax receivable                                       (47,981)         (193,533)
           Inventories                                                              264,390          (417,598)
           Prepaid expenses                                                         (43,336)          (24,051)
           Accounts payable and accrued expenses                                   (420,831)          326,504
                                                                            ------------------- ------------------
                Net cash provided by operating activities                           920,250         1,049,353
                                                                            ------------------- ------------------

Cash Flows From Investing Activities
    (Increase) decrease in restricted cash                                        1,651,908        (1,893,967)
    Purchases of property, equipment, and other                                  (2,386,237)       (1,656,933)
    Proceeds from the sale of property and equipment and rental                     927,728            61,025
    property held for resale
    (Increase) decrease in deposits and other assets                                 60,128          (137,428)
                                                                            ------------------- ------------------
       Net cash provided by (used in) investing activities                          253,527        (3,627,303)
                                                                            ------------------- ------------------

Cash Flows From Financing Activities
    Net borrowings (payments) on line of credit                                    (834,209)          539,398
    Long-term borrowings                                                          1,293,353         2,730,667
    Payments of long-term debt                                                   (3,009,953)         (610,585)
    Issuance of common stock, net of costs                                          188,034            40,304
    Issuance of preferred stock, net of costs                                     2,341,265                 -
    Deferred financing costs                                                        (21,612)         (121,834)
                                                                            ------------------- ------------------
       Net cash provided by (used in) financing activities                          (43,122)        2,577,950
                                                                            ------------------- ------------------

       Net change in cash and cash equivalents                                    1,130,655                 -

Cash and Cash Equivalents
    Beginning                                                                           600               600
                                                                            =================== ==================
    Ending                                                                      $ 1,131,255         $     600
                                                                            =================== ==================

                                   (Continued)
</TABLE>


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>

                                                                                   1998               1997
--------------------------------------------------------------------------- ------------------- ------------------
<S>                                                                              <C>              <C>    
Supplemental Disclosures of Cash Flow Information
   Cash payments for:
       Interest                                                                  $  353,168        $  319,017
       Income taxes                                                                   9,545            23,050
                                                                            =================== ==================

Supplemental Schedule of Noncash Investing and Financing Activities
   Facility improvements financed with accounts payable                          $        -        $  428,315
                                                                            =================== ==================

See Notes to Consolidated Financial Statements.

</TABLE>


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Nature of Business and Significant Accounting Policies

Nature of business: Sparta Foods, Inc., through its wholly-owned subsidiary, La
Canasta of Minnesota, Inc. (La Canasta) formulates, manufactures and markets a
broad line of tortillas, tortilla products, and salsas under its own brand names
and markets sauces for others under private labels.

The Company's customers are principally retail food stores and food distributors
in the Upper Midwest. The Company grants credit on an individual customer basis.

Consolidation: The financial statements of Sparta Foods, Inc. have been
consolidated with its wholly-owned subsidiary, La Canasta (together herein
referred to as the Company). All significant intercompany balances and
transactions have been eliminated.

Management estimates: 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.

Revenue recognition: Revenues are recognized at the time the product is shipped
to the customer. The Company records estimated allowances for sales returns and
promotions.

Fair value of financial instruments: The Company has adopted FASB Statement No.
107, Disclosures About Fair Value of Financial Instruments, which requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. The aggregate fair
values of the financial instruments would not represent the underlying value of
the Company.

The financial statements include the following financial instruments: cash and
cash equivalents, trade accounts receivable, accounts payable, notes payable,
and a line of credit. At September 30, 1998, no separate comparison of fair
values versus carrying values is presented for the aforementioned financial
instruments since their fair values are not significantly different than their
balance sheet carrying amounts.

Cash and cash equivalents: The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents consist primarily of investments in money market
accounts. The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts.

Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.


<PAGE>

SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Nature of Business and Significant Accounting Policies (Continued)

Property and equipment: Property and equipment are carried at cost and are being
depreciated over their useful lives on a straight-line basis. Leasehold
improvements are being depreciated over the shorter of the estimated useful life
of the asset or the life of the lease.

Intangibles: Costs in excess of net assets acquired (goodwill) are being
amortized over 40 years. Covenants not-to-compete are being amortized over 15
years, the term of the agreements. Deferred financing costs are being amortized
over the lives of the agreements, which are 5 to 10 years.

Accounting for long-lived assets: The Company reviews its intangibles, property
and equipment, and rental property periodically to determine potential
impairment by comparing the carrying value of the assets with estimated future
cash flows expected to result from the use of the assets, including cash flows
from disposition. To date, management has determined that no impairment of
long-lived assets exists.

Rental property: Rental property consisted of a facility in Lakeville,
Minnesota, which was previously used in the manufacturing of the Company's
products. The property was recorded at estimated fair market value, which was
lower than cost.

The Company leased this facility under an operating lease in 1998 and 1997. The
lease called for monthly payments of approximately $11,000, plus taxes and
utilities. Rental income under this lease was approximately $80,000 and $130,000
for the years ended September 30, 1998 and 1997, respectively, and is included
in other income in the statements of income. The Company sold the property in
May 1998 at approximately the recorded value.

Income taxes: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

Preferred stock: On February 24, 1998, the Company issued 2,500 shares of
preferred stock, series 1998. The shares are convertible at any time at the rate
of 606.06 shares of common stock for each share of preferred stock. The holders
of the preferred stock have the right to require the Company to repurchase the
stock in the event of a change in control authorized by the Board of Directors
or if the Company is in default with certain covenants as defined in the
agreement. The holders of the preferred stock are entitled to receive, when, as,
and if declared by the Company's Board of Directors, cash dividends at the rate
of 5 percent annually or, at the option of the Company, dividends of shares of
additional preferred stock at the rate of 7.5 percent annually. Dividends are
fully cumulative, accumulate without interest from the date the preferred stock
was originally issued and, if declared by the Board of Directors, are payable,
semiannually on January 1 and July 1. At September 30, 1998, cumulative and
undeclared cash dividends totaled $75,000 or $30 per share.


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Nature of Business and Significant Accounting Policies (Continued)

Recent accounting pronouncements: As of October 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components. Statement No. 130
requires unrealized gains or losses on available-for-sale securities and certain
other items, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. The Company has no
comprehensive income as defined by SFAS No. 130.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
statement requires public enterprises to report selected information about
operating segments in annual and interim reports issued to shareholders. It is
effective for financial statements for fiscal years beginning after December 15,
1997, but it is not required to be applied to interim financial statements in
the initial year of its application. The statement will have no effect on the
Company's basic financial statements, but management is reviewing if additional
disclosures will be required.

Note 2.       Property and equipment

<TABLE>
<CAPTION>


Property and equipment consists of:
                                                                   Estimated
                                                                  Useful Lives                September 30
                                                                                  -------------------------------------
                                                                                        1998               1997
--------------------------------------------------------------- ----------------- ------------------ ------------------
<S>                                                                   <C>             <C>               <C>    
Factory equipment                                                     3-18            $ 6,726,731       $ 5,141,085
Office and other equipment                                            3-12                387,562           356,231
Leasehold improvements                                                 15               1,734,807                 -
Packaging printing plates                                              5                  186,742           155,470
Construction in progress                                               -                    9,500         1,836,000
                                                                                  -------------------------------------
                                                                                      $ 9,045,342       $ 7,488,786
                                                                                  ================== ==================

</TABLE>


Note 3.       Financing Agreements

Line of credit: The Company has a line of credit with a bank, secured by all
assets. Maximum borrowings under the credit agreement are determined by a
borrowing base calculation or $1,200,000, whichever is less. Borrowings bear
interest at prime (8.25 percent at September 30, 1998). The agreement expires
May 30, 2000. At September 30, 1998, there were no borrowings under the line of
credit. The Company is to maintain certain minimum net worth and debt service
coverage levels.

State of Minnesota loan: On July 1, 1997, the Minnesota Agricultural and
Economic Development Board issued $1,950,000 in Series 1997D Tax-Exempt Bonds,
the proceeds of which issue were loaned to the Company to finance new equipment.
The underlying loan from the state is due in monthly installments which vary in
accordance with the maturity dates of the related revenue bonds, plus interest
at rates varying from 4.5 to 6.0 percent. The maturity dates of the revenue
bonds are through August

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 3.       Financing Agreements (Continued)

2008. The effective rate of interest to the Company is 5.79 percent per annum.
At September 30, 1998, $1,791,667 is outstanding. The Company is to maintain
certain minimum net worth, debt service coverage levels, and has restrictions on
the payment of dividends.

In connection with the loan, the Company is required to maintain a debt service
reserve fund and a construction fund. The debt service reserve fund will remain
until all loan obligations have been satisfied. The construction fund represents
undisbursed loan proceeds that are available for approved improvement and
equipment expenditures. These amounts have been reflected on the consolidated
balance sheet as restricted cash as of September 30, 1998 and 1997, as follows:


<TABLE>
<CAPTION>


                                                                              1998                     1997
-------------------------------------------------------------------- ------------------------ ------------------------
<S>                                                                       <C>                     <C>    
Debt service reserve fund, money market funds                             $     197,412           $     195,000
Construction fund, money market funds                                            44,647               1,698,967
                                                                     -------------------------------------------------
                                                                          $     242,059          $    1,893,967
                                                                     ======================== ========================
</TABLE>


<TABLE>
<CAPTION>


Long-term debt:  Long-term debt consists of the following:
                                                                                          September 30
                                                                            ------------------------------------------
                                                                                    1998                 1997
--------------------------------------------------------------------------- --------------------- --------------------
<S>                                                                             <C>                 <C>    
State of Minnesota loan (described above)                                       $   1,791,667       $   1,916,250
Term note payable to bank, secured by substantially all assets
   of the Company, due in monthly installments of $26,535, including interest at
   the prime rate (8.25% as of September 30, 1998), to June 30, 2003, when the
   remaining balance is
   due (1)                                                                          1,243,333                   -
Term and equipment notes payable to bank, paid in June, 1998                                -           2,048,853
Notes payable to a trust and to an individual, paid in May, 1998                            -             736,322
Other notes payable                                                                         -              50,175
                                                                            --------------------- --------------------
                                                                                    3,035,000           4,751,600

Less current maturities                                                               367,377             700,388
                                                                            ------------------------------------------
                                                                                $   2,667,623       $   4,051,212
                                                                            ===================== ====================

(1) The loan agreement requires, among other things, the Company maintain
certain minimum net worth and debt service coverage levels.


</TABLE>



<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.       Financing Agreements (Continued)

Aggregate maturities of long-term debt at September 30, 1998, are as follows:

Years ending September 30:
     1999                                                    $     367,000
     2000                                                          396,000
     2001                                                          422,000
     2002                                                          454,000
     2003                                                          396,000
Later years                                                      1,000,000
                                                      ------------------------
                                                           $     3,035,000
                                                      ========================

Note 4.  Lease Commitments and Rental Expense

During fiscal 1997, the Company moved its operations to a new office and
manufacturing facility. The Company's commitment to relocate these facilities
caused a charge to 1997 operations of $375,126 related to the unamortized cost
of leasehold improvements at its former facility and specific costs related to
the move.

The Company has leased its new office and factory building under a noncancelable
operating lease agreement which expires on August 31, 2012, and requires minimum
monthly rentals of $37,360, which increase in the fifth and tenth year of the
lease, plus the payment of property taxes, normal maintenance, and insurance on
the property. The total rental commitment is recognized as rent expense on a
straight-line basis over the life of the lease. Accordingly, the Company has
recorded accrued rent of $50,188 as a liability at September 30, 1998. In
September 1998, the Company subleased a portion of the building to another
company under a noncancelable agreement which expires March 2000 and requires
annual rentals of $34,800, plus additional amounts for utilities and other
services which are determined on a per-hour basis.

In addition, the Company had leased various items of factory and office
equipment under noncancelable leases.

Approximate minimum future obligations required under operating leases, (net of
the sublease), at September 30, 1998, are as follows:

Years ending September 30:
     1999                                                  $  591,000
     2000                                                     597,000
     2001                                                     594,000
     2002                                                     544,000
     2003                                                     569,000
     Later years                                            4,657,000
                                                       ------------------
                                                          $ 7,552,000
                                                       ==================


<PAGE>

SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.  Lease Commitments and Rental Expense (Continued)

Total rent expenses for all facilities and equipment during the years ended
September 30, 1998 and 1997, were approximately $626,000 and $447,500, net of
$80,000 and $130,000 of sublease and other rental income, respectively.

Note 5.  Agreements and Commitments

Purchase agreements: The Company does not enter into futures contracts. It does,
however, enter into purchase orders for delayed delivery of raw materials,
generally 30 days for raw materials other than corn and flour. The Company
enters into purchase orders with the suppliers for the delayed delivery of corn
and flour for a period of 4 to 12 months, depending on current pricing, to
insure the availability of the type of corn and flour best suited for its
products. At September 30, 1998, the Company had outstanding purchase orders of
approximately $630,000. At the end of each reporting period, the Company
evaluates the open purchase orders for corn and flour to determine whether a
loss should be recognized. No such losses were accruable as of September 30,
1998 and 1997.

Self-funded insurance: The Company provides medical insurance for its employees
under a self-funded plan. The Company estimates expenses under this plan and
recognizes the liability as estimates are made. The Company has purchased
stop-loss insurance for the plan, which limits the Company's liability to
$10,000 per individual per year and also has certain annual aggregate limits.

Note 6.  Income Taxes

The income tax benefit (expense) for 1998 and 1997 consisted of:

<TABLE>
<CAPTION>


                                                                                   1998                  1997
-------------------------------------------------------------------------- --------------------- ---------------------
<S>                                                                        <C>                      <C>    
Current:
   Federal (net of $-0- and $133,000 in 1998 and 1997,
     respectively, of net operating loss carryforward benefits)            $              -         $      (8,000)
   State (net of $-0- and $58,000 in 1998 and 1997, respectively,
     of state net operating loss carryforward benefits)                              (5,000)              (14,000)
Deferred                                                                            270,000                     -
                                                                           -------------------------------------------
                                                                           $        265,000         $     (22,000)
                                                                           ===================== =====================
</TABLE>



<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES AND CONSOLIDATED FINANCIAL STATEMENTS

Note 6.  Income Taxes (Continued)

A reconciliation between income tax benefit (expense) computed at the federal
statutory rate and the Company's effective income tax rate for 1998 and 1997 is
as follows:

<TABLE>
<CAPTION>

                                                                                   1998                  1997
-------------------------------------------------------------------------- --------------------- ---------------------
<S>                                                                                <C>                   <C>   
Federal statutory rate                                                             (34.0)%               (34.0)%
State income taxes, net of federal benefit                                          (6.5)%                (6.5)%
Valuation allowance                                                                 90.3%                    -
Nondeductible expenses                                                              (0.8)%                (0.9)%
Benefit of graduated tax rate                                                       12.7%                    -
Utilization of net operating loss carryforward                                         -                  36.6%
                                                                           --------------------- ---------------------
Effective income tax rate                                                           61.7%                 (4.8)%
                                                                           ===================== =====================

</TABLE>


Temporary differences that give rise to the net deferred tax assets and
liabilities at September 30, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>

                                                                                     1998                 1997
----------------------------------------------------------------------------- -------------------- -------------------
<S>                                                                              <C>              <C>    
Net current deferred tax assets (liabilities)
   Receivable allowances                                                         $    9,000        $      15,000
   Vacation accrual                                                                  23,000               23,000
   Inventory costs                                                                   10,000               15,300
   Bonus accrual                                                                          -               14,200
   Charitable contributions                                                           1,000                    -
   Leased deferred income                                                                 -              (17,000)
Less valuation allowance                                                                  -              (50,500)
                                                                              -------------------- -------------------
                                                                                 $   43,000        $             -  
                                                                              ==================== ===================

</TABLE>

<TABLE>
<CAPTION>


                                                                                     1998                 1997
----------------------------------------------------------------------------- -------------------- -------------------
<S>                                                                             <C>                 <C>    
Net current deferred tax assets (liabilities):
   Depreciation                                                                 $  (554,000)       $    (470,000)
   Property and equipment valuation allowance                                             -               89,200
   Net operating loss carryforwards                                                 703,000              642,000
   AMT credit carryforwards                                                          38,000               42,000
   Intangible assets                                                                 40,000               34,200
Less valuation allowance                                                                  -             (337,400)
                                                                              -------------------- -------------------
                                                                                 $  227,000        $           -  
                                                                              ==================== ===================

</TABLE>

As of September 30, 1997, the Company recorded a valuation allowance of $387,900
against net deferred tax assets to reduce the totals to amounts that management
believed would ultimately be realized. Realization of deferred tax assets is
dependent upon sufficient future taxable income during the period

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6.  Income Taxes (Continued)

when deductible temporary differences and carryforwards are expected to be
available to reduce taxable income. During the year ended September 30, 1998,
management reduced the valuation allowance recorded in prior years, as they
believe there will be sufficient future taxable income to utilize all deductible
temporary differences and carryforwards.

The federal net operating loss carryforwards of $2,343,000 at September 30,
1998, will expire as follows:

Years                                                          Amount
-------------------------------------------------------- --------------------
2009                                                       $   662,000
2010                                                         1,277,000
2011                                                           202,000
2018                                                           202,000

The future use of the federal net operating losses can be subject to annual
limits in the event of ownership changes. The alternative minimum tax (AMT)
credit carryforwards may be carried forward indefinitely to reduce future
regular federal income taxes payable.


Note 7.  Major Customers

The Company had sales to one customer which accounted for approximately 25 and
23 percent of sales for fiscal years 1998 and 1997, respectively. As of
September 30, 1998, accounts receivable from this customer were approximately
$158,800.

In addition, the Company had sales to a second customer through a distributor
which accounted for approximately 12 percent of sales for fiscal years 1998 and
1997, respectively. As of September 30, 1998, accounts receivable from this
distributor were approximately $82,000.


Note 8.  Options, Warrants, and Subsequent Events

Stock options: The Company has a stock option plan, as amended, pursuant to
which qualified and nonqualified stock options for up to 1,300,000 shares of the
Company's $0.01 par value common stock have been reserved for issuance under the
plan and may be granted to key employees and members of the Board of Directors.
The options are generally granted at exercise prices equal to or greater than
the market value of the common stock at the date of grant, expire at varying
dates not to exceed ten years from the grant date, and are not transferable.


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.  Options, Warrants, and Subsequent Events (Continued)

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for grants under the plan.
Had compensation cost for the plan been determined based on the fair values of
options granted (using the method described in Statement No. 123), reported net
income and net income per common share on a pro forma basis as compared to
actual results would have been as follows at September 30:

                                                   1998              1997
------------------------------------------ ----------------- ------------------
Net income:
   Basic:
     As reported                              $  619,496         $  435,729
     Pro forma                                   390,704            345,324
   Diluted:
     As reported                                 694,496            435,729
     Pro forma                                   465,704            345,324
Basic earnings per share:
     As reported                                    0.09               0.07
     Pro forma                                      0.06               0.06
Diluted earnings per share:
     As reported                                    0.08               0.05
     Pro forma                                      0.06               0.05


For purposes of the aforementioned pro forma information, the fair value of each
option is estimated at the grant date using the Black-Scholes option pricing
model with the following weighted-average assumptions for grants in 1998 and
1997, respectively: dividend rate of -0- for both years; price volatility of
77.44 and 99.49 percent; risk-free interest rate of 5.83 and 5.92 percent; and
expected lives of approximately 6 and 4 years. The weighted-average fair values
of options granted during 1998 and 1997 were $0.53 and $0.76, respectively.

The pro forma effects of applying Statement No. 123 are not indicative of future
amounts since, among other reasons, the pro forma requirements of the statement
have been applied only to options granted after September 30, 1995.


<PAGE>

SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.  Options, Warrants, and Subsequent Events (Continued)

Additional information relating to all outstanding options as of September 30,
1998 and 1997, is as follows:

<TABLE>
<CAPTION>
                                                              1998                                 1997
                                                ----------------------------------    --------------------------------
                                                                Weighted-Average                      Weighted-Average
                                                                 Exercise Price                       Exercise Price
                                                    Shares                                Shares
----------------------------------------------- --------------- ------------------ -- --------------- ----------------
<S>                                              <C>                <C>                   <C>            <C>   
Options outstanding at beginning of year            962,585         $   1.76              723,584        $   1.76
   Options exercised                                (19,750)            1.02              (40,000)           0.50
   Options expired                                  (95,585)            3.49              (43,499)           1.60
   Options granted                                  253,000             1.52              322,500            1.07
                                                --------------- ------------------ -- --------------- ----------------
Options outstanding at end of year                1,100,250         $   1.41              962,585        $   1.58
                                                =============== ================== == =============== ================

Options exercisable at end of year                  488,125         $   1.60              343,084        $   2.23
                                                =============== ================== == =============== ================
</TABLE>

The following table summarizes information about stock options outstanding at
September 30, 1998:

<TABLE>
<CAPTION>
                                                 Options Outstanding                    Options Exercisable
                                         ------------------------------------    ------------------------------
                                         Weighted Average
                                            Remaining
                          Number           Contractual      Weighted-Average         Number         Weighted-Average
Range of Exercise     Outstanding at           Life             Exercise         Exercisable at         Exercise
      Prices        September 30, 1998       (Years)              Price        September 30, 1998        Price
------------------- ------------------- ------------------- ------------------ ------------------- -------------------
<S>                      <C>                   <C>              <C>                 <C>                 <C>
$  0.50-0.88             221,250               2.08             $  0.53             165,750             $  0.53
   1.00-1.44             525,500               3.84                1.20             186,125                1.27
   1.56-1.75             248,500               3.57                1.62              37,500                1.75
   2.00-2.94              45,000               0.95                2.42              38,750                2.49
   4.95                   60,000               0.08                4.95              60,000                4.95
------------------- ------------------- ------------------- ------------------ ------------------- -------------------
$  0.50-4.95           1,100,250               3.10             $  1.41             488,125             $  1.60
=================== =================== =================== ================== =================== ===================
</TABLE>

Stock warrants: A summary of warrants follows:

<TABLE>
<CAPTION>
                                                                     Price Range                    Shares
------------------------------------------------------------ ---------------------------- ----------------------------
<S>                                                                        <C>                      <C>    
Outstanding, September 30, 1996                                            $ 0.50 - 4.50            3,712,546
   Exercised                                                                        0.50              (46,709)
                                                             ---------------------------- ----------------------------
Outstanding, September 30, 1997                                                0.50-4.50            3,665,837
   Exercised                                                                   0.50-0.75             (251,664)
                                                             ---------------------------- ----------------------------
Outstanding, September 30, 1998                                              $ 0.50-4.50            3,414,173
                                                             ============================ ============================

</TABLE>

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.  Options, Warrants, and Subsequent Events (Continued)

Warrants expire as follows:

Expiration Date                                                  Shares
----------------------------------------------------- ------------------------
October 20, 1998                                                400,000 (1)
October 31, 1998                                                528,873 (2)
February 2,1999                                               2,390,000
December 9, 1999                                                 15,300
February 2, 2001                                                 80,000
                                                               ---------
                                                              3,414,173


(1)      Subsequent to year end, warrants for 395,000 shares of the Company's
         common stock were exercised for $197,500. In addition, warrants for
         5,000 shares of the Company's common stock expired.

(2)      Subsequent to year end, warrants for 408,873 shares of the Company's
         stock were exercised for $204,437. In addition, warrants for 120,000
         shares of the Company's common stock expired.

Note 9.  Related-Party Transactions

The Company purchased marketing and advertising services from two organizations
owned by members of the Board of Directors. Total expenditures for these
services were approximately $99,000 and $113,000 for 1998 and 1997,
respectively.

The Company purchased certain raw materials from a vendor that is also a
Preferred Stock shareholder. Total purchases for these materials were
approximately $273,000 and $197,000 for fiscal years 1998 and 1997,
respectively.

Note 10.  Earnings Per Share

The Financial Accounting Standards Board has issued Statement No. 128 (SFAS No.
128), Earnings Per Share, which supersedes APB Opinion No. 15. SFAS No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential common stock, such as options, warrants, and convertible
securities, outstanding that trade in a public market. Those entities that have
only common stock outstanding are required to present basic earnings per share
amounts. All other entities are required to present basic and diluted per share
amounts. Diluted per share amounts assume the conversion, exercise, or issuance
of all potential common stock instruments unless the effect is to reduce a loss
or increase the income per common share from continuing operations.


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10.  Earnings Per Share (Continued)

The Company initially applied SFAS No. 128 for the year ended September 30, 1998
and, as required by the statement, has restated all per share information for
the prior year.

<TABLE>
<CAPTION>

                                                                              1998                     1997
-------------------------------------------------------------------- ------------------------ ------------------------
<S>                                                                   <C>                      <C>   
Earnings:
   Net income                                                          $      694,496           $      435,729
   Less preferred stock dividends                                             (75,000)                       -
                                                                     ------------------------ ------------------------
Income available to common stockholders                                $      619,496           $      435,729
                                                                     ======================== ========================

Weighted-average shares:
   Basic weighted-average shares                                            6,882,453                6,692,100
   Adjustments for dilutive shares:
       Options and warrants                                                   968,896                1,230,680
                                                                     ------------------------ ------------------------
Diluted weighted-average shares                                             7,851,349                7,922,780
                                                                     ======================== ========================

Basic earnings per share                                               $         0.09           $         0.07
                                                                     ======================== ========================

Diluted earnings per share                                             $         0.08           $         0.05
                                                                     ======================== ========================

</TABLE>


For the year ended September 30, 1998, the conversion of preferred stock has not
been assumed due to an antidilutive impact on the calculation of diluted
earnings per share.


<PAGE>



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

         None.


                                    PART III

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

         The names and ages of the executive officers of the Registrant and
their positions and offices held as of December 11, 1998 are as follows:

         Name                   Age                   Position with Company

         Joel P. Bachul         56                    President and Chief 
                                                      Executive Officer

         A. Merrill Ayers       52                    Senior Vice President, 
                                                      Treasurer, Chief Financial
                                                      Officer and Secretary

         Thomas C. House        52                    Vice President of 
                                                      Corporate Planning

         William J. Schuch      45                    Vice President of Sales

         Joel P. Bachul, has been the Chief Executive Officer and President of
the Company since December 1, 1994. From August 1991 until July 1994, Mr. Bachul
served as the Executive Vice President and Chief Operating Officer of Old Home
Foods, Inc., a food processing and distribution concern. From July 1990 until
July 1991, Mr. Bachul was the Executive Vice President and Chief Operating
Officer of Bell Cold Storage which provides public and cold storage services.
Mr. Bachul served as Senior Vice President of J.P. Foodservice, a foodservice
distributor, from July 1989 through February 1990. From 1980 until July 1989,
Mr. Bachul served as Vice President, Senior Vice President and Chief Operating
Officer of PYA/Monarch, also a foodservice distributor.


<PAGE>



         A. Merrill Ayers, has served as Treasurer, Chief Financial Officer and
Secretary of the Company since November 9, 1994 and as Senior Vice President of
Finance and Administration since October 1998. Prior to joining the Company, Mr.
Ayers served as Senior Vice President of ITT Consumer Financial Corp. from June
1992 until February 1994.

         Thomas C. House, has served as Vice President of Operations from March
1993 through October 1998 and as Vice President of Corporate Planning since
October 1998. From December 1988 until March 1993, Mr. House was the plant
manager at the Rosemount, Minnesota plant facilities of Continental Nitrogen &
Resource Corporation, a manufacturer of ammonium nitrate-based products and
fertilizers.

         William J. Schuch has been employed by the Company since October 1997
as the Vice President of Sales. Prior to joining the Company, Mr. Schuch was
Director of Marketing and Foodservice for Federated Group, Inc. from January
1995 until July 1997. From July 1992 through January 1995, Mr. Schuch was Sales
Training Manager for CPC Foodservice and from 1978 through July 1992, Mr. Schuch
held various sales positions including Vice President of Sales, West, at LeGout
Foods which was acquired by CPC in 1992.

         There are no family relationships among any of the Company's directors
or executive officers.

         The information required by Item 9 relating to directors and compliance
with Section 16(a) of the Exchange Act is incorporated herein by reference to
the sections labeled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance," respectively, which appear in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders.

ITEM 10. EXECUTIVE COMPENSATION

         The information required by Item 10 is incorporated herein by reference
to the section labeled "Executive Compensation" which appears in the
Registrant's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by Item 11 is incorporated herein by reference
to the sections labeled "Principal Shareholders" and "Management Shareholdings"
which appear in the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders.


<PAGE>



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by Item 12 is incorporated by reference to the
section labeled "Certain Transactions" which appears in the Registrant's
definite Proxy Statement for its 1999 Annual Meeting of Shareholders.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits.

                  Exhibits are numbered in accordance with Item 601 of
                  Regulation S-B. See "Exhibit Index" immediately following the
                  signature page of this Form 10-KSB.

         (b)      Reports on Form 8-K

                  No reports on Form 8-K were filed during the last fiscal
                  quarter of the Registrant's 1998 fiscal year.







<PAGE>


                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
                                            SPARTA FOODS, INC.

Dated:  December 16, 1998                   By:  /s/  Joel P. Bachul         
                                               --------------------------------
                                                Jack P. Bachul, President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company,
in the capacities, and on the dates, indicated.

                               (Power of Attorney)

         Each person whose signature appears below constitutes and appoints JOEL
P. BACHUL and A. MERRILL AYERS as true and lawful attorneys-in-fact and agents,
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-KSB and to file the same, with all
exhibits thereto, and other documents in connection thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

Signature and Title                                               Date

/s/  Joel P. Bachul                                         December 16, 1998
----------------------------------------
Joel P. Bachul, President and Director
(Principal Executive Officer)

/s/  A. Merrill Ayers                                       December 16, 1998
-----------------------------------------
A. Merrill Ayers, Chief Financial Officer
(Principal Accounting Officer)

/s/  Larry P. Arnold                                        December 16, 1998
-----------------------------------------
Larry P. Arnold, Director

/s/  Edward K. Jorgensen                                    December 16, 1998
-----------------------------------------
Edward K. Jorgensen, Director

/s/  John D. Johnson                                        December 16, 1998
-----------------------------------------
John D. Johnson, Director

/s/  Michael J. Kozlak                                      December 16, 1998
-----------------------------------------
Michael J. Kozlak, Director

/s/  R. Dean Nelson                                         December 16, 1998
-----------------------------------------
R. Dean Nelson, Director


<PAGE>



                               SPARTA FOODS, INC.

                          EXHIBIT INDEX TO FORM 10-KSB

Exhibit
Number   Description

3.1      Articles of  Incorporation,  as amended to date.  (Incorporated  by 
         reference to Exhibit  3(i)(5) of the Company's Report on Form 8-K 
         dated February 24, 1998.)*

3.2      By-Laws, as amended to date.

4.1      Form of  Certificate  for Common Stock of Sparta Foods,  Inc.  
         (Incorporated  by reference to the Company's Form 10-QSB for the 
         quarter ended March 31, 1994.)*

10.1**   Amended and  Restated  Stock  Option  Plan.  (Incorporated  by  
         reference  to Exhibit 10.2 to the Company's Annual Report on Form 
         10-KSB for the period ended September 30, 1996.)*

10.2     Concurrent  Ownership and Usage  Agreement  dated November 16, 1990,  
         between La Canasta  Mexican Food Products,  Inc. and La Canasta of 
         Minnesota,  Inc. (Reg. No.  1,560,808).  (Incorporated  by reference 
         to the Company's Form 10-K for the period ended December 31, 1990.) *

10.3     Concurrent  Ownership and Usage  Agreement  dated November 16, 1990,  
         between La Canasta  Mexican Food Products,  Inc. and La Canasta of 
         Minnesota,  Inc. (Reg. No.  1,341,156).  (Incorporated  by reference 
         to the Company's Form 10-K for the period ended December 31, 1990.)*

10.4     Concurrent  Ownership and Usage  Agreement  dated November 16, 1990,  
         between La Canasta  Mexican Food  Products,  Inc. and U Canasta of 
         Minnesota,  Inc. (Reg. No.  1,434,854).  (Incorporated  by reference 
         to the Company's Form 10-K for the period ended December 31, 1990.)*

10.5     License  Agreement between La Canasta of Minnesota,  Inc. and Mexican 
         Foods,  Inc., dated October 28,  1993,  and  relating  to the use of 
         the trade name "La  Campana  Paradiso"  and  "Paradiso." (Incorporated
         by reference to the Company's  Report on Form 8-K with a Date of 
         Report of October 28, 1993.)*

------------------------------
*    Incorporated by reference - Commission File No. 000-19318 unless otherwise
     indicated.
**   Indicates a management contract or compensatory plan or arrangement
     required to be filed as an exhibit to this Form 10-KSB.




<PAGE>


Exhibit
Number   Description

10.6     Distributorship   Agreement   dated  January  21,  1994  between   
         Crystal   Farms   Refrigerated Distribution  Company  and  Sparta  
         Foods,  Inc.  (Incorporated  by  reference  to the  Company's Amendment
         No. 2 on Form 10-KSB/A to the Form 10-KSB for the period ended 
         September 30, 1993.)*

10.7     Addendum No. 1 to Distributor  Agreement dated July 20, 1995 between  
         Crystal Farms  Refrigerated Distribution  Company and Sparta Foods,  
         Inc.  (Incorporated  by reference to the Company's  Form 10-QSB for 
         the period ended June 30, 1995.)*

10.8     Distributor  Agreement dated January 2, 1996,  between  Catalina  
         Specialty  Foods,  Inc. and the Company.  (Incorporated  by  reference
         to Exhibit  10.40 to the  Company's  Form  10-QSB for the period ended
         March 31, 1996.)*

10.9     Form of Warrant issued to certain investors who purchased units, 
         consisting of common stock and warrants, pursuant to the Company's 
         private placement dated February 3, 1996. (Incorporated by reference 
         to Exhibit 10.41 to the Company's Form 10-QSB for the period ended 
         March 31, 1996.)*

10.10    Registration  Rights Agreement dated February 2, 1996,  between and 
         among the company and certain shareholders who purchased units
         pursuant to the Company's  private  placement.  (Incorporated by
         reference to Exhibit 10.42 to the Company's Form 10-QSB for the 
         period ended March 31, 1996.)*

10.11**  Salary  Continuation  Agreement  dated  August  1995  between the  
         Registrant  and Joel P. Bachul (Incorporated  by  reference  to 
         Exhibit  10.39 to the  Company's  Form 10-KSB for the year ended
         September 30, 1996).*

10.12**  Salary  Continuation  Agreement  dated August 1995 between the  
         Registrant  and A. Merrill  Ayers (Incorporated  by  reference  to 
         Exhibit  10.40 to the  Company's  Form 10-KSB for the year ended
         September 30, 1996).*

10.13**  Salary  Continuation  Agreement  dated  August 1995  between the  
         Registrant  and Thomas C. House (Incorporated  by  reference  to 
         Exhibit  10.41 to the  Company's  Form 10-KSB for the year ended
         September 30, 1996).*

10.14    Distribution  Agreement  dated  February 14, 1997 between the Company
         and  Marigold  Foods,  Inc. (Incorporated  by reference to Exhibit 
         10.45 to the  Company's  Form 10-QSB for the period ended March 31, 
         1997.*

------------------------------
*    Incorporated by reference - Commission File No. 000-19318 unless 
     otherwise indicated.
**   Indicates a management contract or compensatory plan or arrangement
     required to be filed as an exhibit to this Form 10-KSB.



<PAGE>

Exhibit
Number   Description

10.15    Commercial Lease between First Industrial L.P. and Sparta Foods, Inc.,
         effective  September 1, 1997 for a 15-year  period  (Incorporated  by 
         reference to Exhibit  10.46 to the  Company's  Form 10-QSB for the 
         period ended June 30, 1997).*

10.16**  Employment  Agreement  dated  November  14, 1997  between  the Company
         and  William J.  Schuch. (Incorporated  by reference to Exhibit  10.38
         to the  Company's  Form 10-KSB for the period ended September 30, 
         1997.)*

10.17    Loan  Agreement  dated as of July 1, 1997  between  the Company and  
         Minnesota  Agricultural  and Economic  Development  Board.  
         (Incorporated  by reference to Exhibit 10.40 to the Company's Form
         10-KSB for the period ended September 30, 1997.)*

10.18    Stock  Purchase  Agreement  dated  February  23, 1998  between  the  
         Company  and Harvest  States Cooperatives. (Incorporated by  reference
         to  Exhibit  10.40 to the  Company's  Form 8-K dated February 24, 
         1998.)*

10.19    Term Loan and Credit  Agreement,  Security  Agreement and Guaranty  
         Agreement dated June 24, 1998 between  the  Company  and  Norwest  
         Bank  Minnesota,  National  Association.   (Incorporated  by
         reference to Exhibit 10.1 to the Company's Form 10-QSB for the 
         period ended June 30, 1998.)

11       Sparta Foods, Inc.  Computation of Net Income per Common Share.

21       Subsidiaries of Registrant. (Incorporated by reference to Exhibit 21
         to the Company's Form 8-K dated February 24, 1998.)

23       Consent of independent public accountant.

24       Power of Attorney (included on signature page of this Form 10-KSB)

27       Financial Data Schedule (filed in electronic format only)

------------------------------
*    Incorporated by reference - Commission File No. 000-19318 unless 
     otherwise indicated.
**   Indicates a management contract or compensatory plan or arrangement
     required to be filed as an exhibit to this Form 10-KSB.