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, 1996

                         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)

                 2570 Kasota Avenue, St. Paul, Minnesota, 55108
               (Address of principal executive offices)(Zip Code)

         Issuer's telephone number, including area code: (612) 646-1888

    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, $.01 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:  $12,662,819

The  aggregate  market  value of the Common Stock held by  nonaffiliates  of the
Registrant as of December 16, 1996 was  approximately  $8,348,811 based upon the
average high and low bid prices of the Registrant's Common Stock on such date.

There were 6,679,049 shares of Common Stock,  $.01 par value,  outstanding as of
December 16, 1996.
                            ------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Documents  incorporated  by reference  pursuant to Rule 12b-23:  Portions of the
Registrant's  Proxy  Statement for its 1997 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>




                                    I N D E X


Description                                                               Page

PART I
 ITEM 1.  DESCRIPTION OF BUSINESS...........................................  1
 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
 ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS...............................................  8
 ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
          OF OPERATION......................................................  9
 ITEM 7.  FINANCIAL STATEMENTS.............................................. 15
 ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH
          ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
          DISCLOSURE........................................................ 26

PART III
 ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
          CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
          OF THE EXCHANGE ACT............................................... 26
 ITEM 10. EXECUTIVE COMPENSATION............................................ 27
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT............................................. 27
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
          TRANSACTIONS...................................................... 27
 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................................. 27



                                        i

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                                     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,  stone ground and
corn flour tortilla chips,  picante and other salsas and sauces.  These products
are  distributed  under the Company's own brand names and under private  labels.
The Company's own retail brands  include La Canasta(R),  La Campana  Paradiso(R)
and Mexitos(R) tortilla chips, Cruz(R), La Canasta(R) and La Campana Paradiso(R)
press and die-cut flour  tortillas,  La Canasta(R),  La Campana  Paradiso(R) and
Chapala(R)  salsas and picante sauces.  The Company also  manufactures  barbecue
sauces and salsas for others under private label.

     The Company's  branded  retail  products are sold in  supermarkets  located
primarily in the  midwestern  United  States,  with  selected  products  sold in
Western Canada.  The Company also produces its Mexican-style  products for other
food distributors under private labels, including Crystados(R) for Crystal Farms
Refrigerated  Distribution  Company  which  distributes  its  products to retail
stores in 23 states.  Other  private  label  products  include Ken  Davis(R) and
Rudolph's(R)  barbecue sauces utilizing the customer's  proprietary  recipes. In
addition,  the Company  supplies  over six thousand  restaurants  and other food
service  establishments  through distributors that include Alliant Food Service,
Inc.,  Sysco  Corporation  and  J.P.  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,
Carlos O'Kellys and Perkins Restaurants.

     The  Company  is  capitalizing  on the  significant  growth  in the sale of
Mexican  food  products  which has  occurred in the United  States over the past
decade.  Over the fifteen-year  period ended in 1995, sales of soft tortillas in
the United States grew from  approximately  $300 million to  approximately  $2.5
billion.  Management  believes that this growth is partially a result of Mexican
food products  becoming less ethnic due to strong 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.

     Prior to 1994,  the Company spent  significant  time and resources  through
acquisition   and  internal   product   development  to  expand  its  production
capabilities and its line of authentic  Mexican food products and to establish a
strong  distribution  network.  Although these activities  increased sales, they
negatively  impacted  the  Company's  net  income.  In fiscal  1994 and 1995 the
Company incurred net losses. The Company is now focusing its efforts on a return
to  profitability  by  attempting  to expand  its  existing  business  and enter
carefully selected new geographic areas in the branded retail, private label and
food service markets.  The Company recorded net income of $105,307 for the year
ended September 30, 1996.

                                        1

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Business Strategy

     The Company's  principal business objective is to improve  profitability by
increasing  sales and reducing  costs.  The Company  plans to increase  sales by
expanding  its  product   marketing  and  sales   activity  and  broadening  its
distribution  patterns  and by placing  greater  emphasis on the  production  of
tortillas.  The Company plans to direct greater marketing and sales resources to
increase brand  awareness of its products,  including  tortilla  chips,  in each
product's   respective  target  market.  In  addition,   the  Company  plans  to
concentrate its  manufacturing  resources on high volume branded retail products
that it believes will generate the highest gross profit margins.  The Company is
also  seeking  to improve  profitability  by  reducing  and  controlling  excess
operating costs.

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,  over  the
fifteen-year period ended in 1995, sales for soft tortillas in the United States
grew from $300 million to approximately $2.5 billion.

     The increase in past sales may be partially  attributable  to the growth in
the United States' Hispanic population,  and a continued increase in the sale of
Mexican-style food products is not assured.  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, such as McDonald's, feature Mexican-style foods on their menus.

Products and Marketing

     General.  The Mexican-style food products  manufactured and 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  (picante and thick and chunky) for  distribution  to
retail food  stores,  food service  establishments  and other  manufacturers  of
Mexican-style  food products.  The Company also manufactures  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, 1996,  1995 and 1994, 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:


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                                                  Year Ended September 30,

Products                                         1996        1995         1994
--------                                         -----       ----         ---- 
Tortillas                                         70%         63%          55%
Corn tortilla chips                               17%         20%          25%
Barbecue sauces, salsas and all other products    13%         17%          20%
                                                       

     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.  In November 1996,
the Company began manufacturing and distributing seven new retail tortilla chips
under the La Canasta(R)  brand and flavored flour tortilla wraps to food service
establishments.

     The Company  distributes its products  through  distribution  centers in 21
states and into  Western  Canada.  During the fiscal years ended  September  30,
1996, 1995 and 1994, the Company's  percentage of sales for distribution to food
service  establishments,  to retail stores under its own brand names,  and under
private label or as ingredients for other food manufacturers,  compared to total
Company sales, were as follows:


                                             Year Ended September 30,

Market Segment                                1996       1995     1994
--------------                                ----       ----     ----
Food service                                   54%        51%      44%
establishments
Branded retail                                 29%        31%      33%
Private label and                              17%        18%      23%
ingredients
                                                       

     Food Service.  The Company's  products are currently served in an estimated
six thousand restaurants and other food service establishments under La Canasta,
Mexitos,  and  Cruz  labels,  and  are  approved  for  use in the  food  service
operations of such  restaurants  as  McDonald's,  Chili's,  Carlos  O'Kellys and
Perkins Restaurants.  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 effected through distributors who carry product
inventory  at their  distribution  centers  located in nine  midwestern  states,
Florida and Canada. These distributors include Alliant Food Service, Inc., J. P.
Food Services, Inc. and Sysco Corporation, who on a combined basis accounted for
over 30% of the Company's food service sales in its fiscal year ended  September
30, 1996. 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.


                                        3

<PAGE>



     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 23 states and Bradley  Distributing,  Inc.  which  distributes
products to  approximately  160 retail  stores in the 13 county  Minneapolis/St.
Paul metropolitan  area. 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.

     Private Label and Ingredients.  The Company manufactures products for other
food distributors to be sold under their own private labels, using the Company's
recipes or recipes  provided by such  distributors.  Since 1991, the Company has
been the sole  manufacturer  of Ken Davis(R) brand barbecue sauces for Ken Davis
Products,  Inc.,  and in December 1993 began  production of barbecue  sauces for
Rudolph's  Licensing,  Inc., under the Rudolph's(R) brand name. The Company also
manufactures  and  sells  tortillas  to  other   manufacturers  to  be  used  as
ingredients for the production of Mexican food products.  Two such manufacturers
are Arden International Kitchens and Schwan's Sales Enterprises, Inc. Arden uses
the Company's tortillas to manufacture its "Charritos" brand Mexican food items,
and Schwan uses the Company's  tortillas in its frozen  burritos  which are sold
door to door by delivery truck in 48 states.

     The Company  believes  that there are two  principal  factors which tend to
promote the  Company's  growing sales of private  label  products.  First is its
manufacturing  expertise,  and second is its experience in both the food service
and  retail  markets.  Sales  to  private  label  customers  are  initiated  and
maintained directly by Company sales personnel.

Principal Customers

     The Company's sales to significant customers during fiscal years 1996, 1995
and 1994 were as follows:



                                                     Year Ended September 30,
                                                         (In thousands)
Customer                                             1996      1995     1994
--------                                             ----      -----    ----
Crystal Farms Refrigerated Distribution Company     $2,557    $1,879   $1,780
Catalina Specialty Foods, Inc.                      $1,962    $1,617   $1,005
Bradley Distributing, Inc.                          $1,011    $1,162   $1,020
Ken Davis Products, Inc.                              $978    $1,112   $1,068
                                                  


The Company has agreements with Crystal Farms Refrigerated Distribution Company,
Ken Davis Products,  Inc. and Catalina  Specialty  Foods,  Inc. a distributor to
McDonald's  Corporation.  The loss of any of these  customers  named above would
have an adverse effect on

                                        4

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the Company's  sales and operating  results.  As part of its marketing plan, the
Company is attempting to establish a strong brand  recognition in key markets in
order to minimize the likelihood of any such loss.

Manufacturing and Supplies

     The Company  manufactures  its products at its principal  place of business
located at 2570 Kasota Avenue, St. Paul, Minnesota. The Company manufactures its
products on 12 production  lines.  These  include:  (i) a hand  stretched  flour
tortilla  line;  (ii) a die-cut  flour  tortilla  line;  (iii) three press flour
tortilla  lines;  (iv) two lines for the production of corn  tortillas;  (v) two
stone ground corn tortilla chip lines;  and (vi) three lines for the  production
of picante salsas, barbecue sauces and other tomato-based sauces.

     The principal ingredients for the Company's manufactured products are corn,
wheat flour, corn flour, corn and soybean oils and tomato-based products.  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 1997 of corn,  flour and oils 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  material 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 permit  the  Company 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 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.  The
Company  estimates that its retail sales of tortillas give it greater than a 50%
share of the 13 county  Minneapolis/St.  Paul metropolitan  market, and that its
principal

                                        5

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competition comes from Reser's Foods, Zapata and Azteca Foods, which supply most
of the remaining market.

     Many of the makers and distributors of these competing  products for retail
distribution  are better  capitalized that 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.  Although  sales of the  Company's  retail  products
outside the Minneapolis/ St. Paul metropolitan area is increasing,  particularly
with  respect to the Cruz brand  tortillas  distributed  by Crystal  Farms,  the
Company's  market  share of retail sales  outside of that area is not  currently
material.

     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  increase  its
market  share in other  metropolitan  area  markets  because  of its  ability to
fulfill a distributor's  needs with a broad line of quality  Mexican-style  food
products and by having its products approved by selected restaurant chains.

Trademarks

     The principal trade names that the Company currently  utilizes are Cruz(R),
La Campana Paradiso(R) and La Canasta(R) in the retail sale of its tortillas; La
Canasta, Chapala(R), Mexitos(R), La Campana Paradiso(R) and Deli Style(R) in the
retail  sale of  tortilla  chips;  and La Canasta,  La Campana  Paradiso(R)  and
Chapala(R)  in retail sale of salsas.  The Company  also uses the trade names La
Canasta,  Cruz and  Mexitos in  connection  with food  service  sales.  With the
exception of La Campana Paradiso and Paradiso,  all of the trade names are owned
by the Company,  and all of the principal  trade names referred to above are the
subject of federal trademark registrations.

     The Company has one registered  trademark and two assignments of registered
trademarks  for the name "La Canasta" that expire in June 2000;  March 2007; and
October  2009,  respectively.  The name  "Cruz" is the  subject of a  registered
trademark  which expires in January 2000. The name "Chapala" is the subject of a
registered  trademark  which  expires in  November  2004.  The  Company  has two
registered  trademarks  for the "Mexitos"  name which expire in October 2003 and
May 2005.  The name "Deli Style" is the subject of a registered  trademark  that
expires March 2009.  All of the Company's  registered  trademarks are subject to
renewal rights and may terminate prior to their respective  expiration dates due
to cancellation,  disclaimer or surrender. The Company currently has no plans to
terminate any of its registered

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trademarks. The effect of these trademarks is to provide an identity between the
Company  and its  products.  While  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,  registration with the U.S. Patent and Trademark Office
provides such right  throughout the United States and a presumption of damage to
the Company should the trademark be infringed.

     The  trademarks  "La Campana  Paradiso" and  "Paradiso" are licensed by the
Company  from an  affiliate  of a former  director of the  Company.  The License
Agreement expires December 31, 1999 and requires the payment of three percent of
the gross sales of products  sold using the "La Campana  Paradiso" or "Paradiso"
name.  In  addition,  the Company  pays a fee equal to one percent of all retail
sales made under the "Cruz"  label to a third party until  January 1, 1997 or an
aggregate of $220,000,  whichever occurs earlier, of which approximately $75,000
has been paid through September 30, 1996.

     The Company may not use the trade name La Canasta or the related trademarks
in 14 western states as those trade names may be used in those states only by La
Canasta  Mexican Food Products,  Inc.,  which 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  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,
City of St. Paul,  the U.S. Food and Drug  Administration,  the  Minneapolis/St.
Paul,  Minnesota  Metropolitan Waste Control  Commission.  As a result of recent
U.S. Food and Drug Administration  rule changes,  some of the Company's products
required  changes in  labeling.  Nutritional  testing has been  completed on all
applicable  products,  and the results of such testing have been incorporated in
new packaging as required by those rules. To management's knowledge, the Company
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  1, 1996 the Company  employed a total of 123  persons.  Of
these full-time employees,  four serve in an executive capacity, 109 are engaged
in manufacturing,  shipping,  quality control and plant  supervision,  three are
engaged in sales and marketing,  and seven are engaged in administrative  tasks.
None  of  the  Company's  employees  are  covered  by  a  collective  bargaining
agreement. The Company provides its employees with a health, dental,  disability
and life insurance program. The Company's management believes that its relations
with its employees are good.


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ITEM 2.                    DESCRIPTION OF PROPERTY

     The Company currently leases an office and  manufacturing  facility located
at  2570  Kasota  Avenue,  St.  Paul,   Minnesota.   The  St.  Paul  office  and
manufacturing   facilities   consists  of  a  total  of  66,000   square   feet,
approximately  5,000 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  $25,000 per month, plus
taxes, insurance and common area charges of approximately $10,000 per month. The
monthly base rent changes periodically over a period that began on April 1, 1996
and will end on May 31, 2000. The lease for the St. Paul facility  terminates on
May 31,  2000.  The  Company  also has an  option  to  extend  the lease for two
five-year  periods on written notice given before November 1, 1999 for the first
five-year option and November 1, 2004 for the second five-year option.

     The Company owns a facility at 21725 Hanover,  Lakeville,  Minnesota, which
facility  consists of a one story steel frame  building  located on 2.5 acres of
land, containing 45,500 square feet of manufacturing and dry and freezer storage
space,  and 1,500 square feet of office space.  On February 1, 1996, the Company
leased the  Lakeville  facility to a  manufacturing  company for a period of ten
years with an option for the lessee to purchase  the  property  during the first
five years. On November 22, 1996, the lessee delivered to the Company, notice of
its intent to exercise  the purchase  option.  The Company  anticipates  it will
close the sale of the Lakeville  facility in February  1997.  If concluded,  the
Company  will  record  a small  gain on the  sale in  fiscal  1997.  There is no
assurance that the Company will close the sale of the facility.

     The  Company  also  sub-leases  approximately  13,800  square  feet for dry
storage  in a  warehouse  facility  located  at 2085  Ellis  Avenue,  St.  Paul,
Minnesota.  The rent is approximately $6,000 per month, and the lease terminates
on March 31, 1998.


ITEM 3.           LEGAL PROCEEDINGS

     There are no material litigation or other legal proceedings pending against
the Company or any of its subsidiaries or any or 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 1996.


                                     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

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<PAGE>



table  represent  inter-dealer  prices,  without  retail  markup,   markdown  or
commission, and do not necessarily represent actual transactions.

                                                       Common Stock
   Fiscal Quarter Ended                        High Bid              Low Bid

December 31, 1994                               $2 1/4                $1 1/2
March 31, 1995                                   2 1/8                   7/8
June 30, 1995                                    1 1/4                   5/8
September 30, 1995                               1 1/16                  5/8

December 31, 1995                               $  7/8                $  1/4
March 31, 1996                                   1 1/2                   3/8
June 30, 1996                                    2 1/4                 1 1/16
September 30, 1996                               2                     1 5/16


     At  December  12,  1996,  the  published  high  and low bid  price  for the
Company's  Common Stock was $1 1/4 per share.  At December 12, 1996,  there were
issued and outstanding  6,679,049  shares of Common Stock of the Company held by
188 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
current  line of credit with a bank  precludes  the Company  from  declaring  or
paying dividends on its Common Stock without the bank's approval.


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

Overview

     La Canasta of Minnesota,  Inc. ("La Canasta"),  the Company's  predecessor,
and now a  wholly-owned  subsidiary  of the  Company,  began  producing  limited
volumes of hand  stretched  flour  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 purpose 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.  The
shareholders of La Canasta  entered into this  transaction to obtain capital for
La Canasta and to  facilitate  La Canasta's  plans to expand its product  lines,
markets and  production  capabilities.  Under the  umbrella of the  Company,  La
Canasta  had begun to expand  its  product  mix in 1990  when it  acquired  food
processing  equipment from SuperValu,  Inc. in Hopkins,  Minnesota,  and started
producing  Ken Davis  barbecue  sauces.  This  enabled La Canasta to expand into
other  tomato-based  products,  such as Mexican  salsas and picante  sauces.  In
January 1992, the Company  continued this expansion by acquiring the business of
Cruz Distributing, Inc., a distributor of Cruz brand press

                                        9

<PAGE>



flour tortillas to retail establishments and McDonald's restaurants. In November
1992,  the Company also  acquired from Chapala  International,  Inc. the Chapala
registered  trademarks  and trade names and certain other assets  related to the
sale and  distribution  of  Mexican-style  foods to  wholesalers  and others for
retail  sale,  including  product  formulas for salsas and  customer  lists.  In
October  1993,  the  Company  acquired   substantially  all  of  the  assets  of
International Food Products, Inc. of Lakeville,  Minnesota, which was engaged in
the  manufacture  and sale of tortillas  and tortilla  chips.  This  acquisition
provided the Company with additional manufacturing capabilities, the established
La Campana  Paradiso and Mexitos  brand  names,  and the retail and food service
distribution  services  of Bradley  Distributing,  Inc.  and Sysco  Corporation,
respectively.

     The foregoing  acquisitions were effected to improve the Company's capacity
to efficiently  manufacture a broad line of  Mexican-style  food products and to
increase  sales and market share by  developing  a  broad-based  responsive  and
capable  distribution  network.  While these  acquisitions  increased sales, the
Company incurred  significant  legal,  accounting and  debt-related  expenses to
complete the transactions.  As a result, the Company incurred substantial losses
in fiscal years 1994 and 1995.

     In response to these years of loss, the ongoing problems of integrating the
Company's  acquisitions  and other  corporate  problems,  the Board of Directors
adopted a  restructuring  plan in October  1994.  In the first quarter of fiscal
1995, the Board of Directors  hired Joel Bachul and Merrill Ayers as its new CEO
and CFO,  respectively,  and they  were  given  the  primary  responsibility  of
managing the restructuring process.

     The  focus  of  management's  efforts  to  date  has  been  to  complete  a
comprehensive  financial restructuring and effectuate changes in connection with
its products and its production  and  distribution  systems  necessary to attain
profitability.

Results of Operations

Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September 30,
1995.

     During fiscal 1996, the Company had net sales of  $12,662,819,  an increase
of $670,831,  or 6%,  compared to net sales of $11,991,988 in fiscal 1995.  This
increase in net sales  resulted  primarily  from  additional  marketing  efforts
relating  to  expansion  of its  existing  customer  base as  well  as into  new
territories.  Four  customers  accounted for 51% of net sales in fiscal 1996 and
48% of net sales in fiscal 1995.

     Gross profit as a percentage  of net sales for fiscal 1996 was 27% compared
to 26% for fiscal 1995.  This  increase in fiscal 1996 was primarily due to more
favorable   operating   efficiencies  and  discontinued  sales  of  unprofitable
products.  Overhead  costs were  reduced in certain  areas to  maximize  product
margins.  Even though the Company faced  increasing  pricing  pressures from raw
material suppliers, it was able to minimize these cost increases by implementing
selective price  increases.  At the end of fiscal 1995 the Company  consolidated
its  production  operations  from its  Lakeville  facility to its St. Paul plant
resulting in additional cost savings achieved in fiscal 1996.

                                       10

<PAGE>




     Selling,  general and  administrative  expenses were  $2,968,569 for fiscal
1996, a decrease of $315,423 or 10%, as compared to  $3,283,992  in fiscal 1995.
Selling,  general and  administrative  expenses as a percentage of net sales for
fiscal  1996  were 23%  compared  to 27% for  fiscal  1995.  This  decrease  was
primarily  attributable  to the return to more normal expense levels which began
in fiscal 1995 following the costs associated with the IFP operating activities,
related  integration costs of the acquisition and professional  costs associated
with the withdrawn  secondary public offering and bridge financing during fiscal
1994.

     Interest  expense  was  $431,741  for fiscal  1996,  a decrease  of $84,471
compared to $516,212 in 1995. This lower interest expense reflects primarily the
effect of interest rate and debt  reductions  associated  with the completion of
the Company's private placement in February,  1996. See,  "Liquidity and Capital
Resources."

     The Company recorded other income of $86,018 during fiscal 1996 compared to
other expense of $279,450 in fiscal 1995. This income results primarily from the
rental of the  Company's  Lakeville  property.  Other expense in fiscal 1995 was
primarily the non-recurring charge of $302,612 reflecting  management's estimate
of the excess of the property's  net book value over current  market value.  Net
income for fiscal  1996 was  $105,307  compared  to a net loss in fiscal 1995 of
$943,778, for the reasons set forth above.

Fiscal Year Ended September 30, 1995 Compared to September 30, 1994

     During fiscal 1995, the Company had net sales of  $11,991,988,  an increase
of $811,075,  or 7% as compared to net sales of $11,180,913 in fiscal 1994. This
increase in net sales  resulted  primarily  from  additional  marketing  efforts
relating  to  expansion  of its  existing  customer  base as  well  as into  new
territories.  Four  customers  accounted for 48% of net sales in 1995 and 44% of
net sales in 1994. Fiscal 1994 sales included approximately $600,000 in products
with low volume and/or low margins as well as heavily discounted products. These
were not continued in fiscal 1995.  Excluding  these sales,  sales on continuing
products  increased  approximately  13% in fiscal 1995.  During fiscal 1995, the
Company  expanded  its food  service  business  in  Illinois,  Indiana,  Kansas,
Nebraska and Wisconsin  and its retail  business  into  Wisconsin,  Illinois and
Iowa.

     Gross profits as a percentage of net sales for fiscal 1995 was 26% compared
to 24% for fiscal 1994.  This  increase in fiscal 1995 was primarily due to more
favorable   operating   efficiencies  and  discontinued  sales  of  unprofitable
products.  Overhead  costs were  reduced in certain  areas to  maximize  product
margins.  Even though the Company faced increasing pricing pressures from flour,
corrugated and plastic  material  suppliers,  it was able to minimize these cost
increases by  implementing  selective  price  increases.  During fiscal 1995 the
Company  consolidated its production  operations from its Lakeville  facility to
its St. Paul plant. Currently, other than USDA-related meat products produced by
outside suppliers, all of the Company's products are produced in-house.

     Selling,  general and  administrative  expenses were  $3,283,992 for fiscal
1995, a decrease of $56,975,  or 2%, as compared to  $3,340,967  in fiscal 1994.
Selling,  general and  administrative  expenses as a percentage of net sales for
fiscal  1995 were 27%,  compared  to 30% for  fiscal  1994.  This  decrease  was
primarily attributable to the return to more normal expense

                                       11

<PAGE>



levels following the costs associated with the IFP operating activities, related
integration  costs of the  acquisition  and costs  associated with the withdrawn
secondary public offering and bridge financing during fiscal 1994.

     Interest  expense  was  $516,212  for fiscal  1995,  a decrease of $155,683
compared to $671,895 in 1994. This reduced interest  expense reflects  primarily
the  comprehensive  financial  restructuring  in December 1994. See Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operation -
Liquidity and Capital Resources.

     The Company  incurred Other Expense of $279,450 during fiscal 1995 compared
to Other Income of $3,707 in fiscal 1994. This expense consists primarily of the
write-down as discussed above.  Excluding this the net loss in fiscal 1995 would
have been  $641,166  or an  improvement  of 46% over  fiscal  1994's net loss of
$1,193,177.

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,  salsa and barbecue  sauces,
during  the summer  months.  This  seasonality  may cause  quarterly  results of
operations to fluctuate.

Raw Material Cost Fluctuations

     The Company does not enter into futures contracts as defined by SFAS 80. 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 2-18 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 place  directly  with the  suppliers.  At the end of each  reporting
period,  the Company  evaluates the open  purchase  orders for corn to determine
whether a loss should be recognized.

Liquidity and Capital Resources

     The Company has financed its  activities  to date  primarily  through debt,
cash generated from its operations and the issuance of securities.

     During fiscal 1996 net cash provided by operating  activities was $305,511,
consisting   principally  of  net  income  of  $105,307  adjusted  for  non-cash
depreciation and amortization expenses of $552,902 and a decrease in inventories
of $181,597,  offset by a decrease of accounts  payable and accrued  expenses of
$489,620.

     Net  cash  used in  investing  activities  in  fiscal  1996  was  $161,286,
primarily the result of capitalized  costs  associated with the  refurbishing of
production  equipment  and  down  payments  on  the  construction  of a  freezer
expansion. During fiscal 1996 net cash used in financing

                                       12

<PAGE>



activities  was $144,488 due mainly to the issuance of  additional  Common Stock
for $808,620 net of costs, offset by net reductions in borrowings of $953,108.

     The Company estimates that as of September 30, 1996, there is an additional
$470,000  which  could be  drawn  under  its bank  line of  credit.  The  amount
available  under this line of credit  fluctuates  daily based upon the Company's
eligible accounts  receivable and inventory.  The line of credit, bank term note
and bank capital note are subject to various financial covenants,  the violation
of which could result in termination of the loan agreements  which would require
the  Company to repay the loans in full.  The Company had been in default of the
financial  covenants in the past, and the bank has waived such  defaults.  It is
management's  opinion that the Company will be able to meet the  requirements of
these covenants in the future;  however,  there is no assurance that the Company
will not violate the  financial  covenants  in the future or that the bank would
waive any violations.

     At September 30, 1996, the Company had cash of $600 and a negative  working
capital of $480,444.

     On February 2, 1996,  the Company raised  $1,280,000  pursuant to a private
offering of 2,560,000 equity units,  each unit consisting of one share of Common
Stock and a warrant,  exercisable  for three  years,  to  purchase  one share of
Common Stock at $0.75 per share.  The Company filed a registration  statement on
Form S-3,  which has been  declared  effective  by the  Securities  and Exchange
Commission,  to  register  the  possible  resale  by  certain  shareholders  who
participated in the Company's December 1994 financial restructuring and February
2, 1996 private  placement  of an aggregate of 6,185,400  shares of Common Stock
including up to 2,978,900 shares that  shareholders may acquire upon exercise of
outstanding warrants.

     The Company  believes that the additional  capital raised,  its bank credit
facilities  and  cash  flow  from  operations  will be  sufficient  to meet  its
operating  requirements  through fiscal 1997,  assuming (i) the Company's fiscal
1997 sales  equal or exceed  fiscal 1996  sales;  (ii) there are no  significant
increases in expenses in fiscal 1997;  and (iii) the Company is able to keep its
bank credit facilities operative.

Accounting Standards Issued and Not Yet Adopted

     The Financial  Accounting  Standards Board (FASB) has issued  Statement No.
123 (SFAS 123),  Accounting  for  Stock-Based  Compensation.  This  statement is
effective  for the  Company's  1997 fiscal  year.  SFAS 123  establishes  a fair
value-based  method  of  accounting  for  stock-based   compensation  plans  and
encourages,  but does not  require,  entities to adopt that method for grants to
employees  in place of APB  Opinion  No.  25,  Accounting  for  Stock  Issued to
Employees,  which uses an intrinsic value-based accounting method. At this time,
the Company does not intend to adopt SFAS 123 in  measuring  expenses for grants
to employees.  However, the Company must present pro forma net income (loss) and
related per share  amounts as if SFAS 123 had been  adopted,  and such pro forma
amounts are expected to reflect higher amounts of expenses than amounts reported
in the financial statements.



                                       13

<PAGE>



Outlook

     Management  believes  the  restructuring  it  began  in  October  1994  has
substantially  been  completed.  Its plan in  fiscal  1997  will be to  increase
revenues and improve  profitability by focusing on new markets and product brand
positioning  of  tortillas  and  tortilla  chips in the retail and food  service
markets to take advantage of strong  industry  growth  patterns.  See Item One -
"Description of Business Business Strategy."

     The foregoing  statements contained in this Outlook section of Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  and
other  forward  looking  statements  made in Part I  "Description  of Business -
Business  Strategy" of this Form 10-KSB for the period ended  September 30, 1996
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
seasonality  of its  sales  and  raw  materials  cost  fluctuations,  which  are
discussed above, and the following:

     Reliance on Principal Customers. The Company has several customers who each
accounted  for a significant  percentage of the Company's  sales in fiscal 1996.
During that period,  sales to Crystal Farms Refrigerated  Distribution  Company,
Ken  Davis  Products,   Inc.,   Catalina   Specialty  Foods,  Inc.  and  Bradley
Distributing,  Inc.  accounted  for  approximately  20%,  8%,  15% and 8% of the
Company's sales, respectively.  The loss of any of the foregoing customers could
have a material and adverse effect on the Company's sales and profitability.

     Competition. The Mexican-style food manufacturing and distribution industry
is  highly  competitive.  The  Company  is  in  competition  with  a  number  of
manufacturers and distributors of Mexican-style  food products and, to a limited
extent,  manufacturers  of "snack  foods," many of which are better  capitalized
than the Company.  The Company will also be subject to future  competition  from
other manufacturers, distributors and retailers who enter into the Mexican-style
food and distribution  industry. In the retail market, many of these competitors
engage in extensive local and national advertising and marketing,  and the brand
names for products  distributed  by those  competitors  are  significantly  more
recognizable  to the  consumer  than the  Company's  brand  names.  In addition,
competition  for shelf space in retail  grocery  stores is intense.  In the food
service market,  the Company is competing with a number of regional and national
producers or Mexican-style  food products.  Many of these competitors are better
capitalized  than the  Company  and have  established  sales  organizations.  No
assurance  can be given that the  Company  will be able to compete as it expands
its markets.
 
     Product  Liability.  The  Company may be subject to  significant  liability
should the  consumption of any of its products  cause injury,  illness or death.
Although the Company carries product liability insurance in the aggregate amount
of  $2,000,000,  with  limits  per  occurrence  of  $1,000,000,  there can be no
assurance that this  insurance  will be adequate to protect the Company  against
product  liability  claims, or that such insurance will continue to be available
to the Company on reasonable terms.

                                       14

<PAGE>




     Government  Regulation.  The  Company's  business  is  subject  to  various
federal,  state and local environmental and health  regulations.  If the Company
were  found  not  to be in  compliance  with  such  regulations,  sanctions  and
penalties  could be imposed  which could  materially  and  adversely  affect the
Company's business.

ITEM 7.           FINANCIAL STATEMENTS



                                       15

<PAGE>






                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Sparta Foods, Inc.
St. Paul, Minnesota

We have audited the  accompanying  consolidated  balance sheets of Sparta Foods,
Inc. and  Subsidiary  (the Company) as of September  30, 1996 and 1995,  and the
related consolidated  statements of operations,  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,  1996 and 1995,  and the results of their
operations  and their cash flows for the years then ended,  in  conformity  with
generally accepted accounting principles.


Minneapolis, Minnesota                /s/ McGladrey & Pullen
November 22, 1996                     -----------------------
                                       McGladrey & Pullen

                                       16

<PAGE>

<TABLE>
<CAPTION>

SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995

ASSETS (Note 3)                                                                1996                    1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                      <C>    

Current Assets
     Cash                                                              $                 600   $                863
     Accounts receivable, less allowances of $52,000 in 1996 and
        $75,000 in 1995 (Note 6)                                                     639,934                678,458
     Inventories:
        Finished goods                                                               241,959                320,303
        Raw materials and packaging                                                  506,513                609,766
     Prepaid expenses                                                                 63,915                 37,495
                                                                       ---------------------------------------------
                   Total current assets                                            1,452,921              1,646,885
                                                                       ---------------------------------------------

Property and Equipment~ (Notes 2 and 5)                                            5,850,489              5,832,508
     Less accumulated depreciation                                                 2,115,810              1,733,420
                                                                       ---------------------------------------------
                                                                                   3,734,679              4,099,088
                                                                       ---------------------------------------------

Other Assets
     Goodwill, less accumulated amortization of $102,358 and
        $80,218, respectively                                                        457,533                479,673
     Covenants not-to-compete, less accumulated amortization
        of $235,366 and $186,733, respectively                                        98,134                146,767
     Rental property held for resale, less accumulated depreciation
        of $15,984 and $-0-, respectively (Note 1)                                   924,016                940,000
     Other                                                                           339,730                242,105
                                                                       ---------------------------------------------
                                                                                   1,819,413              1,808,545
                                                                       ---------------------------------------------
                                                                       $           7,007,013   $          7,554,518
                                                                       =============================================

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


<TABLE>
<CAPTION>



LIABILITIES AND STOCKHOLDERS' EQUITY                                           1996                    1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                      <C>   

Current Liabilities
     Note payable, bank (Note 3)                                       $             294,811   $            997,721
     Current maturities of long-term debt                                            567,905                594,803
     Accounts payable                                                                658,575              1,218,455
     Accrued expenses                                                                412,074                361,814
                                                                       ---------------------------------------------
                   Total current liabilities                                       1,933,365              3,172,793
                                                                       ---------------------------------------------


Long-Term Debt~, less current maturities (Notes 3 and 5)                           2,063,613              2,636,913
                                                                       ---------------------------------------------


Commitments~ (Note 5)


Stockholders' Equity~ (Note 7)
     Preferred stock, authorized 1,000,000 shares, no designated
        par value; none issued                                                           -                      -
     Common stock, authorized 15,000,000 shares, $0.01 par value;
        issued and outstanding 6,679,049 and 4,062,799 shares
        in 1996 and 1995, respectively                                                66,790                 40,627
     Additional paid-in capital                                                    4,911,070              3,777,317
     Accumulated deficit                                                          (1,967,825)            (2,073,132)
                                                                       ---------------------------------------------
                                                                                   3,010,035              1,744,812
                                                                       ---------------------------------------------
                                                                       $           7,007,013   $          7,554,518
                                                                       =============================================



</TABLE>

<PAGE>

<TABLE>
<CAPTION>

SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 1996 and 1995

                                                                                               1996                    1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                     <C>   

Net sales~ (Note 6)                                                                    $          12,662,819   $         11,991,988
Cost of sales                                                                                      9,238,220              8,901,490
                                                                                       ---------------------------------------------
                   Gross profit                                                                    3,424,599              3,090,498

Selling, general, and administrative expenses (Note 8)                                             2,968,569              3,283,992
                                                                                       ---------------------------------------------
                   Operating income (loss)                                                           456,030               (193,494)

Other income (expense) (Notes 1 and 9)                                                                86,018               (279,450)
Interest expense                                                                                    (431,741)              (516,212)
                                                                                       ---------------------------------------------
                   Income (loss) before income taxes                                                 110,307               (989,156)
                                                                          
Income tax (expense) benefit~ (Note 4)                                                                (5,000)                45,378
                                                                                       ---------------------------------------------
                   Net income (loss)                                                   $             105,307   $           (943,778)
                                                                                       =============================================

Net income (loss) per common and common equivalent share:
     Primary                                                                           $                0.02   $              (0.24)
     Fully diluted                                                                                      0.01                    -

Weighted average common and common equivalent shares outstanding:
     Primary                                                                                       7,428,736              3,887,950
     Fully diluted                                                                                 7,617,432                    -
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

<TABLE>
<CAPTION>

SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1996 and 1995

                                                         Number                           Additional
                                                       of Shares                           Paid-In         Accumulated
                                                       Outstanding         Amount          Capital          Deficit           Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>         <C>             <C>              <C>               <C>   

Balance, September 30, 1994                             3,151,089   $      31,510   $   2,696,092    $   (1,129,354)  $   1,598,248
   Common stock issued, less costs of $282,658
       (Note 7)                                           910,332           9,103       1,073,739                 -       1,082,842
   Common stock issued as compensation                      1,378              14           7,486                 -           7,500
   Net loss                                                     -               -               -          (943,778)       (943,778)
                                                      ------------------------------------------------------------------------------
Balance, September 30, 1995                             4,062,799          40,627       3,777,317        (2,073,132)      1,744,812
   Common stock issued, less costs of
      $148,209        (Note 7)                          2,560,000          25,600       1,106,191              -          1,131,791
   Common stock issued in satisfaction of consulting
      services (Note 8)                                    40,000             400          19,600              -             20,000
   Common stock issued upon exercise of warrants
      and options (Note 7)                                 16,250             163           7,962              -              8,125
   Net income                                                   -               -               -          105,307          105,307
                                                      ------------------------------------------------------------------------------
Balance, September 30, 1996                             6,679,049   $      66,790   $   4,911,070    $  (1,967,825)  $    3,010,035
                                                      ==============================================================================

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

<TABLE>
<CAPTION>

SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996 and 1995

                                                                                                1996                 1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                   <C>   

Cash Flows From Operating Activities
     Net income (loss)                                                                   $          105,307   $          (943,778)
     Adjustments to reconcile net income (loss) to net cash provided by
        operating activities:
        Depreciation                                                                                463,049               453,191
        Amortization                                                                                 89,853               134,348
        (Gain) loss on sale of property and equipment                                                10,630               (23,371)
        Loss on impairment of property held for resale                                                  -                 302,612
        Changes in assets and liabilities:
            Accounts receivable                                                                      38,524                97,251
            Inventories                                                                             181,597                95,004
            Prepaid expenses                                                                        (26,420)                5,122
            Other assets                                                                            (67,409)              (33,446)
            Accounts payable and accrued expenses                                                  (489,620)               24,232
                                                                                         -----------------------------------------
                   Net cash provided by operating activities                                        305,511               111,165
                                                                                         -----------------------------------------

Cash Flows From Investing Activities
     Equipment deposits paid                                                                        (68,000)                 -
     Purchases of property, equipment, and other                                                   (107,786)             (549,801)
     Proceeds from the sale of property and equipment                                                14,500                79,245
                                                                                         -----------------------------------------
                   Net cash used in investing activities                                           (161,286)             (470,556)
                                                                                         -----------------------------------------

Cash Flows From Financing Activities
     Net payments on line of credit                                                                (702,910)             (167,278)
     Long-term borrowings                                                                               -               2,184,800
     Payments on long-term borrowings                                                              (650,198)           (1,540,876)
     Short-term borrowings                                                                          400,000                  -
     Deferred finance costs                                                                             -                 (54,588)
     Deferred private placement costs                                                                   -                 (18,704)
     Issuance of common stock, net of costs                                                         808,620               (47,448)
                                                                                         -----------------------------------------
                   Net cash provided by (used in) financing activities                             (144,488)              355,906
                                                                                         -----------------------------------------

                   Net decrease in cash                                                                (263)               (3,485)

Cash
     Beginning                                                                                          863                 4,348
                                                                                         -----------------------------------------
     Ending                                                                              $              600   $               863
                                                                                         =========================================

                                                            (Continued)

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1996 and 1995

                                                                                                 1996                  1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                    <C>    

Supplemental Disclosures of Cash Flow Information
     Cash (receipts) payments for:
        Interest                                                                         $            444,599   $          640,883
        Income taxes                                                                                    5,000              (47,476)
                                                                                         ==========================================

Supplemental Schedule of Noncash Investing and Financing Activities
     Conversion of long-term debt to common stock (Note 7)                               $                 -    $        1,137,790
     Conversion of accounts payable to long-term debt                                                      -               217,000
     Conversion of bridge financing to common stock (Note 7)                                          350,000                  -
     Conversion of accounts payable to common stock (Note 8)                                           20,000                  -
     Debt forgiven on leased asset                                                                        -                 12,861
     Reclassification of deferred private placement costs to equity upon
        issuance of common stock                                                                       18,704                  -
                                                                                         ==========================================

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  Mexican-style  foods  under its own brand  name and for  private
labels, and barbecue sauces for others under private labels.

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

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

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.

Stock-based  compensation:  The Financial  Accounting Standards Board (FASB) has
issued  Statement No. 123 (SFAS 123),  Accounting for Stock-Based  Compensation.
This  statement  is  effective  for the  Company's  1997 fiscal  year.  SFAS 123
establishes  a  fair   value-based   method  of  accounting   for  stock-  based
compensation plans and encourages,  but does not require, entities to adopt that
method for grants to  employees in place of APB Opinion No. 25,  Accounting  for
Stock  Issued to  Employees,  which  uses an  intrinsic  value-based  accounting
method. At this time, the Company does not intend to adopt SFAS 123 in measuring
expenses for grants to  employees.  However,  the Company must present pro forma
net income (loss) and related per share amounts as if SFAS 123 had been adopted,
and such pro forma  amounts are expected to reflect  higher  amounts of expenses
than amounts reported in the financial statements.

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.

Cash: 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.

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.


                                       17

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The financial  statements  include the following  financial  instruments:  cash,
trade  accounts  receivable,  accounts  payable,  notes  payable,  and a line of
credit.  At September  30, 1996,  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.

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

Property and equipment: Property and equipment are carried at cost and are being
depreciated over their useful lives on a straight-line basis.

Intangibles:  Costs in excess of assets acquired  (goodwill) are being amortized
over 40 years.  Covenants  not-to-compete  are being amortized over the terms of
the  agreements,  which are 5 years to 15 years. In accordance with Statement of
Financing  Accounting  Standards  No.  121,  Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to Be  Disposed  Of, the  Company
reviews its  intangibles  periodically  to  determine  potential  impairment  by
comparing the carrying value of the intangibles with estimated future cash flows
expected  to  result  from the use of the  assets,  including  cash  flows  from
disposition.  Should the sum of the expected  future cash flows be less than the
carrying value,  the Company would  recognize an impairment  loss. An impairment
loss would be  measured  by  comparing  the amount by which the  carrying  value
exceeds  the fair  value  of the  intangible  asset.  To  date,  management  has
determined that no impairment of intangibles exists.

Rental property: Rental property consists of a facility in Lakeville, Minnesota,
which was previously used in the  manufacturing  of the Company's  products.  In
fiscal 1995,  the  production  equipment  and  operations  of this facility were
consolidated  into the Company's St. Paul location.  The property is recorded at
the lower of cost or estimated fair market value.

The Company  entered into an  agreement  with a third party during 1996 to lease
this facility under an operating  lease that expires January 31, 2006. The lease
calls for monthly payments of $11,280,  plus taxes and utilities.  Rental income
under this lease was  approximately  $92,000  for the year ended  September  30,
1996, and is included in other income  (expense) in the statement of operations.
The Company commenced depreciating the rental property over its estimated useful
life of 37 years on a straight-line basis at the beginning of the lease.

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.

Net income (loss) per common and common  equivalent share: Net income (loss) per
common share is computed based upon the weighted average number of common shares
and common share equivalents

                                       18

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



outstanding  during each year.  Common  stock  equivalents  are  included in the
computation  using the treasury  stock method  wherever  their  inclusion  has a
dilutive  effect.   Common  stock   equivalents   (options  and  warrants)  were
antidilutive for the year ended September 30, 1995.

Note 2.  Property and Equipment
<TABLE>
<CAPTION>

Property and equipment consists of:


                                                   Estimated                        September 30
                                                  Useful Life
                                                                  -------------------------------------------------
                                                                         1996                         1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                 <C>                            <C>   

Factory equipment                                    12-18               $4,765,838                    $4,743,245

Office and other equipment                             5                    322,562                       327,174

Leasehold improvements                               20-31                  762,089                       762,089
                                                                  -------------------------------------------------

                                                                         $5,850,489                    $5,832,508
                                                                  =================================================

</TABLE>


Note 3.  Financing Agreements

Line of credit:  At September 30, 1996,  the Company has a line of credit with a
bank,  secured by all assets.  Maximum borrowings under the credit agreement are
determined by an accounts receivable and inventory borrowing base calculation or
$1,200,000,  whichever  is less.  Borrowings  bear  interest  at prime  plus 2.0
percent (10.25 percent at September 30, 1996).  At September 30, 1996,  $294,811
was  outstanding  on the line of  credit.  The  Company is to  maintain  certain
minimum net income, net worth, and debt service coverage levels. In addition,  a
maximum debt to net worth ratio is specified, dividends and capital expenses are
restricted, and compensation and new options/warrants are also limited.

Long-term debt:  Long-term debt consists of the following:


                                       19

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>




                                                                                               September 30
                                                                                        1996                   1995
<S>                                                                               <C>                  <C>   

Term note and  equipment  note  payable  to bank,  secured  by all assets of the
Company, due in monthly installments of $21,658 and $6,667,  respectively,  plus
interest at prime plus 2.5%
to December 1, 1997, when the remaining balance is due                             $  1,623,315        $    1,963,211
Note payable, secured by land and building, subordinated to bank
financing,  interest-only  payments at prime plus 4% beginning  January 1, 1995,
through January 1, 1998, thereafter monthly
installments of $11,886, including interest, to January 1, 2003                         553,220               553,220
Note payable, Freedoon Anvary, secured by land and building,
subordinated  to  bank  financing,  interest-only  payments  at  prime  plus  4%
beginning  January  1,  1995,  through  January  1,  1998,   thereafter  monthly
installments of $3,934, including
interest, to January 1, 2003                                                            183,102               183,102
Note payable, attorney, subordinated to bank financing, monthly
installments of $8,500, including interest, at prime plus 1.5%,
to February 1, 1997                                                                      65,066               155,586
Capital lease obligations (see Note 5)                                                  206,815               376,597
                                                                         
                                                                                      2,631,518             3,231,716

Less current maturities                                                                 567,905               594,803
                                                                                   -----------------------------------
                                                                                      2,063,613             2,636,913
                                                                                   ===================================

</TABLE>

Aggregate maturities of long-term debt at September 30, 1996, are as follows:

Years ending September 30:                                       $  568,000
        1997                                                      1,394,000
        1998                                                        117,000
        1999                                                        129,000
        2000                                                        146,000
        2001                                                        278,000
                                                                -----------
        Later years                                              $2,632,000
                                                                ===========


Note 4.  Income Taxes

The income tax (expense) benefit for 1996 and 1995 consisted of:



                                       20

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>

                                                                                   1996                   1995
<S>                                                                      <C>                     <C>   

Current:
Federal--net operating loss carried back to prior years                   $           -          $            45,378
State--minimum fees                                                                   -5,000
                                                                          $           -5,000     $            45,378
</TABLE>



A  reconciliation  between  the income  tax  (expense)  benefit  at the  federal
statutory  rate and the  effective  income  tax rate  for 1996 and  1995,  is as
follows:

<TABLE>
<CAPTION>

                                                                                     1996                    1995
<S>                                                                                      <C>                    <C>    

Federal statutory rates                                                                  (34.0) %                34.0 %
State income taxes net of federal benefit                                                 -4.50                  -4.40
Nondeductible expenses                                                                    -5.60                  -0.30
Net operating loss not utilized                                                               -                 -24.70
Benefit of graduated tax rate                                                              3.20                      -
Utilization of net operating loss carryforward                                            36.40                      -
Effective income tax rate                                                                 -4.50 %                  4.6 %

</TABLE>

Temporary  differences  that  give  rise  to the net  deferred  tax  assets  and
liabilities at September 30, 1996 and 1995, are as follows:

<TABLE>
<CAPTION>

                                                                                   1996                   1995
<S>                                                                     <C>                     <C>   

Net current deferred taxes:
Receivable allowances                                                     $             15,700  $            22,500
Vacation accrual                                                                        17,000               22,000
Capitalized start-up costs                                                              -                     1,900
Inventory costs                                                                         15,900               12,900
Bonus accrual                                                                            1,200                -
Lease deferred income                                                                  -19,000                -
Valuation allowance                                                                    -30,800              -59,300
                                                                          $                      $  -

                                                                                   1996                   1995
Net noncurrent deferred taxes:
Depreciation                                                              $           -544,500   $         -459,300
Property and equipment valuation allowance                                              90,800               90,800
Net operating loss carryforwards                                                       873,900              811,000
AMT credit carryforwards                                                                38,000               38,000
Intangible assets                                                                       31,900    -
Valuation allowance                                                                   -490,100             -480,500
                                                                          $   -                  $  -


</TABLE>

                                       21

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 4.  Income Taxes (Continued)

As of September 30, 1996 and 1995, the Company recorded valuation  allowances of
$520,900 and  $539,800,  respectively,  on the deferred tax assets to reduce the
total to an  amount  that  management  believes  will  ultimately  be  realized.
Realization of deferred tax assets is dependent upon  sufficient  future taxable
income during the period that deductible temporary differences and carryforwards
are  expected  to be  available  to reduce  taxable  income.  There was no other
activity in the valuation allowance account during 1996 or 1995.

The net operating loss  carryforwards  of $2,913,000 at September 30, 1996, will
expire as follows:

Years                                                        Amount
2008                                                    $           268,000
2009                                                              1,135,000
2010                                                              1,276,000
2011                                                                234,000


The alternative  minimum tax (AMT) credit  carryforwards  may be carried forward
indefinitely to reduce future regular federal income taxes payable.

Note 5.  Leases and Other Commitments

Capital  leases:  The Company leases property and equipment under capital leases
with  terms in excess of one year.  Minimum  future  obligations  under  capital
leases at September 30, 1996, are as follows:

Years ending September 30:
1997                                                    $           175,200
1998                                                                 42,600
1999                                                                  2,800
                                                       ---------------------
Total future payments                                               220,600

Less amount representing interest                                    13,800
                                                      ----------------------
Present value of future payments                        $           206,800
                                                      =======================

Property and equipment includes assets held under capital leases, as follows:

                                                    September 30
                                  ----------------------------------------------
                                            1996                   1995
--------------------------------------------------------------------------------
Cost                              $            784,376  $           825,859
Accumulated depreciation                       331,108              265,944
                                  ----------------------------------------------
                                  $            453,268  $           559,915
                                  ==============================================

Operating leases:  The Company leases its office and manufacturing  facility and
certain  manufacturing  equipment  under  operating  leases.  The facility lease
requires  monthly  base  rentals  plus the  payment of 88 percent of real estate
taxes and  operating  expenses of the  building,  expires on May 31,  2000,  and
contains two five-year renewal options.



                                       22

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 5.  Leases and Other Commitments (Continued)

Total rent expenses for  facilities and equipment were $518,500 and $447,100 for
1996 and 1995, respectively.

Minimum  future  obligations  required under  operating  leases at September 30,
1996, are as follows:


Years ending September 30:
1997                                                   $         393,000
1998                                                             344,000
1999                                                             304,000
2000                                                             207,000
2001                                                               8,000
                                                     --------------------
                                                       $       1,256,000
                                                     ====================

License  agreements:  In  connection  with a business  acquisition,  the Company
obtained a license agreement which expires December 31, 1999, which requires the
payment of 3 percent of the gross sales of  products  sold using the "La Campana
Paradiso" or  "Paradiso"  name.  In addition,  the Company pays a fee equal to 1
percent of all retail sales made under the "Cruz"  label until  January 1, 1997,
or an aggregate of $220,000,  whichever occurs earlier, and is required to pay 3
percent  of  net  Chapala  sales  for  15  years.  Expenses  relating  to  these
arrangements were $42,878 and $35,717 in 1996 and 1995, respectively.

Purchase agreements: The Company does not enter into futures contracts. They do,
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 for the  delayed  delivery of corn and flour for a
period  of 2  to  18  months,  depending  on  current  pricing,  to  insure  the
availability of the type of corn best suited for the Company's  products.  These
purchase  orders  are placed  directly  with the  suppliers.  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 are
accruable as of September 30, 1996 and 1995.

Note 6.  Sales
The Company had sales to one customer  which  accounted  for 20 percent of sales
for 1996 and 16 percent of sales for 1995.  As of September  30, 1996,  accounts
receivable from this customer were $80,616.

In  addition,  the  Company  also had  sales to a second  customer  through  one
distributor in 1996 and four separate  distributors  in 1995 which accounted for
16 percent of sales in 1996 and 13 percent of sales in 1995. As of September 30,
1996, accounts receivable from this distributor were $63,825.

Note 7.  Stockholders' Equity

On October 20,  1995,  the Company  obtained  $400,000  in bridge  financing  by
issuing  convertible  promissory  notes and the granting of 400,000  warrants to
purchase  shares of common  stock at $0.50 per  share.  In  February  1996,  the
Company completed a private placement  offering and obtained  additional equity.
The following is a summary of the components of the private placement offering:

         2,560,000  shares of common  stock were issued for $930,000 in cash and
         the conversion of $350,000 of bridge financing debt.


                                       23

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         A total of 2,640,000  in warrants  were issued in  connection  with the
         issuance of the additional  common stock. The warrants have an exercise
         price of $0.75, of which 2,560,000  expire on February 2, 1999, and the
         remaining 80,000 expire on February 2, 2001.

         Net proceeds from the private  placement  offering were used to pay off
         $50,000 of bridge  financing debt and $700,000 of the Company's line of
         credit,  with  the  remaining  proceeds  used  to fund  the  continuing
         operations of the Company.

In December  1994,  the Company  converted  certain  existing  debt and obtained
additional  equity.  The  following  is a  summary  of  the  components  of  the
conversion:

         Sort-term debt of $2,000,000 was repaid or converted to equity. Debt of
         $969,000  was  converted  into  646,000  shares  of common  stock,  and
         $1,031,000 was repaid.

         Additional  equity of $396,500  was  obtained  from the sale of 264,332
         shares of common stock and the conversion of certain notes and accounts
         payable.

         A total of 597,546  in  warrants  were  issued in  connection  with the
         conversion and issuance of additional equity.

Stock  options:  The Company has a stock  option plan,  as amended,  pursuant to
which qualified and  nonqualified  stock options for up to 950,000 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 fair 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.

Note 7.  Stockholders' Equity (Continued)
<TABLE>
<CAPTION>

Changes in stock options are summarized as follows:

                                                                               Price Range              Shares
<S>                                                                     <C>                                <C>    

Outstanding, September 30, 1994:                                          $          1.88 - 5.00             499,033
Granted                                                                               .50 - 2.10             373,333
Canceled                                                                              .50 - 5.00            -178,867
Outstanding, September 30, 1995:                                                      .50 - 5.00             693,499
Granted                                                                               .50 - 1.44             277,000
Canceled                                                                              .50 - 5.00            -235,665
Exercised                                                                                    .50             -11,250
Outstanding, September 30, 1996                                           $           .50 - 5.00             723,584


As of September 30, 1996, 231,792 options were exercisable.
</TABLE>



                                       24

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

Stock warrants:  A summary of warrants follows:

                                               Price Range                     Shares
--------------------------------------------------------------------------------------------------
<S>                                                 <C>                                  <C>   

Outstanding, September 30, 1994                     $          4.50                       460,000
  Granted                                               1.50 - 2.00                       597,546
  Cancelled                                                    4.50                      -380,000
                                      ------------------------------------------------------------
Outstanding, September 30, 1995                         1.50 - 4.50                       677,546
  Granted                                               0.50 - 0.75                     3,040,000
  Exercised                                                    0.50                        -5,000
                                      ------------------------------------------------------------
Outstanding, September 30, 1996                     $   0.50 - 4.50                     3,712,546
                                      ============================================================

</TABLE>

Expiration Date                                           Amount
October 10, 1998                                         400,000
October 31, 1998                                         657,246
February 2, 1999                                       2,560,000
December 9, 1999                                          15,300
February 2, 2001                                          80,000
                                                       ---------
                                                       3,712,546
                                                       =========

Note 8.  Related-Party Transactions

The Company's  former Chairman of the Board received  consulting fees of $34,517
for 1995,  pursuant to a consulting  agreement with the Company dated August 15,
1994.  This agreement  obligated him to provide  executive  management and other
business  services to the Company over the period from August 15, 1994,  through
February 28, 1995,  in exchange  for a consulting  fee of $8,333 per month.  The
consulting agreement was terminated in January 1995.

The Company  issued  40,000  shares of common  stock to a member of the Board of
Directors to satisfy a $20,000  liability for consulting  services  provided and
recorded as of September 30, 1995.

Effective  November 1, 1994, the Company entered into a broker  agreement with a
principal  stockholder  and former  officer and  director  of the Company  which
provides an exclusive  food broker  arrangement  on sales of the Company's  food
products to certain designated accounts on a commission basis.  Commissions paid
during fiscal 1996 and 1995 amounted to $8,799 and $4,512, respectively.

Note 9.  1995 Fourth Quarter Adjustment

During the fourth  quarter of the year ended  September  30,  1995,  the Company
recorded a $302,612 write-down of the Lakeville property value based upon recent
negotiations  for the sale of the  facility.  This  write-down  was necessary to
reflect the recorded  value of this property at the lower of cost or fair market
value.  During 1996,  the Company  entered  into a lease  agreement to rent this
property (see Note 1).




                                       25

<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 presently held are as follows:


Name                        Age           Position with Company

Joel P. Bachul              54            President and Chief Executive Officer

A. Merrill Ayers            50            Treasurer, Chief Financial Officer and
                                          Secretary

Thomas C. House             50            Vice President of Operations


     Joel P. Bachul,  has been the Chief Executive  Officer and President of the
Company,  and its wholly-owned  subsidiary,  La Canasta of Minnesota,  Inc. ("La
Canasta"),  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.

     A. Merrill  Ayers,  has been the  Treasurer,  Chief  Financial  Officer and
Secretary of the Company since  November 9, 1994.  Prior to joining the Company,
Mr. Ayers served as Senior Vice President of ITT Consumer  Financial  Corp. from
June 1992 until  February  1994.  From December 1989 through June 1992 Mr. Ayers
was Vice  President  and  Treasurer of Parsons,  Brinckerhoff,  Quade & Douglas,
Inc., an engineering firm.

     Thomas C. House,  has been  employed by the Company since March 1993 as the
Vice President of Operations. 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.  Mr. House is currently  responsible for the Company's
plant operations, quality control and plant expansion, as well as purchasing and
product distribution.

     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 1997 Annual Meeting of Shareholders.


                                       26

<PAGE>




ITEM 10.          EXECUTIVE COMPENSATION

     The information required by Item 10 is incorporated herein reference to the
section  labeled  "Executive  Compensation"  which  appears in the  Registrant's
definitive Proxy Statement for its 1997 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 section labeled "Principal Shareholders and Management  Shareholdings" which
appears in the  Registrant's  definitive  Proxy  Statement  for its 1997  Annual
Meeting of Shareholders.


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
definitive Proxy Statement for its 1997 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 1996 fiscal year.



                                       27

<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 20, 1996           By: /s/ Joel P.Bachul
                                       Joel P. Bachul, President

Dated:  December 20, 1996           By: /s/ A. Merrill Ayers
                                       A. Merrill Ayers, Chief Financial Officer

     Pursuant to the  requirements  of the  Securities  Exchange Act 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/ Michael J. Kozlak                                        December 20, 1996
----------------------------
Michael J. Kozlak, Director

/s/ Larry Arnold                                             December 20, 1996
----------------------------
Larry Arnold, Director

/s/ Joel P. Bachul                                           December 20, 1996
----------------------------
Joel P. Bachul, Director

----------------------------                                 December __, 1996
Edward Jorgensen, Director

/s/ Richard H. Leepart                                       December 20, 1996
----------------------------
Richard H. Leepart, Director

/s/ R. Dean Nelson                                           December 20, 1996
-----------------------------
R. Dean Nelson, Director


                                       28

<PAGE>




                               SPARTA FOODS, INC.

                          EXHIBIT INDEX TO FORM 10-KSB




Exhibit
Number           Description

3(i)(1)        Articles of  Incorporation.  (Incorporated by reference to the
               Company's  Annual  Report  on  Form  10-K  for the  period  ended
               December 31, 1989.)*

3(i)(2)        Articles of Amendment to Articles of Incorporation. (Incorporated
               by reference to the Company's  Annual Report on Form 10-K for the
               period ending December 31, 1990.)*
       

3(i)(3)        Articles  of  Amendment  to Articles  of  Incorporation  filed on
               October 25, 1993.  (Incorporated  by  reference to the  Company's
               Amendment  No. 2 on Form  10-KSB/A  to the Annual  Report on Form
               10-KSB for the period ended September 30, 1993.)*

3(i)(4)        Articles of Amendment to Articles of Incorporation filed on April
               15, 1994.  (Incorporated by reference to the Company's  Amendment
               No. 2 on Form  10-KSB/A  to the Annual  Report on Form 10-KSB for
               the period ended September 30, 1993.)*

3(ii)          By-Laws.  (Incorporated  by  reference  to the  Company's  Annual
               Report on Form 10-K for the period ended December 31, 1989.)*

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

10.1           Registration  Rights  Agreement  dated January 15, 1991,  between
               Carmen S.  Abril-Lopez and Sparta Foods,  Inc.  (Incorporated  by
               reference  to the  Company's  Annual  Report on Form 10-K for the
               period ended December 31, 1990.)*

10.2 **        Amended and Restated Stock Option Plan.

10.3           Office/Warehouse  Lease  dated  November  20,  1985  between  The
               Travelers Insurance Company and La Canasta of Minnesota, Inc., as
               amended.  (Incorporated  by  reference  to the  Company's  Annual
               Report on Form 10-K for the period ended December 31, 1990.)*

10.4           Manufacturing  Agreement  dated  September 20, 1989,  between Ken
               Davis   Products,   Inc.  and  La  Canasta  of  Minnesota,   Inc.
               (Incorporated by reference to the Company's Annual Report on Form
               10-K for the period ended December 31, 1990.)*

10.5           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  Annual Report on Form 10-K for the period ended
               December 31, 1990.)*

10.6           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  Annual Report on Form 10-K for the period ended
               December 31, 1990.)*

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


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

*        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>





10.8           Amendment  No. Four dated  October  10, 1991 to  Office/Warehouse
               Lease dated  November  20, 1985 between The  Travelers  Insurance
               Company  and  La  Canasta  of   Minnesota,   Inc.,   as  amended.
               (Incorporated by reference to the Company's Annual Report on Form
               10-K for the period ended September 30, 1991.)*

10.9           Form of  Contingent  Payment  Agreement  dated  December 31, 1991
               among  Sparta   Foods,   Inc.  and  the   shareholders   of  Cruz
               Distributing  Inc.  (Incorporated  by reference to the  Company's
               Post-Effective Amendment No. 1 to the Registration Statement (No.
               33-24394C) on Form S-18 dated August 6, 1992.)

10.10          Amendment No. Five dated May 18, 1992 to  Office/Warehouse  Lease
               dated November 20, 1985 among Advent Realty  Limited  Partnership
               II (successor to The Travelers Insurance Company),  La Canasta of
               Minnesota, Inc. and Sparta Foods, Inc. (Incorporated by reference
               to  the   Company's   Post-Effective   Amendment  No.  1  to  the
               Registration  Statement (No. 33-14394C) on Form S-18 dated August
               6, 1992.)

10.11          Mortgage Note and Mortgage Deed of La Canasta of Minnesota,  Inc.
               in favor of Fredoon  Anvary dated October 1, 1993.  (Incorporated
               by reference to the Company's  Current  Report on Form 8-K with a
               Date of Report of October 28, 1993.)*

10.12          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  Current  Report on
               Form 8-K with a Date of Report of October 28, 1993.)*

10.13          Warrant issued to International Food Products,  Inc. for purchase
               of 120,000 shares of Sparta Foods,  Inc.'s Common Stock and dated
               October 28, 1993.  (Incorporated  by  reference to the  Company's
               Current  Report on Form 8-K with a Date of Report of October  28,
               1993.)*

10.14          Warrant issued to Fredoon Anvary for purchase of 60,000 shares of
               Sparta  Foods,  Inc.'s  Common Stock and dated  October 28, 1993.
               (Incorporated  by reference to the  Company's  Current  Report on
               Form 8-K with a Date of Report of October 28, 1993.)*

10.15          Option Agreement  between Fredoon Anvary and Sparta Foods,  Inc.,
               granting  Fredoon Anvary an option to purchase  300,000 shares of
               Sparta  Foods,  Inc.'s  Common Stock and dated  October 28, 1993.
               (Incorporated  by reference to the  Company's  Current  Report on
               Form 8-K with a Date of Report of October 28, 1993.)*

10.16          Amendment No. 2 dated August 9, 1993 to  Manufacturing  Agreement
               between Ken Davis  Products,  Inc.  and La Canasta of  Minnesota,
               Inc.  (Incorporated by reference to the Company's Amendment No. 2
               on Form  10-KSB/A  to the  Annual  Report on Form  10-KSB for the
               period ended September 30, 1993.)*

10.17          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 Annual Report on Form 10-KSB for the period
               ended September 30, 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>





10.18          Amendment No. Six dated March 31, 1993 to Office/Warehouse  Lease
               dated November 30, 1985 among Advent Realty  Limited  Partnership
               II (successor to The Travelers  Insurance Company,  La Canasta of
               Minnesota, Inc. and Sparta Foods, Inc. (Incorporated by reference
               to the  Company's  Annual  Report on Form  10-KSB  for the period
               ended September 30, 1994.)*

10.19          Broker  Agreement  dated  November 1, 1994 between Food  Creators
               International,  Inc.  and Sparta  Foods,  Inc.  (Incorporated  by
               reference to the Company's  Annual Report on Form 10- KSB for the
               period ended September 30, 1994.)*

10.20          Registration  Rights Agreement dated December 9, 1994 between IFP
               Trust and Sparta Foods,  Inc.  (Incorporated  by reference to the
               Company's  Annual  Report on Form  10-KSB  for the  period  ended
               September 30, 1994.)*

10.21          Amendment  Modifying  Subordinated  Mortgage  Notes and  Security
               Agreement  dated  December  9,  1994 by and among La  Canasta  of
               Minnesota, Inc., IFP Trust and Fredoon Anvary (without exhibits).
               (Incorporated by reference to the Company's Annual Report on Form
               10-KSB for the period ended September 30, 1994.)*

10.22          Registration Rights Agreement dated December 9, 1994 by and among
               Nicholas G.  Grammas,  Carmen S.  Abril-Lopez  and Sparta  Foods,
               Inc.,  among others.  (Incorporated by reference to the Company's
               Annual  Report on Form 10-KSB for the period ended  September 30,
               1994.)*

10.23          Form of RAT-Series  Warrants  dated  December 9, 1994 to purchase
               Common  Stock of  Sparta  Foods,  Inc.  at $2.00  per  share  and
               expiring on October 31, 1998.  (Incorporated  by reference to the
               Company's  Annual  Report on Form  10-KSB  for the  period  ended
               September 30, 1994.)*

10.24          Form of RES-Series  Warrants  dated  December 9, 1994 to purchase
               Common  Stock of  Sparta  Foods,  Inc.  at $4.50  per  share  and
               expiring on October 31, 1998.  (Incorporated  by reference to the
               Company's  Annual  Report on Form  10-KSB  for the  period  ended
               September 30, 1994.)*

10.25          Credit  and  Security  Agreement  dated  December  9, 1994  among
               Norwest Bank Minnesota,  N.A.,  Sparta Foods, Inc. and La Canasta
               of Minnesota, Inc. (without exhibits). (Incorporated by reference
               to the  Company's  Annual  Report on Form  10-KSB  for the period
               ended September 30, 1994.)*

10.26          $1,200,000  Revolving  Note dated  December  9, 1994 issued by La
               Canasta of  Minnesota,  Inc. in favor of Norwest Bank  Minnesota,
               N.A. (Incorporated by reference to the Company's Annual Report on
               Form 10-KSB for the period ended September 30, 1994.)*

10.27          $1,784,000  Term Note dated December 9, 1994 issued by La Canasta
               of  Minnesota,  Inc.  in favor of Norwest  Bank  Minnesota,  N.A.
               (Incorporated by reference to the Company's Annual Report on Form
               10-KSB for the period ended September 30, 1994.)*

10.28          $400,000 Capital Note dated December 9, 1994 issued by La Canasta
               of  Minnesota,  Inc.  in favor of Norwest  Bank  Minnesota,  N.A.
               (Incorporated by reference to the Company's Annual Report on Form
               10-KSB for the period ended September 30, 1994.)*

10.29          Guaranty dated  December 9, 1994 issued by Sparta Foods,  Inc. in
               favor of Norwest Bank Minnesota,  N.A. (Incorporated by reference
               to the  Company's  Annual  Report on Form  10-KSB  for the period
               ended September 30, 1994.)*


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

*        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>





10.30          Form of Indemnification  Agreement between Sparta Foods, Inc. and
               certain Selling Shareholders listed in Registration  Statement on
               Form  SB-2.   (Incorporated   by  reference   to  the   Company's
               Registration  Statement on Form SB-2 (No.  33-89284)  dated April
               14, 1995.)

10.31          Amendment to Credit and Security Agreement dated December 9, 1994
               among Norwest Bank  Minnesota,  N.A.,  Sparta Foods,  Inc. and La
               Canasta of  Minnesota,  Inc.  (Incorporated  by  reference to the
               Company's  Registration  Statement  on Form SB-2  (No.  33-89284)
               dated April 14, 1995.)

10.32          Addendum  No. 1 to  Distribution  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.)*

10.33          Form of Convertible  Promissory Note issued to certain accredited
               investors who provided capital dated October 1995.  (Incorporated
               by reference to Exhibit 10.38 to the  Company's  Form 10- KSB for
               the period ended September 30, 1996.)*

10.34          Form of Warrant issued to certain  investors who provided capital
               in form of  convertible  Promissory  Notes  dated  October  1995.
               (Incorporated by reference to Exhibit 10.39 to the Company's Form
               10KSB for the period September 30, 1996.)*

10.35          Distribution  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.)*

10.36          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.)*

10.37          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.)*

10.38          Third Amendment to Credit  Agreement dated April 23, 1996, by and
               among Norwest Bank Minnesota,  N.A., the Company and LaCanasta of
               Minnesota,  Inc.  (Incorporated  by reference to Exhibit 10.43 to
               the Company's Form 10-QSB for the period ended March 31, 1996.)*

10.39          Salary Continuation  Agreement between the Registrant and Joel P.
               Bachul dated August 16, 1995.

10.40          Salary  Continuation  Agreement  between  the  Registrant  and A.
               Merrill Ayers dated August 11, 1995.

10.41          Salary  Continuation  Agreement between the Registrant and Thomas
               C. House dated August 14, 1995.

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

21             Subsidiaries  of  Registrant.  (Incorporated  by reference to the
               Company's  Annual  Report  on  Form  10-K  for the  period  ended
               September 30, 1992.)*

23             Consent of independent public accountant.


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

*        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>





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