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, 1997

                         Commission File No.: 000-19318

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

Minnesota                                                           41-1618240
(State or other jurisdiction of                                   (IRS Employer
incorporation or organization)                            Identification Number)
              1565 First Avenue N.W., New Brighton, Minnesota 55112
               (Address of principal executive offices)(Zip Code)

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

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

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

Check  whether  the Issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  Registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days. 
   Yes [ X ] No  [  ]

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B  is not  contained  herein,  and  will  not be  contained,  to the  best  of
Registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ X ]

Issuer's revenues for its most recent fiscal year: $14,077,841

The  aggregate  market  value of the Common Stock held by  nonaffiliates  of the
Registrant as of December 11, 1997 was approximately  $11,047,785 based upon the
average high and low bid prices of the Registrant's Common Stock on such date.

There were 6,798,637 shares of Common Stock,  $.0l par value,  outstanding as of
December 11, 1997.
                            -------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Documents  incorporated  by reference  pursuant to Rule 12b-23:  Portions of the
Registrant's  Proxy  Statement for its 1998 Annual Meeting are  incorporated  by
reference into Items 9, 10, 11 and 12 of Part III.

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

<PAGE>


                                      INDEX


Description                                                                Page

PART I........................................................................1

   ITEM 1. DESCRIPTION OF BUSINESS............................................1
   ITEM 2. DESCRIPTION OF PROPERTY............................................7
   ITEM 3. LEGAL PROCEEDINGS..................................................7
   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................7

PART II.......................................................................8

   ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........8
   ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OR OPERATION..........9
   ITEM 7. FINANCIAL STATEMENTS..............................................15
   ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
           ACCOUNTING AND FINANCIAL DISCLOSURE...............................33

PART III.....................................................................33

   ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL 
           PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT........33
   ITEM 10.EXECUTIVE COMPENSATION............................................34
   ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....34
   ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................35
   ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K..................................35




<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

         Sparta Foods,  Inc.  ("Sparta" or the  "Company")  manufactures a broad
line of Mexican food  products  which  include corn and flour  tortillas,  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 products include Cruz, La Canasta and La Campana Paradiso
tortillas,  La Canasta,  La Campana  Paradiso  and Mexitos  tortilla  chips,  La
Canasta,  and Chapala 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 retail products primarily for food
distributors,  including Crystal Farms Refrigerated  Distribution  Company which
distributes its products to retail stores in 21 states and Marigold Foods,  Inc.
which  distributes its products in 7 states.  The company produces private label
sauce  products  utilizing the  customer's  proprietary  recipes.  Private label
products  include Ken Davis and  Rudolph's  barbecue  sauces.  In addition,  the
Company   supplies   its  products  to   restaurants   and  other  food  service
establishments through distributors that include Catalina Specialty Foods, Inc.,
Alliant Food Service,  Inc., Sysco  Corporation and 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, Perkins, Friendly's and Carlos O'Kelly.

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

Business Strategy

         The Company's goal is to become a leading  producer of tortillas in the
United States. The Company's goal is to derive approximately 80% of its revenues
from tortilla  sales by the year 2000.  The Company plans to achieve its goal by
continuing  to  capitalize  on the  expected  growth in tortilla  sales,  and by
expanding  its  product   marketing  and  sales   activity  and  broadening  its
distribution  patterns.  The Company plans to direct greater marketing and sales
resources  to increase  brand  awareness  of its  tortilla  products,  including
tortilla chips, in each product's respective target market.
<PAGE>

Industry and Market

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

         The increase in past sales may be partially  attributable to the growth
in the United States  Hispanic  population.  However,  the Company's  management
believes  that  Mexican-style  food  products  have become less "ethnic" and now
enjoy a greater consumer acceptance, as illustrated by the fact that non-Mexican
restaurants  feature  Mexican-style  foods  on  their  menus.  According  to the
Tortilla  Industry  Association,  sales of tortillas  increased 67% from 1992 to
1994 in the North Central Region of the United States,  which includes  Indiana,
Illinois, Iowa, Michigan, Ohio and Wisconsin.

Products and Marketing

         General.  The 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,
1997,  1996 and 1995,  the  percentage  of sales of tortillas,  tortilla  chips,
barbecue  sauces,  salsas and all other products as compared to all sales of the
Company were as follows:
<TABLE>
<CAPTION>
                                                                     Year Ended September 30,

Products                                                           1997              1996              1995
--------                                                           ----              ----              ----
<S>                                                                 <C>               <C>              <C> 

Tortillas                                                           72%               70%              63%
Corn tortilla chips                                                 16%               17%              20%
Barbecue sauces, salsas and all other products                      12%               13%              17%
</TABLE>

         The Company  continually  seeks to expand its product lines through the
development  of new  products  for retail sale under the  Company's  own branded
labels and value-added products for the food service market. During fiscal 1997,
the Company began  manufacturing and distributing seven new tortilla chips under
the La Canasta brand label,  four new flavored  flour  tortilla  wraps under the
Cruz brand label for retail sale and flavored  flour  tortilla wraps for sale to
food service establishments.

         The Company  distributes  its  products  through  distribution  centers
primarily in the Midwestern  United States and into Western  Canada.  During the
fiscal years ended September 30, 1997,  1996 and 1995, 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:
<PAGE>
                                         Year Ended September 30,

Market Segment               1997                  1996                  1995
--------------               ----                  ----                  ----
Food service
     establishments           54%                  54%                   51%
Branded retail                32%                  29%                   31%
Private label and
      ingredients             14%                  17%                   18%


         Food  Service.   The  Company's   products  are  currently   served  in
restaurants  and other food service  establishments  and are approved for use in
the food service operations of such restaurants as McDonald's,  Chili's,  Carlos
O'Kelly,  Friendly's and Perkins.  Sales to Catalina  Specialty  Foods,  Inc., a
distributor  to  McDonald's,  accounted for  approximately  12% of the Company's
sales in fiscal year 1997.  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.  These
distributors include Alliant Food Service,  Inc., J. P. Food Services,  Inc. and
Sysco  Corporation,  who on a combined basis accounted for  approximately 29% of
the Company's  food service  sales in its fiscal year ended  September 30, 1997.
The  Company's  distributors  provide  continued  sales and  service to the food
service  customer,  while the  Company's  direct  sales  personnel  and  brokers
continue to solicit new restaurant customers and act as coordinators between the
Company and the distributors.

         Branded  Retail.  The  Company's  branded  retail  products are sold to
retail  grocery chains and  independent  stores  through  distributors,  such as
Crystal Farms Refrigerated  Distribution Company which distributes  refrigerated
goods to retail stores in 21 states,  Marigold  Foods,  Inc.  which  distributes
products  in retail  stores in 7 states and  Bradley  Distributing,  Inc.  which
distributes  products  to  approximately  160  retail  stores  in the 13  county
Minneapolis/St.  Paul  metropolitan  area.  Sales to Crystal Farms  Refrigerated
Distributor  Company,  accounted for approximately 23% of the Company's sales in
fiscal year 1997. The Company has an agreement  with Crystal Farms  Refrigerated
Distribution  Company,  which expires in the year 2004.  The Company's  products
appear in such grocery  chains as Cub Foods and Rainbow Foods and in independent
stores such as Byerly's and Lunds.  Through its retail store  distributors,  the
Company often establishes incentives,  such as volume sales discounts, which are
offered  to  encourage  retail  stores  to  prominently  display  the  Company's
products.  The Company  also  utilizes  in-store  demonstrations  to promote its
retail products. The Company's distributors deal directly with the retail stores
in soliciting  orders to be filled from local warehouses and assist in arranging
shelf space and implementing in-store promotions.

         Private Label and Ingredients.  The Company  manufactures  products for
other food  distributors to be sold under the  distributor's own private labels,
using the  Company's  recipes  or recipes  provided  by such  distributors.  The
Company  manufactures  barbecue sauces for Ken Davis Products,  Inc.,  Rudolph's
<PAGE>

Licensing,  Inc., and others.  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.

Manufacturing and Supplies

         The Company  manufactures  its products on 14  production  lines at its
principal  place of business  located at 1565 First Avenue N.W.,  New  Brighton,
Minnesota. These lines include: (i) a hand stretched flour tortilla line; (ii) a
die-cut flour tortilla line;  (iii) five press flour  tortilla  lines;  (iv) two
lines for the production of corn  tortillas;  (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 1998 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  materials  at a higher than  current  market price if current
market prices fall below the Company's contract price. The Company believes that
termination  of one or more of its raw  material  contracts  will not  adversely
affect its ability to control its raw material  costs as such  contracts  can be
replaced.  The  Company  regularly  maintains  stores  of corn,  flour and other
ingredients in sufficient quantities at its plant to enable it to fulfill one to
two  weeks of normal  production,  and  cooking  oil and  other  ingredients  in
sufficient quantities to fulfill three or more weeks of production.

Competition

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

         The  Company  estimates  that its  retail  sales of  tortillas  give it
approximately  a 50% share of the 13 county  Minneapolis/St.  Paul  metropolitan
market,  and that its principal  competition  comes from Resers Foods and Azteca
Foods, which supply much of the remaining market. The Company believes, based on
an independent  consumer  marketing study of the twelve primary consumer markets
in the Midwest, that it is the third largest seller of tortillas in the Midwest,
based upon its combined tortilla sales in 4 of the 12 markets in the Midwest.

         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.
<PAGE>

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

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

Trademarks

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

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

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

         The  mark LA  CAMPANA  PARADISO  is  licensed  by the  Company  from an
affiliate of a former  director of the Company.  The license  agreement  expires
December 31, 1999 and  requires  the payment of three  percent (3%) of the gross
sales of products sold under the LA CAMPANA PARADISO mark.

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

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

Government Regulation

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

Personnel

         As of December 1, 1997 the Company employed a total of 138 persons.  Of
these full-time employees,  4 serve in an executive capacity, 123 are engaged in
manufacturing, shipping, quality control and plant supervision, 4 are engaged in
sales and  marketing,  and 7 are engaged in  administrative  tasks.  None of the
Company's  employees  are  covered by a  collective  bargaining  agreement.  The
Company  provides  its  employees  with a health,  dental,  disability  and life
insurance program. The Company's management believes that its relations with its
employees are good.

ITEM 2.  DESCRIPTION OF PROPERTY

         The  Company  currently  leases  offices and  manufacturing  facilities
located at 1565 First Avenue N.W.,  New Brighton,  Minnesota,  leases  warehouse
space at 2085 Ellis Avenue,  St. Paul,  Minnesota,  and owns a facility at 21725
Hanover,  Lakeville,  Minnesota.  The  New  Brighton  office  and  manufacturing
facilities  consists of a total of 112,000  square  feet,  approximately  16,000
square feet of which is office  space and the  remainder  of which is devoted to
manufacturing,  and dry, freezer and refrigerated storage. The Company currently
pays a base rent of  approximately  $37,000 per month,  plus taxes.  The monthly
base rent  increases to  approximately  $41,000  starting  September 1, 2002 and
increases again to  approximately  $45,000 on September 1, 2007 until the end of
the lease term on August 31, 2012.
<PAGE>

         The  Company-owned  Lakeville  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.  The  Company  has listed the
property for sale with a real estate broker.

         The  Company  also  subleases  approximately  13,800  square  feet in a
warehouse facility for dry storage.  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 of their property.

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

         There  were  no  matters  submitted  to a vote of  shareholders  of the
Company during the fourth quarter of 1997.



<PAGE>
                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

                                                    Common Stock
                              -------------------------------------------------
Fiscal Quarter Ended               High Bid                           Low Bid
----------------------------- -------------------------------------------------
December 31, 1995                     $0.875                            $0.250
March 31, 1996                         1.500                             0.375
June 30, 1996                          2.250                             1.063
September 30, 1996                     2.000                             1.313

December 31, 1996                     $1.500                            $0.875
March 31, 1997                         1.250                             0.813
June 30, 1997                          1.500                             0.750
September 30, 1997                     2.000                             1.250

         At  December  11,  1997 the  published  high and low bid  price for the
Company's  Common Stock was $1.625 per share.  At December 11, 1997,  there were
issued and outstanding  6,798,637  shares of Common Stock of the Company held by
180 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.

         On July 18, 1997,  the Company  issued 20,000 shares of Common Stock to
an accredited  investor who exercised a Warrant to purchase such shares at $0.50
per share. The Company claimed an exemption from registration under Section 3(b)
of the Securities Act of 1933.

         On August 28, 1997,  the Company issued 9,080 shares of Common Stock to
an accredited  investor who exercised a Warrant to purchase such shares at $0.50
per share. The Company claimed an exemption from registration under Section 3(b)
of the Securities Act of 1933.
<PAGE>

         On September 30, 1997, the Company issued 11,629 shares of Common Stock
to an  accredited  investor who  exercised a Warrant to purchase  such shares at
$0.50 per share.  The  Company  claimed an  exemption  from  registration  under
Section 3(b) of the Securities Act of 1933.

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

Overview

         La Canasta of Minnesota, Inc. ("La Canasta"), the predecessor of Sparta
Foods, Inc. (the "Company"),  and now a wholly-owned  subsidiary of the Company,
began producing limited volumes of hand stretched tortillas,  corn tortillas and
corn tortilla chips shortly  following its  organization in 1981,  primarily for
sale to  restaurants.  The Company was organized  under the laws of the State of
Minnesota in 1988,  originally under the name of "Sparta Corp." for the purposes
of raising  capital for the  acquisition  of, or investment  in, a business.  In
January 1991, the Company  acquired all of the  outstanding  capital stock of La
Canasta.  During the period 1991 through 1993 the Company completed acquisitions
which expanded its trademark retail brands to include Cruz, Chapala, Mexitos and
La  Campana  Paradiso,   its  food  service  customers  to  include   McDonald's
restaurants and its retail distribution network to include Bradley Distributing,
Inc.  In  1995  the  Company  relocated  its  Lakeville,   Minnesota  production
operations  to its St.  Paul  manufacturing  facility.  The  Company  leased the
Lakeville facility in 1996 for a period of 10 years. Effective September 1, 1997
the Company  signed a 15-year lease to relocate all  operations to an office and
manufacturing facility in New Brighton,  Minnesota.  The current facility in St.
Paul has been sublet for the remainder of its lease term.

Results of Operations

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

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

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

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

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

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

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.
<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  International  Food
Products' 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.

         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  nonrecurring  charge  of  $302,612  reflecting
management's  estimate of the excess of the  property's  net book value over the
then 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.

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  1997 net cash  provided  by  operating  activities  was
$1,049,353,  consisting  principally  of net  income of  $435,729  adjusted  for
non-cash  depreciation and amortization expenses of $628,089, a non-cash loss on
disposal  of  equipment  of $294,213  and an  increase  in accounts  payable and
accrued  expenses of  $326,504,  offset by  increases  in  accounts  receivable,
inventories  and prepaid  expenses of $635,182.  The increase of  inventories of
$417,598  was  primarily  due  to  the  buildup  in  finished  goods  to  ensure
fulfillment of customer orders during the relocation of production  equipment to
New  Brighton  from St.  Paul which  began in  September  of 1997 and  continued
through November of 1997.

         Net cash used in investing  activities  in fiscal 1997 was  $3,627,303,
primarily  the  result  of the  purchase  of new  production  equipment  and the
renovation  of the office and  manufacturing  facility in New  Brighton.  During
fiscal 1997 net cash provided by financing  activities was $2,577,950 due mainly
to borrowings  associated with the purchase of equipment and renovations for New
Brighton as detailed below.

         At September 30, 1997,  the Company had a negative  working  capital of
$1,271,962.

         On July 1, 1997,  the Company and its bank signed an Amendment to their
Credit Agreement which adjusted various  financial  covenants and made available
additional  revolving credit  borrowings of $800,000 through January 1, 1998, at
which time this  additional  borrowing  may be converted  into a five-year  term
loan. The Company  estimates that at September 30, 1997, there was an additional
<PAGE>

$400,000  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 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.

         On July 2, 1997, in  conjunction  with the  relocation of the Company's
corporate  office and  manufacturing  facility,  the Company signed a $1,950,000
credit agreement with the Minnesota  Agricultural and Economic Development Board
("Board") for new equipment financing. The Board issued tax-exempt revenue bonds
under its Small Business Development Loan Program and loaned the proceeds to the
Company to purchase new  equipment.  The  effective  interest  rate is 5.79% per
annum, and the loan matures on August 1, 2008. The Company is subject to various
financial  covenants,  and  the  Board  received  a  security  interest  in  the
equipment. At September 30, 1997 the outstanding borrowings were $1,916,250.

         The  Company's  ability to achieve its growth  objectives  is dependent
upon its ability to fund its working capital requirements.  The Company believes
that the additional  borrowings,  its bank credit  facilities and cash flow from
operations will be sufficient to meet its working capital  requirements  through
fiscal 1998, assuming (i) the Company's fiscal 1998 sales equal or exceed fiscal
1997 sales; (ii) there are no significant  increases in expenses in fiscal 1998,
and (iii) the Company is able to keep its bank credit facilities operative.  The
Company's  failure to completely  satisfy its working capital  conditions listed
(i) through (iii) above, may require the Company to obtain additional  financing
to fund  its  working  capital  requirements.  The  Company's  ability  to raise
additional working capital is significantly restricted, and if obtainable, would
be on terms less favorable to the Company and may result in substantial dilution
to shareholders.

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
Statements of the Financial Accounting Standards Board. It does, however,  enter
into purchase  orders for delayed  delivery of raw materials,  generally 30 days
for raw materials  other than flour and corn.  The Company  enters into purchase
orders  for  delayed  delivery  of flour and corn for a period  of 4-12  months,
depending on current  pricing,  to ensure the  availability of the type of flour
and corn best  suited for the  Company's  products.  These  purchase  orders are
placed directly with the suppliers.
<PAGE>

Accounting Standard Issued and Not Yet Adopted

         The Financial  Accounting  Standards Board has issued Statement No. 128
(SFAS No. 128), Earnings Per Share (EPS), which supersedes Accounting Principles
Board  Opinion  No.  15.  SFAS  No.  128  requires  the  presentation  of EPS of
outstanding common stock and potential common stock, such as options,  warrants,
and convertible securities that trade in a public market. A dual presentation of
EPS, basic and diluted with restated  comparative  periods' data, is required on
the  statement of income.  The  Statement  is  effective  for annual and interim
financial  statements issued for periods ending after December 15, 1997; earlier
application is not permitted, but disclosure is required.

Outlook

         The Company's  plan in fiscal 1998 will be to utilize its new equipment
to  increase  sales 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."  Management  believes that
its major computer  applications which are critical to the Company's  operations
are either year 2000  compliant  or require  nonmaterial  resources to make them
year 2000 compliant.

         Statements  relating  to the  Company's  goal and  business  objectives
contained in the section entitled Description of "Business - Business Strategy,"
estimates  relating  to its bank  line of  credit,  assumption  relating  to the
Company's  working  capital and  operating  requirements,  and its future growth
contained in the Management's Discussion and Analysis of Financial Condition and
Results of Operations  and the  President's  statements  relating to the growing
non-ethnic use of tortillas,  management's  optimism of the Company's future and
its  growth  potential  and the  intent to  leverage  the  Company's  brand name
strength  contained in the President's  Letter to  Shareholders  attached to the
Company's 1998 Annual Report to Shareholders are forward-looking statements that
involve a number of risks and  uncertainties.  Some of the  factors  that  could
cause  actual  results  to differ  materially  include  but are not  limited  to
seasonality  of its  sales  and  raw  materials  cost  fluctuations,  which  are
discussed above and the following:

         Sufficiency of Working Capital.  At September 30, 1997, the Company had
a negative  working capital of $1,271,962.  At September 30, 1997,  there was an
estimated  $400,000  which  could have been drawn  under the  Company's  Line of
Credit. The amount available  fluctuates daily based upon the Company's eligible
accounts receivable and inventory.  In addition, the Company's ability to obtain
additional  equity capital is very restricted,  and, if obtainable at all, would
result in substantial  dilution.  Therefore,  the Company's  ability to fund its
working capital requirements in fiscal 1998 will be almost entirely dependent on
generating  sales which  equal or exceed the  Company's  fiscal  1997 sales.  In
addition,  any  unforeseen  expense of a material  nature would  materially  and
adversely affect the Company's ability to fund ongoing operations.
<PAGE>

         Reliance on Principal  Customers.  During 1997,  sales to Crystal Farms
Refrigerated  Distribution  Company  ("Crystal  Farms") and  Catalina  Specialty
Foods,  Inc.  accounted  for  approximately  23%  and  12%  respectively  of the
Company's  sales and management  expects  Crystal Farms to account for a greater
percentage of the Company's sales in the future.  Crystal Farms is the Company's
largest single  distributor of its retail products and has a significant  impact
on the Company's  growth in the retail market.  Although the Company and Crystal
Farms operate  under a  distribution  agreement,  the loss of Crystal Farms as a
customer  would have a material and adverse  effect on the  Company's  sales and
profitability and future growth.

         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 of 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.


<PAGE>



ITEM 7.  FINANCIAL STATEMENTS

                          INDEPENDENT AUDITOR'S REPORT

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

We have audited the  accompanying  consolidated  balance sheets of Sparta Foods,
Inc. and  Subsidiary  (the Company) as of September  30, 1997 and 1996,  and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the years then ended.  These financial  statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Sparta Foods, Inc.
and  Subsidiary  as of  September  30,  1997 and 1996,  and the results of their
operations  and their cash flows for the years then ended,  in  conformity  with
generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP


Minneapolis, Minnesota
November 14, 1997


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
<TABLE>
<CAPTION>

ASSETS (Note 3)                                                                    1997                 1996
--------------------------------------------------------------------------- -------------------- --------------------
<S>                                                                             <C>                 <C> 

Current Assets
     Cash                                                                       $        600        $        600
     Accounts receivable, less allowances of $49,500 in
         1997 and $52,000 in 1996 (Note 6)                                           833,467             639,934
     Inventories:
         Finished goods                                                              566,212             241,959
         Raw materials and packaging                                                 531,358             438,013
     Prepaid expenses                                                                156,466             132,415
                                                                            -------------------- --------------------
              Total current assets                                                 2,088,103           1,452,921
                                                                            -------------------- --------------------

Property and Equipment (Note 2)                                                    7,488,786           5,983,245
     Less accumulated depreciation                                                 2,371,131           2,115,810
                                                                            -------------------- --------------------
                                                                                   5,117,655           3,867,435
                                                                            -------------------- --------------------

Other Assets
     Restricted cash (Note 3)                                                      1,893,967                  --
     Goodwill, less accumulated amortization of $72,564 and
         $102,358, respectively                                                      440,808             457,533
     Covenants not-to-compete, less accumulated
         amortization of $40,772 and $235,366, respectively                           69,228              98,134
     Rental property held for resale, less accumulated
         depreciation of $38,728 and $15,984, respectively
         (Note 1)                                                                    906,422             924,016
     Other                                                                           381,162             206,974
                                                                            -------------------- --------------------
                                                                                   3,691,587           1,686,657
                                                                            -------------------- --------------------
                                                                                 $10,897,345          $7,007,013
                                                                            ==================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY                                               1997                 1996
--------------------------------------------------------------------------- -------------------- --------------------
<S>                                                                              <C>                 <C>

Current Liabilities
     Note payable, bank (Note 3)                                                 $   834,209         $   294,811
     Current maturities of long-term debt                                            700,388             567,905
     Accounts payable:
         Trade                                                                       861,120             658,575
         Construction                                                                428,315                  --
     Accrued expenses                                                                536,033             412,074
                                                                            -------------------- --------------------
              Total current liabilities                                            3,360,065           1,933,365
                                                                            -------------------- --------------------

Long-Term Debt, less current maturities (Note 3)                                   4,051,212           2,063,613
                                                                            -------------------- --------------------

Commitments (Note 4)


Stockholders' Equity (Notes 3 and 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 6,765,758 and
         6,679,049 shares in 1997 and 1996, respectively                              67,657              66,790
     Additional paid-in capital                                                    4,950,507           4,911,070
     Accumulated deficit                                                          (1,532,096)          (1,967,825)
                                                                            -------------------- --------------------
                                                                                   3,486,068           3,010,035
                                                                            -------------------- --------------------
                                                                                 $10,897,345          $7,007,013
                                                                            ==================== ====================
</TABLE>


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
                                                                                   1997                 1996
------------------------------------------------------------------------------------------------ --------------------
<S>                                                                             <C>                  <C>

Net sales (Note 6)                                                              $ 14,077,841         $12,662,819
Cost of sales                                                                      9,821,560           9,238,220
                                                                            -------------------- --------------------
              Gross profit                                                         4,256,281           3,424,599

Selling, general, and administrative expenses (Note 8)                             3,209,798           2,968,569
Nonrecurring charge (Note 4)                                                         375,126                  --
                                                                            -------------------- --------------------
              Operating income                                                       671,357             456,030

Other Income, net (Note 1)                                                           106,807              86,018
Interest expense                                                                    (320,435)           (431,741)
                                                                            -------------------- --------------------
              Income before income taxes                                             457,729             110,307

Income tax expense (Note 5)                                                          (22,000)             (5,000)
                                                                            -------------------- --------------------
              Net income                                                        $    435,729        $    105,307
                                                                            ==================== ====================

Net income per common and common equivalent share:
     Primary                                                                    $       0.06        $       0.02
     Fully diluted                                                                      0.05                0.01

Weighted-average common and common equivalent shares:
     Primary                                                                       9,483,290           7,428,736
     Fully diluted                                                                 9,483,290           7,617,432
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>

SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
                                                                  Common Stock          
                                                          -----------------------------   Additional
                                                              Shares                       Paid-In       Accumulated
                                                           Outstanding     Par Value       Capital         Deficit          Total
--------------------------------------------------------- --------------- ------------- -------------- ---------------- ------------
<S>                                                         <C>           <C>            <C>           <C>              <C>    

Balance, September 30, 1995                                 4,062,799     $   40,627     $ 3,777,317   $ (2,073,132)    $  1,744,812
   Common stock issued, net of costs of $148,209            2,560,000         25,600       1,106,191             --        1,131,791
   Common stock issued in satisfaction of consulting
        services                                               40,000            400          19,600             --           20,000
   Common stock issued upon exercise of warrants
        and options                                            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
   Common stock issued upon exercise of warrants
        and options, net of costs of $3,050                    86,709            867          39,437             --           40,304
   Net income                                                      --             --              --        435,729          435,729
                                                          --------------- ------------- -------------- ---------------- ------------
Balance, September 30, 1997                                 6,765,758     $   67,657     $ 4,950,507   $ (1,532,096)    $  3,486,068
                                                          =============== ============= ============== ================ ============
</TABLE>
See Notes to Consolidated Financial Statements.

<PAGE>

SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>

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

Cash Flows From Operating Activities
    Net income                                                                    $    435,729        $    105,307
    Adjustments to reconcile net income to net cash provided
       by operating activities:
       Depreciation                                                                    547,790             506,856
       Amortization                                                                     80,299              89,853
       Loss on disposal of property and equipment                                      294,213              10,630
       Changes in assets and liabilities:
           Accounts receivable                                                        (193,533)             38,524
           Inventories                                                                (417,598)            181,147
           Prepaid expenses                                                            (24,051)            (25,970)
           Accounts payable and accrued expenses                                       326,504            (489,620)
                                                                               ------------------- ------------------
                  Net cash provided by operating activities                          1,049,353             416,727
                                                                               ------------------- ------------------

Cash Flows From Investing Activities
    Increase in restricted cash                                                     (1,893,967)                 --
    Purchases of property, equipment, and other                                     (1,656,933)           (131,936)
    Proceeds from the sale of property and equipment                                    61,025              14,500
    Increase in deposits and other assets                                             (137,428)           (155,066)
                                                                               ------------------- ------------------
                  Net cash used in investing activities                             (3,627,303)           (272,502)
                                                                               ------------------- ------------------

Cash Flows From Financing Activities
    Net borrowings (payments) on line of credit                                        539,398            (702,910)
    Long-term borrowings                                                             2,730,667                  --
    Payments of long-term debt                                                        (610,585)           (650,198)
    Short-term borrowings                                                                   --             400,000
    Issuance of common stock, net of costs                                              40,304             808,620
    Deferred financing costs                                                          (121,834)                 --
                                                                               ------------------- ------------------
                  Net cash provided by (used in) financing activities                2,577,950            (144,488)
                                                                               ------------------- ------------------

                  Net change in cash                                                        --                (263)

Cash
    Beginning                                                                              600                 863
                                                                               ------------------- ------------------
    Ending                                                                     $           600     $           600
                                                                               =================== ==================
</TABLE>

                                   (Continued)
<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended September 30, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                      1997               1996
------------------------------------------------------------------------------ ------------------- ------------------
<S>                                                                             <C>                  <C> 

Supplemental Disclosures of Cash Flow Information
    Cash payments for:
       Interest                                                                 $      319,017       $     444,599
       Income taxes                                                                     23,050               5,000
                                                                               =================== ==================

Supplemental Schedule of Noncash Investing and Financing
    Activities
    Facility improvements financed with accounts payable                         $     428,315       $          --
    Conversion of bridge financing to common stock                                          --             350,000
    Conversion of accounts payable to common stock                                          --              20,000
    Reclassification of deferred private placement costs to equity
       upon issuance of common stock                                                        --              18,704
                                                                               =================== ==================

</TABLE>

See Notes to Consolidated Financial Statements.

<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. The Company grants credit on an individual customer basis.

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

Management estimates: The preparation of financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

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

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

The financial  statements  include the following  financial  instruments:  cash,
trade  accounts  receivable,  accounts  payable,  notes  payable,  and a line of
credit.  At September  30, 1997,  no separate  comparison  of fair values versus
carrying values is presented for the aforementioned  financial instruments since
their fair  values are not  significantly  different  than their  balance  sheet
carrying amounts.

Cash: 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.
<PAGE>

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 net  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 to 15 years.  

Accounting  for  long-lived  assets:  In accordance  with Statement of Financial
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,  property  and  equipment,  and  rental  property  periodically  to
determine  potential  impairment by comparing  the carrying  value of the assets
with estimated  future cash flows expected to result from the use of the assets,
including  cash flows from  disposition.  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 (estimated discounted cash flows
or appraisal of assets) of the assets.  To date,  management has determined that
no impairment of long-lived assets exists.

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

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 approximately  $11,000,  plus taxes and utilities.
Rental  income under this lease was  approximately  $130,000 and $92,000 for the
years ended September 30, 1997 and 1996, respectively,  and is included in other
income in the  statements  of income.  The Company  commenced  depreciating  the
rental  property  over  its  remaining  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.
<PAGE>

Net income per common and common  equivalent  share: Net income per common share
is computed based upon the  weighted-average  number of common shares and common
share  equivalents  (stock options and warrants)  outstanding  during each year.
Common stock  equivalents,  assumed to have been exercised,  are included in the
computation  using the treasury stock method when their inclusion has a dilutive
effect.  Fully diluted  earnings per common share  reflect the maximum  dilution
that would have  resulted from the exercise of the  equivalents.  

Issued but not yet adopted standard: The FASB has issued Statement No. 128 (SFAS
No. 128),  Earnings Per Share, which supersedes APB Opinion No. 15. SFAS No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential  common stock,  such as options,  warrants,  and  convertible
securities,  outstanding that trade in a public market. Those entities that have
only common stock  outstanding are required to present basic  earnings-per-share
amounts.  All other entities are required to present basic and diluted per-share
amounts. Diluted per-share amounts assume the conversion,  exercise, or issuance
of all potential common stock instruments  unless the effect is to reduce a loss
or increase the income per common share from continuing operations. All entities
required to present earnings-per-share amounts must initially apply SFAS No. 128
for  annual  and  interim  periods  ending  after  December  15,  1997.  Earlier
application is not permitted, but disclosure is required.

If  the  Company  had  applied  SFAS  No.  128  in  the  accompanying  financial
statements, the following amounts would have been reported:
<TABLE>
<CAPTION>
                                                                                         September 30
                                                                          -------------------------------------------
                                                                                  1997                  1996
------------------------------------------------------------------------- --------------------- ---------------------
<S>                                                                       <C>                   <C>    

Weighted-average outstanding shares                                              6,692,100             5,778,550
Pro forma basic earnings per share                                        $           0.07      $           0.02
Weighted-average dilutive securities options and warrants                        1,796,212             1,392,323
Weighted-average diluted shares                                                  8,488,312             7,170,873
Pro forma diluted earnings per share                                      $           0.05      $           0.01
</TABLE>


Reclassifications:  Certain  amounts on the  consolidated  balance sheet for the
year ended September 30, 1996, have been  reclassified to be consistent with the
classifications  adopted as of September 30, 1997,  with no effect on previously
reported stockholders' equity.
<PAGE>

Note 2.  Property and Equipment

Property and equipment consists of:
<TABLE>
<CAPTION>
                                                                                          September 30
                                                          Estimated       -------------------------------------------
                                                         Useful Lives              1997                  1996
--------------------------------------------------- --------------------- --------------------- ---------------------
<S>                                                         <C>            <C>                   <C>

Factory equipment                                           3-18           $     5,141,085       $     4,765,838
Office and other equipment                                  3-12                   356,231               322,562
Leasehold improvements                                       --                         --               762,089
Packaging printing plates                                    5                     155,470               132,756
Construction in progress                                     --                  1,836,000                    --
                                                                          --------------------- ---------------------
                                                                           $     7,488,786       $     5,983,245
                                                                          ===================== =====================
</TABLE>

Note 3.  Financing Agreements

Line of credit:  The Company  has a line of credit  with a bank,  secured by all
assets.  Maximum  borrowings  under the credit  agreement  are  determined  by a
borrowing base  calculation or $1,200,000,  whichever is less.  Borrowings  bear
interest at prime plus 0.25 percent (8.75  percent at September  30,  1997).  At
September  30, 1997,  $834,209  was  outstanding  under the line of credit.  The
Company is to  maintain  certain  minimum  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.

State of  Minnesota  loan:  On July 1,  1997,  the  Minnesota  Agricultural  and
Economic  Development  Board issued $1,950,000 in Series 1997D tax-exempt Bonds,
the proceeds of which issue were loaned to the Company to finance new  equipment
(see Note 4). The underlying loan from the state is due in monthly  installments
which vary in accordance  with the maturity dates of the related  revenue bonds,
plus  interest at rates varying from 4.5 to 6.0 percent.  The effective  rate of
interest  to the Company is 5.79  percent  per annum.  At  September  30,  1997,
$1,916,250 is outstanding.  The Company is to maintain certain minimum net worth
and debt service coverage levels.

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

Debt service reserve fund, U.S. government securities 
     due within one year                                         $     195,000
Construction fund, money market funds                                1,698,967
                                                                 -------------
                                                                 $   1,893,967
                                                                 =============
<PAGE>
Long-term debt:  Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                          September 30
                                                                            -----------------------------------------
                                                                                   1997                 1996
                                                                            -------------------- --------------------
<S>                                                                          <C>                 <C>  

State of Minnesota loan (described above)                                    $     1,916,250     $
                                                                                                               --
Term and equipment  notes payable to bank,  secured by all 
    assets of the Company, due in  monthly  installments of 
    $21,658  and  $6,342,  respectively,  plus interest at prime 
    plus 0.5% to December 31, 1999, when the remaining balance is due              1,397,075            1,623,315
Term note payable to bank, secured by all assets of the Company,
    due  in  monthly  installments  of  one-sixtieth  of the  
    principal  balance outstanding as of November 1, 1997, commencing 
    on December 31, 1997, plus interest at prime plus 0.5% to
    December 31, 1999, when the remaining balance is due                             651,778                   --
Notes payable to a trust and to an individual, secured by rental
    property  held for resale,  subordinated  to bank  financing,  
    interest-only payments  at prime plus 4%,  through  January 1, 1998, 
    thereafter  combined monthly installments of $16,565, including 
    interest, to January 1, 2003                                                     736,322              736,322
Other notes payable                                                                   50,175              271,881
                                                                            -------------------- --------------------
                                                                                   4,751,600            2,631,518

Less current maturities                                                              700,388              567,905
                                                                            -------------------- --------------------
                                                                            $      4,051,212     $      2,063,613
                                                                            ==================== ====================
</TABLE>
Aggregate maturities of long-term debt at September 30, 1997, are as follows:

Years ending September 30:
    1998                                             $        700,388
    1999                                                      738,994
    2000                                                    1,433,086
    2001                                                      315,446
    2002                                                      346,471
    Later years                                             1,217,215
                                                     --------------------
                                                      $     4,751,600
                                                     ====================
Note 4.  Leases and Other Commitments

Manufacturing  facility move and expansion,  and operating leases: During fiscal
1997,  the  Company  moved its  operations  to a new  office  and  manufacturing
facility.  The Company's commitment to relocate these facilities caused a charge
to current  operations of $375,126  related to the unamortized cost of leasehold
improvements  at its former facility and specific costs related to the move. The
lease for the new  facility  requires  monthly  base rentals plus the payment of
real estate  taxes and  operating  expenses of the building  through  August 31,
2012.
<PAGE>

The lease on the  Company's  former  facility  is still in  existence,  requires
monthly base rentals plus the payment of 88 percent of the real estate taxes and
operating expenses of the building, and expires on May 31, 2000. The Company has
entered  into a sublease  agreement  whereby  the  sublessee  is required to pay
substantially all of the base rental,  real estate taxes, and operating expenses
on the facility for the remainder of the lease term. The total minimum  sublease
rentals to be received are approximately $688,000.

In addition to the  relocation,  the Company is in the process of expanding  its
manufacturing capabilities through facility improvements and the purchase of new
equipment.  The  estimated  cost is  approximately  $3,200,000.  To finance this
activity, the Company has obtained a $1,950,000 loan from the State of Minnesota
and an additional  $750,000  capital  equipment  loan from its current bank. The
remaining  $500,000 in improvements  will be financed  through  operations.  The
total costs incurred through September 30, 1997, were $1,836,000.

Total rent expenses for all  facilities and equipment were $577,500 and $518,500
for 1997 and 1996, respectively.

Minimum future obligations required under operating leases, excluding the former
facility lease, at September 30, 1997, are as follows:

Years ending September 30:
     1998                                        $         648,000
     1999                                                  607,000
     2000                                                  593,200
     2001                                                  578,000
     2002                                                  544,300
     Later years                                         5,226,000
                                                ---------------------
                                                  $      8,196,500
                                                =====================

License  agreements:  In  connection  with a business  acquisition,  the Company
entered into a license agreement  expiring 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 paid a fee equal to 1
percent of all retail sales made under the "Cruz"  label until  January 1, 1997,
and is  required  to pay 3 percent of net sales of  "Chapala"  products  through
2007.  Expenses relating to these  arrangements were $23,450 and $42,878 in 1997
and 1996,  respectively.  

Purchase agreements: The Company does not enter into futures contracts. It does,
however,  enter into  purchase  orders for delayed  delivery  of raw  materials,
generally  30 days for raw  materials  other  than corn and flour.  The  Company
enters into purchase orders with the suppliers for the delayed  delivery of corn
and flour for a period of 4 to 12  months,  depending  on  current  pricing,  to
insure  the  availability  of the type of corn and  flour  best  suited  for its
products.  At September 30, 1997, the Company had outstanding purchase orders of
approximately  $744,000.  At the  end of  each  reporting  period,  the  Company
evaluates  the open  purchase  orders for corn and flour to determine  whether a
loss should be  recognized.  No such losses were  accruable as of September  30,
1997 and 1996.
<PAGE>

Note 5.  Income Taxes

The income tax expense for 1997 and 1996 consisted of:
<TABLE>
<CAPTION>

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

Current:
    Federal (net of $133,000 and $18,900 in 1997 and 1996,
       respectively, of net operating loss carryforward benefits)           $            8,000   $               --
    State (net of $58,000 and $-0- in 1997 and 1996, respectively,
       of state net operating loss carryforward benefits)                               14,000                5,000
                                                                            -------------------- --------------------
                                                                            $          22,000    $            5,000
                                                                            ==================== ====================
</TABLE>

A reconciliation  between income tax expense  computed at the federal  statutory
rate  and the  Company's  effective  income  tax  rate  for  1997 and 1996 is as
follows:
<TABLE>
<CAPTION>

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

Federal statutory rate                                                             (34.0)%              (34.0)%
State income taxes, net of federal benefit                                          (6.5)                (4.5)
Nondeductible expenses                                                              (0.9)                (5.6)
Benefit of graduated tax rate                                                       --                    3.2
Utilization of net operating loss carryforward                                      36.6                 36.4
                                                                            -------------------- --------------------
Effective income tax rate                                                           (4.8)%               (4.5)%
                                                                            ==================== ====================
</TABLE>
Temporary  differences  that  give  rise  to the net  deferred  tax  assets  and
liabilities at September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>

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

Net current deferred tax assets (liabilities):
    Receivable allowances                                                    $     15,000         $     15,700
    Vacation accrual                                                               23,000               17,000
    Inventory costs                                                                15,300               15,900
    Bonus accrual                                                                  14,200                1,200
    Lease deferred income                                                         (17,000)             (19,000)
Less valuation allowance                                                          (50,500)             (30,800)
                                                                            -------------------- --------------------
                                                                            $          --        $          --
                                                                            ==================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                   1997                 1996
--------------------------------------------------------------------------- -------------------- --------------------
<S>                                                                         <C>                  <C>

Net noncurrent deferred tax assets (liabilities):
    Depreciation                                                            $    (470,000)       $    (544,500)
    Property and equipment valuation allowance                                     89,200               90,800
    Net operating loss carryforwards                                              642,000              873,900
    AMT credit carryforwards                                                       42,000               38,000
    Intangible assets                                                              34,200               31,900
Less valuation allowance                                                         (337,400)            (490,100)
                                                                            -------------------- --------------------
                                                                            $          --        $          --
                                                                            ==================== ====================
</TABLE>

As of September 30, 1997 and 1996, the Company recorded valuation  allowances of
$387,900 and $520,900,  respectively,  against net deferred tax assets to reduce
the totals to amounts that  management  believed  would  ultimately be realized.
Realization of deferred tax assets is dependent upon  sufficient  future taxable
income during the period when deductible temporary differences and carryforwards
are  expected to be available to reduce  taxable  income.  There was no activity
other than the utilization of net operating loss  carryforwards in the valuation
allowance account during 1997 or 1996.

The net operating loss  carryforwards  of $2,141,000 at September 30, 1997, will
expire as follows:

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

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

Note 6.  Major Customers

The Company had sales to one customer  which  accounted for 23 and 20 percent of
sales for fiscal years 1997 and 1996,  respectively.  As of September  30, 1997,
accounts receivable from this customer were $158,000.

In addition,  the Company had sales to a second  customer  through a distributor
which  accounted  for 12 and 16 percent of sales for fiscal years 1997 and 1996,
respectively.   As  of  September  30,  1997,   accounts  receivable  from  this
distributor were $79,000.
<PAGE>

Note 7.  Options and Warrants

Stock  options:  The Company has a stock  option plan,  as amended,  pursuant to
which qualified and nonqualified stock options for up to 1,300,000 shares of the
Company's $0.01 par value common stock have been reserved for issuance under the
plan and may be granted to key  employees and members of the Board of Directors.
The options are  generally  granted at exercise  prices equal to or greater than
the 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.

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

                                                1997                 1996
---------------------------------------- -------------------- -----------------
Net income:
    As reported                          $      435,729       $     105,307
    Pro forma                                   345,324              78,747
Primary earnings per share:
    As reported                                    0.06                0.02
    Pro forma                                      0.06                0.01
Fully diluted earnings per share:
    As reported                                    0.05                0.01
    Pro forma                                      0.05                0.01

For purposes of the aforementioned pro forma information, the fair value of each
option is estimated  at the grant date using the  Black-Scholes  option  pricing
model with the  following  weighted-average  assumptions  for grants in 1997 and
1996,  respectively:  dividend rate of zero for both years;  price volatility of
99.49 and 106.20 percent;  risk-free interest rate of 5.92 and 6.15 percent; and
expected lives of approximately 4 and 5 years.

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


<PAGE>
Additional  information  relating to all outstanding options as of September 30,
1997 and 1996, is as follows:
<TABLE>
<CAPTION>
                                                                1997                              1996
                                                   -------------------------------- ---------------------------------
                                                                   Weighted-Average                 Weighted-Average
                                                                        Exercise                         Exercise
                                                       Shares            Price          Shares            Price
-------------------------------------------------- ---------------- --------------- ---------------- ----------------
<S>                                                    <C>          <C>                <C>           <C>   

Options outstanding at beginning of year               723,584      $     1.76          693,499      $       2.30
Options exercised                                      (40,000)           0.50          (11,250)             0.50
Options expired                                        (43,499)           1.60         (235,665)             2.76
Options granted                                        322,500            1.07          277,000              1.19
                                                   ---------------- --------------- ---------------- ----------------
Options outstanding at end of year                     962,585      $     1.58          723,584      $       1.76
                                                   ================ =============== ================ ================

Weighted-average fair value of options,
     granted during the year                                        $     0.76                       $       0.97
                                                                    ===============                  ================
</TABLE>

The following table summarizes  information  about stock options  outstanding at
September 30, 1997:
<TABLE>
<CAPTION>

                                                    Options Outstanding                 Options Exercisable
                                           ------------------------------------- ------------------------------------
                                           Weighted-Average
                             Number           Remaining                              Number
                         Outstanding at       Contractual      Weighted-Average   Exercisable at   Weighted-Average
       Range of           September 30,         Life               Exercise        September 30,       Exercise
   Exercise Prices            1997             (Years)              Price             1997              Price
----------------------- ------------------ ------------------ ------------------ ----------------- ------------------
<S>                          <C>                 <C>          <C>                      <C>         <C>             

      $0.50-0.88             233,750             3.2          $      0.52              115,250     $      0.53
       1.06-1.75             564,500             4.3                 1.26              101,000            1.48
       2.00-2.94              45,000             2.0                 2.42               27,500            2.51
       4.32-5.00             119,335             0.7                 4.88               99,334            4.87
      ------------      ------------------ ------------------ ------------------ ----------------- ------------------
      $0.50-5.00             962,585             2.6          $      1.58              343,084     $      2.23
     =============      ================== ================== ================== ================= ==================
</TABLE>

Stock warrants:  A summary of warrants follows:
<TABLE>
<CAPTION>

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

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
    Exercised                                              0.50                 (46,709)
                                            ------------------------- ------------------------
Outstanding, September 30, 1997                  $  0.50 - 4.50               3,665,837
                                            ========================= ========================
</TABLE>


<PAGE>



Warrants expire as follows:

Expiration Date                                      Shares
--------------------------------------------- ---------------------
October 10, 1998                                       400,000
October 31, 1998                                       610,537
February 2, 1999                                     2,560,000
December 9, 1999                                        15,300
February 2, 2001                                        80,000
                                              ---------------------
                                                     3,665,837
                                              =====================

Note 8.  Related-Party Transactions

The Company  purchased  marketing and advertising  services from an organization
owned by a member  of the  Board of  Directors.  Total  expenditures  for  these
services were approximately $113,500 in 1997.




<PAGE>

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

      None.

                                    PART III

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

         The names and ages of the  executive  officers  of the  Registrant  and
their positions and offices held as of December 1, 1997 are as follows:

  Name                       Age          Position with Company

  Joel P. Bachul             55           President and Chief Executive Officer

  A. Merrill Ayers           51           Vice President, Treasurer, Chief 
                                          Financial Officer and Secretary

  Thomas C. House            51           Vice President of Operations

  William J. Schuch          44           Vice President of Sales

         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.

<PAGE>

     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, purchasing and product distribution.

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

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

     The  information  required by Item 9 relating to directors  and  compliance
with Section  16(a) of the Exchange Act is  incorporated  herein by reference to
the sections  labeled  "Election of  Directors"  and "Section  16(a)  Beneficial
Ownership  Reporting  Compliance,"  respectively,  which appear in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders.

ITEM 10. EXECUTIVE COMPENSATION

     The information  required by Item 10 is incorporated herein by reference to
the section labeled "Executive  Compensation"  which appears in the Registrant's
definitive Proxy Statement for its 1998 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 1998  Annual
Meeting of Shareholders.
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by Item 12 is incorporated by reference to the
section  labeled  "Certain  Transactions"  which  appears  in  the  Registrant's
definitive Proxy Statement for its 1998 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 1997 fiscal year.


<PAGE>
                                   SIGNATURES

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

Dated:  December 19, 1997       By:   /s/  Joel P. Bachul       
                                      Jack P. Bachul, President

Dated:  December 19, 1997       By:   /s/  A. Merrill Ayers   
                                      A. Merrill Ayers, Chief Financial Officer

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

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

Signature and Title                                             Date

/s/  Michael J. Kozlak                                 December 19, 1997
Michael J. Kozlak, Director

/s/  Larry Arnold                                      December 19, 1997
Larry Arnold, Director

/s/  Joel P. Bachul                                    December 19, 1997
Joel P. Bachul, Director

                                                       December ___, 1997
Edward Jorgensen, Director

                                                       December ___, 1997
Richard H. Leepart, Director

/s/  R. Dean Nelson                                    December 19, 1997
R. Dean Nelson, Director
<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 10KSB/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 10KSB/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**       Amended and Restated Stock Option Plan.

10.2         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.)*

10.3         Concurrent  Ownership and Usage Agreement dated November 16, 1990,
             between La Canasta Mexican Food Products,  Inc. and La Canasta of 
             Minnesota, Inc. (Reg. No. 1,560,808).  (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>


Exhibit
Number       Description
-------      -----------
10.4         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.)*

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

10.6         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.)*

10.7         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. 33-24394C) on Form S-18 dated August 6, 1992.)

10.8         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.)*

10.9         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.)*

10.10        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>
Exhibit
Number       Description
-------      -----------

10.11        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.)*

10.12        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.)*

10.13        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.)*

10.14        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 10KSB for the period ended September 30, 
             1994.)*

10.15        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 10KSB for the period ended September 30, 
             1994.)*

10.16        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.)*

10.17        $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.)*

10.18        $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.)*
---------------------
*   Incorporated by reference - Commission File No. 000-19318 unless
    otherwise indicated
**  Indicates a management contract or compensatory plan or arrangement required
    to be filed as an exhibit to this Form 10-KSB.

<PAGE>

Exhibit
Number       Description
-------      -----------

10.19        $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.)*

10.20        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.)*

10.21        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.)

10.22        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.)

10.23        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.)*

10.24        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.)*

10.25        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.)*

10.26        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.)*

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


<PAGE>

Exhibit
Number       Description
-------      -----------

10.27        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.)*

10.28        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.)*

10.29        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.)*

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

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

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

10.33        Fourth Amendment to Credit and Security Agreement dated December 
             20, 1996 between the Company and Norwest Bank Minnesota,  National
             Association  (Incorporated by reference to Exhibit 10.42 to the 
             Company's Form 10-QSB for the period ended December 31, 1996).*

10.34        Manufacturing Agreement between the Company and Ken Davis Products,
             Inc.  (Incorporated by reference to Exhibit 10.43 to the Company's
             Form 10-QSB for the period ended December 31, 1996).*

10.35        Amendment to Consultant  Agreement dated December 20, 1996 between
             the Company and Catalina  Specialty Foods, Inc. (Incorporated by 
             reference to Exhibit 10.44 to the Company's Form 10-QSB for the 
             period ended December 31, 1996).*
---------------------
*   Incorporated by reference - Commission File No. 000-19318 unless
    otherwise indicated
**  Indicates a management contract or compensatory plan or arrangement required
    to be filed as an exhibit to this Form 10-KSB.


<PAGE>

Exhibit
Number       Description
-------      -----------

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

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

10.38        Employment Agreement dated November 14, 1997 between the Company
             and William J. Schuch.

10.39        Fifth  Amendment  to Credit  Agreement  and  Security  Agreement 
             dated as of July 1, 1997 between the Company and Norwest Bank 
             Minnesota, National Association.

10.40        Loan Agreement dated as of July 1, 1997 between the Company and 
             Minnesota  Agricultural  and Economic  Development Board.

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.

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.