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, 1999
                         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: (651) 697-5500
    Securities registered pursuant to Section 12(b) of the Exchange Act: None
      Securities registered pursuant to Section 12(g) of the Exchange Act:
                     Common Stock, $.0l par value per share

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

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

Issuer's revenues for its most recent fiscal year: $15,748,588

The aggregate market value of the common stock held by nonaffiliates of the
Registrant as of December 15, 1999 was approximately $9,855,045 based upon the
average high and low bid prices of the Registrant's common stock on such date.

There were 10,218,016 shares of common stock, $.0l par value, outstanding as of
December 15, 1999.
                            -------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Documents incorporated by reference pursuant to Rule 12b-23: None.

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


<PAGE>



                                      INDEX


Description                                                                 Page

PART I

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

PART II

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

PART III

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




<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

         Sparta Foods, Inc. manufactures and distributes a broad line of Mexican
food products which include corn and flour tortillas, stone ground and corn
flour tortilla chips. We also distribute, under our brand names, salsas and
picante sauces. Our brand names and products include Arizona Brand, Cruz, La
Campana Paradiso, La Canasta, La La's and Spanish Bell tortillas, Arizona Brand,
Blue Heaven, and La Canasta tortilla chips and La Canasta and Chapala salsas and
picante sauces.

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

         We are capitalizing on the significant growth in the sale of tortilla
products which has occurred in the United States over the past decade. In 1998
sales of tortilla products in the United States were approximately $3.3 billion
according to a survey by the Tortilla Industry Association, a not-for-profit
organization, and are estimated to reach $5.5 billion by the year 2000. We
believe 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

         Our goal is to become one of the premier manufacturing companies of
high quality tortillas nationwide. We plan to grow the business by expanding our
retail grocery and foodservice sales. In connection with our retail grocery
products, we intend to focus on the refrigerated tortilla as the primary product
and selectively expand the distribution of this product in new geographic areas,
such as the midwest, east and southeast regions of the United States, where we
believe we can establish a significant market position. In October 1999 we
purchased Food Products Corporation dba Arizona Brand, Phoenix, Arizona, the
second largest retail manufacturer of tortillas and tortilla-related products in
Arizona. In connection with our foodservice products, we intend to target our
sales to chain foodservice operators and expand geographically into expected
high growth markets. We believe we are well positioned to continue to capitalize
on the expected growth in sales of tortilla products nationwide. We plan to grow
our sales internally, through joint ventures or additional acquisitions of
compatible manufacturing facilities or regional brands and through the
development of new distribution relationships.


<PAGE>

Products and Marketing

         General. The food products manufactured and distributed by us 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. We
also distribute, under our own brand names, salsa and picante sauces. We
distribute our products to retail food stores and food service establishments.
We also manufacture or market products for other food distributors to be sold
under their own private labels using the customer's or our own proprietary
recipes. During the fiscal years ended September 30, 1999, 1998 and 1997, the
percentage of sales of tortillas, tortilla chips, barbecue sauces, salsas and
all other sauce products as compared to all total sales were as follows:

                                          Year Ended September 30,
                                        ---------------------------------------
Products                                1999              1998             1997
-----------                             ----              ----             ----
Tortillas                                81%               79%              72%
Corn tortilla chips                      17%               15%              16%
Salsa and all other products              2%                6%              12%

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

         We distribute our products through distribution centers primarily in
the Midwestern United States and Arizona. During the fiscal years ended
September 30, 1999, 1998 and 1997, our percentage of sales for distribution to
food service establishments, to retail stores under our own brand names, and
under private label, compared to total sales, were as follows:

                                                Year Ended September 30,
                                             ----------------------------
Market Segment                        1999            1998             1997
----------------                      ----            -----            ----
Food service
     establishments                   60%              58%              54%
Branded retail                        38%              35%              32%
Private label and
      Ingredients                      2%               7%              14%


         Food Service. Our 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

<PAGE>

to McDonald's, accounted for approximately 12% of our sales in fiscal year 1999.
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 our sales personnel or brokers. We pay food brokers a
commission based upon the percentage of the net sales of products sold. We are
obligated to pay such commission for as long as the broker continues to achieve
specified minimum sales. Sales to food service establishments are conducted
through distributors who carry product inventory at their distribution centers.
These distributors include Alliant Food Service, Inc., U.S. Food Services, Inc.
and Sysco Corporation, who on a combined basis accounted for approximately 36%
of our food service sales in the fiscal year ended September 30, 1999. Our
distributors provide continued sales and service to the food service customers,
while our direct sales personnel and brokers continue to solicit new restaurant
customers and act as coordinators between us and the distributors.

         Branded Retail. Our branded retail products are sold to retail grocery
chains and independent stores directly in Arizona and, in the Midwestern U.S.,
through distributors such as Crystal Farms Refrigerated Distribution Company
which distributes refrigerated goods to retail stores in 28 states, Marigold
Foods, Inc. which distributes products in retail stores in 7 states and Prinsen
Distributing, Inc. which distributes products to approximately 160 retail stores
in the 13 county Minneapolis/St. Paul metropolitan area. Sales to Crystal Farms
Refrigerated Distribution Company, accounted for approximately 26% of our sales
in fiscal year 1999. We have a distribution agreement with Crystal Farms
Refrigerated Distribution Company, which expires in the year 2004. Our products
appear in such grocery chains as Cub Foods and Rainbow Foods, in independent
stores such as Byerly's and Lunds in the midwest, and in grocery chains such as
Fry's, Albertson's and Safeway in Arizona. Through our retail store
distributors, we often establish incentives, such as volume sales discounts,
which are offered to encourage retail stores to prominently display our
products. We also utilize in-store demonstrations to promote our retail
products. Our 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. During fiscal year 1998, we ceased
manufacturing salsas, picante sauces and barbecue and other sauces and
contracted with third parties to manufacture such products for us. We market
many of these products under our own labels and private labels. During fiscal
year 1998 we ceased our manufacturing relationship with our largest barbecue
sauce customer which accounted for the decrease in sales under Private Label and
Ingredients as a percentage of our total sales in that year. Our Arizona
Division markets and distributes several snack products on behalf of other
manufacturers into grocery chains in Arizona and manufactures and distributes
private label tortillas and tortilla chips for some of these grocery chains.

Manufacturing and Supplies

         We manufacture our products on 11 production lines at our corporate
headquarters in New Brighton, Minnesota. These lines include: (i) a hand
stretched flour tortilla line; (ii) a die-cut flour tortilla line; (iii) five
press flour tortilla lines; (iv) two lines for the production of corn tortillas;
and (v) two stone ground corn tortilla chip lines. We also manufacture our

<PAGE>

products on 5 production lines at our Phoenix, Arizona facility. These lines
include: (i) a press flour tortilla line; (ii) two lines for the production of
corn tortillas; (iii) a corn tortilla chip line; and (iv) a line for the
production of popcorn.

         The principal ingredients for our manufactured products are corn, wheat
flour, corn flour, corn and soybean oils. These ingredients may be purchased by
us from a number of sources and are generally readily available under normal
conditions. Samples of incoming ingredients are tested to ensure that they meet
our quality specifications. We have made contract purchases through the first
half of the year 2000 of corn and flour to secure consistency in price and
quality and reasonable assurance of a supply of product ingredients. Although we
believe that such contracts help reduce the risk of unexpected and unfavorable
increases in raw material prices, we may be required to purchase our raw
materials at a higher than current market price if current market prices fall
below our contract price. We believe that termination of one or more of our raw
material contracts will not adversely affect our ability to control our raw
material costs as such contracts can be replaced. We regularly maintain stores
of corn, flour and other ingredients in sufficient quantities at our plants to
enable us 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.

         We estimate that our retail sales of tortillas give us approximately a
51% share of the 13 county Minneapolis/St. Paul metropolitan market, and
approximately a 20% share of the Phoenix metropolitan market. We believe that
our principal competition comes from Resers Foods and Azteca Foods, which supply
much of the remaining Minneapolis/St. Paul market and Mission Foods which is the
largest retail supplier in the Phoenix market. We believe, based on an
independent consumer marketing study of the twelve primary consumer markets in
the Midwest, that we are the third largest seller of tortillas in the Midwest,
based upon our combined tortilla sales in 4 of the 12 markets in the Midwest,
and the second largest seller of tortillas in Arizona.

         The retail market for fried corn tortilla chips is dominated by Frito
Lay, which we believe is a market leader in the 13 county Minneapolis/St. Paul
area and Phoenix markets and the national market. We also compete with Old
Dutch, Barrel O'Fun and Mission brands. We estimate that we have 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 us certain
pricing advantages in the local market areas. In marketing our salsas and
picante sauces for retail distribution, we compete with such brands as Pace, Old
El Paso, Frito Lay and Chi Chi's. We believe that we currently have 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 us 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 we believe that the quality of our products is good and that the
retail prices for our products are competitive, our ability to obtain retail
shelf space is primarily dependent on our distributors and brokers.

         In marketing our products to food service establishments, we compete
with a number of regional and national producers of Mexican-style products,
including BecLin Foods, Inc., Lake Park, Minnesota; Mexican Original (Tyson
Foods, Inc.), Fayetteville, Arkansas; and Mission Foods, Inc., Dallas, Texas.
Most of these competitors are better capitalized than us and have well
established sales organizations. While we are 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, we believe we will be
able to compete in other metropolitan area markets because of our ability to
fulfill a distributor's needs with a broad line of quality tortillas and
tortilla chips which are approved by selected restaurant chains.

Trademarks

         The principal trade names that we currently utilize are ARIZONA BRAND,
CRUZ, LA CAMPANA PARADISO, LA CANASTA, LA LA's and SPANISH BELL in the retail
sale of tortillas; ARIZONA BRAND, BLUE HEAVEN and LA CANASTA, in the retail sale
of tortilla chips; and LA CANASTA and CHAPALA in the retail sale of salsas. We
also use the trade name CRUZ in connection with food service sales. Except as
discussed below, we believe we have the unrestricted right to use all of these
trade names or their associated logos.

         Our CRUZ logo used in connection with tortillas is the subject of a
federal trademark registration which expires January 2000, but may be renewed
for an additional 10 years. We intend to renew this registration. Our federal
registration for the mark CRUZ used in connection with tortillas expires January
2008. The mark CHAPALA used in connection with salsas is the subject of a
federal trademark registration which expires November 2004. We own a federal
trademark registration for our MEXITOS logo used in connection with tortillas,
tortilla chips and hot sauce which expires May 2005. We own a federal trademark
registration which expires in November 2003 for the ARIZONA BRAND logo for use
in connection with corn and flour tortillas and corn and tortilla chips. Our
federal trademark registration for BLUE HEAVEN used in connection with corn
pancake and waffle mix, popped popcorn, muffin mix, cornmeal, and cornchips
expires August 2009. We own a federal trademark registration for the mark
SPANISH BELL used in connection with tortillas and corn chips which expires
April 2003 and a federal trademark registration for our SPANISH BELL logo used
in connection with tortillas and corn chips which expires April 2004. The use of
the mark LA LA'S in connection with tortillas and taco chips is the subject of a
federal trademark registration which expires January 2008. All of our trademark
registrations are subject to renewal rights and may terminate prior to their
respective expiration dates due to cancellation, disclaimer or surrender.


<PAGE>

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

         The mark LA CAMPANA PARADISO is licensed by us from an affiliate of one
of our former directors. The license agreement expires December 2014 and
currently requires the payment of a royalty of two to three percent (2-3%),
depending on volume, of the gross sales of products sold under the LA CAMPANA
PARADISO mark. The license agreement also provides for termination of the
license if we fail to meet certain minimum annual royalties.

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

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

Government Regulation

         We are 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, the Minneapolis/St. Paul, Minnesota
Metropolitan Waste Control Commission, the Maricopa County, Arizona
Environmental Services Department and the City of Phoenix, Arizona Water
Services Division. We believe we are in substantial compliance with all
applicable rules and regulations of the above-referenced agencies. The costs
associated with our compliance with environmental laws are minimal.

Personnel

         As of December 1, 1999 we employed a total of 228 persons. Of these
full-time employees, 5 serve in an executive capacity, 203 are engaged in
manufacturing, shipping, quality control and plant supervision, 8 are engaged in
sales and marketing, and 12 are engaged in administrative tasks. Our employees
are not covered by a collective bargaining agreement. We provide our employees
with health, dental, disability and life insurance programs. We believe that our
relations with our employees are good.


<PAGE>



ITEM 2.  DESCRIPTION OF PROPERTY

         We currently lease offices and manufacturing facilities located at 1565
First Avenue N.W., New Brighton, Minnesota, and 3121 East Washington Street,
Phoenix, Arizona. The New Brighton facility 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. We currently pay a base rent of approximately $40,500 per month, plus
taxes. The monthly base rent increases to approximately $44,500 starting
September 1, 2002 and increases again to approximately $48,500 on September 1,
2007 until the end of the lease term on August 31, 2012. The Phoenix facility
consists of a total of 60,000 square feet in two buildings, approximately 5,000
square feet of which is office space and the remainder of which is devoted to
manufacturing and dry and refrigerated storage. We currently pay a base rent of
approximately $17,500 per month, plus taxes, which is adjusted annually by a
factor of the CPI index, through the end of the lease term on October 31, 2004.
There is an optional renewal period of 5 years through October 31, 2009.

ITEM 3.  LEGAL PROCEEDINGS

         In January 1999, we entered into a Supply Agreement with Rupari Food
Services, Inc. to supply Rupari with the Banditos Chip and Cheese and Banditos
Chip and Salsa products. The agreement, which we believe to be an enforceable
contract, required an initial minimum purchase order for at least 166,667 cases
of product and 781,000 cases of product over the five year term of the
agreement. Since March 1999, Rupari has been in default of this agreement for
failure to order the required minimum number of cases of product and other
breaches. As a result, we are pursuing legal claims exceeding $2 million against
Rupari under the terms of our agreement. These claims are for reimbursement of
the outstanding account receivable balance, inventory purchased and committed to
be purchased relating to the agreement, as well as other financial obligations
associated with the termination of the agreement resulting from Rupari's failure
to perform its obligations under this agreement. On December 22, 1999, we filed
action against Rupari in the United States District Court in the City of
Minneapolis. Although we expect to recover, at a minimum, the outstanding
account receivable balance, inventory purchased and committed to be purchased
and other direct costs we have incurred in performing our obligations under the
agreement, we have been advised that Rupari will contest our claims on the
grounds of breach of warranty and non-performance.

         There is no other material litigation or other material legal
proceedings pending against us or our subsidiaries or any of our property.

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

         There were no matters submitted to a vote of our shareholders during
the fourth quarter of 1999.



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                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

December 31, 1998              $1.500            $0.875
March 31, 1999                  1.500             1.000
June 30, 1999                   1.500             0.875
September 30, 1999              1.125             0.750

         At December 15, 1999 the published high and low bid price for our
common stock was $1.25 per share. At December 15, 1999, there were issued and
outstanding 10,218,016 shares of common stock held by 201 shareholders of
record. Record ownership includes ownership by nominees who may hold for
multiple owners.

         We have not paid a dividend on our common stock and do not anticipate
paying any such dividends in the foreseeable future. Our credit agreement
precludes us from declaring or paying dividends on our common stock without the
creditor's approval.




<PAGE>



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

Overview

La Canasta of Minnesota, Inc. ("La Canasta") is the predecessor of Sparta Foods,
Inc., and now operates as our wholly-owned subsidiary. La Canasta 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. We were 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, we
acquired all of the outstanding capital stock of La Canasta. Since 1991, we have
completed acquisitions and secured new broker and distributor relationships
which have expanded our trademark retail brands to include Cruz, Chapala,
Mexitos and La Campana Paradiso, our retail distribution network to include
Crystal Farms Refrigerated Distribution Company and Marigold Foods, Inc. and our
food service customers to include McDonald's, Perkins, Friendly's and Carlos
O'Kelly restaurants. In October 1999, we acquired Food Products Corporation,
located in Phoenix Arizona, a manufacturer and distributor of tortillas and
tortillas chips in the southwestern United States. The acquisition expanded our
retail brands to include Arizona Brand, Spanish Bell, and La La's.

Results of Operations

Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998

During fiscal 1999, we had net sales of $15,748,588, an increase of $785,431, or
5%, compared to net sales of $14,963,157 in fiscal 1998. This increase resulted
primarily from higher sales volume during the fourth quarter, increasing by
$634,903 or 16% compared to the fourth quarter of fiscal 1998. The increased
sales were primarily to existing customers as well as expansion into new
territories through our primary retail distributors, Crystal Farms Refrigerated
Distribution Company and Marigold Foods, Inc.

Gross profit as a percentage of net sales for fiscal 1999 is 30% compared to 29%
for fiscal 1998. This increase is primarily due to more favorable operating
efficiencies and raw material pricing.

Selling, general and administrative expenses were $4,592,758 for fiscal 1999, an
increase of $886,475 or 24%, as compared to $3,706,283 in fiscal 1998. This
increase is due mainly to the hiring of additional sales personnel and
consultants to implement our long-term sales growth objectives. In addition,
increased advertising and promotional expenses were incurred on new and existing
products in an effort to penetrate new markets and increase market share in
existing markets.

Interest expense was $193,052 for fiscal 1999, a decrease of $140,726 compared
to $333,778 in fiscal 1998. This decrease is due to significant debt reductions
during the second half of fiscal 1998 as a result of the use of proceeds from
the issuance of preferred stock and the sale of rental property. We recorded
other income of $144,182 during fiscal 1999 compared to $159,077 in fiscal 1998.
This income consists primarily of rental and interest income.


<PAGE>

Income tax expense was $15,000 for fiscal 1999 compared to an income tax benefit
of $265,000 for fiscal 1998. The income tax expense in fiscal 1999 includes a
state minimum fee. The income tax benefit in fiscal 1998 is the result of
reversing a valuation allowance on a deferred tax asset associated with our net
operating loss carryforwards from prior years.

For the reasons discussed above, net income for fiscal 1999 was $9,842 compared
to net income in fiscal 1998 of $694,496.

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

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

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

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

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

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


<PAGE>

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

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

Liquidity and Capital Resources

We financed our current activities primarily through cash generated from our
operations and the issuance of common stock resulting from the exercise of
warrants.

Cash provided by operating activities during fiscal 1999 was $182,094 consisting
primarily of net income of $9,842, depreciation and amortization of $925,001 and
an increase in accounts payable and accrued expenses of $268,950 offset by an
increase in accounts receivable of $357,779, an increase in inventories of
$632,941 and an increase in prepaid expenses of $40,291. Cash used in investing
activities was $397,355 consisting of the purchase of equipment of $539,432
offset by a decrease in restricted cash and deposits of $51,178 and proceeds
from the sale of equipment of $90,899. Cash provided by financing activities was
$1,785,602 consisting of $2,154,601 in proceeds from the issuance of common
stock pursuant to the exercise of outstanding warrants offset by reductions in
long-term debt of $368,999.

At September 30, 1999, we had cash and cash equivalents of $2,701,596 and
working capital of $3,376,039.

During October 1999, we purchased substantially all of the assets of a tortilla
and tortilla chip manufacturing company located in Phoenix Arizona for
approximately $10,000,000 including the assumption of certain liabilities. The
acquisition was funded by a use of working capital of $2,700,000, seller
financing of $3,000,000, and increased bank financing of $4,300,000. As part of
the bank financing, we increased our operating line of credit with the bank from
a maximum available balance of $1,200,000 to $3,000,000, subject to certain
borrowing base calculations.

We believe that our bank credit facilities and cash flow from operations will be
sufficient to meet our operating requirements through fiscal 2000.

Seasonality

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


<PAGE>


Raw Material Cost Fluctuations

We do not enter into futures contracts as defined by Statements of the Financial
Accounting Standards Board. We do, however, enter into purchase orders for
delayed delivery of raw materials, generally 30 days for raw materials other
than flour and corn. We enter 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 our products.
These purchase orders are placed directly with the suppliers.

Outlook and Year 2000

Our plan in fiscal 2000 is to continue to grow the business by increasing sales
and expanding our presence in new geographic territories. Our plan is to grow
the business internally as well as through joint ventures and/or continued
acquisitions and through the development of new distribution relationships. See
Item One "Description of Business - Business Strategy."

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

We have completed an assessment of our exposure to the Year 2000 issue by
evaluating our software and hardware systems. Our assessment revealed that our
exposure to the Year 2000 issue is nominal, and we have upgraded our software
and hardware systems to make such systems Year 2000 compliant. In addition to
evaluating our own systems, we have inquired of our major customers and
suppliers as to their exposure to the Year 2000 issue to determine the extent to
which we are indirectly vulnerable to the Year 2000 issue from such customers
and suppliers. Many of our customers and suppliers have responded that they
believe they are or will be Year 2000 compliant. We plan to continue to assess
our exposure to the Year 2000 issue and develop plans to address any
developments associated with the Year 2000 issue that could have an adverse
effect on our operations.

Statements relating to our (a) goals and business objectives contained in the
section entitled "Description of Business - Business Strategy," (b) Year 2000
assessment and exposure, and (c) our future growth contained in the section
entitled "Management's Discussion and Analysis or Plan of Operations" are
forward-looking statements that involve a number of risks and uncertainties.
Some of the factors that could cause actual results to differ materially include
but are not limited to (i) seasonality of our sales and raw materials cost
fluctuations, which are discussed above; (ii) a decline in national sales growth
of tortillas; (iii) failure of our sales force to achieve its annual sales
objectives; (iv) our failure to continue to produce high quality tortillas; (v)
our inability to grow our business due to competitive factors; and (vi) the loss
of any of our significant customers or distributors. In addition, any unforeseen
expense of a material nature would materially and adversely affect our ability
to grow our operations.


<PAGE>

ITEM 7.  FINANCIAL STATEMENTS


                               Sparta Foods, Inc.
                                 and Subsidiary
                          Consolidated Financial Report
                               September 30, 1999






<PAGE>



                          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, 1999 and 1998, 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, 1999 and 1998, 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, L.L.P.
Minneapolis, Minnesota
November 12, 1999, except for Note 12, as to which the
date is November 18, 1999

<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998

<TABLE>
<CAPTION>
ASSETS (Note 3)                                                                      1999               1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                <C>
Current Assets
     Cash and cash equivalents                                                 $       2,701,596  $       1,131,255
     Accounts receivable, less allowances of $58,000 in 1999 and
         $30,000 in 1998 (Note 7)                                                      1,235,531            877,752
     Inventories:
         Finished goods                                                                  461,105            436,784
         Raw materials and packaging                                                   1,005,016            396,396
     Prepaid expenses and other assets                                                   239,043            203,498
     Deferred tax asset (Note 6)                                                          80,000             43,000
                                                                               -------------------------------------
                   Total current assets                                                5,722,291          3,088,685
                                                                               -------------------------------------

Property and Equipment (Note 2)                                                        9,524,435          9,045,342
     Less accumulated depreciation                                                     3,593,581          2,788,399
                                                                               -------------------------------------
                                                                                       5,930,854          6,256,943
                                                                               -------------------------------------

Other Assets
     Restricted cash (Note 3)                                                            198,158            242,059
     Goodwill, less accumulated amortization of $98,244 and
         $85,404, respectively                                                           415,128            427,968
     Covenants not-to-compete, less accumulated amortization
         of $46,084 and $39,424, respectively                                             53,916             60,576
     Deferred financing costs, less accumulated amortization of
         $89,957 and $64,778, respectively                                               109,765            133,256
     Deferred tax asset (Note 6)                                                         190,000            227,000
     Other                                                                               172,721            284,698
                                                                               -------------------------------------
                                                                                       1,139,688          1,375,557
                                                                               -------------------------------------
                                                                               $      12,792,833  $      10,721,185
                                                                               =====================================
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                                                 1999               1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                <C>
Current Liabilities
     Current maturities of long-term debt                                      $       1,190,241  $         367,377
     Accounts payable                                                                    635,513            506,874
     Accrued expenses                                                                    513,244            419,260
     Income taxes payable                                                                  7,254                  -
                                                                               -------------------------------------
                   Total current liabilities                                           2,346,252          1,293,511
                                                                               -------------------------------------


Accrued Rent (Note 4)                                                                     96,515             50,188
                                                                               -------------------------------------

Long-Term Debt, less current maturities (Note 3)                                       1,475,760          2,667,623
                                                                               -------------------------------------


Commitments and Contingency (Notes 3, 4, 5, 12, and 14)


Stockholders' Equity (Note 8)
Convertible preferred stock, Series 1998, authorized 1,000,000
shares, $1,000 par value; 2,500 shares issued and outstanding
(Note 13)                                                                              2,500,000          2,500,000
     Common stock, authorized 15,000,000 shares, $0.01 par value;
         issued and outstanding 10,191,416 and 7,037,172 shares
         in 1999 and 1998, respectively                                                  101,914             70,371
     Additional paid-in capital                                                        7,100,150          4,977,092
     Accumulated deficit                                                                (827,758)          (837,600)
                                                                               -------------------------------------
                                                                                       8,874,306          6,709,863
                                                                               -------------------------------------
                                                                               $      12,792,833  $      10,721,185
                                                                               =====================================

</TABLE>

<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1999 and 1998

<TABLE>
<S>                                                                            <C>                <C>
                                                                                     1999               1998
--------------------------------------------------------------------------------------------------------------------
Net sales (Notes 7 and 11)                                                     $      15,748,588  $      14,963,157
Cost of sales                                                                         11,082,118         10,652,677
                                                                               -------------------------------------
Gross profit                                                                           4,666,470          4,310,480

Selling, general, and administrative expenses                                          4,592,758          3,706,283
                                                                               -------------------------------------
Operating income                                                                          73,712            604,197

Other income, net (Note 1)                                                               144,182            159,077
Interest expense                                                                        (193,052)          (333,778)
                                                                               -------------------------------------
Income before income taxes                                                                24,842            429,496

Income tax benefit (expense) (Note 6)                                                    (15,000)           265,000
                                                                               -------------------------------------
Net income                                                                     $           9,842  $         694,496
                                                                               =====================================

Net income                                                                     $           9,842  $         694,496
Preferred stock dividends (Note 13)                                                     (125,000)           (75,000)
                                                                               -------------------------------------
Net income (loss) available to common shareholders                             $        (115,158) $         619,496
                                                                               =====================================

Earnings (loss) per common share (Note 10):
Basic                                                                          $           (0.01) $            0.09
Diluted                                                                                    (0.01)              0.08
                                                                               =====================================
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                   Preferred Stock           Common Stock
                                                                 --------------------  -------------------------
                                                                 Shares                  Shares
                                                               Outstanding  Par Value  Outstanding    Par Value
----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>      <C>           <C>           <C>
Balance, September 30, 1997                                         --    $      --       6,765,758   $ 67,657
     Preferred stock issued, net of costs of $158,735              2,500    2,500,000          --         --
     Common stock issued upon exercise of warrants and options      --           --         271,414      2,714
     Net income                                                     --           --            --         --
                                                                   -------------------------------------------
Balance, September 30, 1998                                        2,500    2,500,000     7,037,172     70,371
     Common stock issued upon exercise of warrants and options      --           --       3,154,244     31,543
     Net income                                                     --           --            --         --
                                                                   -------------------------------------------
Balance, September 30, 1999                                        2,500  $ 2,500,000    10,191,416   $101,914
                                                                   ===========================================

</TABLE>

<TABLE>
<CAPTION>
(continued)                                                      Additional
                                                                  Paid-In          Accumulated
                                                                  Capital            Deficit            Total
----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>               <C>
Balance, September 30, 1997                                      $ 4,950,507       $(1,532,096)      $ 3,486,068
     Preferred stock issued, net of costs of $158,735               (158,735)             --           2,341,265
     Common stock issued upon exercise of warrants and options       185,320              --             188,034
     Net income                                                         --             694,496           694,496
                                                                 -----------------------------------------------
Balance, September 30, 1998                                        4,977,092          (837,600)        6,709,863
     Common stock issued upon exercise of warrants and options     2,123,058              --           2,154,601
     Net income                                                         --               9,842             9,842
                                                                 -----------------------------------------------
Balance, September 30, 1999                                      $ 7,100,150       $  (827,758)      $ 8,874,306
                                                                 ===============================================

</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1999 and 1998

<TABLE>
<S>                                                                                           <C>               <C>
                                                                                                  1999              1998
                                                                                              -----------       -----------
Cash Flows From Operating Activities
    Net income                                                                                $     9,842       $   694,496
    Adjustments to reconcile net income to net cash provided by operating activities:
     Depreciation                                                                                 880,322           687,095
     Amortization                                                                                  44,679            65,023
     Deferred income taxes                                                                           --            (270,000)
     Loss on disposal of property and equipment                                                    (2,688)           (8,606)
     Changes in current assets and liabilities:
       Accounts receivable                                                                       (357,779)          (43,235)
       Inventories                                                                               (632,941)          264,390
       Prepaid expenses and other assets                                                          (28,291)          (48,082)
       Accounts payable and accrued expenses                                                      268,950          (420,831)
                                                                                              -----------       -----------
           Net cash provided by operating activities                                              182,094           920,250
                                                                                              -----------       -----------

Cash Flows From Investing Activities
    Decrease in restricted cash                                                                    43,901         1,651,908
    Purchases of property, equipment, and other                                                  (539,432)       (2,386,237)
    Proceeds from the sale of property and equipment and rental property held for resale           90,899           927,728
    Decrease in deposits and other assets                                                           7,277            60,128
                                                                                              -----------       -----------
           Net cash provided by (used in) investing activities                                   (397,355)          253,527
                                                                                              -----------       -----------

Cash Flows From Financing Activities
    Net payments on line of credit                                                                   --            (834,209)
    Long-term borrowings                                                                             --           1,293,353
    Payments of long-term debt                                                                   (368,999)       (3,009,953)
    Issuance of common stock, net of costs                                                      2,154,601           188,034
    Issuance of preferred stock, net of costs                                                        --           2,341,265
    Deferred financing costs                                                                         --             (21,612)
                                                                                              -----------       -----------
           Net cash provided by (used in) financing activities                                  1,785,602           (43,122)
                                                                                              -----------       -----------

           Net change in cash and cash equivalents                                              1,570,341         1,130,655

Cash and Cash Equivalents
    Beginning                                                                                   1,131,255               600
                                                                                              -----------       -----------
    Ending                                                                                    $ 2,701,596       $ 1,131,255
                                                                                              ===========       ===========

Supplemental Disclosures of Cash Flow Information
    Cash payments for:
     Interest                                                                                 $   193,046       $   353,168
     Income taxes                                                                                   3,000             9,545
                                                                                              ===========       ===========

</TABLE>
See Notes to Consolidated Financial Statements.



<PAGE>


Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Sparta Foods, Inc., through its wholly owned subsidiary, La
Canasta of Minnesota, Inc. (La Canasta), formulates, manufactures, and markets a
broad line of tortillas, tortilla products, and salsas under its own brand names
and markets sauces for others under private labels.

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

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

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

Revenue recognition: Revenues are recognized at the time the product is shipped
to the customer.

Fair value of financial instruments: The financial statements include the
following financial instruments and the methods and assumptions used in
estimating their fair value: for cash and cash equivalents, the carrying amount
is fair value; for accounts receivable and accounts payable, the carrying
amounts approximate their fair values due to the short-term nature of these
instruments; and for the fixed-rate notes payable, fair value has been estimated
based on discounted cash flows using interest rates being offered for similar
borrowing. 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,
except for a term note with a book value of $1,650,000 at September 30, 1999,
for which the fair value is approximately $1,110,000. In addition, the aggregate
fair values of the financial instrument would not represent the underlying value
of the Company.

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

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

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


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Significant Accounting Policies (Continued)
Intangibles: Costs in excess of net assets acquired (goodwill) are being
amortized over 40 years. Covenants not-to-compete are being amortized over 15
years, the terms of the agreements. Deferred financing costs are being amortized
over the lives of the debt agreements, which are five to 10 years.

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

Advertising: Expenditures for advertising costs are expensed as incurred. Total
advertising expense was approximately $251,000 and $191,000 in 1999 and 1998,
respectively.

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.

Operating segments: The Company adopted SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information, for the year ended September 30, 1999.
This statement requires public enterprises to report selected information about
operating segments in annual and interim reports issued to shareholders. The
adoption of this statement had no impact on the Company's financial condition or
results of operations.

Note 2.   Property and Equipment
Property and equipment consists of:

                                 Estimated          September 30
                                              ---------------------------
                                  Useful          1999           1998
                                   Lives
-------------------------------------------------------------------------
Factory equipment                  3-18       $  7,010,491   $  6,726,731
Office and other equipment         3-12            413,256        387,562
Leasehold improvements              15           1,747,182      1,734,807
Packaging printing plates            5             204,489        186,742
Construction in progress             -             149,017          9,500
                                              ---------------------------
                                              $  9,524,435   $  9,045,342
                                              ---------------------------



<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.  Financing Agreements
Line of credit: The Company has a line of credit with a bank, secured by all
assets. Maximum borrowings under the credit agreement are determined by a
borrowing base calculation or $1,200,000, whichever is less. Borrowings bear
interest at prime (8.25 percent at September 30, 1999). The agreement expires
May 30, 2000. At September 30, 1999, there were no borrowings under the line of
credit. The Company is to maintain certain minimum net worth and debt service
coverage levels.

On October 12, 1999, the Company entered into a new line of credit with the bank
in connection with its acquisition of the assets of Food Products Corporation
[see (1) following]. Maximum borrowings under the new agreement are determined
by a borrowing base calculation or $3,000,000, whichever is less. Borrowings
bear interest at the prime rate. The agreement expires September 30, 2000, if
not renewed. The credit agreement requires, among other things, that the Company
meet certain financial covenants related to net income, net worth, and cash
flow. Advances under the line are secured by substantially all assets of the
Company. On November 12, 1999, $1,615,000 was outstanding under the line.

State of Minnesota loan: On July 1, 1997, the Minnesota Agricultural and
Economic Development Board issued $1,950,000 in Series 1997D Tax-Exempt Bonds,
the proceeds of which issue were loaned to the Company to finance new equipment.
The underlying loan from the state is due in monthly installments which vary in
accordance with the maturity dates of the related revenue bonds, plus interest
at rates varying from 4.5 to 6.0 percent. The maturity dates of the revenue
bonds are through August 2008. The effective rate of interest to the Company is
5.79 percent per annum. At September 30, 1999 and 1998, the loan balances were
$1,650,000 and $1,791,667, respectively. The Company is to maintain certain
minimum net worth and debt service coverage levels, and has restrictions on the
payment of dividends.

In connection with the loan, the Company is required to maintain a debt service
reserve fund and a construction fund. The debt service reserve fund will remain
until all loan obligations have been satisfied. The construction fund represents
undisbursed loan proceeds that are available for approved improvement and
equipment expenditures. These amounts have been reflected on the consolidated
balance sheets as restricted cash as of September 30, 1999 and 1998, as follows:

                                                    1999          1998
------------------------------------------------------------------------
Debt service reserve fund, money market funds    $ 198,158     $ 197,412
Construction fund, money market funds                   -         44,647
                                                 -----------------------
                                                 $ 198,158     $ 242,059
                                                 -----------------------



<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.     Financing Agreements (Continued)
Long-term debt: Long-term debt consists of the following:

                                                            September 30
                                                      -----------------------
                                                        1999          1998
-----------------------------------------------------------------------------
State of Minnesota loan (described above)             $1,650,000   $1,791,667
Term note payable to bank, secured by substantially
all assets of the Company (1)                          1,016,001    1,243,333
                                                       ----------------------
                                                       2,666,001    3,035,000

Less current maturities                                1,190,241      367,377
                                                       ----------------------
                                                      $1,475,760   $2,667,623
                                                       ----------------------


(1)      On October 13, 1999, the Company acquired all assets and assumed
         certain liabilities of Food Products Corporation (FPC), a tortilla
         manufacturer in Phoenix, Arizona, for $9,000,000, plus assumed
         liabilities of $1,170,000. In connection with the purchase, the Company
         entered into a five-year term loan for $3,300,000 with a bank. The loan
         bears interest at the prime rate, plus 0.25 percent. The note is due in
         59 monthly principal installments of $55,000. The remaining principal
         balance is due and payable on September 30, 2004. The loan agreement
         requires, among other things, that the Company meet certain financial
         covenants related to net income, net worth, and cash flow. The loan is
         secured by substantially all assets of the Company and replaces the
         Company's previous term note payable.

         In addition to the aforementioned bank term loan, the Company entered
         into a $3,000,000 secured subordinated note with the sellers. The note
         is payable in 20 quarterly installments of $183,470, including interest
         at 8 percent. The note is secured by substantially all assets of the
         Company and is subordinated to the bank term loan.

Aggregate maturities of long-term debt (including debt incurred or refinanced
subsequent to year-end in connection with the aforementioned acquisition) are as
follows:

Years ending September 30:

2000                                                $ 1,190,000
2001                                                  1,357,000
2002                                                  1,411,000
2003                                                  1,473,000
2004                                                  1,532,000
Later years                                             987,000
                                                    -----------
                                                    $ 7,950,000
                                                    -----------

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Lease Commitments and Rental Expense
The Company leases its office and factory building under a noncancelable
operating lease which expires on August 31, 2012, and requires minimum monthly
rentals of $37,360, which increase in the fifth and tenth year of the lease,
plus the payment of property taxes, normal maintenance, and insurance on the
property. The total rental commitment is recognized as rent expense on a
straight-line basis over the life of the lease. Accordingly, the Company has
recorded accrued rent of $96,515 and $50,188 as a liability at September 30,
1999 and 1998, respectively. In September 1998, the Company subleased a portion
of the building to another company under a noncancelable agreement which expires
March 2000 and requires annual rentals of $34,800, plus additional amounts for
utilities and other services which are determined on a per-hour basis.

In connection with the Company's acquisition of the assets of Food Products
Corporation (FPC) (see Note 3) the Company assumed the lease on the
manufacturing and office facilities of FPC. The lease calls for minimum annual
rentals of approximately $265,000, which will be adjusted annually based on
increases in the consumer price index. The lease expires October 31, 2004.

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

Approximate minimum future obligations required under all operating leases of
the Company and FPC (net of the sublease) are as follows:

Years ending September 30:
2000                                                   $  1,126,000
2001                                                        886,000
2002                                                        785,000
2003                                                        785,000
2004                                                        723,000
Later years                                               5,761,000
                                                       ------------
                                                       $ 10,066,000
                                                       ------------

Total rent expenses for all facilities and equipment during the years ended
September 30, 1999 and 1998, were approximately $679,000 and $626,000,
respectively, net of $82,000 and $80,000 of sublease and other rental income,
respectively.


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Agreements and Commitments
Purchase agreements: The Company does not enter into futures contracts. It does,
however, enter into purchase orders for delayed delivery of raw materials,
generally 30 days for raw materials other than corn and flour. The Company
enters into purchase orders with the suppliers for the delayed delivery of corn
and flour for a period of four 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, 1999, the Company had outstanding purchase orders of
approximately $76,000. 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, 1999 and 1998.

Self-funded insurance: The Company provides medical insurance for its employees
under a self-funded plan. The Company estimates expenses under this plan and
recognizes the liability as estimates are made. The Company has purchased
stop-loss insurance for the plan, which limits the Company's liability to
$20,000 per individual per year and also has certain annual aggregate limits.

Note 6. Income Taxes
The income tax benefit (expense) for 1999 and 1998 consisted of:

                                             1999                 1998
--------------------------------------------------------------------------
Currently payable:
  Federal                                $    (10,000)       $    --
  State                                        (5,000)          (5,000)
Deferred                                           --          270,000
                                       -----------------------------------
                                         $    (15,000)       $ 265,000
                                       -----------------------------------


A reconciliation between income tax expense (benefit) computed at the federal
statutory rate and the Company's effective income tax rate for 1999 and 1998 is
as follows:

                                                   1999            1998
---------------------------------------------------------------------------
Federal statutory rate                              (34.0)%         (34.0)%
State income taxes, net of federal benefit           (6.5)%          (6.5)%
Valuation allowance                                    --           *90.3%
Nondeductible expenses                              (30.0)%          (0.8)%
Benefit of graduated tax rate                        10.1%           12.7%
                                                   ------------------------
Effective income tax benefit (expense) rate         (60.4)%          61.7%
                                                   ------------------------


* Benefit is due to the reversal of the valuation allowance that existed at
  September 30, 1997, related to the deferred tax asset associated with the
  net operating loss carryforwards.

Temporary differences that give rise to the net deferred tax assets and
liabilities at September 30, 1999 and 1998, are as follows:

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6.     Income Taxes (Continued)
                                                       1999           1998
-------------------------------------------------------------------------------
Net current deferred tax assets:
  Receivable allowances                            $       12,000  $      9,000
  Vacation accrual                                         34,000        23,000
  Inventory costs                                          24,000        10,000
  Bonus accrual                                             8,000
  Charitable contributions                                  2,000         1,000
                                                   ----------------------------
                                                   $       80,000  $     43,000
                                                   ============================


                                                       1999           1998
-------------------------------------------------------------------------------
Net noncurrent deferred tax assets (liabilities):
  Depreciation                                     $     (809,000)  $  (554,000)
  Net operating loss carryforwards                        922,000       703,000
  AMT credit carryforwards                                 38,000        38,000
  Intangible assets                                        39,000        40,000
                                                   ----------------------------
                                                   $      190,000   $   227,000
                                                   ============================


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. Management does not
believe a valuation allowance is necessary, as they believe there will be
sufficient future taxable income to utilize all deductible temporary differences
and carryforwards.

The federal net operating loss carryforwards of $2,358,000 at September 30,
1999, will expire as follows if not utilized:

Years                                              Amount
--------------------------------------------------------------
2009                                        $      662,000
2010                                             1,277,000
2011                                               202,000
2018                                               148,000
2019                                                69,000



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

<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Major Customers
The Company had sales to one customer which accounted for approximately 26 and
25 percent of sales for fiscal years 1999 and 1998, respectively. As of
September 30, 1999, accounts receivable from this customer were approximately
$204,000.

In addition, the Company had sales to a second customer through a distributor
which accounted for approximately 12 percent of sales for fiscal years 1999 and
1998. As of September 30, 1999, accounts receivable from this distributor were
approximately $81,000.

Note 8. 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 and may
be granted to key employees and members of the Board of Directors. The options
are generally granted at exercise prices equal to or greater than the market
value of the common stock at the date of grant, expire at varying dates not to
exceed 10 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 at September 30:

                                                        1999           1998
------------------------------------------------------------------------------
Net income (loss) available to common shareholders--basic:
  As reported                                        $ (115,158)   $  619,496
  Pro forma                                            (253,298)      390,704
Net income (loss)--diluted:
  As reported                                          (115,158)      694,496
  Pro forma                                            (253,298)      465,704
Basic earnings (loss) per share:
  As reported                                             (0.01)         0.09
  Pro forma                                               (0.03)         0.06
Diluted earnings (loss) per share:
  As reported                                             (0.01)         0.08
  Pro forma                                               (0.03)         0.06


<PAGE>
SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Options and Warrants (Continued)
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 1999 and
1998, respectively: dividend rate of -0- for both years; price volatility of
49.87 and 77.44 percent; risk-free interest rate averaging 5.22 and 5.83
percent; and expected lives of approximately five and four years. The
weighted-average grant date fair value of options granted during 1999 and 1998
were $0.31 and $0.53, respectively.

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

Additional information relating to all outstanding options as of September 30,
1999 and 1998, is as follows:

<TABLE>
<CAPTION>
                                                           1999                              1998
                                               ----------------------------       ------------------------------------------
                                                                Weighted-                        Weighted-
                                                                 Average                          Average
                                                                Exercise                         Exercise
                                                      Shares     Price                  Shares     Price
----------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>         <C>                     <C>       <C>
Options outstanding at beginning of year           1,100,250   $   1.41                962,585   $    1.76
  Options exercised                                   (1,250)      0.50                (19,750)       1.02
  Options expired                                   (278,500)      2.06                (95,585)       3.49
  Options granted                                    352,500       1.03                253,000        1.52
                                               -----------------------------------------------------------
Options outstanding at end of year                 1,173,000   $   1.13              1,100,250   $    1.41
                                               ===========================================================

Options exercisable at end of year                   588,250   $   1.08                488,125   $    1.60
                                               ===========================================================
</TABLE>

The following table summarizes information about stock options outstanding at
September 30, 1999:

<TABLE>
<CAPTION>
                                            Options Outstanding           Options Exercisable
                                       ---------------------------   -----------------------------
                                          Weighted-
                                           Average
                       Number             Remaining      Weighted        Number          Weighted
   Range of          Outstanding at      Contractual     Average      Exercisable at     Average
   Exercise          September 30,          Life         Exercise      September 30,     Exercise
    Prices              1999               (Years)        Price           1999           Prices
--------------------------------------------------------------------------------------------------
<S>                    <C>                  <C>        <C>              <C>              <C>
$0.50 - $0.88            218,750             1.08       $   0.53         218,750          $   0.53
$0.94 - $1.13            511,000             3.50           1.02         125,750              1.07
$1.38 - $1.63            358,250             3.50           1.48         166,250              1.45
$1.75 - $2.00             85,000             0.54           1.82          77,500              1.83
--------------------------------------------------------------------------------------------------
$0.50 - $2.00          1,173,000             2.84       $   1.13         588,250          $   1.08
==================================================================================================

</TABLE>
<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Options and Warrants (Continued)
Stock warrants: A summary of warrants follows:

                                         Price Range        Shares
--------------------------------------------------------------------
Outstanding, September 30, 1997      $   0.50 - 4.50       3,665,837
  Exercised                              0.50 - 0.75        (251,664)
                                     -------------------------------
Outstanding, September 30, 1998          0.50 - 4.50       3,414,173
  Exercised                              0.50 - 0.75      (3,152,994)
  Expired                                0.50 - 4.50        (181,179)
                                     -------------------------------
Outstanding, September 30, 1999      $   0.50 - 0.75          80,000
                                     -------------------------------


Warrants outstanding at September 30, 1999, expire February 2, 2001.

Note 9. Related-Party Transactions
The Company purchased marketing, advertising, and consulting services from two
organizations owned by members of the Board of Directors. Total expenditures for
these services were approximately $57,000 and $99,000 for 1999 and 1998,
respectively.

The Company purchased certain raw materials from a vendor that is also a
preferred stock shareholder. Total purchases for these materials were
approximately $253,000 and $273,000 for fiscal years 1999 and 1998,
respectively. Accounts payable to this vendor at September 30, 1999, were
approximately $22,500.

Note 10. Earnings Per Share
The Company computes basic earnings (loss) per share based upon the
weighted-average number of common shares outstanding during each year. Preferred
stock dividends are included in the net income (loss) attributable to common
shareholders in calculating basic earnings (loss) per share. Potential common
shares such as options, warrants, and convertible preferred stock are included
in the computation of diluted loss per common share where their effect is
dilutive.

                                                       1999            1998
------------------------------------------------------------------------------
Earnings:
Net income                                            $     9,842   $  694,496
Less preferred stock dividends                           (125,000)     (75,000)
                                                      ------------------------
Income (loss) available to common stockholders        $  (115,158)  $  619,496
                                                      ========================

Weighted-average shares:
Basic weighted-average shares                           9,347,958    6,882,453
Adjustments for dilutive shares:
Options and warrants                                           --      968,896
                                                      ------------------------
Diluted weighted-average shares                         9,347,958    7,851,349
                                                      ========================

Basic earnings (loss) per share                       $     (0.01)  $     0.09
                                                      ========================

Diluted earnings (loss) per share                     $     (0.01)  $     0.08
                                                      ========================
<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Earnings Per Share (Continued)
For the years ended September 30, 1999 and 1998, the conversion of preferred
stock has not been assumed since its impact on diluted earnings (loss) per share
would be antidilutive. In addition, options and warrants were excluded from
diluted earnings (loss) per share in 1999 since their effect was also
antidilutive.

Note 11. Segment and Product Line Information
The Company's reportable segments are strategic business units that offer
principally the same products and services but are distributed to different
types of customers. They are managed separately because each business requires
different marketing strategies. The Company has two reportable segments: food
service and retail.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. There are no intersegment
transactions. The Company evaluates performance based on sales and gross profit
of the respective segments and does not separately evaluate total assets, cash
flows, or other financial matters.

Sales and gross profit by segment are as follows:

                                            1999
                         -----------------------------------------------------
                           Retail             Food Service            Total
                         -----------------------------------------------------
Net sales                $ 6,191,797          $ 9,556,791          $15,748,588
Cost of sales              3,924,729            7,157,389           11,082,118
                         -----------------------------------------------------
Gross profit             $ 2,267,068          $ 2,399,402          $ 4,666,470
                         =====================================================


                                             1998
                         -----------------------------------------------------
                           Retail             Food Service            Total
                         -----------------------------------------------------
Net sales                $ 5,209,474          $ 9,753,683          $14,963,157
Cost of sales              3,031,112            7,621,565           10,652,677
                         -----------------------------------------------------
Gross profit             $ 2,178,362          $ 2,132,118          $ 4,310,480
                         =====================================================


The Company's percentages of revenue by major product line for the years ended
September 30, 1999 and 1998, are as follows:

                                              1999                    1998
--------------------------------------------------------------------------
Tortillas                                      81%                     79%
Corn tortilla chips                            17%                     15%
Salsa and all other products                    2%                      6%


<PAGE>


SPARTA FOODS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Supply Agreement
In January 1999, the Company entered into a five-year Supply Agreement (the
Agreement) with a customer to supply private label retail food products. The
Agreement details certain minimum order requirements and payment terms, with
which the customer is not in compliance. On November 18, 1999, the Company
notified the customer of these events of default. The Agreement specifies that
the customer has 30 days to cure these events of default, or the Agreement is
terminated. Upon such termination, as detailed in the Agreement, the customer is
obligated to pay the Company for all remaining inventory and accounts
receivable, totaling approximately $654,000 as of September 30, 1999. In
addition, the Company has purchase order obligations for inventory materials
totaling approximately $136,000 as of September 30, 1999, which the customer is
obligated to pay for under the terms of the Agreement. The Company has filed
action against the customer. In the opinion of management, the ultimate outcome
of this matter will not have a material effect on the Company.

Note 13. Preferred Stock
On February 24, 1998, the Company issued 2,500 shares of preferred stock, series
1998. The shares are convertible at any time at the rate of 606.06 shares of
common stock for each share of preferred stock. The holders of the preferred
stock have the right to require the Company to repurchase the stock in the event
of a change in control authorized by the Board of Directors or if the Company is
in default with certain nonfinancial covenants relating primarily to normal
business operations as defined in the agreement. The holders of the preferred
stock are entitled to receive, when, as, and if declared by the Company's Board
of Directors, cash dividends at the rate of 5 percent annually or, at the option
of the Company, dividends of shares of additional preferred stock at the rate of
7.5 percent annually. Dividends are fully cumulative, accumulate without
interest from the date the preferred stock was originally issued and, if
declared by the Board of Directors, are payable, semiannually on January 1 and
July 1. At September 30, 1999 and 1998, cumulative and undeclared cash dividends
totaled $200,000, or $80 per share, and $75,000, or $30 per share, respectively.

Note 14. Agreement With Potential Acquiror
On November 12, 1999, the Company entered into an agreement with Cenex Harvest
States Cooperatives (Cenex) under which the Company granted Cenex the exclusive
right, until December 31, 1999, to negotiate the acquisition of the Company.
Cenex owns 92,500 shares of common stock and is the owner of the preferred stock
convertible into 1,515,150 shares of common stock.


<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.

Directors and Executive Officers

         The names and ages of our executive officers and directors and their
positions and offices held as of December 15, 1999 are as follows:

         Name                     Age    Position with Company

         Joel P. Bachul           57     President, Chief Executive Officer and
                                         Director

         A. Merrill Ayers         53     SeniorVice President, Treasurer, Chief
                                         Financial Officer and Secretary

         Craig S. Cram            44     Executive Vice President, Sales and
                                         Operations

         Larry P. Arnold          56     Director

         Thomas F. Baker          56     Director

         William J. Benzick       58     Director

         John D. Johnson          51     Director

         Edward K. Jorgensen      60     Director

         Michael J. Kozlak        46     Director

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


<PAGE>

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

         Craig S. Cram, has served as our Executive Vice President, Sales and
Operations since March 1999 and was Vice President-Operations from September
1998 until March 1999. Mr. Cram served as General Manager of Creative Foods, a
USDA meat plant co-packer, from 1994 until 1998.

         Larry P. Arnold, a director since February 1996, has been retired since
January 1993. For more than five years prior thereto, he was Managing General
Partner of Wessels, Arnold & Henderson, a Minneapolis-based investment banking
firm. Mr. Arnold is also a director of Van Wagoner Funds.

         Thomas F. Baker, a director since May 1999, has been retired since May
1999. For more than five years prior thereto he was Executive Vice President,
Finance and Administration, of Cenex Harvest States Cooperatives, an
agricultural cooperative.

         William J. Benzick, a director since May 1999, was Founder, Chairman of
the Board and CEO of Best, Inc. until August 1997 when he became Chairman
Emeritus. Best, Inc. was a food service management company which was acquired by
Fine Host Corporation in 1997.

         John D. Johnson, a director since February 1998, has been President and
General Manager of Cenex Harvest States Cooperatives, an agricultural
cooperative, since June 1998. Prior to the merger of CENEX, Inc. and Harvest
States Cooperatives on June 1, 1998, Mr. Johnson served as President and Chief
Executive Officer (from 1995 to 1998) and as Group Vice President (from 1992 to
1995) of Harvest States Cooperatives. Mr. Johnson was appointed to Sparta's
Board of Directors in February 1998 in connection with that certain Stock
Purchase Agreement dated February 23, 1998 between us and Cenex Harvest States
Cooperatives (f/k/a Harvest States Cooperatives). Sparta issued 2,500 shares of
Preferred Stock, Series 1998 to Cenex Harvest States in consideration for
$2,500,000. Pursuant to our agreement with Cenex Harvest States, we agreed to
use our best efforts to nominate as a director and elect Cenex Harvest States'
nominee as a director so long as Cenex Harvest States owns no less than 10% of
the outstanding Preferred Stock, Series 1998. Mr. Johnson is Cenex Harvest
States' nominee for director.

         Edward K. Jorgensen, a director since February 1996, has been President
of Nordex International, a food distribution company, since September 1994.
Effective August 31, 1994, Mr. Jorgensen retired as Vice President of Trade
Relations for CPC Foodservice, an international food manufacturer, with whom he
had been associated since January 1993. For 27 years prior thereto, he served as
Senior Vice President of Foodservice for the Kellogg Company.


<PAGE>

         Michael J. Kozlak, a director since March 1995, has been Managing
Director of GMAC/RFC, a mortgage banking company, since October 1998. From
January 1998 to October 1998, Mr. Kozlak served as a consultant with Kozlak
Associates, a firm which provides consulting services to the banking and
mortgage banking industries. He served as Senior Executive Vice President of PNC
Mortgage Corporation of America, a mortgage banking company, from January 1996
to December 1997, and as a consultant with Kozlak Associates from January 1994
through November 1995. From March 1985 until December 1993, Mr. Kozlak served as
President and Chief Executive Officer of First Bank Mortgage, a wholly-owned
mortgage banking subsidiary of First Bank, N.A. In addition to his position at
First Bank Mortgage, Mr. Kozlak assumed the responsibility for the Financial
Services Division within First Bank System. Mr. Kozlak has served as a member of
various senior level committees at First Bank System, including its Retail
Banking Task Force, Senior Asset and Liability Committee and Consumer Credit
Committee.

         Each of our directors hold office until the next annual meeting of
shareholders or until his or her successor has been duly elected and qualified.
Our executive officers are appointed by and serve at the discretion of our Board
of Directors. There are no family relationships among any of our directors or
executive officers.

Compliance with Section 16(a) of the Exchange Act

         Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than 10
percent of our outstanding shares of common stock, to file initial reports of
ownership and reports of changes in ownership of our securities with the
Securities and Exchange Commission. Our officers, directors and greater than 10
percent shareholders are required by Securities and Exchange Commission
Regulations to furnish us with copies of all Section 16(a) forms they file.

         Based solely on a review of the copies of such reports furnished to or
obtained by us or written representations that no other reports were required,
we believe that during the fiscal year ended September 30, 1999, all filing
requirements applicable to our directors, officers or beneficial owners of more
than 10% of our outstanding shares of common stock were complied with except
that Thomas F. Baker was late filing a Form 4 to report one transaction.

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table
Set forth in the table below is the compensation paid by us during each of the
last three fiscal years to our Chief Executive Officer and each other executive
officer whose total salary and bonus for fiscal 1999 exceeded $100,000.


<PAGE>
<TABLE>
<CAPTION>


                                                                                                       Long-Term
                                                                        Annual Compensation           Compensation
                                                                                                         Awards
                                                         ----------------------------------------     ------------
                                                                                                       Securities
                                                                                     Other Annual      Underlying
Name and Principal Position                      Year    Salary ($)     Bonus ($)    Compensation     Options (#)
-------------------------------                  ----    ----------     ---------    ------------     -----------
<S>                                              <C>       <C>           <C>            <C>             <C>
Joel P. Bachul                                   1999      162,692       36,000          None            75,000
President and Chief Executive Officer            1998      155,000       51,500          None            50,000
                                                 1997      139,231       31,250          None           100,000


A. Merrill Ayers                                 1999      136,250       25,400          None            52,500
Senior Vice President and Chief Financial        1998      130,000       35,000          None            35,000
Officer                                          1997      114,231       25,000          None            75,000



Thomas C. House                                  1999      110,000       16,500          None              0
Former Vice President of Corporate Planning      1998      110,000       30,000          None            35,000
                                                 1997       96,038       21,250          None            75,000
</TABLE>

         No other executive officer received a salary and bonus from us in
excess of $100,000 during the last fiscal year.

Change in Control Arrangements

         We have entered into Salary Continuation Agreements with Joel P.
Bachul, President and Chief Executive Officer, and A. Merrill Ayers, Senior Vice
President and Chief Financial Officer and a Change of Control Executive
Severance Pay Agreement with Craig S. Cram, Executive Vice President of Sales
and Operations. These agreements provide that in the event that the officer's
employment is terminated without cause in connection with a sale, merger or
other change of control of us, such officer will be entitled to receive
severance payments for 24 months equal to his base compensation at the time of
termination. The Agreements also provide that any outstanding stock option held
by such officers will vest immediately prior to the effective date of a change
of control.

Option/SAR Grants During 1999 Fiscal Year

         The following table sets forth the options that have been granted to
our executive officers listed in the Summary Compensation Table during our last
fiscal year ended September 30, 1999.

<TABLE>
<CAPTION>
                             Number of            Percent of
                            Securities          Total Options/
                            Underlying          SARs Granted to        Exercise or
                           Options/SARs          Employees in          Base Price          Expiration
              Name           Granted (#)           Fiscal Year           ($/Share)              Date
-------------------        -------------       ----------------       -------------        -----------
<S>                          <C>                     <C>                 <C>                <C>
Joel P. Bachul               75,000(1)               24.0%               $0.9375            10/7/03

A. Merrill Ayers             52,500(1)               16.8%               $0.9375            10/7/03

Thomas C. House              35,000(1)               11.2%               $0.9375            10/7/03 (2)

</TABLE>

<PAGE>

(1)      Such option is exercisable as to 25% of the total number of shares per
         year for four years beginning October 7, 1999.

(2)      Such option terminated on September 30, 1999 in connection with Mr.
         House's termination of employment with us.

Option/SAR Exercises During Fiscal 1999
and Fiscal Year-End Option/SAR Values

         The following table provides certain information regarding the exercise
of stock options to purchase shares of our common stock during the year ended
September 30, 1999, by the officers named in the Summary Compensation Table and
the fiscal year-end value of unexercised stock options held by such officers.


<TABLE>
<CAPTION>
                                                                                       Value of Unexercised In-
                         Number of Shares     Value       Number of Unexercised          the-Money Options at
                           Acquired on       Realized   Options at Fiscal Year End        Fiscal Year End ($)
         Name               Exercise            ($)     (exercisable/unexercisable)  (exercisable/unexercisable)(1)
-------------------     -----------------    --------   ---------------------------  ------------------------------
<S>                           <C>              <C>        <C>          <C>             <C>                <C>
Joel P. Bachul                 None             0          225,000      175,000         23,438             0

A. Merrill Ayers               None             0          147,500      125,000         15,625             0

Thomas C. House                None             0          132,500      107,500(2)      15,625             0
</TABLE>


(1)      Based on a fiscal year-end of September 30, 1999 and a common stock
         price of $0.8125 per share, which is the last sale price of our common
         stock on September 30, 1999. The value of in-the-money options is
         calculated as the difference between the fair market value of the
         common stock underlying the options and the exercise price of the
         options at fiscal year end. Exercisable options refer to those options
         that are exercisable as of September 30, 1999, while unexercisable
         options refer to those options that are not exercisable as of September
         30, 1999, but which will become exercisable at various times in the
         future.

(2)      Such unexercisable portions terminated as of September 30, 1999 in
         connection with Mr. House's termination of employment with us.

Compensation of Directors

         General Policy. Each director who is not employed by us receives $500
for each Board meeting attended. Directors may be reimbursed for expenses
incurred in attending meetings of the board of directors.

         Stock Options. Under our Amended and Restated Stock Option Plan, each
person who becomes a nonemployee director is automatically granted a
nonqualified option exercisable for 15,000 shares of common stock, and each
nonemployee director who is reelected to the board of directors will thereafter
receive a nonqualified option for 2,000 shares. On February 25, 1999, the date
of the 1999 annual meeting of shareholders, Messrs. Arnold, Johnson, Jorgensen
and Kozlak each received an option to purchase 2,000 shares at an exercise price
of $1.40625, which was the fair market value of our common stock on such date,
and Messrs. Baker and Benzick each received an option to purchase 15,000 shares
at an exercise price of $1.125 upon their election to the board on July 9, 1999.



<PAGE>

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Principal Shareholders

         The following table sets forth the number of shares of our common stock
beneficially owned as of December 15, 1999, by each person known to us to be the
beneficial owner of 5% or more of our common stock:

  Name and Address of                       Number of Shares           Percent
  Shareholder                             Beneficially Owned(1)     of Class(2)
---------------------------------         ---------------------     -----------
Cenex Harvest States Cooperatives             1,607,650(3)               13.7%
5500 Cenex Drive
Inver Grove Heights, MN  55077

Carmen S. Abril Lopez                           754,480                  7.4%
901 West Culver
Phoenix, AZ  85007

Donald R. Brattain                              662,000                  6.5%
601 Lakeshore Parkway
Minnetonka, MN  55305
---------------------

(1)      Unless otherwise indicated, the person listed as the beneficial owner
         of the shares has sole voting and sole investment power over the
         shares.

(2)      Shares not outstanding but deemed beneficially owned by virtue of the
         right of a person to acquire them as of December 15, 1999, or within 60
         days of such date are treated as outstanding only when determining the
         percent owned by such individual and when determining the percent owned
         by the group.

(3)      Includes 1,515,150 shares which are not outstanding but which may be
         issued upon conversion of convertible Preferred Stock.



<PAGE>


Management Shareholdings

         The following table sets forth the number of shares of our common stock
beneficially owned as of December 15, 1999, by each of our executive officers
named in the Summary Compensation Table, by each director and by all directors
and current executive officers as a group:

Name and Address of                         Number of Shares         Percent
Shareholder or Identity of Group          Beneficially Owned(1)     of Class(2)
---------------------------------         ---------------------     -----------
Larry P. Arnold                                  376,000(3)             3.7%
3376 Breconwood Circle
Wayzata, MN  55391

Joel P. Bachul                                   365,250(4)             3.5%
1565 First Ave. N.W.
New Brighton, MN  55112

Michael J. Kozlak                                273,000(5)             2.7%
5049 Green Farms Road
Edina, MN  55436

A. Merrill Ayers                                 189,125(6)             1.8%
1565 First Ave. N.W.
New Brighton, MN  55112

Thomas C. House                                  155,900(7)             1.5%
1483 Arden Oak Drive
Arden Hills, MN 55112

Edward K. Jorgensen                              58,000(3)                *
5N175 Deerpath Way
St. Charles, IL  60175

Craig S. Cram                                    27,000(8)                *
1565 First Ave. N.W.
New Brighton, MN  55112

John D. Johnson (9)                              8,000(10)                *
1667 N. Snelling
St. Paul, MN  55164

Thomas F. Baker                                  3,000(10)                *
1573 Lone Oak Road
Eagan, MN  55121

William J. Benzick                               3,000(10)                *
4137 Brigadoon Drive
Shorview, MN  55126

Current Officers and Directors as a group      1,302,375(11)            12.2%
(9 persons)
---------------------

* Less than 1%.

(1)      See footnote (1) to preceding table.

(2)      See footnote (2) to preceding table.

(3)      Includes 18,000 shares which may be purchased upon exercise of options
         which are exercisable as of December 15, 1999 or within 60 days of such
         date.

(4)      Includes 231,250 shares which may be purchased upon exercise of options
         which are exercisable as of December 15, 1999 or within 60 days of such
         date.

(5)      Includes 23,000 shares which may be purchased upon exercise of options
         which are exercisable as of December 15, 1999 or within 60 days of such
         date.

(6)      Includes 163,125 shares which may be purchased upon exercise of options
         which are exercisable as of December 15, 1999 or within 60 days of such
         date.

(7)      Includes 95,900 shares which may be purchased upon exercise of options
         which are exercisable as of December 15, 1999 or within 60 days of such
         date.

(8)      Includes 10,000 shares which may be purchased upon exercise of options
         which are exercisable as of December 15, 1999 or within 60 days of such
         date.

(9)      Mr. Johnson is an executive officer of Cenex Harvest States
         Cooperatives, which is one of our shareholders.

(10)     Such shares are not outstanding but may be purchased upon exercise of
         options which are exercisable as of December 15, 1999 or within 60 days
         of such date.

(11)     Includes 477,375 shares which may be purchased upon exercise of options
         which are exercisable as of December 15, 1999 or within 60 days of such
         date.


<PAGE>

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On November 12, 1999, we entered into an agreement with Cenex Harvest
States Cooperatives ("Cenex") under which we granted Cenex the exclusive right,
until December 31, 1999, to negotiate the acquisition of us. Cenex owns 92,500
shares of our common stock and Preferred Stock convertible into 1,515,150 shares
of common stock, representing in the aggregate 13.7% of the common stock which
would be outstanding upon conversion of such shares of Preferred Stock. John D.
Johnson, one of our directors, is President and General Manager of Cenex.


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 by us during the fourth
                  quarter of the fiscal year ending September 30, 1999. A report
                  on Form 8-K was filed on October 26, 1999 reporting under Item
                  2 our acquisition of Food Products Corporation, and a Form 8-K
                  was filed on November 17, 1999 reporting under Item 5 our
                  agreement to grant Cenex Harvest States Cooperatives the
                  exclusive right to negotiate an acquisition of us.


<PAGE>


                                   SIGNATURES

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

                                            SPARTA FOODS, INC.

Dated:  December 20, 1999                   By:      /s/  Joel P. Bachul
                                              Jack P. Bachul, President

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

                               (Power of Attorney)

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

Signature and Title                                         Date

/s/  Joel P. Bachul                                December 20, 1999
Joel P. Bachul, President and Director
(Principal Executive Officer)

/s/  A. Merrill Ayers                              December 20, 1999
A. Merrill Ayers, Chief Financial Officer
(Principal Accounting Officer)

/s/  Larry P. Arnold                               December 20, 1999
Larry P. Arnold, Director

/s/  Thomas F. Baker                               December 20, 1999
Thomas F. Baker, Director

/s/  William J. Benzick                            December 20, 1999
William J. Benzick, Director


Edward K. Jorgensen, Director


John D. Johnson, Director

/s/  Michael J. Kozlak                             December 20, 1999
Michael J. Kozlak, Director



<PAGE>



                               SPARTA FOODS, INC.

                          EXHIBIT INDEX TO FORM 10-KSB

Exhibit
Number   Description

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

3.2      By-Laws, as amended to date. (Incorporated by reference to 3.2 to our
         Form 10-KSB for the fiscal year ended September 30, 1998).*

4.1      Form of Certificate for common stock of Sparta Foods, Inc.
         (Incorporated by reference to our Form 10-QSB for the quarter ended
         March 31, 1994.)*

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

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

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

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

10.5     Distributorship Agreement dated January 21, 1994 between Crystal Farms
         Refrigerated Distribution Company and Sparta Foods, Inc. (Incorporated
         by reference to our Amendment No. 2 on Form 10-KSB/A to the 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

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

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

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

10.9**   First Amendment dated April 1, 1999 to Salary Continuation Agreement
         dated August 1995 between us and Joel Bachul. (Incorporated by
         reference to Exhibit 10.6 to our Form 10-QSB for the quarterly period
         ended June 30, 1999).*

10.10**  Salary Continuation Agreement dated August 1995 between us and A.
         Merrill Ayers. (Incorporated by reference to Exhibit 10.40 to our Form
         10-KSB for the quarterly year ended September 30, 1996).*

10.11**  First Amendment dated April 1, 1999 to Salary Continuation Agreement
         dated August 1995 between us and A. Merrill Ayers. (Incorporated by
         reference to Exhibit 10.7 to our Form 10-QSB for the quarterly period
         ended June 30, 1999).*

10.12**  Change of Control Executive Severance Pay Agreement dated April 1, 1999
         between Company and Craig S. Cram. (Incorporated by reference to
         Exhibit 10.5 to our Form 10-QSB for the quarterly period ended June 30,
         1999).*

10.13    Distribution Agreement dated February 14, 1997 between us and Marigold
         Foods, Inc. (Incorporated by reference to Exhibit 10.45 to our Form
         10-QSB for the quarterly period ended March 31, 1997.*

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



<PAGE>




Exhibit
Number   Description

10.14    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 our Form 10-QSB for the quarterly period
         ended June 30, 1997).*

10.15    Second Amendment dated June 3, 1999 to the Industrial Building Lease
         Agreement dated September 1, 1997 between us and First Industrial, LP.
         (Incorporated by reference to Exhibit 10.3 to our Form 10-QSB for the
         quarterly period ended June 30, 1999).*

10.16    Supply Agreement dated January 14, 1999 between us and Rupari Food
         Services, Inc. (Incorporated by reference to Exhibit 10.4 to our Form
         10-QSB for the quarterly period ended June 30, 1999).*

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

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

10.19    Equipment Lease Agreement dated March 5, 1999 between us and Firstar
         Equipment Finance Corporation. (Incorporated by reference to Exhibit
         10.1 to our Form 10-QSB for the quarterly period ended March 31,
         1999).*

10.20    Revised License Agreement dated January 1, 1999 between us and Atlas
         International Food and Equipment. (Incorporated by reference to Exhibit
         10.8 to our Form 10-QSB for the quarterly period ended June 30, 1999).*

10.21    Secured Subordinated Promissory Note dated October 13, 1999 by and
         between us and Food Products Corporation. (Incorporated by reference to
         Exhibit 10.1 to our Current Report on Form 8-K dated October 13,
         1999).*

10.22    Assignment of Lease dated October 13, 1999 by and between us and Food
         Products Corporation and related Lease Agreement. (Incorporated by
         reference to Exhibit 10.2 to our Current Report on Form 8-K dated
         October 13, 1999).*

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


<PAGE>

10.23    Term Loan and Credit Agreement dated October 13, 1999 by and between us
         and Norwest Bank Minnesota, National Association. (Incorporated by
         reference to Exhibit 10.3 to our Current Report on Form 8-K dated
         October 13, 1999).*

10.24    Term Note dated October 13, 1999, issued by Sparta Foods, Inc. to
         Norwest Bank Minnesota, National Association. (Incorporated by
         reference to Exhibit 10.4 to our Current Report on Form 8-K dated
         October 13, 1999).*

10.25    Security Agreement dated October 13, 1999 by and between us and Norwest
         Bank Minnesota, National Association. (Incorporated by reference to
         Exhibit 10.5 to our Current Report on Form 8-K dated October 13,
         1999).*

11       Sparta Foods, Inc. Computation of Earnings (loss) Per Common Share.

21       Subsidiaries of Registrant. (Incorporated by reference to Exhibit 21 to
         our Form 8-K dated February 24, 1998.)*

23       Consent of independent public accountant.

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

27       Financial Data Schedule (filed in electronic format only)

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