##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended December 31, 2001



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Commission File Number 0-16251

GALAXY NUTRITIONAL FOODS, INC.
(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 25-1391475
(I.R.S. Employer
Identification No.)

|                                                                            |  |                 
|--------------------------------------------------------------------------- |  | ----------------
|2441 Viscount Row
Orlando, Florida
(Address of principal executive offices) |  | 32809
(Zip Code)

(407) 855-5500
(Registrants telephone number, including area code)

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

YES [X]   NO
[  ]

On February 11, 2002, there were 10,981,729 shares of Common Stock $.01
par value per share, outstanding.





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TABLE OF CONTENTS



|                                             |                                                                                                   |                                   |  |  |  |  |  | 
|-------------------------------------------- | ------------------------------------------------------------------------------------------------- | --------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION               
|                                             | ITEM 1. FINANCIAL STATEMENTS                                                                     
|                                             |                                                                                                   | BALANCE SHEETS                   
|                                             |                                                                                                   | STATEMENTS OF OPERATIONS         
|                                             |                                                                                                   | STATEMENT OF STOCKHOLDERS EQUITY
|                                             |                                                                                                   | STATEMENTS OF CASH FLOWS         
|                                             |                                                                                                   | NOTES TO FINANCIAL STATEMENTS    
|                                             | ITEM  2.    Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | ITEM  3.    Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION                  
|                                             | ITEM  2.    Changes in Securities and Use of Proceeds                                            
|                                             | ITEM  3.    Defaults Upon Senior Securities                                                      
|                                             | ITEM  5.    Other Information                                                                    
|                                             | ITEM  6.    Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                  
|AMENDED & LIMITED WAIVER                    
|WAIVER LETTER                               
|ALLONGE TO 2ND AMENDED & RESTATED PROM. NOTE



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##### Table of Contents



GALAXY NUTRITIONAL FOODS, INC.

Index to Form 10-Q
For Quarter Ended December 31, 2001

|           |  |                                                                                       |  |         
|---------- |  | ------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                       |  | PAGE NO.
|           |  |                                                                                       |  |         
|PART I     |  | FINANCIAL INFORMATION                                                                 |  |         
|Item 1.    |  | Financial Statements                                                                  |  |         
|           |  | Balance Sheets                                                                        |  | 3       
|           |  | Statements of Operations                                                              |  | 4       
|           |  | Statement of Stockholders Equity                                                     |  | 5       
|           |  | Statements of Cash Flows                                                              |  | 6       
|           |  | Notes to Financial Statements                                                         |  | 7-11    
|Item 2.    |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations |  | 12-17   
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 18      
|PART II    |  | OTHER INFORMATION                                                                     |  |         
|Item 2.    |  | Changes in Securities and Use of Proceeds                                             |  | 19      
|Item 3.    |  | Defaults upon Senior Securities                                                       |  | 19      
|Item 5.    |  | Other Information                                                                     |  | 20      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 21-23   
|SIGNATURES |  |                                                                                       |  | 24      





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##### Table of Contents












PART I. FINANCIAL INFORMATION
BALANCE SHEETS
GALAXY NUTRITIONAL FOODS, INC.

|                                                       |                                                                                            |                           |                            |                                      |           |              |            |             |            |            |            | 
|------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ------------------------- | -------------------------- | ------------------------------------ | --------- | ------------ | ---------- | ----------- | ---------- | ---------- | ---------- | 
|                                                       |                                                                                            |                           |                            |                                      |           | DECEMBER 31, |            | MARCH 31,  
|                                                       |                                                                                            |                           |                            |                                      |           | 2001         |            | 2001       
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           |                            |                                      |           | (Unaudited)  |            |             |            |           
|ASSETS                                                
|                                                       | CURRENT ASSETS:                                                                            |                           |                            |                                      |           |              |            |             |           
|                                                       |                                                                                            | Cash and cash equivalents |                            | $                                    | 82,409    |              |            | $           | 500        |           
|                                                       |                                                                                            | Trade receivables, net    |                            |                                      | 7,055,332 |              |            |             | 8,053,561  |           
|                                                       |                                                                                            | Inventories, net          |                            |                                      | 7,750,208 |              |            |             | 10,774,540 |           
|                                                       |                                                                                            | Other receivables         |                            |                                      | 534,781   |              |            |             | 519,624    |           
|                                                       |                                                                                            | Deferred tax asset        |                            |                                      | 532,000   |              |            |             | 532,000    |           
|                                                       |                                                                                            | Prepaid expenses          |                            |                                      | 1,193,530 |              |            |             | 1,107,100  |           
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           |                            | Total current assets                 |           |              | 17,148,260 |             |            |            | 20,987,325 | 
|                                                       | PROPERTY & EQUIPMENT, NET                                                                  |                           | 25,101,221                 |                                      |           |              | 25,303,094 |            
|                                                       | DEFERRED TAX ASSET                                                                         |                           | 1,028,000                  |                                      |           |              | 1,028,000  |            
|                                                       | OTHER ASSETS                                                                               |                           | 706,922                    |                                      |           |              | 764,707    |            
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           |                            | TOTAL                                |           | $            | 43,984,403 |             |            | $          | 48,083,126 | 
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           |                            | LIABILITIES AND
STOCKHOLDERS EQUITY |           |              |            |             |            |            |            | 
|                                                       | CURRENT LIABILITIES:                                                                       |                           |                            |                                      |           |              |            |             |           
|                                                       | Book overdrafts                                                                            |                           | $                          |                                     |           |              | $          | 446,829     |           
|                                                       | Line of credit                                                                             |                           |                            | 6,038,974                            |           |              |            | 8,776,278   |           
|                                                       | Accounts payable  trade                                                                   |                           |                            | 6,522,941                            |           |              |            | 9,456,065   |           
|                                                       | Accrued liabilities                                                                        |                           |                            | 653,565                              |           |              |            | 143,782     |           
|                                                       | Current portion of term notes payable                                                      |                           |                            | 10,013,535                           |           |              |            | 1,666,000   |           
|                                                       | Current portion of subordinated notes payable                                              |                           |                            | 3,893,655                            |           |              |            | 502,866     |           
|                                                       | Current portion of obligations under capital leases                                        |                           |                            | 177,258                              |           |              |            | 28,755      |           
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           | Total current liabilities  |                                      |           | 27,299,928   |            |             |            | 21,020,575 |           
|                                                      
|TERM NOTES PAYABLE,
less current portion               |                                                                                            |                           |                           |                                      |           |              | 9,614,499  |            
|SUBORDINATED NOTES PAYABLE                             |                                                                                            |                           |                           |                                      |           |              | 2,878,930  |            
|OBLIGATIONS UNDER CAPITAL LEASES,
less current portion |                                                                                            |                           | 530,810                    |                                      |           |              | 29,825     |            
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           | Total liabilities          |                                      |           | 27,830,738   |            |             |            | 33,543,829 |           
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|COMMITMENTS AND CONTINGENCIES                          |                                                                                            |                           |                           |                                      |           |              |           |            
|REDEEMABLE CONVERTIBLE PREFERRED STOCK                 |                                                                                            |                           | 1,723,977                  |                                      |           |              |           |            
|                                                      
|STOCKHOLDERS EQUITY:                                  |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       | Common stock                                                                               |                           |                            | 109,817                              |           |              |            | 100,176     |           
|                                                       | Additional paid-in capital                                                                 |                           |                            | 58,891,550                           |           |              |            | 51,902,100  |           
|                                                       | Accumulated deficit                                                                        |                           |                            | (31,679,018                          | )         |              |            | (24,570,318 | )         
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           | 27,322,349                 |                                      |           |              | 27,431,958 |            
|                                                       | Less: Notes receivable arising from the exercise
of stock options and sale of common stock |                           |                            | (12,772,200                          | )         |              |            | (12,772,200 | )         
|                                                       | Less: Treasury stock, 26,843, at cost                                                      |                           |                            | (120,461                             | )         |              |            | (120,461    | )         
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           | Total stockholders equity |                                      |           | 14,429,688   |            |             |            | 14,539,297 |           
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            
|                                                       |                                                                                            |                           |                            | TOTAL                                |           | $            | 43,984,403 |             |            | $          | 48,083,126 | 
|                                                       |                                                                                            |                           |                            |                                      |           |              |            |            

See accompanying notes to condensed financial statements.

3



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##### Table of Contents






GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |            |            |  
|-------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------ | ---------- | ------------------ | --------- | ----------------- | ---------- | --------- | --------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                                                               |                                                                       |                          |            | THREE MONTHS ENDED |           | NINE MONTHS ENDED
|                                                                                                               |                                                                       |                          |            | DECEMBER 31,       |           | DECEMBER 31,     
|                                                                                                               |                                                                       |                          |            |                    |           |                  
|                                                                                                               |                                                                       |                          |            | 2001               |           | 2000              |            | 2001      |           | 2000
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |     
|Net Sales                                                                                                      |                                                                       | $                        | 10,400,300 |                    |           | $                 | 11,258,310 |           |           | $    | 33,596,411 |            |            | $ | 34,729,293 |           
|Cost of Goods Sold                                                                                             |                                                                       |                          | 7,358,506  |                    |           |                   | 7,461,741  |           |           |      | 25,528,140 |            |            |   | 22,402,602 |           
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|                                                                                                               | Gross margin                                                          |                          |            | 3,041,794          |           |                   |            | 3,796,569 |           |      |            | 8,068,271  |            |   |            | 12,326,691 |           
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Operating Expenses:                                                                                            |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|                                                                                                               | Selling                                                               |                          |            | 2,058,166          |           |                   |            | 3,687,567 |           |      |            | 5,622,540  |            |   |            | 8,360,800  |           
|                                                                                                               | Delivery                                                              |                          |            | 595,162            |           |                   |            | 596,164   |           |      |            | 1,807,783  |            |   |            | 1,876,215  |           
|                                                                                                               | Non-cash compensation
        related to options
        and warrants |                          | (1,563,086 | )                  |           |                   |           |           |           |      | 2,058,057  |            |            |   |           |           
|                                                                                                               | General and administrative                                            |                          |            | 922,540            |           |                   |            | 891,756   |           |      |            | 3,390,101  |            |   |            | 2,299,827  |           
|                                                                                                               | Research and development                                              |                          |            | 43,074             |           |                   |            | 71,084    |           |      |            | 140,930    |            |   |            | 195,395    |           
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|                                                                                                               |                                                                       | Total operating expenses |            |                    | 2,055,856 |                   |            |           | 5,246,571 |      |            |            | 13,019,411 |   |            |            | 12,732,237 |  
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Income (Loss) from Operations                                                                                  |                                                                       |                          | 985,938    |                    |           |                   | (1,450,002 | )         |           |      | (4,951,140 | )          |            |   | (405,546   | )         
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Other Income (Expense):                                                                                        |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|                                                                                                               | Interest expense                                                      |                          |            | (876,472           | )         |                   |            | (283,981  | )         |      |            | (2,201,982 | )          |   |            | (897,620   | )         
|                                                                                                               | Other income (expense)                                                |                          |            | 40,528             |           |                   |            | 33,604    |           |      |            | 44,422     |            |   |            | 48,592     |           
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|                                                                                                               |                                                                       | Total                    |            |                    | (835,944  | )                 |            |           | (250,377  | )    |            |            | (2,157,560 | ) |            |            | (849,028   | )
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Net Income (Loss) Before Income Tax Benefit                                                                    |                                                                       |                          | 149,994    |                    |           |                   | (1,700,379 | )         |           |      | (7,108,700 | )          |            |   | (1,254,574 | )         
|Income Tax Benefit                                                                                             |                                                                       |                          |           |                    |           |                   |           |           |           |      |           |            |            |   | 240,000    |           
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Income (Loss) Before Cumulative Effect
Of Change in Accounting Policy                                          |                                                                       |                          | 149,994    |                    |           |                   | (1,700,379 | )         |           |      | (7,108,700 | )          |            |   | (1,014,574 | )         
|Cumulative Effect of Change in
Accounting Policy                                                               |                                                                       |                          |           |                    |           |                   | (786,429   | )         |           |      |           |            |            |   | (786,429   | )         
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|NET INCOME (LOSS)                                                                                              |                                                                       |                          | 149,994    |                    |           |                   | (2,486,808 | )         |           |      | (7,108,700 | )          |            |   | (1,801,003 | )         
|                                                                                                              
|Preferred Stock Dividends                                                                                      |                                                                       |                          | 331,647    |                    |           |                   |           |           |           |      | 1,533,538  |            |            |   |           |           
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Net Income (Loss) Available to
Common Shareholders                                                             |                                                                       | $                        | (181,653   | )                  |           | $                 | (2,486,808 | )         |           | $    | (8,642,238 | )          |            | $ | 1,801,003  | )         
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Basic and Diluted Net Earnings (Loss) Per
Common Share Before Cumulative Effect
Of Change in Accounting Policy |                                                                       | $                        | (0.02      | )                  |           | $                 | (0.18      | )         |           | $    | (0.84      | )          |            | $ | (0.11      | )         
|Cumulative Effect of Change in Accounting
Policy                                                               |                                                                       |                          | 0.00       |                    |           |                   | (0.09      | )         |           |      | 0.00       |            |            |   | (0.09      | )         
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Basic and Diluted Net Earnings (Loss)
Per Common Share                                                         |                                                                       | $                        | (0.02      | )                  |           | $                 | (0.27      | )         |           | $    | (0.84      | )          |            | $ | (0.20      | )         
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           
|Weighted Average Shares Outstanding -
Basic and Diluted                                                        |                                                                       |                          | 10,750,790 |                    |           |                   | 9,211,102  |           |           |      | 10,273,538 |            |            |   | 9,185,734  |           
|                                                                                                               |                                                                       |                          |            |                    |           |                   |            |           |           |      |            |            |            |   |            |           

See accompanying notes to condensed financial statements.

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##### Table of Contents






GALAXY NUTRITIONAL FOODS, INC.
STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)

|                                                                            |  |              |            |           |            |                 |             |         |            |       |            |       |                  |       |             |   |  |   |             |   |  |   |          |   |  |   |            |  
|--------------------------------------------------------------------------- |  | ------------ | ---------- | --------- | ---------- | --------------- | ----------- | ------- | ---------- | ----- | ---------- | ----- | ---------------- | ----- | ----------- | - |  | - | ----------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                            |  | Common Stock |            |           |            |                 |             |         |            |       |            |       | Notes Receivable |       |             |   |  |   |             |   |  |   |          |   | 
|                                                                            |  |              |            |           | Additional |                 | Accumulated |         | for Common |       | Treasury   |       |                  |       |             |   |  |   |            
|                                                                            |  | Shares       |            | Par Value |            | Paid-In Capital |             | Deficit |            | Stock |            | Stock |                  | Total
|                                                                            |  |              |            |           |            |                 |             |         |            |       |            |       |                  |      
|Balance at March 31, 2001                                                   |  |              | 10,017,612 |           |            | $               | 100,176     |         |            | $     | 51,902,100 |       |                  | $     | (24,570,318 | ) |  | $ | (12,772,200 | ) |  | $ | (120,461 | ) |  | $ | 14,539,297 |  
|Exercise of options                                                         |  |              | 4,143      |           |            |                 | 41          |         |            |       | 19,480     |       |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | 19,521     |  
|Exercise of warrants                                                        |  |              | 373,625    |           |            |                 | 3,737       |         |            |       | 985,549    |       |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | 989,286    |  
|Issuance of common stock                                                    |  |              | 582,648    |           |            |                 | 5,826       |         |            |       | 2,994,774  |       |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | 3,000,600  |  
|Issuance of common stock
under employee stock
purchase plan                 |  |              | 3,701      |           |            |                 | 37          |         |            |       | 17,108     |       |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | 17,145     |  
|Fair value of consulting warrants                                           |  |              |           |           |            |                 |            |         |            |       | 331,200    |       |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | 331,200    |  
|Non-cash compensation related
to options under non-recourse
note receivable |  |              |           |           |            |                 |            |         |            |       | 1,726,857  |       |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | 1,726,857  |  
|Dividends on preferred stock                                                |  |              |           |           |            |                 |            |         |            |       | (262,500   | )     |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | (262,500   | )
|Discount on preferred stock                                                 |  |              |           |           |            |                 |            |         |            |       | 2,020,734  |       |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | 2,020,734  |  
|Accretion of discount on
preferred stock                                    |  |              |           |           |            |                 |            |         |            |       | (843,752   | )     |                  |       |            |   |  |   |            |   |  |   |         |   |  |   | (843,752   | )
|Net loss                                                                    |  |              |           |           |            |                 |            |         |            |       |           |       |                  |       | (7,108,700  | ) |  |   |            |   |  |   |         |   |  |   | (7,108,700 | )
|                                                                            |  |              |            |           |            |                 |             |         |            |       |            |       |                  |       |             |   |  |   |             |   |  |   |          |   |  |   |            |  
|Balance at December 31, 2001                                                |  |              | 10,981,729 |           |            | $               | 109,817     |         |            | $     | 58,891,550 |       |                  | $     | (31,679,018 | ) |  | $ | (12,772,200 | ) |  | $ | (120,461 | ) |  | $ | 14,429,688 |  
|                                                                            |  |              |            |           |            |                 |             |         |            |       |            |       |                  |       |             |   |  |   |             |   |  |   |          |   |  |   |            |  

See accompanying notes to condensed financial statements.

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GALAXY NUTRITIONAL FOODS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |      |            |            |            |  
|---------------------------------------------------- | ----------------------------------------------------------------------------- | ---------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------- | --------- | ----------------- | ---------- | ---- | ---------- | ---------- | ---------- | -
|                                                     |                                                                               |                                    |                                                                                             |                            |           | NINE MONTHS ENDED
|                                                     |                                                                               |                                    |                                                                                             |                            |           | DECEMBER 31,     
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                  
|                                                     |                                                                               |                                    |                                                                                             |                            |           | 2001              |            | 2000
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|                                                     | CASH FLOWS USED IN OPERATING ACTIVITIES:                                      |                                    |                                                                                             |                            |           |                   |            |      |           
|                                                     |                                                                               |                                    |                                                                                             | Net Income (Loss)          |           | $                 | (7,108,700 | )    |            | $          | (1,801,003 | )
|                                                     | ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH USED IN OPERATING ACTIVITIES: |                                    |                                                                                             |                            |           |                   |            |      |           
|                                                     |                                                                               |                                    | Depreciation expense                                                                        |                            |           | 1,551,983         |            |      |            | 1,073,702  |           
|                                                     |                                                                               |                                    | Amortization of debt discount                                                               |                            |           | 511,859           |            |      |            | 118,035    |           
|                                                     |                                                                               |                                    | Cumulative effect of change in accounting policy                                            |                            |           |                  |            |      |            | 786,429    |           
|                                                     |                                                                               |                                    | Provision for doubtful accounts                                                             |                            |           | 425,000           |            |      |            |           |           
|                                                     |                                                                               |                                    | Consulting and director services paid in exchange
for issuance of common stock and warrants |                            |           | 343,388           |            |      |            | 104,843    |           
|                                                     |                                                                               |                                    | Deferred tax benefit                                                                        |                            |           |                  |            |      |            | (240,000   | )         
|                                                     |                                                                               |                                    | Non-cash compensation related to options under
non-recourse note receivable                 |                            |           | 1,726,857         |            |      |            |           |           
|                                                     |                                                                               |                                    | (Increase) decrease in:                                                                     |                            |           |                   |            |      |            |            |           
|                                                     |                                                                               |                                    |                                                                                             | Trade receivables          |           |                   | 573,229    |      |            |            | (139,472   | )
|                                                     |                                                                               |                                    |                                                                                             | Other receivables          |           |                   | (15,157    | )    |            |            | (158,602   | )
|                                                     |                                                                               |                                    |                                                                                             | Inventories                |           |                   | 3,024,332  |      |            |            | (3,391,335 | )
|                                                     |                                                                               |                                    |                                                                                             | Prepaid expenses and other |           |                   | 148,453    |      |            |            | 40,443     |  
|                                                     |                                                                               |                                    | Increase (decrease) in:                                                                     |                            |           |                   |            |      |            |            |           
|                                                     |                                                                               |                                    |                                                                                             | Accounts payable           |           |                   | (2,933,124 | )    |            |            | 1,761,585  |  
|                                                     |                                                                               |                                    |                                                                                             | Accrued liabilities        |           |                   | 247,283    |      |            |            | (5,833     | )
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|NET CASH USED IN OPERATING ACTIVITIES:               |                                                                               |                                    | (1,504,597                                                                                  | )                          |           |                   | (1,851,208 | )   
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|CASH FLOWS USED IN INVESTING ACTIVITIES:             |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|                                                     |                                                                               |                                    | Purchase of property and equipment                                                          |                            |           | (565,110          | )          |      |            | (9,303,168 | )         
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|                                                     |                                                                               |                                    | Net borrowings (payments) on line of credit                                                 |                            |           | (2,737,304        | )          |      |            | 2,270,704  |           
|                                                     |                                                                               |                                    | Decrease in book overdrafts                                                                 |                            |           | (446,829          | )          |      |            | (811,309   | )         
|                                                     |                                                                               |                                    | Net borrowings (payments) on notes payable                                                  |                            |           | (1,266,964        | )          |      |            | 7,473,462  |           
|                                                     |                                                                               |                                    | Principal payments on capital lease obligations                                             |                            |           | (135,512          | )          |      |            | (24,805    | )         
|                                                     |                                                                               |                                    | Proceeds from issuance of common stock                                                      |                            |           | 3,017,745         |            |      |            | 44,974     |           
|                                                     |                                                                               |                                    | Proceeds from exercise of common stock options                                              |                            |           | 19,521            |            |      |            |           |           
|                                                     |                                                                               |                                    | Proceeds from exercise of common stock warrants, net of costs                               |                            |           | 800,000           |            |      |            | 2,321,928  |           
|                                                     |                                                                               |                                    | Proceeds from issuance of preferred stock, net of costs                                     |                            |           | 2,900,959         |            |      |            |           |           
|                                                     |                                                                               |                                    | Purchase of treasury stock                                                                  |                            |           |                  |            |      |            | (120,461   | )         
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|                                                     |                                                                               | NET CASH FROM FINANCING ACTIVITIES |                                                                                             |                            | 2,151,616 |                   |            |      | 11,154,493 |           
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                               |                                    | 81,909                                                                                      |                            |           |                   | 117        |     
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD       |                                                                               |                                    | 500                                                                                         |                            |           |                   | 383        |     
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |     
|CASH AND CASH EQUIVALENTS, END OF PERIOD             |                                                                               | $                                  | 82,409                                                                                      |                            |           | $                 | 500        |     
|                                                     |                                                                               |                                    |                                                                                             |                            |           |                   |            |     

See accompanying notes to condensed financial statements.

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GALAXY NUTRITIONAL FOODS, INC.
NOTES TO FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

The unaudited condensed consolidated financial statements have been prepared by
the Company, under the rules and regulations of the Securities and Exchange
Commission. The accompanying condensed consolidated financial statements
contain all normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of such financial statements.
Certain information and disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted under such rules and regulations although the
Company believes that the disclosures are adequate to make the information
presented not misleading. The year-end balance sheet data was derived from the
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America.
These unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and notes included on Form 10-K/A for
the fiscal year ended March 31,2001. Interim results of operations for the
nine-month period ended December 31, 2001 may not necessarily be indicative of
the results to be expected for the full year.

Net Income (Loss) per Common Share

Net income (loss) per common share is computed by dividing net income or loss
by the weighted average shares outstanding. Diluted income (loss) per share is
computed on the basis of weighted average shares outstanding plus
potential common shares which would arise from the exercise of stock options,
warrants and conversion of the Series A preferred stock.

Options, warrants and conversion of the Series A preferred stock for 3,254,701
and 3,242,558 shares have not been included in the computation of diluted net
earnings (loss) per common share for the three and nine months ended December
31, 2001, as their effect would be antidilutive. Options and warrants for
1,905,214 shares have not been included in the computation of diluted net
earnings (loss) per common share for the three and nine months ended December
31, 2000, as their effect would be antidilutive.

Use of Estimates

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

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 Business
Combinations, and SFAS No. 142 Goodwill and Other Intangible Assets, which
change the accounting for business combinations and goodwill. SFAS No. 141
requires that the purchase method of accounting be used for business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method will be prohibited. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, will
therefore cease upon adoption of the Statement, which for the Company will be
January 1, 2002. The Company is currently evaluating the impact of SFAS No.
141 and SFAS No. 142 on its financial statements.

In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion No. 30,
Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, it retains the fundamental provisions of those
Statements. SFAS No. 144 becomes effective for fiscal years beginning after
December 15, 2001. The Company is currently evaluating the impact of SFAS No.
144 on its financial statements.

Reclassifications

Certain items in the financial statements of the prior period have been
reclassified to conform to current period presentation.

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Segment Information

The Company does not identify separate operating segments for management
reporting purposes. The results of operations are the basis on which
management evaluates operations and makes business decisions.

(2) Inventories

Inventories are summarized as follows:

|                  |  |              |           |           |  |   |            | 
|----------------- |  | ------------ | --------- | --------- |  | - | ---------- | 
|                  |  | DECEMBER 31, |           | MARCH 31,
|                  |  | 2001         |           | 2001     
|                  |  |              |           |          
|                  |  | (Unaudited)  |           |           |  |  
|Raw materials     |  | $            | 3,297,974 |           |  | $ | 4,314,685  | 
|Finished goods    |  |              | 4,705,234 |           |  |   | 6,459,855  | 
|Inventory Reserve |  |              | (253,000  | )         |  |   |           | 
|                  |  |              |           |           |  |   |            | 
|Total             |  | $            | 7,750,208 |           |  | $ | 10,774,540 | 
|                  |  |              |           |           |  |   |            | 

(3) Line of Credit and Notes Payable

In November 1996, the Company obtained a line of credit with a maximum
principal amount of $2 million from FINOVA Capital Corporation, the proceeds
of which were used for working capital and expansion purposes. Over the
years, the Company received several increases to the line to its current
level of $13 million. Interest is payable monthly on the outstanding draws
on the line of credit at a rate of prime plus two percent (6.75% at December
31, 2001). The interest will increase to prime plus four percent in February
2002. The line of credit expires on October 15, 2002 at which time the
entire outstanding principal amount of the line of credit, and all accrued
but unpaid interest thereon, is due and payable in full. As of December 31,
2001, the Company had an outstanding balance of $6,038,974 under this line of
credit.

On September 30, 1999, the Company secured a $4 million subordinated note
payable from FINOVA Mezzanine to finance working capital and capital
improvement needs of the Company. The subordinated note is payable interest
only monthly with a principal payment in one lump sum upon maturity on
October 15, 2002 and bears interest at an annual rate of 13.5%. Effective
in February 2002, the interest rate will increase to 15.5%. In connection
with the subordinated note, the Company issued a warrant to purchase up to
915,000 shares of common stock to the subordinated note holder at an
exercise price of $3.41 per share which represented 80% of the fair value of
the Companys stock on the date the warrant was issued. The warrant was
valued at $786,900 which was recorded as a debt discount and is being
amortized to interest expense from the date of issuance of the note to the
October 15, 2002 maturity date of the note.

On December 26, 2000, the subordinated note holder exercised a portion of
the warrant to purchase 815,000 shares of common stock at a price of $3.41
per share. In connection with this transaction, the Company agreed to
reimburse the note holder for brokerage commission and other expenses
incurred by the note holder for the sale of the 815,000 shares to the
public, which were sold at a price of $3.25 per share. In addition, the
Company agreed to guarantee the price ($4.41 per share) at which the shares
would be sold to the public. The difference between the actual price
received by the note holder ($3.25) and the guaranteed price ($4.41) was
$945,400, which was recorded as a debt discount and is being amortized over
the remaining term of the subordinated note. The consideration for the
$815,000 difference between the exercise price of $3.41 and the guaranteed
price of $4.41 on 815,000 shares was funded through the issuance of an
additional subordinated term note bearing interest at an annual rate of
13.5% and was due in December 2001. This note was extended and is being
paid down by $30,000 per business day through February 28, 2002. As of
December 31, 2001, the Company had an outstanding balance of $3,893,655
which includes principal of $4,815,000 less $921,345 of debt discount
remaining to be amortized.

The line of credit and subordinated loans described above contain certain
financial and operating covenants. For the fiscal quarter ended December 31,
2001, the Company was in violation of the minimum operational cash flow to
contractual debt service ratio, the funded debt to EBITDA ratio, and the
capital expenditure limitation. On February 13, 2002, the Company received a
waiver from FINOVA Capital and FINOVA Mezzanine pursuant to which they waived
the duty to comply with such financial covenants for the fiscal quarter ended
December 31, 2001.

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In March 2000, the Company obtained a $10 million term loan from SouthTrust
Bank, N.A. This note bears interest at prime rate (4.75% at December 31,
2001) and is due in monthly principal installments of $93,000 plus interest.
The note matures in March 2005. The balance outstanding on this note as of
December 31, 2001 was $8,963,535.

In October 2000, the Company obtained a $1.5 million short-term bridge loan
from SouthTrust Bank, N.A. This note bears interest at prime rate (4.75% at
December 31, 2001) and is due in monthly principal installments of $50,000
plus interest. The note matures in October 2003. The balance outstanding
on this note as of December 31, 2001 was $1,050,000.

The Company believes that it will again fail to
meet certain financial and other covenants on the FINOVA line of
credit and FINOVA subordinated loan for the fiscal quarters to end on
March 31, 2002 and thereafter. In the event the Company cannot change
the covenants or obtain waivers for these covenant failures, FINOVA
Capital and FINOVA Mezzanine could exercise their respective rights
under their loan documents to, among other things, declare a default
under the loans, accelerate their indebtedness such that it would
become immediately due and payable, and pursue foreclosure on the
Companys assets which are pledged as collateral for such loans.

In the event that FINOVA exercises their right to
accelerate their indebtedness or pursue foreclosure, then SouthTrust
has the ability to do the same based on a cross-default provision in
their loan agreement. Since the Company does not have a waiver from
FINOVA for possible future covenant violations, the entire balance of
the SouthTrust notes as of December 31, 2001 of $10,013,535 was
classified as current in accordance with EITF 86-30 and Financial
Accounting Standard No. 78. The Company believes that this situation
is highly unlikely and the FINOVA and SouthTrust debt will be paid in
accordance with the short and long-term payment schedule detailed
above.

(4) Supplemental Cash Flow Information

For purposes of the statement of cash flows, all highly liquid investments
with a maturity date of three months or less are considered to be cash
equivalents.

|                                                                                                                |  |             |           |             |  |   |           | 
|--------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | ----------- |  | - | --------- | 
|For the nine months ended December 31,                                                                          |  | 2001        |           | 2000       
|                                                                                                                |  |             |           |            
|                                                                                                                |  | (unaudited) |           | (unaudited)
|Noncash financing and investing activities:                                                                     |  |             |           |             |  |   |           | 
|Acquisition of assets through capital leases                                                                    |  | $           | 785,000   |             |  | $ |          | 
|Preferred dividends recorded for preferred
shareholder waiver received in exchange for
issuance of common stock |  | $           | 359,400   |             |  | $ |          | 
|Accrued preferred stock dividends and related
beneficial conversion feature                                     |  | $           | 330,600   |             |  | $ |          | 
|Discount related to preferred stock                                                                             |  | $           | 2,020,734 |             |  | $ |          | 
|Accretion of discount on preferred stock                                                                        |  | $           | 843,752   |             |  | $ |          | 
|Cash paid for:                                                                                                  |  |             |           |             |  |   |           | 
|Interest                                                                                                        |  | $           | 1,703,121 |             |  | $ | 1,491,326 | 

(5) Income Taxes

The Company has a deferred tax asset as of December 31, 2001 of $1,560,000.
The deferred tax asset represents mainly tax operating loss carryforwards
incurred in prior years, which are expected to be realized in the future.
Based upon an assessment of all available evidence, management believes that
realization of the deferred tax asset is more likely than not. In the event
that realization of the remaining tax asset is considered more likely than
not in the future, a portion of the related benefit will be allocated to the
cumulative effect of a change in accounting policy recorded in the third
quarter of fiscal 2001.

(6) Change in Accounting Policy

The Company changed its accounting policy in the third quarter of fiscal 2001
with regards to slotting fees and certain advertising costs. The effect of
this accounting change is to adopt this policy as of the beginning of fiscal
2001 (April 1, 2000). Previously, slotting fees and certain advertising
costs were capitalized and amortized over the shorter of the expected period
of benefit or one year. The Company changed this accounting policy to
expense these costs as incurred. This change was made because there has been
a change in the expected period of benefit related to these costs. During
fiscal 2001, the Companys slotting fees and advertising costs increased
significantly in order for the Company to maintain current relationships with
brokers and customers as opposed to generation and stimulation of future
sales. As a result, the Company believes these expenses are more
appropriately period expenses, rather than those that would benefit future
periods, and should be expensed as incurred. The cumulative effect of this
change in accounting policy recorded in the third quarter of fiscal 2001 was
$786,429.

(7) Capital Stock

On April 6, 2001, in accordance with an exemption from registration under
Regulation D promulgated under the Securities Act of 1933, as amended, the
Company received proceeds of approximately $3,082,000 less costs of $181,041
for the issuance of 72,646 shares of the Companys Series A convertible
preferred stock and warrants to purchase shares of the Companys common
stock. The shares are subject to certain designations, preferences and

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rights, including the right to convert each preferred share into ten shares
of common stock, the right to a ten percent stock dividend after one year of
issuance payable in shares of preferred stock, and an eight percent stock
dividend for the subsequent three years thereafter payable in either
cash or shares of preferred stock. The per share conversion price is the lower of
(x) $5.10, (y) the market price on the original issue date or (z) 95% of the
average of the two lowest closing bid prices on the principal market of the
common stock out of the fifteen trading days prior to conversion. The
liquidation preference of each preferred share is $48.18 plus accrued
dividends ($51.79 at December 31, 2001).

The warrants include initial warrants of 120,000 shares, redemption warrants
of 120,000 shares, and 30% warrants. The initial warrants are exercisable
for a period of five years at an exercise price equal to the lower of (a)
$5.30 or (b) a price equal to 110% of the average of the closing bid price of
the common stock for the 30 trading days ending on January 1, 2002. The
redemption warrants are exercisable upon redemption for a period of five
years at an exercise price equal to the lower of (a) 110% of the market price
of the common stock at the redemption date or (b) 110% of the average closing
bid price of the common stock for 30 trading days ending on the 270th day
following the redemption date. The 30% warrants shall only become exercisable
if at any time after February 15, 2002 that both (a) all of
the preferred shares have not been redeemed in full and (b) the Registration Statement
covering the resale of all of the registerable securities is not then
effective. The number of shares underlying the 30% warrants is determined by
dividing (x) 30% of the preferred shares originally purchased by the investor
by (y) the average closing bid price of the Companys common stock during the
five day period ending on February 15, 2002.

The holders of the preferred stock have the right to require the Company to
redeem their shares of preferred stock on April 6, 2005 or upon occurrence of
other events, as defined. The redemption price shall be paid in cash at a
price per preferred share equal to the greater of (a) 100% of the preference
amount ($48.18 plus accrued dividends) or (b) an amount equal to the product
of (1) the number of shares of common stock then issuable to the holders upon
conversion of the preferred stock being redeemed and (2) the market price on
the date of redemption.

In connection with the issuance of the preferred stock and warrants, the
Company has recorded accrued dividends of $262,500 for the 10% preferred
stock dividend and $68,100 of dividends related to the beneficial conversion
feature on the accrued dividends to be paid with preferred stock. The
Company recorded a discount on preferred stock of $2,020,734 related to the
beneficial conversion feature ($1,466,334), the fair value of the initial
warrants ($277,200) and redemption warrants ($277,200) and the fair value of
the mandatory redemption price. The excess of the redemption value of
$5,015,199 over the initial carrying value of $515,187 was $4,500,012 and is
being accreted and recorded as dividends over the redemption period (48
months) using the straight line method, which approximates the effective
interest method. For the nine months ended December 31, 2001, the Company
recorded $843,752 of dividends related to the accretion of preferred stock.

On September 25, 2001, the Company issued an investor, in accordance with an
exemption from registration under Regulation D promulgated under the
Securities Act of 1933, as amended, (i) an aggregate of 522,648 shares of
common stock, $0.01 par value, and (ii) warrants to purchase 140,000 shares
of common stock, $0.01 par value, at an aggregate sales price of
approximately $3,000,000. Registration of the shares was completed by
October 25, 2001.

In conjunction with the Series A Purchase Agreement, the Company agreed that
it would not sell or enter into any agreement to sell any of its securities
or incur any indebtedness outside the ordinary course of business for the
time period beginning April 6, 2001 and continuing until three months after
the date the investors shares are effectively registered (Anti-Financing
Right). To induce the investors to waive their Anti-Financing Right to
allow the Company to proceed with transactions contemplated by the September
25, 2001 common stock issuance, the Company issued 30,000 shares of common
stock to each of the investors at a per share purchase price of par value
($.01). The difference between the total purchase price ($600) and the market
price of the stock on the closing date of ($360,000) is considered preferred
stock dividends. This dividend amount of $359,400 is included in the
computation of earnings per common share.

(8) Subsequent Events

Pursuant to certain Securities Purchase Agreements dated January 17, 2002,
the Company sold 170,365 shares of its common stock for $4.744 (95% of an
average market price) and issued warrants of 42,592 shares exercisable at
$5.744 per share. The Company received proceeds of $808,212 related to the
sale of these common shares. In addition, the Company received proceeds of
$1,270,800 from the exercise of warrants.

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GALAXY NUTRITIONAL FOODS, INC.




ITEM  2.    Managements Discussion and
Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this report.

The following discussion contains certain forward-looking statements, within
the meaning of the safe-harbor provisions of the Private Securities Reform
Act of 1995, the attainment of which involves various risks and uncertainties.
Forward-looking statements may be identified by the use of forward-looking
terminology such as may, will, expect, believe, estimate,
anticipate, continue, or similar terms, variations of these terms or the
negative of those terms. Our actual results may differ materially from those
described in these forward-looking statements due to among other factors,
competition in our product markets, dependence on suppliers, our manufacturing
experience, and production delays or inefficiencies.

Galaxy Nutritional Foods, Inc. (the Company) is principally engaged in the
development, manufacturing and marketing of a variety of healthy cheese and
dairy related products, as well as other cheese alternatives. These healthy
cheese and dairy related products include low or no fat, low or no cholesterol
and lactose-free varieties. These products are sold throughout the United
States and internationally to customers in the retail, food service and
industrial markets. Our headquarters and manufacturing facilities are located
in Orlando, Florida.

Results of Operations

During fiscal year 2000, the Company experienced increasing demand for its
products but was unable to fill all of the orders it received due, in part, to
a lack of production capacity. During the latter part of fiscal 2001 and the
beginning of fiscal 2002, we significantly increased our production capacity by
purchasing and installing additional production equipment for six new
production lines that included slice lines, a new chunk cheese line, a cup
line, a string cheese line, and a shred line. This equipment will enable us to
produce new products, and to improve the quality, and increase the production,
of existing products. The installation of the equipment was delayed
significantly due to late shipments by manufacturers and problems with
configuring the machines to meet the manufacturing needs of our unique line of
products, but was completed by September 2001. Because of the delays in the
installation of the equipment, we experienced excess overhead costs and
downtime during the first and second quarter of fiscal 2002, which resulted in
increased costs and reduced cash flows for that period. Additionally,
although a substantial portion of the purchase price and installation costs
incurred in connection with the new equipment was financed through a loan
obtained from SouthTrust Bank, N.A., we used nearly all of the excess cash that
we had at the time to purchase and install the new equipment. As a result of
the large cash outlays related to this expansion along with the delays in new
product shipment, we experienced and are continuing to experience shortfalls in
cash that has affected nearly every aspect of our operations.

Net Saleswere $10,400,300 in the three months ended December 31, 2001,
compared to net sales of $11,258,310 for the three months ended December 31,
2000, a decrease of 8%. Net sales were $33,596,411 for the nine months ended
December 31, 2001 compared to $34,729,293 for the same period one year ago, a
decrease of 3%.

Due to the significant reduction in cash flows in fiscal 2002 as described
above, we experienced an inability to purchase raw materials, which resulted in
an inability to fill orders and created short shipments to customers. The
short shipments to customers forced us to temporarily reduce product prices to
maintain our shelf space in supermarkets. While demand for our products
continues to increase rapidly, sales growth was maintained at lower levels until we
obtained the cash required to meet these demands. We believe that we would
have shown an increase in sales had we not experienced cash shortages,
production delays, and shipping shortages.

Cost of Goods Soldwere $7,358,506 representing 71% of net sales for the
quarter ended December 31, 2001, compared with $7,461,741 or 66% of net sales
for the same period ended December 31, 2000. Cost of goods sold were
$25,528,140 for the nine months ended December 31, 2001, representing 76% of
net sales as compared to $22,402,602 or 65% of net sales for the nine months
ended December 31, 2000.

The increase was primarily the result of four key factors: (a) problems and
delays associated with the construction of new production lines, (b) an
increase in raw materials costs, (c) an inability to negotiate beneficial
vendor terms, and (d) a

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change in production focus. First, the installation of our new production
equipment was delayed significantly due to late shipments by manufacturers and
problems with configuring the machines to meet the manufacturing needs of our
unique line of products. These delays caused excess overhead costs and
downtime during the first and second quarter of fiscal 2002. Second, due to a
worldwide shortage of our primary raw ingredient, casein, resulting from the
outbreak of Mad Cow and foot and mouth disease epidemics in Europe, the
price of casein increased by approximately 26% in the nine months ended
December 31, 2001 compared to the same period one year ago. Third, due to our
cash shortage resulting from our use of cash to purchase and install new
production equipment, and delays in implementing the new equipment, our
purchasing department was unable to purchase our raw materials in sufficient
quantities or to take advantage of beneficial terms for cash payment that has,
in the past, created optimum pricing for our raw materials and
supplies helped us reduce our costs. Finally, late in the second quarter of fiscal 2002,
we changed our production focus by scaling back our product mix to 200 core
items that made up nearly 98% of our sales. As a result of the change in
focus, we have written off $347,000 and provided for a $253,000 reserve for
potential obsolete and slow moving inventory. In response to the additional
efficiencies that the new equipment is now providing, we substantially
decreased the number of production personnel in January 2002.
Therefore, we expect to see reduced production costs in the future.

Sellingexpenses were $2,058,166 for the quarter ended December 31, 2001,
compared with $3,687,567 for the same period ended December 31, 2000, a
decrease of 44%. For the nine months ended December 31, 2001, selling expenses
were $5,622,540 as compared to $8,360,800 for the same period one year ago, a
decrease of 33%. The decrease in expenses is due to a reduction in advertising
and promotional expenses during fiscal 2002. During the nine months ended
December 31, 2000, we were involved in an extensive advertising campaign to
promote our flagship Veggie product line. This campaign included print,
television, and radio advertising and focuses on key markets throughout the
country where distribution of our products is widespread. We also incurred
increased slotting fees to expand our shelf space in retail stores during the
nine months ended December 2000. The advertising fees decreased by nearly
$1.7 million and slotting fees decreased by nearly $1.5 million during the nine
months ended December 31, 2001 as compared to the nine months ended December
31, 2000.

Deliveryexpenses were $595,162 for the quarter ended December 31, 2001,
compared with $596,164 for the same period ended December 31, 2000. Delivery
expenses were $1,807,783 for the nine months ended December 31, 2001 compared
to $1,876,215 for the nine months ended December 31, 2000, a decrease of 4%.
The decrease in delivery costs is a result of bringing the scheduling and
coordinating of shipments in-house during the nine months ended December 31,
2001.

Non-cash compensation related to stock options and warrantsdecreased
$1,563,086 for the three months and increased $2,058,057 for the nine months
ended December 31, 2001 as compared to the same periods one year ago. The
change is the result of the adoption of Interpretation No. 44 (FIN 44). The
Financial Accounting Standards Board issued FIN 44, which clarifies the
application of APB Opinion 25 relating to the accounting consequences of
various modifications to fixed stock options. FIN 44 covers specific events
that occurred after December 15, 1998 and was effective as of July 2, 2000. FIN
44 clarified that when an option is repriced, it is treated as a variable
option and is marked to market each quarter. The adoption of FIN 44 required
us to change our accounting related to the note receivable from our president.
The underlying options were required to be treated as variable due to the
exchange of interest bearing recourse notes with a non-interest bearing
non-recourse note. Accordingly, any differences between the exercise price of
the options and the market price of our common stock is recorded as
compensation expense at each reporting period. The market value of our stock
declined from $6.00 at September 30, 2001 to $5.35 at December 31, 2001 and we
recorded a $1,894,286 decrease in the compensation related to this decline in
value. Additionally, in the third quarter ended December 31, 2001, we recorded a $331,200
expense related to the fair value of warrants issued for future consulting
services.

General and Administrativeexpenses were $922,540 for the quarter ended
December 31, 2001, compared with $891,756 for the same period ended December
31, 2000, a 3% increase. General and administrative expenses increased 47% to
$3,390,101 for the nine months ended December 31, 2001 compared to $2,299,827
for the same period one year ago. During the nine months ended December 31,
2001, we increased the reserve for doubtful accounts by $425,000. Management
has begun an intense credit and collection effort on its significantly
outstanding deductions by customers and hopes to recover some of this in the
future. In addition, we saw an increase in legal and auditing fees by nearly
$500,000 in relation to the multiple stock transactions and consulting services
required during the 2002 fiscal year.

Research and Developmentexpenses were $43,074 for the quarter ended December
31, 2001, compared with $71,084 for the quarter ended December 31, 2000, a 39%
decrease. These expenses were $140,930 for the nine months ended

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December 31, 2001 as compared to $195,395 for the same period one year ago, a
28% decrease. This decrease in expenses is mainly the result of the completion
of several new formulas in fiscal 2001.

Interestexpense increased to $876,472 for the quarter ended December 31, 2001
from $283,981 for the quarter ended December 31, 2000, a 209% increase.
Interest expense was $2,201,982 for the nine months ended December 31, 2001
compared to $897,620 for the same period in fiscal 2001, an increase of 145%.
One of the reasons for the increase is that approximately $360,000 and $665,000
of interest for the three and nine months ended December 31, 2000,
respectively, were capitalized to construction in progress. No interest was
capitalized during the nine months ended December 31, 2001. In addition, the
increase is also attributable to additional borrowings and increased interest
rates under our line of credit from FINOVA Capital Corporation, as
well as an
additional subordinated loan we obtained from FINOVA Mezzanine Capital, Inc.
and a term loan that we obtained from SouthTrust N.A.

On September 30, 1999, we obtained a $4,000,000 subordinated loan from FINOVA
Mezzanine. In December 2000, we obtained an additional $815,000 subordinated
loan from FINOVA Mezzanine in connection with a price guarantee we gave to
FINOVA Mezzanine upon the exercise of their warrants to purchase the Companys
common stock and sale of the underlying common shares to the public. Both of
the subordinated loans originally bore interest at a rate of 11.5%, but in July
2001 the notes were amended to increase the rate to 13.5%. This rate will
increase to 15.5% in February 2002. The subordinated debt includes an original
issue discount of $786,900 recorded in September 1999, and an additional
$945,400 recorded in December 2000 in connection with the price guarantee,
which is amortized as interest expense over the term of the debt. During the
first nine months of fiscal 2002, $511,859 was amortized to interest expense
for these debt discounts, as compared to $118,035 during the first nine months
of fiscal 2001.

In March 2000, we obtained a $10 million term loan from SouthTrust Bank, N.A.
This loan bears interest at prime rate and is due in monthly principal
installments of $93,000 plus interest. The balance outstanding on this note as
of December 31, 2001 was $8,963,535. This loan was used to pay off a prior term
note payable and to finance approximately $7.5 million in new equipment to
expand our production capacity. Additionally, we obtained a $1.5 million loan
from SouthTrust Bank, N.A. in October 2000. This loan bears interest at prime
and is payable in monthly principal installments of $50,000 plus interest. The
balance on this loan was $1.05 million as of December 31, 2001.

Income tax expensefor the nine months ended December 31, 2001 was zero
compared to income tax benefit of $240,000 for the same period in the prior
year at December 31, 2000. We have recorded a deferred tax asset of $1,560,000
derived mainly from tax net operating losses incurred in prior years, which are
expected to be realized in the future. This represents approximately 18% of
the tax net operating loss carry forward available at December 31, 2001.

Liquidity and Capital Resources

Operating Activities Net cash used in operating activities was $1,504,597
for the nine months ended December 31, 2001 compared to net cash used of
$1,851,208 for the same period in 2000. The decrease in cash used for
operations is primarily attributable to a decrease in inventory as a result of
the cash shortages that we experienced during this period. Such decrease in
cash used for operations was partially offset by a decrease in accounts payable
which was paid down with proceeds from our preferred stock offering in April
2001.

Investing Activities Net cash used in investing activities totaled $565,110
for the nine months ended December 31, 2001 compared to net cash used of
$9,303,168 for the same period in 2000. The decrease in cash used for
investing activities during fiscal 2002 as compared to fiscal 2001 resulted
from the majority of the new production equipment being purchased prior to
March 31, 2001. There were still some remaining expenses related to this new
production equipment in the beginning of fiscal 2002. Installation of the new
production equipment was completed in September 2001. We expect the purchases
and installation of this new production equipment to double our production
capacity on key products.

Financing Activities Net cash flows provided by financing activities were
$2,151,616 for the nine months ended December 31, 2001 compared to cash flows
provided by financing activities of $11,154,493 for the same period in 2000.
The large cash flows from financing activities during the nine months ended
December 31, 2001 were primarily the result of the issuance of common stock and
preferred stock. These proceeds were partially offset by payments under our
line of credit from FINOVA Capital Corporation and our term loan from
SouthTrust Bank, N.A. During the nine months ended December 31, 2000, the
large cash inflows were the result of draws on the line of credit and the term
loan. The increased

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draws in fiscal 2001 were used to finance the increase in inventories, as well
as to purchase and install new state-of-the-art production equipment.

In November 1996, we obtained a line of credit with a maximum principal amount
of $2 million from FINOVA Capital Corporation, the proceeds of which were used
for working capital and expansion purposes. Over the years, we received
several increases to the line to its current level of $13 million. The amount
that we can borrow under the line of credit is based on a formula of up to 85%
of eligible accounts receivable plus 50% of eligible inventories not to exceed
$6,000,000, as defined in the agreement. The line of credit is secured by all
accounts receivable, inventory, machinery, equipment, trademarks and patents
owned by us. Interest is payable monthly on the outstanding draws on the line
of credit at a rate of prime plus two percent (6.75% at December 31, 2001). In
February 2002, the rate will increase to prime plus four percent. The line of
credit expires on October 15, 2002 at which time the entire outstanding
principal amount of the line of credit, and all accrued but unpaid interest
thereon, is due and payable in full.

On September 30, 1999, we obtained a $4 million subordinated loan from FINOVA
Mezzanine Capital, Inc. to finance additional working capital and capital
improvement needs. We received loan proceeds in the amount of $3,620,000 after
paying loan costs of $380,000. Amounts outstanding under the loan are secured
by a subordinated lien on substantially all of our assets. A balloon payment
of the entire principal amount of the loan, and all accrued but unpaid interest
thereon, is due upon maturity in October 2002. The interest rate applicable
to the loan was increased in July 2001 from 11.5% to 13.5%. In February 2002,
the interest rate will increase to 15.5%. In consideration of the loan, we
issued to FINOVA Mezzanine a warrant to purchase 915,000 shares of our common
stock at an exercise price of $3.41 per share which represented 80% of the fair
value of our stock on the date the warrant was issued. The warrant was valued
at $786,900 which was recorded as a debt discount and is being amortized to
interest expense from the date of issuance of the note to the maturity date of
the note.

On December 26, 2000, the FINOVA Mezzanine exercised a portion of the warrant
to purchase 815,000 shares of common stock at a price of $3.41 per share. We
received from the exercise of the warrant net proceeds of $2,452,329, after
paying transaction costs of $326,822. In connection with this transaction, we
agreed to reimburse FINOVA Mezzanine for brokerage commission and other
expenses incurred by it, in connection with the sale of the 815,000 shares to
the public, which were sold at a price of $3.25 per share. These costs and
expenses were recorded as a reduction in the proceeds received from the
exercise of the warrants. In addition, we agreed to guarantee the price ($4.41
per share) at which the shares would be sold to the public. The difference
between the actual price received by FINOVA Mezzanine ($3.25) and the
guaranteed price ($4.41) was $945,400, which was recorded as a debt discount
and is being amortized over the remaining term of the subordinated note. The
consideration for the difference between the exercise price of $3.41 and the
guaranteed price of $4.41 was $815,000. FINOVA Mezzanine agreed to finance
such amount under an additional subordinated term loan which was payable in
full on December 29, 2001. However, we obtained an extension for a fee of
$55,000 and are paying this note down by $30,000 per business day through
February 28, 2002.

The line of credit and subordinated loans described above contain certain
financial and operating covenants. In July 2001, we notified FINOVA Capital
and FINOVA Mezzanine that we had failed to comply with the minimum operational
cash flow to contractual debt service ratio, the funded debt to EBITDA ratio
and the capital expenditure limitation. At no time has FINOVA Capital or
FINOVA Mezzanine delivered to us a notice of default of the line of credit or
the subordinated loans as a result of such failures. FINOVA Capital agreed to
amend such covenants and to waive those violations for the fiscal year ended
March 31, 2001 and the fiscal quarter ended June 30, 2001 pursuant to that
certain Amendment and Limited Waiver to Security Agreement dated July 13, 2001.
In consideration for this waiver and amendment, we accepted an increase in the
interest rate on the line of credit to prime plus 2% and agreed to pay a fee in
the amount of $100,000. FINOVA Mezzanine also agreed to waive the violations of its
covenants for the fiscal year ended March 31, 2001 and the fiscal quarter ended
June 30, 2001, and to amend those covenants for future fiscal quarters pursuant
to a letter agreement dated July 12, 2001 and amendments to the subordinated
notes. In consideration of the waiver, we accepted an increase in the interest
rate to from 11.5% to 13.5% per annum on the subordinated loans, and agreed to
pay an amendment/waiver fee in the amount of $20,000, which was paid in January
2002.

For the fiscal quarter ended September 30, 2001, we were again in violation of
the minimum operational cash flow to contractual debt service ratio, the funded
debt to EBITDA ratio, and the capital expenditure limitation. As of November
14, 2001, we entered into an Amendment and Limited Waiver to Security Agreement
with FINOVA Capital pursuant to which FINOVA Capital waived our duty to comply
with such financial covenants for the fiscal quarter ended September 30, 2001.
Additionally, the Amendment and Limited Waiver to Security Agreement also
provided for an acceleration of

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the maturity date of the line of credit from August 1, 2003 to October 15,
2002, and the payment of an amendment/waiver fee in the amount of $50,000. In
connection with the aforementioned waivers and amendments, we also entered into
an Intellectual Property Security Agreement whereby we granted FINOVA Capital a
security interest in all of our intellectual property and other proprietary
property. FINOVA Mezzanine also agreed to waive the violations to its
covenants for the fiscal quarter ended September 30, 2001 pursuant to a letter
agreement dated as of November 14, 2001 and certain amendments to the
subordinated notes. In consideration of the waiver, we accepted an
acceleration of the maturity date of the subordinated notes from August 1, 2003
to October 15, 2002, and agreed to pay an amendment/waiver fee in the amount of
$10,000, which was paid in January 2002. The subordinated debt was classified
as current beginning with the fiscal quarter ended September 30,
2001, since we
believed we would again fail to meet these covenants for our fiscal quarter
ended December 31, 2001.

For the fiscal quarter ended December 31, 2001, we were again in violation of
the minimum operational cash flow to contractual debt service ratio, the funded
debt to EBITDA ratio, and the capital expenditure limitation. On February 13,
2002, we entered into an Amendment and Limited Waiver to Security Agreement
with FINOVA Capital pursuant to which FINOVA Capital waived our duty to comply
with such financial covenants for the fiscal quarter ended December 31, 2001.
This Amendment and Limited Waiver to Security Agreement required an increase in
the interest rate from prime plus two percent to prime plus four percent and a
payment of an amendment/waiver fee in the amount of $50,000 payable over six
weeks. Additionally, FINOVA Mezzanine also agreed to waive the violations to
its covenants for the fiscal quarter ended December 31, 2001. In consideration
of the waiver, FINOVA Mezzanine required an increase in the interest rate from
13.5% to 15.5% along with an amendment/waiver fee in the amount of $10,000
payable over six weeks.

We believe that we will again fail to meet certain financial and other
covenants of the line of credit and subordinated loans for the fiscal quarters
to end on March 31, 2002 and thereafter. Therefore, we are already in
discussions with FINOVA to amend the covenants for the remaining term of these
loans. In the event we cannot change the covenants or obtain waivers for
these covenant failures, FINOVA Capital and FINOVA Mezzanine could exercise their respective rights under their loan documents to,
among other things, declare a default under the loans, accelerate their
indebtedness such that it would become immediately due and payable, and pursue
foreclosure of our assets which are pledged as collateral for such loans. We
are also currently in discussions with other lenders to replace these loans at
the end of their term in October 2002 or sooner, if necessary.

In March 2000, we obtained a $10 million term loan from SouthTrust Bank, N.A.
This note bears interest at prime rate and is due in monthly principal
installments of $93,000 plus interest. The note matures in March 2005. The
balance outstanding on this note as of December 31, 2001 was $8,963,535. This
note was used to pay off a prior term loan and to finance approximately $7.5
million in new equipment purchases to expand our production capacity, including
the new production equipment purchased and installed throughout fiscal 2001 and
the beginning of fiscal 2002. This term loan is secured by certain machinery
and equipment, including our new production equipment.

In October 2000, our president guaranteed a $1.5 million short-term bridge loan
that we obtained from SouthTrust Bank, N.A. by pledging some of his shares of
our common stock to secure the loan. Interest on this note is at the prime
rate (4.75% at December 31, 2001). The loan is being paid down by monthly
principal payments of $50,000 plus interest. The note matures in October 2003.
In consideration of his guarantee and related pledge, we granted our president
stock options to acquire 343,125 shares of our common stock at an exercise
price of $3.88 per share. Such options shall expire on December 15, 2010.

In the event that FINOVA exercises their right to
accelerate their indebtedness or pursue foreclosure, then SouthTrust
has the ability to do the same based on a cross-default provision in
their loan agreement. Since we do not have a waiver from FINOVA for
possible future covenant violations, the entire balance of the
SouthTrust notes as of December 31, 2001 of $10,013,535 was
classified as current in accordance with EITF 86-30 and Financial
Accounting Standard No. 78. However, we believe that this situation
is highly unlikely and the FINOVA and SouthTrust debt will be paid in
accordance with the short and long-term payment schedule detailed
above.

On April 6, 2001, we issued to two specified investors, in accordance with an
exemption from registration under Regulation D promulgated under the Securities
Act of 1933, as amended, (i) an aggregate of 72,646 shares Series A convertible
preferred stock, $0.01 par value, and (ii) warrants to purchase shares common
stock, $0.01 par value, at an aggregate sales price of approximately
$3,082,000. The shares are subject to certain designations, preferences and
rights, including the right to convert each preferred share into ten shares of
common stock, the right to a ten percent stock dividend after one year of
issuance, and an eight percent stock dividend for the subsequent three years
thereafter.

The warrants include an initial issuance to the investors of warrants to
purchase an aggregate of 120,000 shares of common stock. The initial warrants
are exercisable for a period of five years from April 6, 2001, at a per share
exercise price equal to the lesser of (a) $5.30 or (b) a price equal to 110% of
the average of the closing bid price of the common stock for the thirty trading
days ending on January 1, 2002. The warrants also include the issuance to the
investors of warrants to purchase an aggregate of 120,000 shares of common
stock, which are exercisable simultaneous with and as a condition to any
redemption of the shares. Finally, the warrants include the issuance to the
investors of warrants to purchase shares of

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common stock in an amount determined by dividing (x) 30% of
the shares originally purchased by the investors by (y) the average closing bid
price of the common stock during the five day period ending on February 15,
2002 (the 30% warrants). The 30% warrants are exercisable for a period of
five years from February 15, 2002 at per share exercise price equal to 110% of
the average closing bid price of the common stock during the five day period
ending on February 15, 2002. We have filed a registration statement with the
Securities and Exchange Commission to register the shares underlying the
warrants and the preferred stock. Such registration statement became effective
on October 17, 2001.

On September 25, 2001, we issued to one specified investor, in accordance with
an exemption from registration under Regulation D promulgated under the
Securities Act of 1933, as amended, (i) an aggregate of 522,648 shares of
common stock, $0.01 par value, and (ii) warrants to purchase 140,000 shares of
common stock, $0.01 par value, at an aggregate sales price of approximately
$3,000,000. The warrants are exercisable at a price per share equal to $6.74
until September 25, 2006. We have filed a registration statement with the
Securities and Exchange Commission to register the shares issued and those
shares underlying the warrant. Such registration statement became effective on
October 17, 2001.

Management believes that proceeds received in connection with the preferred
stock issuance in April 2001, the common stock issuance in September 2001
together with cash flow from current operations will allow us to meet our
current liquidity needs based on current operation levels. However,
substantial additional financing is necessary to meet the demands of expected
future higher sales volumes and to refinance the FINOVA Capital and FINOVA
Mezzanine loans that are coming due in October 2002.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations which
addresses the financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, Business Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. SFAS
No. 141 requires that all business combinations be accounted for by a single
method, the purchase method, modifies the criteria for recognizing intangible
assets, and expands disclosure requirements. The provisions of SFAS No. 141
apply to all business combinations initiated after June 30, 2001. We do not
expect that the adoption of SFAS No. 141 will have a material effect on our
results of operations or statements of financial position.

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets which addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for
in financial statements upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite useful lives not be
amortized but rather tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives. SFAS
No. 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. In addition, SFAS No. 142 expands
the disclosure requirements about goodwill and other intangible assets in the
years subsequent to their acquisition. SFAS No. 142 is effective for our fiscal
year 2003. Impairment losses for goodwill and indefinite-life intangible assets
that arise due to the initial application of SFAS No. 142 are to be reported as
resulting from a change in accounting principle. However, goodwill and
intangible assets acquired after June 30, 2001 will be subject immediately to
provisions of SFAS 142. We do not expect that the adoption of SFAS No. 142 will
have a material effect on our results of operations or statements of financial
position.

In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion No. 30,
Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, it retains the fundamental provisions of those
Statements. SFAS No. 144 becomes effective for fiscal years beginning after
December 15, 2001. We are currently evaluating the impact of SFAS No. 144 on
our financial statements.

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ITEM  3.    Quantitative and Qualitative Disclosures About Market Risk

The interest on the Companys debt is floating and based on the prevailing
market interest rates. For market based debt, interest rate changes generally
do not affect the market value of the debt but do impact future interest
expense and hence earnings and cash flows, assuming other factors remain
unchanged. A theoretical 1% change in market rates in effect on December 31,
2001 with respect to the Companys anticipated debt as of such date would
increase interest expense and hence reduce the net income of the Company by
approximately $40,000 for the quarter.

The Companys sales for the nine months ended December 31, 2001 and 2000
denominated in a currency other than U.S. dollars were less than 1% of total
sales and no net assets were maintained in a functional currency other than
U.S. dollars at December 31, 2001. The effects of changes in foreign currency
exchange rates has not historically been significant to the Companys
operations or net assets.

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PART II. OTHER INFORMATION
GALAXY NUTRITIONAL FOODS, INC.




ITEM  2.    Changes in Securities and Use of Proceeds

On September 24, 2001, we sold 522,648 shares of common stock and warrants to
purchase 140,000 shares of common stock to Hare & Co. f/b/o John Hancock Small
Cap Value Fund pursuant to a certain Securities Purchase Agreement for an
aggregate sales price of approximately $3,000,000. The shares and warrants
were issued in reliance upon the exemption from securities registration
afforded by Rule 506 under Regulation D as promulgated by the Securities and
Exchange Commission under the Securities Act of 1933, as amended. The warrants
held by Hare & Co. f/b/o John Hancock Small Cap Value Fund are exercisable at a
price per share equal to $6.74. All of the warrants are exercisable until
September 24, 2006.

Pursuant to that certain Amendment and Waiver Agreement dated as of September
24, 2001, we issued 30,000 shares of common stock to each of BH Capital
Investments, L.P. and Excalibur Limited Partnership in order to induce them to
waive our obligation not to sell or enter into any agreement to sell any of its
securities for the time period beginning April 6, 2001 and continuing until
January 15, 2002, to allow the transaction described in the preceding
paragraph. We undertook this obligation pursuant to that certain Series A
Preferred Stock and Warrants Purchase Agreement dated April 6, 2001, by and
among us, BH Capital Investments, L.P. and Excalibur Limited Partnership. The
shares were issued in reliance upon the exemption from securities registration
afforded by Section 4(2) of the Securities Act of 1933, as amended.




ITEM  3.    Defaults Upon Senior Securities

In July 2001, we notified FINOVA Capital and FINOVA Mezzanine that we had
failed to comply with the minimum operational cash flow to contractual debt
service ratio, the funded debt to EBITDA ratio and the capital expenditure
limitation. At no time has FINOVA Capital or FINOVA Mezzanine delivered to us
a notice of default of the line of credit or the subordinated loans as a result
of such failures. FINOVA Capital agreed to amend such covenants and to waive
those violations for the fiscal year ended March 31, 2001 and the fiscal
quarter ended June 30, 2001 pursuant to that certain Amendment and Limited
Waiver to Security Agreement dated July 13, 2001. In consideration for this
waiver and amendment, we accepted an increase in the interest rate on the line
of credit to prime plus 2% and agreed to pay a fee in the amount of $100,000. FINOVA
Mezzanine also agreed to waive the violations of its covenants for the fiscal
year ended March 31, 2001 and the fiscal quarter ended June 30, 2001, and to
amend those covenants for future fiscal quarters pursuant to a letter agreement
dated July 12, 2001 and amendments to the subordinated notes. In consideration
of the waiver, we accepted an increase in the interest rate to from 11.5% to
13.5% per annum on the subordinated loans, and agreed to pay an
amendment/waiver fee in the amount of $20,000, which was paid in January 2002.

For the fiscal quarter ended September 30, 2001, we were again in violation of
the minimum operational cash flow to contractual debt service ratio, the funded
debt to EBITDA ratio, and the capital expenditure limitation. As of November
14, 2001, we entered into an Amendment and Limited Waiver to Security Agreement
with FINOVA Capital pursuant to which FINOVA Capital waived our duty to comply
with such financial covenants for the fiscal quarter ended September 30, 2001.
Additionally, the Amendment and Limited Waiver to Security Agreement also
provided for an acceleration of the maturity date of the line of credit from
August 1, 2003 to October 15, 2002, and the payment of an amendment/waiver fee
in the amount of $50,000. In connection with the aforementioned waivers and
amendments, we also entered into an Intellectual Property Security Agreement
whereby we granted FINOVA Capital a security interest in all of our
intellectual property and other proprietary property. FINOVA Mezzanine also
agreed to waive the violations to its covenants for the fiscal quarter ended
September 30, 2001 pursuant to a letter agreement dated as of November 14, 2001
and certain amendments to the subordinated notes. In consideration of the
waiver, we accepted an acceleration of the maturity date of the subordinated
notes from August 1, 2003 to October 15, 2002, and agreed to pay an
amendment/waiver fee in the amount of $10,000, which was paid in January 2002.
The subordinated debt was classified as current beginning with the fiscal
quarter ended September 30, 2001, since we believed we would again fail to meet
these covenants for our fiscal quarter ended December 31, 2001.

For the fiscal quarter ended December 31, 2001, we were again in violation of
the minimum operational cash flow to contractual debt service ratio, the funded
debt to EBITDA ratio, and the capital expenditure limitation. On February 13,
2002, we entered into an Amendment and Limited Waiver to Security Agreement
with FINOVA Capital pursuant to which FINOVA Capital waived our duty to comply
with such financial covenants for the fiscal quarter ended December 31, 2001.

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This Amendment and Limited Waiver to Security Agreement required an increase in the interest rate from
prime plus two percent to prime plus four percent and a payment of an
amendment/waiver fee in the amount of $50,000 payable over six weeks.
Additionally, FINOVA Mezzanine also agreed to waive the violations to its
covenants for the fiscal quarter ended December 31, 2001. In consideration of
the waiver, FINOVA Mezzanine required an increase in the interest rate from
13.5% to 15.5% along with an amendment/waiver fee in the amount of $10,000
payable over six weeks.

We believe that we will again fail to meet certain financial and other
covenants of the line of credit and subordinated loans for the fiscal quarters
to end on March 31, 2002 and thereafter. Therefore, we are already in
discussions with FINOVA to amend the covenants for the remaining term of these
loans. In the event we cannot change the covenants or obtain waivers for
these covenant failures, FINOVA Capital, FINOVA Mezzanine and SouthTrust Bank
N.A. could exercise their respective rights under their loan documents to,
among other things, declare a default under the loans, accelerate their
indebtedness such that it would become immediately due and payable, and pursue
foreclosure of our assets which are pledged as collateral for such loans. We
are also currently in discussions with other lenders to replace these loans at
the end of their term in October 2002 or sooner, if necessary.




ITEM  5.    Other Information

On October 5, 2001, we issued warrants to acquire 60,000 shares of common stock
to each of BH Capital Investments, L.P. and Excalibur Limited Partnership in
consideration of consulting services to be provided to us by them for one year.
The warrants are exercisable for five years at a price of $5.86 per share. We
also agreed to register the shares underlying the warrants by filing a
registration statement with the Securities and Exchange Commission on or about
February 18, 2002.

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ITEM  6.    Exhibits and Reports on Form 8-K

The following exhibits are filed as part of this Form 10-Q.

|           |  |                                                                                                                                                                                                                                                                                          
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Exhibit Description                                                                                                                                                                                                                                                                      
|           |  |                                                                                                                                                                                                                                                                                          
|*3.1       |  | Certificate of Incorporation of the Company, as amended (Filed
as Exhibit 3.1 to the Companys Registration Statement on Form
S-18, No. 33-15893-NY, incorporated herein by reference.)                                                                                                  
|*3.2       |  | Amendment to Certificate of Incorporation of the Company, filed
on February 24, 1992 (Filed as Exhibit 4(b) to the Companys
Registration Statement on Form S-8, No. 33-46167, incorporated
herein by reference.)                                                                        
|*3.3       |  | By-laws of the Company, as amended (Filed as Exhibit 3.2 to the
Companys Registration Statement on Form S-18, No. 33-15893-NY,
incorporated herein by reference.)                                                                                                                       
|*3.4       |  | Amendment to Certificate of Incorporation of the Company, filed
on January 19, 1994 (Filed as Exhibit 3.4 to the Companys
Registration Statement on Form SB-2, No. 33-80418, and
incorporated herein by reference.)                                                                     
|*3.5       |  | Amendment to Certificate of Incorporation of the Company, filed
on July 11, 1995 (Filed as Exhibit 3.5 on Form 10-KSB for
fiscal year ended March 31, 1996, and incorporated herein by
reference.)                                                                                       
|*3.6       |  | Amendment to Certificate of Incorporation of the Company, filed
on January 31, 1996 (Filed as Exhibit 3.6 on Form 10-KSB for
fiscal year ended March 31, 1996, and incorporated herein by
reference.)                                                                                    
|*3.7       |  | Amendment to Certificate of Incorporation of the Company, filed
on November 16, 2000, effective November 17, 2000 (Filed as
Exhibit 3.1 to Registration Statement on Form S-3 filed
November 28, 2000, and incorporated herein by reference.)                                            
|*3.8       |  | Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock filed on April 5, 2001 (Filed as
Exhibit 3.8 on Form 10-K/A for fiscal year ended March 31,
2001, and incorporated herein by reference.)                                                     
|*4.1       |  | Series A Preferred Stock and Warrants Purchase Agreement, by
and among BH Capital Investments, L.P., Excalibur Limited
Partnership and the Company, dated April 6, 2001 (Filed as
Exhibit 4.1 on Form 10-K/A for fiscal year ended March 31,
2001, and incorporated herein by reference.)
|*4.2       |  | Amendment and Waiver Agreement, by and among BH Capital
Investments, L.P., Excalibur Limited Partnership and the
Company, dated September 24, 2001 (Filed as Exhibit 4.5 to
Registration Statement on Form S-3 filed October 3, 2001, and
incorporated herein by reference.)             
|*4.3       |  | Securities Purchase Agreement, by and between Hare & Co. f/b/o
John Hancock Small Cap Value Fund and the Company, dated
September 24, 2001 (Filed as Exhibit 4.6 to Registration
Statement on Form S-3 filed October 3, 2001, and incorporated
herein by reference.)                     
|*4.4       |  | Stock Purchase Warrant issued to Hare & Co. f/b/o John Hancock
Small Cap Value Fund and the Company, dated September 25, 2001
(Filed as Exhibit 4.7 to Registration Statement on Form S-3
filed October 3, 2001, and incorporated herein by reference.)                                  
|*4.5       |  | Registration Rights Agreement, by and between Hare & Co. f/b/o
John Hancock Small Cap Value Fund and the Company, dated
September 24, 2001 (Filed as Exhibit 4.8 to Registration
Statement on Form S-3 filed October 3, 2001, and incorporated
herein by reference.)                     
|*10.1      |  | Second Amendment to the Security Agreement with Finova
Financial Services dated June 1998 (Filed as Exhibit 10.1 on
Form 10-K for fiscal year ended March 31, 1999, and
incorporated herein by reference.)                                                                               
|*10.2      |  | Third Amendment to the Security Agreement with Finova Financial
Services dated December 1998 (Filed as Exhibit 10.2 on Form
10-K for fiscal year ended March 31, 1999, and incorporated
herein by reference.)                                                                            

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|           |  |                                                                                                                                                                                                                                                                                                        
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Exhibit Description                                                                                                                                                                                                                                                                                    
|           |  |                                                                                                                                                                                                                                                                                                        
|*10.3      |  | Term Loan Agreement with SouthTrust Bank dated March 2000
(Filed as Exhibit 10.3 on Form 10-K/A for fiscal year ended
March 31, 2000, and incorporated herein by reference.)                                                                                                                           
|*10.4      |  | Cabot Industrial Properties L.P. Lease dated July 1999 (Filed
as Exhibit 10.4 on Form 10-K/A for fiscal year ended March 31,
2000, and incorporated herein by reference.)                                                                                                                              
|*10.5      |  | Preferability letter from BDO Seidman, L.L.P. (Filed as Exhibit
10.3 on Form 10-Q for quarter ended December 31, 2000, and
incorporated herein by reference.)                                                                                                                                          
|*10.6      |  | Third Amendment to Lease Agreement, dated as of August 14,
2001, by and between Anco Company and the Company (Filed as
Exhibit 10.6 on Form 10-K/A for fiscal year ended March 31,
2001, and incorporated herein by reference.)                                                                        
|*10.7      |  | Amendment and Limited Waiver to Security Agreement, dated as of
July 13, 2001, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.7 on Form 10-Q/A for the
quarter ended September 30, 2001, and incorporated herein by
reference.)                                        
|*10.8      |  | Waiver Letter from FINOVA Mezzanine Capital, Inc. to the
Company dated as of July 12, 2001 (Filed as Exhibit 10.8 on
Form 10-Q/A for the quarter ended September 30, 2001, and
incorporated herein by reference.)                                                                                      
|*10.9      |  | Amended and Restated Secured Promissory Note in the principal
amount of $815,000, dated as of July 13, 2001, by the Company
in favor of FINOVA Mezzanine Capital, Inc. (Filed as Exhibit
10.9 on Form 10-Q/A for the quarter ended September 30, 2001,
and incorporated herein by reference.)          
|*10.10     |  | Second Amended and Restated Secured Promissory Note in the
principal amount of $4,000,000, dated as of July 13, 2001, by
the Company in favor of FINOVA Mezzanine Capital, Inc. (Filed
as Exhibit 10.10 on Form 10-Q/A for the quarter ended September
30, 2001, and incorporated herein by reference.)
|*10.11     |  | Amendment and Limited Waiver to Security Agreement, dated as of
November 14, 2001, by and between the Company and FINOVA
Capital Corporation (Filed as Exhibit 10.11 on Form 10-Q/A for
the quarter ended September 30, 2001, and incorporated herein
by reference.)                                   
|*10.12     |  | Intellectual Property Security Agreement, dated as of November
14, 2001, by and between the Company and FINOVA Capital
Corporation (Filed as Exhibit 10.12 on Form 10-Q/A for the
quarter ended September 30, 2001, and incorporated herein by
reference.)                                             
|*10.13     |  | Waiver Letter from FINOVA Mezzanine Capital, Inc. to the
Company dated as of November 14, 2001 (Filed as Exhibit 10.13
on Form 10-Q/A for the quarter ended September 30, 2001, and
incorporated herein by reference.)                                                                                 
|*10.14     |  | Allonge to Second Amended and Restated Secured Promissory Note,
dated as of November 14, 2001, by the Company in favor of
FINOVA Mezzanine Capital, Inc. (Filed as Exhibit 10.14 on Form
10-Q/A for the quarter ended September 30, 2001, and
incorporated herein by reference.)                       
|10.15      |  | Amendment and Limited Waiver to Security Agreement, dated as of
February 13, 2002, by and between the Company and FINOVA
Capital Corporation (Filed hereon.)                                                                                                                                           
|10.16      |  | Waiver Letter from FINOVA Mezzanine Capital, Inc. to the
Company dated as of February 13, 2002 (Filed hereon.)                                                                                                                                                                                         
|10.17      |  | Allonge to Second Amended and Restated Secured Promissory Note
dated as of February 13, 2002, by the Company in favor of
FINOVA Mezzanine Capital, Inc. (Filed hereon.)                                                                                                                                



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|* |  | Previously filed
|- |  | ----------------

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Reports on Form 8-K

There were no reports on Form 8-K filed by the Company during this period.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                        |  |                                                                                                                  
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------
|                        |  | GALAXY NUTRITIONAL FOODS, INC.                                                                                   
|                       
|Date: February 20, 2002 |  | /s/Angelo S. MoriniAngelo S. Morini
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
|                       
|Date: February 20, 2002 |  | /s/ LeAnn HitchcockLeAnn Hitchcock
Chief Financial Officer
(Principal Accounting Officer)                        

23