FORM 10-Q


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

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



                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004


                          -----------------------------
                         COMMISSION FILE NUMBER 1-15345



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



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

            2441 VISCOUNT ROW
            ORLANDO, FLORIDA                                       32809
(Address of principal executive offices)                        (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 [ ]

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

      On February 14, 2005, there were 18,391,214 shares of Common Stock, $.01
par value per share, outstanding.




                                       1
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

                               INDEX TO FORM 10-Q
                       FOR QUARTER ENDED DECEMBER 31, 2004



                                                                        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

     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             FINANCIAL CONDITION AND RESULTS OF OPERATION                     14

     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK       24

     ITEM 4. CONTROLS AND PROCEDURES                                          24



PART II. OTHER INFORMATION

     ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      26

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                  26

     ITEM 6. EXHIBITS                                                         27


SIGNATURES                                                                    30





                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,           MARCH 31,
                                                                             NOTES             2004                  2004
                                                                             -----          ------------          ------------
                                                                                         (UNAUDITED)
                                  ASSETS
CURRENT ASSETS:
<S>                                                                                         <C>                   <C>
  Cash                                                                                      $    111,618          $    449,679
  Trade receivables, net                                                       8               5,253,821             3,964,198
  Inventories                                                                                  5,003,660             4,632,843
  Prepaid expenses and other                                                                     214,542               266,301
                                                                                            ------------          ------------

         Total current assets                                                                 10,583,641             9,313,021

PROPERTY AND EQUIPMENT, NET                                                                   18,758,623            20,232,089
OTHER ASSETS                                                                                     303,718               416,706
                                                                                            ------------          ------------

         TOTAL                                                                              $ 29,645,982          $ 29,961,816
                                                                                            ============          ============


                   LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Line of credit                                                               2            $  5,546,703          $  4,605,277
  Accounts payable                                                                             2,292,650             1,266,346
  Accrued liabilities                                                                          1,314,926             1,812,300
  Warrant liability                                                            3                 500,000                    --
  Current portion of accrued employment contracts                              7                 586,523               366,305
  Current portion of term notes payable                                        2               1,657,500             1,140,000
  Current portion of obligations under capital leases                                            194,331               231,432
                                                                                            ------------          ------------

         Total current liabilities                                                            12,092,633             9,421,660

ACCRUED EMPLOYMENT CONTRACT, less current portion                              7               1,141,433             1,293,142
TERM NOTES PAYABLE, less current portion                                       2               6,914,485             8,241,985
OBLIGATIONS UNDER CAPITAL LEASES, less current portion                                           134,369               204,967
                                                                                            ------------          ------------

         Total liabilities                                                                    20,282,920            19,161,754
                                                                                            ------------          ------------

COMMITMENTS AND CONTINGENCIES                                                                         --                    --

REDEEMABLE CONVERTIBLE PREFERRED STOCK                                         3                      --             2,573,581

STOCKHOLDERS' EQUITY:                                                          3
  Common stock                                                                                   183,882               156,573
  Additional paid-in capital                                                                  67,450,115            64,520,084
  Accumulated deficit                                                                        (45,378,274)          (43,557,515)
                                                                                            ------------          ------------

                                                                                              22,255,723            21,119,142
  Less:  Notes receivable arising from the exercise of                         7
         stock options and sale of common stock                                              (12,772,200)          (12,772,200)
        Treasury stock, 26,843 shares, at cost                                                  (120,461)             (120,461)
                                                                                            ------------          ------------

         Total stockholders' equity                                                            9,363,062             8,226,481
                                                                                            ------------          ------------

         TOTAL                                                                              $ 29,645,982          $ 29,961,816
                                                                                            ============          ============
</TABLE>

                 See accompanying notes to financial statements.



                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED                           NINE MONTHS ENDED
                                                   DECEMBER 31,                                 DECEMBER 31,
                                         ----------------------------------          ----------------------------------
                                             2004                  2003                  2004                  2003
                                         ------------          ------------          ------------          ------------
<S>                                      <C>                   <C>                   <C>                   <C>
NET SALES                                $ 10,632,877          $  9,638,571          $ 33,725,108          $ 27,664,259

COST OF GOODS SOLD                          8,289,551             6,715,750            25,860,850            19,096,843
                                         ------------          ------------          ------------          ------------
  Gross margin                              2,343,326             2,922,821             7,864,258             8,567,416
                                         ------------          ------------          ------------          ------------

OPERATING EXPENSES:
Selling                                     1,213,549             1,110,097             4,246,419             3,870,829
Delivery                                      549,379               544,930             1,757,962             1,430,706
Non-cash compensation related to
  options & warrants (NOTE 1 AND
  NOTE 4)                                     361,186              (255,712)              402,388             1,179,677
Employment contract expense
  (NOTE 7)                                         --             1,830,329               444,883             1,830,329
General and administrative                    595,196               752,123             1,794,506             2,621,621
Research and development                       74,861                65,474               226,479               191,466
                                         ------------          ------------          ------------          ------------
  Total operating expenses                  2,794,171             4,047,241             8,872,637            11,124,628
                                         ------------          ------------          ------------          ------------

LOSS FROM OPERATIONS                         (450,845)           (1,124,420)           (1,008,379)           (2,557,212)

Interest expense                             (288,556)             (253,934)             (812,380)           (1,019,391)
                                         ------------          ------------          ------------          ------------

NET LOSS                                 $   (739,401)         $ (1,378,354)         $ (1,820,759)         $ (3,576,603)

Preferred Stock Dividends (NOTE 3)                 --                48,556                82,572               157,172
Preferred Stock Accretion to
  Redemption Value (NOTE 3)                        --               131,076               203,605             1,677,409
                                         ------------          ------------          ------------          ------------

NET LOSS AVAILABLE TO COMMON
  SHAREHOLDERS                           $   (739,401)         $ (1,557,986)         $ (2,106,936)         $ (5,411,184)
                                         ============          ============          ============          ============

BASIC AND DILUTED NET LOSS PER
  COMMON SHARE (NOTE 5)                  $      (0.04)         $      (0.10)         $      (0.13)         $      (0.37)
                                         ============          ============          ============          ============
</TABLE>

                See accompanying notes to financial statements.



                                       4
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                        Notes
                                   Common Stock          Additional                  Receivable
                             -----------------------      Paid-In      Accumulated   for Common       Treasury
                               Shares     Par Value       Capital        Deficit        Stock          Stock          Total
                             ----------  ------------  ------------   ------------   ------------   ------------   ------------
<S>                          <C>         <C>           <C>            <C>            <C>            <C>            <C>
Balance at March 31, 2004    15,657,321  $    156,573  $ 64,520,084   $(43,557,515)  $(12,772,200)  $   (120,461)  $  8,226,481


Costs associated with
  equity raise                       --            --       (88,634)            --             --             --        (88,634)
Issuance of common
  stock                       2,009,527        20,095     2,292,385             --             --             --      2,312,480
Conversion of
  preferred stock               721,366         7,214       840,215             --             --             --        847,429
Fair value of
  warrants and
  employee options
  issued                             --            --      (110,237)            --             --             --       (110,237)
Dividends on
  preferred stock                    --            --       (82,572)            --             --             --        (82,572)
Accretion of discount
  on preferred stock                 --            --        78,874             --             --             --         78,874
Net loss                             --            --            --     (1,820,759)            --             --     (1,820,759)
                             ----------  ------------  ------------   ------------   ------------   ------------   ------------

Balance at December
  31, 2004                   18,388,214  $    183,882  $ 67,450,115   $(45,378,274)  $(12,772,200)  $   (120,461)  $  9,363,062
                             ==========  ============  ============   ============   ============   ============   ============
</TABLE>

                See accompanying notes to financial statements.



                                       5
<PAGE>

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


<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,                                                     NOTES           2004              2003
                                                                                  -------   -----------------  ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                         <C>                <C>
  Net Loss                                                                                  $   (1,820,759)    $   (3,576,603)
  Adjustments to reconcile net income (loss) to net cash from (used
    in) operating activities:
      Depreciation and amortization                                                              1,633,256          1,657,431
      Amortization of debt discount and financing costs                                             65,881            192,078
      Provision for losses on trade receivables                                                    109,000             14,000
      Non-cash compensation related to options and warrants                        1,4             402,388          1,179,677
      (Increase) decrease in:
        Trade receivables                                                                       (1,398,623)           854,539
        Inventories                                                                               (370,817)         1,208,195
        Prepaid expenses and other                                                                  51,759             26,492
      Increase (decrease) in:
        Accounts payable                                                                         1,026,304         (1,151,801)
        Accrued liabilities                                                                        120,973          1,564,055
                                                                                            -----------------  ---------------

   NET CASH FROM (USED IN) OPERATING ACTIVITIES                                                   (180,638)         1,968,063
                                                                                            -----------------  ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                                               (77,207)          (175,311)
  Decrease in other assets                                                                          34,482              1,806
                                                                                            -----------------  ---------------

   NET CASH FROM (USED IN) INVESTING ACTIVITIES                                                    (42,725)          (173,505)
                                                                                            -----------------  ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Book overdrafts                                                                                       --         (1,151,276)
  Net borrowings (payments) on lines of credit                                                     941,426           (549,916)
  Repayments on subordinated note payable                                                               --         (4,000,000)
  Borrowings on term note payable                                                                       --          2,000,000
  Repayments on term notes payable                                                                (810,000)        (1,246,760)
  Principal payments on capital lease obligations                                                 (190,282)          (297,821)
  Financing costs for long term debt                                                                    --           (232,230)
  Redemption of preferred stock                                                                 (2,279,688)                --
  Proceeds from issuance of common stock, net of offering costs                                  2,223,846          4,158,587
                                                                                            -----------------  ---------------

   NET CASH FROM (USED IN) FINANCING ACTIVITIES                                                   (114,698)        (1,319,416)
                                                                                            -----------------  ---------------

NET INCREASE (DECREASE) IN CASH                                                                   (338,061)           475,142

CASH, BEGINNING OF PERIOD                                                                          449,679              1,598
                                                                                            -----------------  ---------------

CASH, END OF PERIOD                                                                 6       $      111,618     $      476,740
                                                                                            =================  ===============
</TABLE>

                See accompanying notes to financial statements.


                                       6
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

(1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      ------------------------------------------
      The unaudited financial statements have been prepared by the Company,
      under the rules and regulations of the Securities and Exchange Commission.
      The accompanying 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 omitted
      under such rules and regulations although the Company believes that the
      disclosures are adequate to make the information presented not misleading.
      The March 31, 2004 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 financial statements should be read in conjunction with
      the financial statements and notes included on Form 10-K for the fiscal
      year ended March 31, 2004. Interim results of operations for the
      nine-month period ended December 31, 2004 may not necessarily be
      indicative of the results to be expected for the full year.

      Stock Based Compensation
      ------------------------
      The Company accounts for its stock-based employee compensation plans under
      the accounting provisions of Accounting Principles Board Opinion No. 25,
      "Accounting for Stock Issued to Employees", furnishes the pro forma
      disclosures required under Statement of Financial Accounting Standards
      ("SFAS") No. 123, "Accounting for Stock-Based Compensation", and applies
      SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
      Disclosure" on a prospective basis for options granted after March 31,
      2003.

      In December 2004, the Financial Accounting Standards Board (FASB) issued
      SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"),
      which addresses the accounting for share-based payment transactions in
      which a company receives employee services in exchange for (a) equity
      instruments of the company or (b) liabilities that are based on the fair
      value of the company's equity instruments or that may be settled by the
      issuance of equity instruments. Under SFAS No. 123R companies are required
      to record compensation expense for all share-based payment award
      transactions measured at fair value. This statement is effective for
      quarters beginning after June 15, 2005. Effective April 1, 2003, the
      Company adopted the fair value method of recording compensation expense
      related to all stock options granted after March 31, 2003, in accordance
      with SFAS No. 123. Accordingly, the fair value of stock options as
      determined on the date of grant using the Black-Scholes option-pricing
      model, will be expensed over the vesting period of the related stock
      options. The negative impact on diluted earnings per share related to the
      issuance of employee stock options during the nine months ended December
      31, 2004 and 2003 were approximately $0 and $0.02, respectively. Since the
      Company currently recognizes compensation expense at fair value for
      share-based payment awards in accordance with SFAS No. 123, it does not
      anticipate adoption of this standard will have a material impact on its
      financial position, results of operations, or cash flows.

      SFAS No. 123 requires the Company to provide pro- forma information
      regarding net income (loss) and earnings (loss) per share amounts as if
      compensation cost for the Company's employee and director stock options
      had been determined in accordance with the fair market value-based method
      prescribed in SFAS No. 123. The Company estimates the fair value of each
      stock option at the grant date by using a Black-Scholes option-pricing
      model. The following assumptions were used for options issued during the
      periods:

<TABLE>
<CAPTION>
              Nine Months Ended                                                   December 31,      December 31,
                                                                                     2004               2003
                                                                                 -------------      ------------
<S>                                                                              <C>                <C>
              Dividend Yield                                                          None               None
              Volatility                                                         44.9% to 46%         41% to 45%
              Risk Free Interest Rate                                            3.38% to 412       2.01% to 4.28%
              Expected Lives in Months                                              60 to 120          36 to 120
</TABLE>

     Under the accounting provisions of SFAS No. 123, the Company's net income
     (loss) and net income (loss) per basic and diluted share would have been
     reduced to the pro forma amounts indicated below:


                                       7
<PAGE>


<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED                          NINE MONTHS ENDED
                                                         DECEMBER 31,                                DECEMBER 31,
                                                --------------------------------          --------------------------------
                                                    2004                 2003                 2004                 2003
                                                -----------          -----------          -----------          -----------
<S>                                             <C>                  <C>                  <C>                  <C>
Net loss to common shareholders as              $  (739,401)         $(1,557,986)         $(2,106,936)         $(5,411,184)
  reported
  Add:  Stock-based compensation
  expense included in reported net loss             176,186             (255,712)             217,388            1,179,677
  Deduct:  Stock-based compensation
  expense determined under fair value
  based method for all awards                      (203,064)             181,865             (304,381)          (1,525,891)
                                                -----------          -----------          -----------          -----------
  Pro forma net loss to common
  shareholders                                  $  (766,279)         $(1,631,833)         $(2,193,929)         $(5,757,398)
                                                ===========          ===========          ===========          ===========

Net loss per common share:
  Basic & Diluted - as reported                 $     (0.04)         $     (0.10)         $     (0.13)         $     (0.37)
  Basic & Diluted - pro forma                   $     (0.04)         $     (0.11)         $     (0.13)         $     (0.39)
</TABLE>


     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
     common 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
     convertible preferred stock.

     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 and disclosure of contingent assets and
     liabilities at the date of the financial statements and reported amounts of
     revenues and expense during the reporting period. The Company's significant
     estimates include the allowance for doubtful accounts receivable, which is
     made up of reserves for promotions, discounts and bad debts, provision for
     inventory obsolescence, valuation of deferred taxes, and valuation of stock
     options and warrants. Actual results could differ from those estimates.

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

     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. The Company's
     sales are generated primarily within the United States of America.


(2)  LINE OF CREDIT AND NOTES PAYABLE
     --------------------------------
     On May 27, 2003, the Company obtained from Textron Financial Corporation
     ("Textron") a revolving credit facility (the "Textron Loan") with a maximum
     principal amount of $7,500,000 pursuant to the terms and conditions of a
     Loan and Security Agreement dated May 27, 2003 (the "Textron Loan
     Agreement"). The Textron Loan is secured by the Company's inventory,
     accounts receivable and all other assets. Generally, subject to the maximum
     principal amount, which can be borrowed under the Textron Loan and certain
     reserves that must be maintained during the term of the Textron Loan, the
     amount available under the Textron Loan for borrowing by the Company from
     time to time is equal to the sum of (i) 85% of the net amount of its
     eligible accounts receivable plus (ii) 60% of the Company's eligible
     inventory not to exceed $3,500,000. Advances under the Textron Loan bear
     interest at a variable rate, adjusted on the first (1st) day of each month,
     equal to the prime rate plus 1.75% per annum (7% at December 31, 2004)
     calculated on the average cash borrowings for the preceding month. The
     Textron Loan matures and all amounts are due and payable in full on May 26,
     2006. However, in accordance with EITF 95-22, "Balance Sheet Classification
     of Borrowings Outstanding under Revolving Credit Agreements that involve
     both a Subjective Acceleration Clause and a Lock-Box Arrangement," the
     balance is reflected as current on the balance sheet. As of December 31,
     2004, the outstanding principal balance on the Textron Loan was $5,546,703.



                                       8
<PAGE>

     The Textron Loan Agreement contains certain financial and operating
     covenants. Due to the $444,883 charge to operations related to the
     Separation and Settlement Agreement between the Company and Christopher J.
     New, its former Chief Executive Officer, the Company fell below the
     requirement for the adjusted tangible net worth and the fixed charge
     coverage ratio covenants for the quarter ended September 30, 2004. In a
     third amendment to the Textron Loan Agreement dated November 10, 2004,
     Textron agreed to change a definition in the loan covenants, the effect of
     which brought the Company back into compliance with both ratios. The
     Company anticipates that it will be in compliance with these ratios, as
     amended, for the foreseeable future based on current forecasts.

     Simultaneous with the closing of the Textron Loan in May 2003, SouthTrust
     Bank extended the Company a new term loan in the principal amount of
     $2,000,000. This loan was consolidated with the Company's March 2000 term
     loan with SouthTrust Bank, which had a then outstanding principal balance
     of $8,131,985 for a total term loan amount of $10,131,985. The revised term
     loan bears interest at SouthTrust Bank's prime rate of interest plus 1%
     (6.25% at December 31, 2004), and is due in increasing principal
     installments by June 2009. Each month, the Company will pay the accrued
     interest on the loan plus principal amounts as follows: $110,000 from
     January 2005 to June 2005, and $166,250 from July 2005 until maturity in
     June 2009. In a Loan Modification letter dated May 21, 2004, beginning in
     October 2004, interest may be adjusted quarterly from prime to prime plus
     1.25% according to the Company's performance in its Maximum Funded Debt to
     EBITDA ratio in prior quarters. This note is secured by all of the
     Company's equipment and certain related assets. The balance outstanding on
     the term loan as of December 31, 2004 was $8,571,985.


(3)  CAPITAL STOCK
     -------------
     Preferred Stock & Subsequent Period Redemption
     ----------------------------------------------
     On October 6, 2004, BH Capital Investments, LP and Excalibur Limited
     Partnership, the holders of the Company's Series A convertible preferred
     stock (the "Series A Preferred Holders"), converted 10,278 Series A
     convertible preferred shares into approximately 600,000 shares of common
     stock. The value of these converted Series A convertible preferred shares
     including accrued dividends was $644,068. Simultaneously, the remaining
     30,316 Series A convertible preferred shares held by the Series A Preferred
     Holders were acquired by the Company for a total price of $2,279,688. All
     previously outstanding shares of the Series A convertible preferred stock
     of the Company have now been cancelled. As part of the transaction, the
     former Series A Preferred Holders also received warrants to purchase up to
     500,000 shares of common stock at an exercise price of $2.00 per share for
     a period of five years. The fair value of the warrants is $205,000.

     On April 6, 2001, the Company received from the Series A Preferred Holders
     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 with a face value of $3,500,000 and warrants to purchase shares of
     the Company's common stock. The shares were subject to certain
     designations, preferences and rights including the right to convert such
     shares into shares of common stock at any time. The per share conversion
     price was equal to the quotient of $48.18, plus all accrued and unpaid
     dividends for each share of the Series A convertible preferred stock,
     ($62.61 at December 31, 2004), divided by the lesser of (x) $1.75 or (y)
     95% of the average of the two lowest closing bid prices of the Company's
     common stock on the American Stock Exchange ("AMEX") out of the fifteen
     trading days immediately prior to conversion.

     The Series A Preferred Holders converted 13,578 and 9,028 shares of the
     Series A convertible preferred stock plus accrued dividends, into 721,366
     and 306,254 shares of common stock, respectively, during the nine months
     ended December 31, 2004 and 2003, respectively. The conversion prices
     ranged from $1.07 to $1.75 based on the above formula.

     The Series A Preferred Holders had the right to receive on any outstanding
     Series A convertible preferred stock a ten percent dividend on the shares,
     payable one year after the issuance of such preferred stock, and an eight
     percent dividend for the subsequent three years thereafter, payable in
     either cash or shares of preferred stock. For the three and nine months
     ended December 31, 2004, the Company recorded preferred dividends of $0 and
     $82,572, respectively, on the outstanding shares of the Series A
     convertible preferred stock. For the three and nine months ended December
     31, 2003, the Company recorded preferred dividends of $48,556 and $157,172,
     respectively, on the outstanding shares of the Series A convertible
     preferred stock.

     On April 6, 2001, the Company recorded the initial carrying value of the
     preferred stock as $521,848. Each quarter the Company calculated an
     estimated redemption value of the remaining preferred stock and then
     calculates the difference between the initial carrying value and this
     estimated redemption value. The difference was then accreted over the



                                       9
<PAGE>

     redemption period (48 months beginning April 2001) using the straight-line
     method, which approximates the effective interest method. For the three and
     nine months ended December 31, 2004, the Company recorded $0 and $203,605,
     respectively, related to the accretion of the redemption value of preferred
     stock and the beneficial conversion feature of accrued dividends. For the
     three and nine months ended December 31, 2003, the Company recorded
     $131,076 and $1,677,409, respectively, related to the accretion of the
     redemption value of preferred stock and the beneficial conversion feature
     of accrued dividends.

     Common Stock Issuance
     ---------------------
     On October 6, 2004, the Company completed a private placement of its Common
     Stock, $.01 par value, issuing a total of 2,000,000 shares to an existing
     shareholder of the Company for aggregate gross proceeds to the Company of
     $2,300,000. These proceeds were used to redeem the Company's Series A
     convertible preferred stock as discussed above. The purchase price of the
     shares was $1.15 per share. The shareholder also received a warrant to
     purchase up to 500,000 shares of common stock of the Company at an exercise
     price of $1.15 per share for a period of five years. The closing sale price
     of the common stock on the AMEX Stock Exchange on October 6, 2004 was
     $1.30. The shares are restricted securities that have not been registered
     under the Act and may not be offered or sold in the United States absent
     registration or applicable exemptions and registration requirements. The
     Company has undertaken the obligation to file and obtain effectiveness of a
     registration statement with the Securities and Exchange Commission within
     180 days of closing to register the shares issued in the private placement
     and to include the shares underlying the warrants described herein.

     In accordance with a registration rights agreement, the Company has agreed
     that if a registration statement was not filed, or did not become effective
     within the defined period of time, then in addition to any other rights the
     investor may have, the Company would be required to pay the investor an
     amount in cash, as liquidated damages, equal to 2.5% of the product of (i)
     the per share purchase price of the shares acquired and (ii) the number of
     shares of registrable securities then held by the investor, for the period
     from April 4, 2005 to the first Computation Date, and for each 30-day
     period of any subsequent Computation Dates thereafter, in each case
     calculated on a pro rata basis to the date on which the registration
     statement is declared effective by the SEC. "Computation Date" means the
     date that is 30 days after April 4, 2005 and, if the registration statement
     to be filed by the Company has not theretofore been declared effective by
     the SEC, each date which is 30 days after the previous Computation Date
     until such registration statement is so declared effective. The Company
     plans to file the registration statement in the near future.

     In accordance with EITF 00-19, "Accounting for Derivative Financial
     Instruments Indexed To, and Potentially Settled in the Company's Own
     Stock," and the terms of the warrants, the fair value of the warrants were
     accounted for as a liability, with an offsetting reduction to the carrying
     value of the common stock. The warrant liability will be reclassified to
     equity upon the effective date of the registration statement.

     The fair value of the warrants was estimated using the Black-Scholes
     option-pricing model with the following assumptions: no dividends,
     risk-free interest rate of 3.45%, contractual life of 5 years, and
     volatility of 46%. The fair value of the warrants on October 6, 2004, was
     estimated to be $315,000. On December 31, 2004, the fair value of the
     warrants was re-measured and estimated to be $500,000. The increase of
     $185,000 was reflected as a charge to non-cash compensation in the
     Statement of Operations in the quarter ended December 31, 2004.


(4)  NON-CASH COMPENSATION RELATED TO OPTIONS AND WARRANTS
     -----------------------------------------------------
     The Company calculates non-cash compensation related to its securities in
     the Company's Statements of Operations on three primary items:

     a.  notes receivable for common stock
     The Financial Accounting Standards Board issued Interpretation No. 44 ("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. Accordingly, any increase in the market price of the Company's
     common stock over the exercise price of the options that was not previously
     recorded is recorded as compensation expense at each reporting period. If
     there is a decrease in the market price of the Company's common stock
     compared to the prior reporting period, the reduction is recorded as
     compensation income. Compensation income is limited to the original base
     exercise price (the "Floor") of the options. In accordance with FIN 44, the
     underlying shares related to the $12,772,200 note receivable from the
     Company's founder, Angelo S. Morini, are treated as variable due to the
     nature of the note being non-interest bearing and non-recourse.


                                       10
<PAGE>

     The Floor for the underlying shares is $4.38 per share. There was no
     non-cash compensation expense or income related to these shares recorded
     during the three and nine months ended December 31, 2004 and 2003 as the
     price of the Company's common stock at the beginning and end of the periods
     was below the Floor.


     b.  option and warrant repricing
     On October 11, 2002, the Company repriced all outstanding options granted
     to employees prior to October 11, 2002 (4,284,108 shares at former prices
     ranging from $2.84 to $10.28) to the then market price of $2.05 per share.
     In addition, the Company repriced the outstanding warrants held by current
     consultants as of October 11, 2002 (291,429 shares at former prices ranging
     from $3.31 to $5.50) to the then market price of $2.05 per share. This
     stock option repricing resulted in variable accounting treatment for these
     stock options beginning with the quarter ended December 31, 2002 and such
     variable accounting treatment will continue until the related options have
     been cancelled, expired or exercised. On December 4, 2002, as a result of
     discussions and negotiations with certain major shareholders, the Company's
     founder, Angelo S. Morini, agreed to reverse the repricing of his 3,692,035
     options for the purpose of improving shareholder value and lessening
     potential financial statement expense. Although the exercise prices of the
     options were reversed back to their original amounts, the Company is still
     required to account for any outstanding options related to these
     reversed-repriced options in accordance with variable accounting standards
     each period.

     For the three and nine months ended December 31, 2004, the Company did not
     record any income or expense related to these variable options and warrants
     as the stock price was below $2.05 at the beginning and end of the period.
     The Company recorded non-cash compensation income of $379,428 and non-cash
     compensation expense of $540,613 related to these variable options and
     warrants for the three and nine months ended December 31, 2003,
     respectively. The remaining outstanding variable options and warrants as of
     December 31, 2004 were 3,882,092.

     c.  option and warrant issuances
     The Company recorded $361,186 and $402,388 as non-cash compensation expense
     related to options and warrants that were issued to and vested by officers,
     directors and consultants during the three and nine months ended December
     31, 2004, respectively. The Company recorded $123,716 and $639,064 as
     non-cash compensation expense related to stock, options and warrants that
     were issued to and vested by officers, directors and consultants during the
     three and nine months ended December 31, 2003, respectively.


(5)  EARNINGS PER SHARE
     ------------------
     The following is a reconciliation of basic net earnings (loss) per share to
     diluted net earnings (loss) per share:

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED                          NINE MONTHS ENDED
                                                          DECEMBER 31,                                DECEMBER 31,
                                               ----------------------------------          ----------------------------------
                                                   2004                  2003                  2004                  2003
                                               ------------          ------------          ------------          ------------
<S>                                            <C>                   <C>                   <C>                   <C>
Net loss per common share                      $   (739,401)         $ (1,557,986)         $ (2,106,936)         $ (5,411,184)
                                               ============          ============          ============          ============

Average shares outstanding - basic and
  diluted                                        18,218,651            15,401,972            16,554,208            14,720,618
                                               ============          ============          ============          ============

Basic and diluted net income (loss)
  per common share                             $      (0.04)         $      (0.10)         $      (0.13)         $      (0.37)
</TABLE>


     Potential exercise of options for 5,075,702 shares and warrants for
     2,285,356 shares have not been included in the computation of diluted net
     loss per common share for the three and nine months ended December 31,
     2004, respectively, as their effect would be antidilutive. Potential
     conversion of Series A convertible preferred stock for 1,652,296 shares,
     options for 4,742,201 shares and warrants for 1,242,856 shares have not
     been included in the computation of diluted net loss per common share for
     the three and nine months ended December 31, 2003, respectively, as their
     effect would be antidilutive.


(6)  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.


                                       11
<PAGE>


<TABLE>
<CAPTION>
  Nine months ended December 31,                                              2004               2003
  ----------------------------------------------------------------         ----------         ----------
<S>                                                                        <C>                <C>
  Non-cash financing and investing activities:
  Fair value of options and warrants issued                                $  704,763         $  685,308

  Accrued preferred stock
     dividends                                                                 82,572            157,172
  Beneficial conversion feature related to preferred stock dividends           14,491             78,906
  Accretion of discount on preferred stock                                    189,114          1,598,503
  Purchase of equipment through capital lease obligations and term
     notes payable                                                             82,583                 --
  Reduction in notes payable through issuance of common stock                      --            162,424

  Cash paid for:
  Interest                                                                    767,001            861,126
  Income taxes                                                                     --                 --
</TABLE>


(7)  RELATED PARTY TRANSACTIONS
     --------------------------
     Angelo S. Morini
     ----------------
     In June 1999, in connection with an amended and restated employment
     agreement for Angelo S. Morini, the Company's Founder, the Company
     consolidated two full recourse notes receivable ($1,200,000 from November
     1994 and $11,572,200 from October 1995) related to the exercise of
     2,914,286 shares of the Company's common stock into a single note
     receivable in the amount of $12,772,200 that is due on June 15, 2006. This
     new consolidated note is non-interest bearing and non-recourse and is
     secured by the 2,914,286 shares of the Company's common stock. Per the June
     1999 employment agreement and the October 2003 Second Amended and Restated
     Employment Agreement, this loan may be forgiven upon the occurrence of any
     of the following events: 1) Mr. Morini is terminated without cause; 2)
     there is a material breach in the terms of Mr. Morini's employment
     agreement; or 3) there is a change in control of the Company for which Mr.
     Morini did not vote "FOR" in his capacity as a director or a shareholder.

     In a Second Amended and Restated Employment Agreement effective October 13,
     2003, Angelo S. Morini the Company's Founder, Vice-Chairman and President
     resigned from his positions with the Company as Vice Chairman and President
     and will no longer be involved in the daily operations of the Company. He
     will retain the title of Founder and has been named Chairman Emeritus. Mr.
     Morini will continue as an employee and as a member of the Company's Board
     of Directors. Additionally, he may carry out special assignments designated
     to him by the Chairman of the Board. The agreement is for a five-year
     period beginning October 13, 2003 and provides for an annual base salary of
     $300,000 plus standard health insurance benefits, club dues and an auto
     allowance. The Company accrued and expensed the five-year cost of this
     agreement in the quarter ended December 31, 2003. The total estimated costs
     expensed under this agreement are $1,830,329 of which $1,385,419 remained
     unpaid but accrued ($366,305 in short-term liabilities and $1,019,114 in
     long-term liabilities) as of December 31, 2004. The long-term portion will
     be paid out in nearly equal monthly installments ending in October 2008.

     In July 2004, the Company entered into a brokerage contract with Mr.
     Morini's brother. The contract has been cancelled effective December 1,
     2004. Total amounts to be paid in accordance with this brokerage contract
     are deemed to be immaterial.

     Christopher J. New
     ------------------
     On July 8, 2004, Christopher J. New resigned from his position as Chief
     Executive Officer in order to pursue other opportunities. In accordance
     with the Separation and Settlement Agreement between the Company and Mr.
     New, the Company recorded $444,883 related to the employment contract
     expense in July 2004. This settlement will be paid out in nearly equal
     installments over two years payable on the Company's regular payroll dates.
     In addition to the compensation, the Company agreed that Mr. New's stock
     option rights under that certain Non-Qualified Stock Option Agreement dated
     December 5, 2002 (for 25,000 shares at $1.67) and that certain
     Non-Qualified Stock Option Agreement dated July 16, 2001 (for 100,000
     shares at $2.05) will continue in full force and effect as if he was
     employed by the Company. As of December 31, 2004, the remaining balance
     accrued was $342,537 ($220,218 in short-term liabilities and $122,319 in
     long-term liabilities).


                                       12
<PAGE>

     Michael E. Broll
     ----------------
     On July 8, 2004, Michael E. Broll, a member of the Company's Board of
     Directors, was appointed as the Chief Executive Officer upon the
     resignation of Mr. New. The Company entered into a one-year employment
     agreement with Mr. Broll pursuant to which Mr. Broll is entitled to receive
     an annual base salary of $200,000 plus a performance bonus at the
     discretion of the Board, standard health benefits, a housing allowance of
     up to $500 per week for one year and an auto allowance of $1,500 per month.
     The employment agreement renews automatically for one-year periods unless
     cancelled by either party ninety days prior to the end of the term. In the
     event Mr. Broll's employment is terminated without cause, he will be
     entitled to receive one year of his base salary as severance.


(8)  ECONOMIC DEPENDENCE
     -------------------
     The Company had one customer that accounted for approximately 15% and 13%
     of sales in the three and nine months ended December 31, 2004. As of
     December 31, 2004, the amount due from this customer is approximately 15%
     of the balance of accounts receivable. There were no customers that
     accounted for greater than 10% of sales or of the accounts receivable
     balance as of December 31, 2003.






                                       13
<PAGE>


                         GALAXY NUTRITIONAL FOODS, INC.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operation

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. These
forward-looking statements are based on the Company's current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by us. 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. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, the Company's actual
results may differ materially from those described in these forward-looking
statements due to among other factors, competition in the Company's product
markets, dependence on suppliers, the Company's manufacturing experience, and
production delays or inefficiencies. The Company undertakes no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.

Galaxy Nutritional Foods, Inc. (the "Company") is principally engaged in
developing, manufacturing and marketing a variety of healthy cheese and dairy
related products, as well as other cheese alternatives, and is a leading
producer of dairy alternative products made with soy. These healthy cheese and
dairy related products include low or no fat, no saturated fat, no trans-fat,
low or no cholesterol and lactose-free varieties. These products are sold
throughout the United States and internationally to customers in the retail and
food service markets. The Company's headquarters and manufacturing facilities
are located in Orlando, Florida.

MATERIAL EVENTS
On October 6, 2004, BH Capital Investments, LP and Excalibur Limited
Partnership, the holders of the Company's Series A convertible preferred stock
(the "Series A Preferred Holders"), converted 10,278 Series A convertible
preferred shares into approximately 600,000 shares of common stock.
Simultaneously, the remaining 30,316 Series A convertible preferred shares held
by the Series A Preferred Holders were redeemed by the Company for a total price
of $2,279,688. All previously outstanding shares of the Series A convertible
preferred stock of the Company have now been cancelled. As part of the
transaction, the former Series A Preferred Holders also received warrants to
purchase up to 500,000 shares of common stock at an exercise price of $2.00 per
share for a period of five years. The fair value of the warrants is $205,000.
The cash for the redemption was provided to the Company through a private
placement of 2,000,000 shares of its common stock with an existing shareholder
of the Company for aggregate gross proceeds to the Company of $2,300,000. See
"Equity Financing" below for further details.

BUSINESS ENVIRONMENT
The Company is principally engaged in developing, manufacturing and marketing a
variety of healthy cheese and dairy related products, as well as other cheese
alternatives, and is a leading producer of dairy alternative products made with
soy and brown rice. For the nine months ended December 31, 2004, 66% of the
Company's sales were derived from sales of sliced cheese products. The Company
is in the process of strengthening and balancing its product segmentation among
various forms of cheese such as slices, shreds, and chunks, and its other
non-cheese related products. For example, the Company may add new products that
appeal to younger consumers and have portable functionality (that is,
"on-the-go" users) as well as products targeted toward specific ethnic cuisines.

Management focuses on several items in order to measure the Company's
performance. In the short term (1 to 3 years), management is working towards
obtaining positive trends in several areas including:

     o    Operating cash flow

     o    Gross margin in dollars and percentage of net sales

     o    Operating income excluding certain employment contract expenses and
          non-cash compensation related to options and warrants

     o    EBITDA excluding certain employment contract expenses and non-cash
          compensation related to options and warrants

     o    Liquidity

     o    Net sales trends (as they relate to consumer demand)

     o    Key financial ratios (AR/AP/Inventory turnover)

     o    Other operating ratios and statistics



                                       14
<PAGE>

In the long term (over 3 years), management is striving to generate consistent
and predictable net sales growth while incrementally enhancing net cash flow
from operations.

The principal raw material used by the Company is casein, which accounts for
approximately 46% of the Company's raw material purchases. As casein is a
significant component of the Company's product formulation, the Company is
vulnerable to short and long-term changes in casein pricing, which at times has
been volatile. During the first nine months of fiscal 2005, the Company has seen
a 30% increase in casein prices compared to the first nine months of fiscal
2004, which resulted in an increase in cost of goods of approximately $2,000,000
dollars. Every 5% increase in casein prices will result in an annual cost
increase of approximately $350,000 assuming the same amount of pounds purchased
as in fiscal 2004. Costs are rising mainly due to a worldwide shortage of casein
and due to the decline in the US dollar value. The Company believes that casein
prices will remain at historical highs through the end of the first quarter of
fiscal 2006. The Company anticipates that this will result in an annual increase
in casein prices of approximately 35% for fiscal 2005 over fiscal 2004. In order
to offset the high casein costs, management is incorporating lower cost formula
modifications that maintain the integrity of the Company's product benefits as
well as reducing costs in several other raw materials and operational labor
categories. Finally, management has passed along some of the increased costs to
its customers during fiscal 2005 and will propose additional price increases as
appropriate.

 Management believes that stabilized, albeit high, casein prices and ongoing
operational cost reductions will provide the opportunity to resume a targeted
yet enhanced consumer marketing campaign directed toward the Company's core
brands in fiscal 2006. Management is continuing with plans to build the core
branded business by leveraging a premium brand approach that begins with
superior product quality over most of the direct alternative cheese competition.
Management believes that combining "healthy" product attributes, improved taste
and product functionality will lead to better than expected consumer experiences
with our brands. Management's focus is to transfer those improved consumer
experiences into enhanced market share and higher margins.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                Three Months Ended December 31,                      Nine Months Ended December 31,
                     -------------------------------------------------   -----------------------------------------------
                        2004           2003          Change         %       2004         2003        Change          %
                     -------------------------------------------------   -----------------------------------------------
<S>                  <C>            <C>             <C>           <C>    <C>          <C>           <C>            <C>
Net Sales            10,632,877     9,638,571       994,306       10.3%  33,725,108   27,664,259    6,060,849      21.9%
Cost of Goods Sold    8,289,551     6,715,750     1,573,801       23.4%  25,860,850   19,096,843    6,764,007      35.4%
                     -------------------------------------------------   -----------------------------------------------
Gross Margin          2,343,326     2,922,821      (579,495)     (19.8%)  7,864,258    8,567,416     (703,158)     (8.2%)
                     =================================================   ===============================================
Gross Profit %               22%           30%                                   23%          31%
                     ============================                        ==========================
</TABLE>


Net Sales increased approximately 10% in the third quarter and approximately 22%
in the first nine months of fiscal 2005 compared to the same periods in fiscal
2004. This increase over the first nine months of fiscal 2005 is primarily due
to increased sales in contract manufacturing, the food service business and
Wholesome Valley Organic products. During the first nine months of fiscal 2005,
the Company had one new contract manufacturing customer that accounted for
approximately 13% of sales. This customer accounted for nearly 78% of the
increase in fiscal 2005 sales during the first nine months. Contract
manufacturing sales consist primarily of products that generate high sales
volumes but lower gross margins.

Management uses several internal and external reports to monitor sales by brand,
segment, form and channel of sale to determine the outside factors affecting the
sales levels. These reports provide management with information on which brand,
segments, forms and/or channel sales are increasing or decreasing both in units
sold and price per unit. By reviewing these reports along with industry data
from publications, syndicated retail consumption reports, and conversations with
major retailers, other manufacturers in the food and beverage industry, and
ingredient and service suppliers, management makes decisions on which brands to
promote and analyzes trends in the consumer marketplace.

The Company's internal data indicates that its overall branded sales were
slightly higher in the first nine months of fiscal 2005 versus the first nine
months of fiscal 2004. Although the Company is a very strong leader within the
alternative cheese category, the Company is working toward increasing its
presence within the overall alternative dairy category through a combination of
new product development and consumer marketing.



                                       15
<PAGE>

The increase in the sales in the first nine months of fiscal 2005 as compared to
fiscal 2004 is attributable to the Company's focus on three primary areas:

      o     The Company shifted the emphasis and resource allocation of its
            marketing strategy from vendor promotions (retailer
            publications/flyers featuring price reductions and on-shelf
            temporary price reductions) to consumer advertising (magazine,
            radio, event sponsorship, etc.) and consumer promotions (for
            example, on-pack "cents off" coupons, "cents off" coupons delivered
            via newspapers, in-store product sampling, product benefit
            communication at the point of purchase/shelf). The Company saw an
            increase in sales through its consumer advertising and promotions,
            which highlight and communicate the benefits of the Company's
            products to meet the consumer demand for low carbohydrate and high
            protein products. This is a significant strategy shift and is based
            upon retail consumption data purchased from IRI (Information
            Resources Incorporated) that indicates increased sales potential
            from consumer focused marketing efforts versus similar dollars being
            spent toward price related vendor advertising and promotions. The
            Company experienced an average 17% increase in sales in those
            markets where there was consumer advertising promotions.

      o     The Company also focused its efforts toward generating consumer
            awareness, conducting product trials, and generating more repeat
            purchases for its brands, which will enrich our branded presence
            within the alternative cheese category.

      o     The Company secured certain contract manufacturing opportunities,
            which it previously turned away or did not pursue earlier in prior
            years due to cash constraints. This enabled the Company to better
            utilize some of its excess production capacity, which resulted in a
            higher return on invested capital. The proceeds generated from these
            sales are being used to further support the Company's brands. The
            Company increased its contract manufacturing activities by nearly
            348% which resulted in a 19% increase in sales in the first nine
            months of fiscal 2005 compared to the first nine months of fiscal
            2004. The Company's contract manufacturing activities relate
            primarily to products that generate lower margins. As the Company
            added additional contract manufacturing business to its product mix,
            the Company's gross margin percentage has decreased.

The Company plans to maintain contract manufacturing at its current level of
approximately 20% of sales. For fiscal 2006, the Company is projecting continued
double-digit growth in sales through improved distribution and penetration of
its core brands.

COST OF GOODS SOLD increased from 70% of net sales in the third quarter of
fiscal 2004 to 78% of net sales in the third quarter of fiscal 2005. This 8%
increase in cost of goods sold was primarily due to rising raw material costs.
Cost of goods sold also increased 8% during the first nine months of fiscal 2005
compared to the first nine months of 2004. Of this 8% increase in cost of goods
sold in relation to net sales, 6% was a direct result of higher key raw material
costs (including casein, packaging and film supplies) and the balance of the
increase was due to the addition of certain contract manufacturing items that
were sold at a lower margin resulting in a higher cost in relation to net sales.
Based on current pricing trends with its suppliers, management expects to see
stabilized, albeit high, casein prices during the remainder of fiscal 2005.
Every 5% increase in casein prices will result in an annual cost increase of
approximately $350,000 assuming the same amount of pounds purchased as in fiscal
2004. Costs are rising mainly due to a worldwide shortage of casein and due to
the decline in the US dollar value. The Company anticipates that the price of
casein will remain high during the remainder of fiscal 2005, resulting in an
annual increase of approximately 35% over fiscal 2004. The Company believes that
casein prices will stabilize but remain at historical highs through the end of
the first quarter of fiscal 2006. Management is striving to offset these cost
increases by implementing projects to improve production efficiency and to
reduce costs of other raw materials. Additionally, management has passed along
some of these costs to its customers through sales price increases on certain
products. Management monitors its costs and production efficiencies through
various ratios including pounds produced per hour and cost per pound sold and
uses these ratios to make decisions in purchasing, production and setting sales
prices.

In fiscal 2005, the gross profit percentage will remain lower than the levels in
fiscal 2004 due to the sharp increase in raw material costs and the change in
the product mix due to the addition of several contract manufacturing customers
as noted above. In spite of the increase in net sales during fiscal 2005, gross
margin for fiscal 2005 is expected to be comparable or slightly lower than the
gross margin for fiscal 2004 due to a large portion of raw material cost
increases that cannot be passed on completely to existing customers.



                                       16
<PAGE>


<TABLE>
<CAPTION>
                                   Three Months Ended December 31,                 Nine Months Ended December 31,
                            --------------------------------------------------------------------------------------------
                                2004          2003       Change        %        2004        2003       Change       %
                            --------------------------------------------------------------------------------------------
<S>                           <C>          <C>         <C>          <C>      <C>         <C>          <C>         <C>
Gross Margin                  2,343,326    2,922,821   (579,495)    (19.8%)  7,864,258   8,567,416    (703,158)   (8.2%)
Operating Expenses:
   Selling                    1,213,549    1,110,097    103,452       9.3%   4,246,419   3,870,829     375,590     9.7%
   Delivery                     549,379      544,930      4,449       0.8%   1,757,962   1,430,706     327,256    22.9%
   Non-cash compensation
   related to options and
   warrants                     361,186    (255,712)    616,898     241.3%     402,388   1,179,677    (777,289)  (65.9%)
   Employment contract               --    1,830,329 (1,830,329)   (100.0%)    444,883   1,830,329  (1,385,446)  (75.7%)
   General & administrative     595,196      752,123   (156,927)    (20.9%)  1,794,506   2,621,621    (827,115)  (31.6%)
   Research & development        74,861       65,474      9,387      14.3%     226,479     191,466      35,013    18.3%
                            --------------------------------------------------------------------------------------------
Total Operating Expenses      2,794,171    4,047,241 (1,253,070)    (31.0%)  8,872,637  11,124,628  (2,251,991)  (20.2%)
                            --------------------------------------------------------------------------------------------

Loss From Operations           (450,845) (1,124,420)    673,575      59.9%  (1,008,379) (2,557,212)  1,548,833    60.6%

Non-cash compensation
  related to options and
  warrants  (2)                 361,186    (255,712)    616,898     241.3%     402,388   1,179,677    (777,289)  (66.0%)

Employment contract  (3)             --   1,830,329  (1,830,329)   (100.0%)    444,883   1,830,329  (1,385,446)  (75.7%)
                            --------------------------------------------------------------------------------------------

Operating Income (Loss), as
  Adjusted (1) (a non-GAAP
  measure)                      (89,659)    450,197    (539,856)   (119.9%)   (161,108)    452,794    (613,902) (135.6%)
                            ============================================================================================
</TABLE>


(1)      Management utilizes certain non-GAAP measures such as Operating Income,
         as adjusted, Net Income, as adjusted and EBITDA, as adjusted, because
         they provide useful information to management, lenders and investors in
         order to accurately review the Company's current on-going operations
         and business trends related to its financial condition and results of
         operations. Additionally, these measures are key factors upon which the
         Company prepares its budgets and forecasts, calculates bonuses, and
         evaluates loan covenants. These non-GAAP measures are not in accordance
         with, or an alternative for, generally accepted accounting principles
         and may be different from non-GAAP measures reported by other
         companies.
(2)      In its determination of non-GAAP measures, management excludes the
         non-cash compensation related to options and warrants because it
         believes that this item does not accurately reflect the Company's
         current on-going operations. Non-cash compensation is calculated based
         on fluctuations in the Company's stock price, which can skew the
         financial results dramatically up and down. The price of the Company's
         common shares as traded on AMEX is outside the Company's control and
         typically do not reflect the Company's current operations.
(3)      In its determination of non-GAAP measures, management excludes the
         employment contract expenses related to Angelo S. Morini and
         Christopher J. New because it believes that these items do not reflect
         expenses related to the Company's current on-going operations.
         Additionally, these items are excluded by the Company's lenders when
         calculating compliance with loan covenants.

The decrease in Operating Income, as adjusted, during the third quarter of
fiscal 2005 compared to the third quarter of fiscal 2004 is primarily due to the
decrease in gross margin as a result of the sharp increase in cost of goods sold
as described above.

Selling expenses were 11% and 12% of net sales in the third quarter of fiscal
2005 and 2004, respectively. Selling expenses were 13% and 14% of net sales in
the first nine months of fiscal 2005 and 2004, respectively. The dollar increase
in selling expenses during the three and nine months of fiscal 2005 was due to
the increase in sales volume and due to a shift in marketing efforts from vendor
promotions to consumer advertising. In the first nine months of fiscal 2005, the
Company increased consumer advertising by approximately $404,000 and decreased
vendor promotions by nearly $46,000 compared to the first nine months of fiscal
2004.



                                       17
<PAGE>

The large consumer advertising costs were related to a strategic television
campaign, which was undertaken to promote the Company's Veggie brand products
during the second and third quarter of fiscal 2005. Although selling expenses
are increasing in dollars, they are becoming a smaller percentage of sales in
the first nine months of fiscal 2005, as the fixed components of selling
expenses are remaining comparable to the first nine months of fiscal 2004. The
Company expects that fiscal 2005 selling expenses will increase compared to
fiscal 2004 expenses as a result of the higher sales volume and based on the
Company's current plan for marketing strategic products. Selling expenses for
fiscal 2006 are expected to be higher in amount due to increased sales, but
lower in percentage as the fixed expenses of the selling category do not
increase in proportion to sales. Management believes that the Company's internal
sales force and broker network are sufficiently robust to leverage higher sales
volume with a minimal increase in overall dollars spent.

Delivery expenses increased $4,449 and $327,256 in the third quarter and in the
first nine months of fiscal 2005 compared to the same periods in fiscal 2004 as
a result of the increase in net sales. Delivery expenses approximate 5% of net
sales each period. Unless offset by price savings from shipping larger loads,
the Company anticipates that delivery costs will increase as a percentage of
sales in the future periods due to higher fuel prices and rate changes due to
the new laws regarding limitation of driver hours. The Company anticipates that
total fiscal 2005 delivery expenses will range from 5% to 6% of net sales based
on the above factors.

Non-cash Compensation Related to Options and Warrants

<TABLE>
<CAPTION>
                                         Three Months Ended December 31,         Nine Months Ended December 31,
                                          -----------------------------          -----------------------------
                                             2004               2003                2004               2003
                                          ----------         ----------          ----------         ----------
<S>                                       <C>                <C>                 <C>                <C>
Notes Receivable for Common Stock         $       --         $       --          $       --         $       --
Option and Warrant Repricing                      --           (379,428)                 --            540,613
Option and Warrant Issuances                 361,186            123,716             402,388            639,064
                                          ----------         ----------          ----------         ----------
    Total Non-Cash Compensation
    (Income)/Expense                      $  361,186         $ (255,712)         $  402,388         $1,179,677
                                          ==========         ==========          ==========         ==========
</TABLE>


The Company values the non-cash compensation related to its securities on three
primary items:

     a.  Notes Receivable for Common Stock
     -------------------------------------
     The Financial Accounting Standards Board issued Interpretation No. 44 ("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. Accordingly, any increase in the market price of the Company's
     common stock over the exercise price of the options that was not previously
     recorded is recorded as compensation expense at each reporting period. If
     there is a decrease in the market price of the Company's common stock
     compared to the prior reporting period, the reduction is recorded as
     compensation income. Compensation income is limited to the original base
     exercise price (the "Floor") of the options. In accordance with FIN 44, the
     underlying shares related to the $12,772,200 note receivable from the
     Company's founder, Angelo S. Morini, are treated as variable due to the
     nature of the note being non-interest bearing and non-recourse. The Floor
     for the underlying shares is $4.38 per share. There was no non-cash
     compensation expense or income related to these shares recorded during the
     three and nine months ended December 31, 2004 and 2003 as the price of the
     Company's common stock at the beginning and end of the periods was below
     the Floor. Due to the volatility of the market price of its common stock,
     the Company is incapable of predicting whether this expense will increase
     or decrease in the future. If the Company's stock price is above the Floor
     of $4.38, a $0.01 increase or decrease in the Company's common stock price
     results in an expense or income, respectively, of approximately $29,000.

     b. Option and Warrant Repricing
     -------------------------------
     On October 11, 2002, the Company repriced all outstanding options granted
     to employees prior to October 11, 2002 (4,284,108 shares at former prices
     ranging from $2.84 to $10.28) to the then market price of $2.05 per share.
     In addition, the Company repriced the outstanding warrants held by current
     consultants as of October 11, 2002 (291,429 shares at former prices ranging
     from $3.31 to $5.50) to the then market price of $2.05 per share. This
     stock option repricing resulted in variable accounting treatment for these
     stock options beginning with the quarter ended December 31, 2002 and such
     variable accounting treatment will continue until the related options have
     been cancelled, expired or exercised. On December 4, 2002, as a result of
     discussions and negotiations with certain major shareholders, the Company's
     founder, Angelo S. Morini, agreed to reverse the repricing of his 3,692,035
     options for the purpose of improving shareholder value and lessening
     potential financial statement expense. Although the exercise prices of the
     options were reversed back to their original amounts, the Company is still
     required to account for any outstanding options related to these
     reversed-repriced options in accordance with variable accounting standards
     each period.



                                       18
<PAGE>

     For the three and nine months ended December 31, 2004, the Company did not
     record any income or expense related to these variable options and warrants
     as the stock price was below $2.05 at the beginning and end of the period.
     The Company recorded non-cash compensation income of $379,428 and non-cash
     compensation expense of $540,613 related to these variable options and
     warrants for the three and nine months ended December 31, 2003,
     respectively. The remaining outstanding variable options and warrants as of
     December 31, 2004 were 3,882,092. Assuming no further options or warrants
     are exercised or cancelled and all are vested and the Company's stock price
     is above the lowest Floor of $2.05, a $0.01 increase or decrease in the
     Company's common stock price results in an expense or income, respectively,
     up to $39,000.

     c.  Option and Warrant Issuances
     --------------------------------
     The Company recorded $361,186 and $402,388 as non-cash compensation expense
     related to options and warrants that were issued to and vested by officers,
     directors and consultants during the three and nine months ended December
     31, 2004, respectively. The Company recorded $123,716 and $639,064 as
     non-cash compensation expense related to stock, options and warrants that
     were issued to and vested by officers, directors and consultants during the
     three and nine months ended December 31, 2003, respectively. In accordance
     with EITF 00-19, the Company will need to record an expense or income up to
     $5,000 for every $0.01 increase or decrease, respectively, in the Company's
     common stock price.

Employment Contract Expense - On July 8, 2004, Christopher J. New resigned from
his position as Chief Executive Officer in order to pursue other opportunities.
In accordance with the Separation and Settlement Agreement between the Company
and Mr. New, Mr. New is entitled to receive (1) a one-time settlement of $1,000;
(2) two years of his base salary, payable over two years on the Company's
regular payroll dates; (3) coverage of health care costs for six months; and (4)
extension of the time for which he can exercise his employee stock options under
that certain Non-Qualified Stock Option Agreement dated December 5, 2002 (for
25,000 shares at $1.67) and that certain Non-Qualified Stock Option Agreement
dated July 16, 2001 (for 100,000 shares at $2.05) from 60 days after leaving
employment to the end of the option terms. The Company recorded $444,883 in
costs related to this separation agreement as employment contract expense in
July 2004. This charge is reflected in the results for the Company's second
quarter and for the first nine months of fiscal 2005.

During the three and nine months ended December 31, 2004, the Company recorded
$1,830,329 in costs related to the Second Amended and Restated Employment
Agreement between Angelo S. Morini and the Company. The Company is paying these
costs over five years in nearly equal monthly installments ending in October
2008.

General and administrative expenses decreased by 21% in the third quarter and by
32% in the first nine months of fiscal 2005 compared to the third quarter and
first nine months of fiscal 2004, respectively. This decrease results primarily
from a decrease in personnel costs and legal fees. Personnel costs declined due
to the change in the employment status of Angelo S. Morini per the amended
employment agreement in October 2003. Legal fees were higher in the first nine
months of fiscal 2004 due to the private placement and corporate refinancing
that was completed in May 2003. Additionally, legal fees decreased in fiscal
2005 due to the settlement of the Schreiber lawsuit in May 2004. Management
anticipates that general and administrative expenses will be lower in fiscal
2005 than in fiscal 2004 due to lower legal fees incurred in fiscal 2005 to date
and a decrease in personnel expenses based on the amended employment agreement
with Angelo S. Morini.

Research and development expenses increased by $9,387 in the third quarter of
fiscal 2005 compared to the third quarter of fiscal 2004 and by $35,013 in the
first nine months of fiscal 2005 compared to the first nine months of fiscal
2004 primarily as a result of an increase in research and development personnel
costs. The Company anticipates a slight increase in research and development
expenses in fiscal 2005 compared to fiscal 2004 primarily due to additional
personnel costs associated with new product development.

Interest expense increased slightly in the third quarter of fiscal 2005 compared
to the third quarter of fiscal 2004 due to higher floating interest rates with
the Company's primary lenders, Southtrust Bank and Textron Financial
Corporation. The increase in floating interest rates was due to higher
prevailing market interest rates upon which the Company's lenders' floating
rates are based. Interest expense decreased $207,011 or 20% in the first nine
months of fiscal 2005 compared to the first nine months of fiscal 2004 due to a
reduction of the Company's average outstanding debt through the refinancing in
May 2003. Additionally, the FINOVA asset based line of credit was replaced by a
comparable line of credit with more favorable terms from Textron through the
refinancing. See "Debt Financing" below for further detail on the Company's
outstanding debts and interest rates thereon.




                                       19
<PAGE>

Ebitda Calculation

<TABLE>
<CAPTION>
                                    Three Months Ended December 31,                 Nine Months Ended December 31,
                            -----------------------------------------------------------------------------------------------
                                  2004      2003         Change        %         2004       2003        Change       %
                            -----------------------------------------------------------------------------------------------
<S>                            <C>      <C>             <C>          <C>     <C>         <C>          <C>          <C>
Loss From Operations           (450,845)(1,124,420)     673,575      59.9%   (1,008,379) (2,557,212)  1,548,833    60.6%

Interest Expense               (288,556)  (253,934)     (34,622)    (13.6%)    (812,380) (1,019,391)    207,011    20.3%
                            -----------------------------------------------------------------------------------------------
Net Loss                       (739,401)(1,378,354)     638,953       46.4%  (1,820,759) (3,576,603)  1,755,844    49.1%
   Non-cash compensation
   related to options and
   warrants  (2)                361,186   (255,712)     616,898     241.3%      402,388   1,179,677    (777,289)  (65.9%)
   Employment contract  (3)          --  1,830,329   (1,830,329)   (100.0%)     444,883   1,830,329  (1,385,446)  (75.7%)
                            -----------------------------------------------------------------------------------------------
NET INCOME (LOSS), AS          (378,215)   196,263     (574,478)   (292.7%)    (973,488)   (566,597)   (406,891)  (71.8%)
ADJUSTED  (1) (a non-GAAP
measure)

  Interest Expense              288,556    253,934       34,622      13.6%      812,380   1,019,391    (207,011)  (20.3%)
  Depreciation                  541,170    548,632       (7,462)     (1.4%)   1,633,256   1,657,431     (24,175)   (1.5%)
                            -----------------------------------------------------------------------------------------------
EBITDA, AS ADJUSTED  (1) (a     451,511    998,829     (547,318)    (54.8%)   1,472,148   2,110,225    (638,077)  (30.2%)
non-GAAP measure)
                            ===============================================================================================
EBITDA % OF NET SALES           4.3%       10.4%                                4.4%        7.6%
                            =========================                       =========================
</TABLE>


(1)      Management utilizes certain non-GAAP measures such as Operating Income,
         as adjusted, Net Income, as adjusted and EBITDA, as adjusted, because
         they provide useful information to management, lenders and investors in
         order to accurately review the Company's current on-going operations
         and business trends related to its financial condition and results of
         operations. Additionally, these measures are key factors upon which the
         Company prepares its budgets and forecasts, calculates bonuses, and
         evaluates loan covenants. These non-GAAP measures are not in accordance
         with, or an alternative for, generally accepted accounting principles
         and may be different from non-GAAP measures reported by other
         companies.
(2)      In its determination of non-GAAP measures, management excludes the
         non-cash compensation related to options and warrants because it
         believes that this item does not accurately reflect the Company's
         current on-going operations. Non-cash compensation is calculated based
         on fluctuations in the Company's stock price, which can skew the
         financial results dramatically up and down. The price of the Company's
         common shares as traded on AMEX is outside the Company's control and
         typically do not reflect the Company's current operations.
(3)      In its determination of non-GAAP measures, management excludes the
         employment contract expenses related to Angelo S. Morini and
         Christopher J. New because it believes that these items do not reflect
         expenses related to the Company's current on-going operations.
         Additionally, these items are excluded by the Company's lenders when
         calculating compliance with loan covenants.

The decrease in net income, as adjusted, is primarily the result of the decrease
in gross margin as a result of the sharp increase in cost of goods sold as
described above.

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
Nine Months Ended December 31,                   2004                 2003               Change               %
                                             -----------          -----------          -----------          ------
<S>                                          <C>                  <C>                  <C>                  <C>
Cash provided by (used in) operating
  activities                                 $  (180,638)         $ 1,968,063          $(2,148,701)         (109.2%)

Cash used in investing activities                (42,725)            (173,505)             130,780           75.4%


Cash used in financing activities               (114,698)          (1,319,416)           1,204,718           91.3%
                                             -----------          -----------          -----------          ------

Net increase (decrease) in cash              $  (338,061)         $   475,142          $  (813,203)         (171.1%)
                                             ===========          ===========          ===========          ======
</TABLE>


                                       20
<PAGE>

Operating Activities - The decrease in cash provided by operations in the first
nine months of fiscal 2005 compared to the first nine months of fiscal 2004 is
primarily attributable to higher accounts receivable and inventory levels offset
by higher accounts payable balances reflective of the higher sales volume in the
current year. Accounts receivable, inventory and accounts payable levels are
rising due to the higher sales volumes during the first nine months of fiscal
2005. Accounts receivable collection periods are fairly consistent with prior
periods and inventory turnover is increasing. The Company anticipates that
annual operating activities should provide positive cash for operations in
future years. Additionally, the Company anticipates that accounts receivable,
inventories and accounts payable balances will continue to increase during
fiscal 2005 as sales continue to increase over fiscal 2004 levels.

Investing Activities - The decrease in cash used for investing activities during
the nine months ended December 31, 2004 as compared to the nine months ended
December 31, 2003 primarily resulted from a lower level of fixed asset purchases
during the period. The Company currently has no plans for any major capital
additions. Most current period purchases of assets are for normal recurring
asset upgrades and replacements.

Financing Activities - During the first nine months of fiscal 2005, the Company
increased its line of credit with Textron Financial Corporation to fund its
increases in accounts receivable and inventory levels. Additionally, the Company
issued 2,000,000 shares of its common stock for aggregate gross proceeds of
$2,300,000. These proceeds were then used to redeem the remaining 30,316 Series
A convertible preferred shares held by the Series A Preferred Holders for a
total price of $2,279,688. See "Equity Financing" below for further details.
During the first quarter of fiscal 2004, the Company raised $3,850,000 through
the issuance of common stock and $2,000,000 from a new term loan with SouthTrust
Bank. The Company used $4,000,000 of these proceeds to pay in full the principal
balance owed to FINOVA Mezzanine. The remaining proceeds were used for
operations and to further reduce the Company's accounts payable and debt
balances.

Debt Financing
--------------
On May 27, 2003, the Company obtained from Textron Financial Corporation
("Textron") a revolving credit facility (the "Textron Loan") with a maximum
principal amount of $7,500,000 pursuant to the terms and conditions of a Loan
and Security Agreement dated May 27, 2003 (the "Textron Loan Agreement"). The
Textron Loan is secured by the Company's inventory, accounts receivable and all
other assets. Generally, subject to the maximum principal amount, which can be
borrowed under the Textron Loan and certain reserves that must be maintained
during the term of the Textron Loan, the amount available under the Textron Loan
for borrowing by the Company from time to time is equal to the sum of (i) 85% of
the net amount of its eligible accounts receivable plus (ii) 60% of the
Company's eligible inventory not to exceed $3,500,000. Advances under the
Textron Loan bear interest at a variable rate, adjusted on the first (1st) day
of each month, equal to the prime rate plus 1.75% per annum (7% at December 31,
2004) calculated on the average cash borrowings for the preceding month. The
Textron Loan matures and all amounts are due and payable in full on May 26,
2006. As of December 31, 2004, the outstanding principal balance on the Textron
Loan was $5,546,703.

The Textron Loan Agreement contains certain financial and operating covenants.
Due to the $444,883 charge to operations related to the Separation and
Settlement Agreement between the Company and Christopher J. New, its former
Chief Executive Officer, the Company fell below the requirement for the adjusted
tangible net worth and the fixed charge coverage ratio covenants for the quarter
ended September 30, 2004. In a third amendment to the Textron Loan Agreement
dated November 10, 2004, Textron agreed to change a definition in the loan
covenants, the effect of which brought the Company back into compliance with
both ratios. The Company anticipates that it will be in compliance with these
ratios, as amended, for the foreseeable future based on current forecasts.

Simultaneous with the closing of the Textron Loan in May 2003, SouthTrust Bank
extended the Company a new term loan in the principal amount of $2,000,000. This
loan was consolidated with the Company's March 2000 term loan with SouthTrust
Bank, which had a then outstanding principal balance of $8,131,985 for a total
term loan amount of $10,131,985. The revised term loan bears interest at
SouthTrust Bank's prime rate of interest plus 1% (6.25% at December 31, 2004),
and is due in increasing principal installments by June 2009. Each month, the
Company will pay the accrued interest on the loan plus principal amounts as
follows: $110,000 from January 2005 to June 2005, and $166,250 from July 2005
until maturity in June 2009. In a Loan Modification letter dated May 21, 2004,
beginning in October 2004, interest may be adjusted quarterly from prime to
prime plus 1.25% according to the Company's performance ratios in prior
quarters. This note is secured by all of the Company's equipment and certain
related assets. The balance outstanding on the term loan as of December 31, 2004
was $8,571,985.




                                       21
<PAGE>


Equity Financing
----------------
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 from the Series A Preferred Holders 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 with a face value of $3,500,000
and warrants to purchase up to 500,000 shares of the Company's common stock. The
Series A Preferred Holders had the right to receive on any outstanding Series A
convertible preferred stock a ten percent stock dividend on the shares, payable
one year after the issuance of such preferred stock, and an eight percent stock
dividend for the subsequent three years thereafter, payable in either cash or
shares of preferred stock. The Series A convertible preferred stock was subject
to certain designations, preferences and rights set forth in the Company's
Restated Certificate of Incorporation, including the right to convert such
shares into shares of common stock at any time, at a current conversion rate
(subject to appropriate adjustment for stock splits, stock dividends,
recapitalizations and other events) of the number of shares of common stock for
each share of Series A convertible preferred stock equal to the quotient of
$48.18, plus all accrued dividends that are then unpaid for each share of the
Series A convertible preferred stock divided by the lesser of (x) $1.75 or (y)
95% of the average of the two lowest closing bid prices of the Company's common
stock on the American Stock Exchange out of the fifteen trading days immediately
prior to conversion.

As of September 30, 2004, the Series A Preferred Holders had converted 32,052
shares of the Series A convertible preferred stock plus accrued dividends, into
1,206,240 shares of common stock. The conversion prices ranged from $1.28 to
$1.75 based on the above formula.

On October 6, 2004, the Company's Series A Preferred Holders converted 10,278
Series A convertible preferred shares into approximately 600,000 shares of
common stock. Simultaneously, the remaining 30,316 Series A convertible
preferred shares held by the Series A Preferred Holders were acquired by the
Company for a total price of $2,279,688. All previously outstanding shares of
the Series A convertible preferred stock of the Company have now been cancelled.
As part of the transaction, the former Series A Preferred Holders also received
warrants to purchase up to 500,000 shares of common stock at an exercise price
of $2.00 per share for a period of five years. The fair value of the warrants is
$205,000.

On October 6, 2004, the Company completed a private placement of its common
stock, $.01 par value, issuing a total of 2,000,000 shares to Mr. Fredrick
DeLuca (an existing shareholder of the Company) for aggregate gross proceeds to
the Company of $2,300,000. The purchase price of the shares was $1.15 per share.
Mr. DeLuca also received a warrant to purchase up to 500,000 shares of common
stock of the Company at an exercise price of $1.15 per share for a period of
five years. The closing sale price of the common stock on the AMEX Stock
Exchange on October 6, 2004 was $1.30. The shares are restricted securities that
have not been registered under the Act and may not be offered or sold in the
United States absent registration or applicable exemptions and registration
requirements. The Company has undertaken the obligation to file a registration
statement with the Securities and Exchange Commission within 180 days of closing
to register the shares issued in the private placement and to include the shares
underlying the warrants described herein. In accordance with EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled in the Company's Own Stock," and the terms of the warrants, the fair
value of the warrants were accounted for as a liability, with an offsetting
reduction to the carrying value of the common stock. The warrant liability will
be reclassified to equity upon the effective date of the registration statement.

The fair value of the warrants was estimated using the Black-Scholes
option-pricing model with the following assumptions: no dividends, risk-free
interest rate of 3.45%, contractual life of 5 years, and volatility of 46%. The
fair value of the warrants on October 6, 2004, was estimated to be $315,000. On
December 31, 2004, the fair value of the warrants was re-measured and estimated
to be $500,000. The increase of $185,000 was reflected as a charge to non-cash
compensation in the Statement of Operations in the quarter ended December 31,
2004.

Summary
-------
Management believes that with the proceeds available with its Textron credit
facilities together with cash flow from current operations, the Company will
have enough cash to meet its current liquidity needs for general operations for
the foreseeable future.


                                       22
<PAGE>




CRITICAL ACCOUNTING POLICIES

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 and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of income and expense during the
reporting periods presented. The Company's significant estimates include the
allowance for doubtful accounts receivable, provision for obsolete inventory,
and valuation of deferred taxes and warrants. Although the Company believes that
these estimates are reasonable, actual results could differ from those estimates
given a change in conditions or assumptions that have been consistently applied.

The critical accounting policies used by the Company, and the methodology for
estimates and assumptions are as follows:

Valuation of Accounts Receivable and Chargebacks
The Company records revenue upon shipment of products to its customers and
reasonable assurance of collection on the sale. It provides credit terms to
customers usually based on net 30 days. The Company performs ongoing credit
evaluations of its accounts receivable and makes reserves for anticipated future
credits that will be issued to its customers for promotions, discounts, spoils,
etc., based on historical experience. In addition, the Company evaluates the
accounts for potential uncollectible amounts. The Company's accounts receivable
reserve estimate is based on a specific identification and a general reserve
methodology over the remaining items.

Based on the age of the receivable, cash collection history and past dilution in
the receivables, the Company makes an estimate of its anticipated bad debt,
anticipated future authorized deductions due to current period activity and
anticipated collections on non-authorized amounts that customers have currently
deducted on past invoices. Based on this analysis, the Company reserved $742,000
and $671,742 for known and anticipated future credits and doubtful accounts at
December 31, 2004 and 2003, respectively. Actual bad debt expense during the
periods is less than 1% of gross sales. We believe that this estimate is
reasonable, but there can be no assurance that the Company's estimate will not
change given a change in economic conditions or business conditions within the
food industry or the Company.

Inventory
---------
Inventories are valued at the lower of cost or market. Cost is determined using
a weighted average, first-in, first out method. The Company reviews its
inventory valuation each month and writes down the inventory for potential
obsolete and damaged inventory. In addition, the finished goods inventory value
is reduced to market value when the known sales price is less than the cost of
the inventory.

Deferred Taxes
--------------
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.

Valuation of Non-Cash Compensation
----------------------------------
The Company accounts for its stock-based employee compensation plans under the
accounting provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", furnishes the pro forma disclosures required
under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", and applies SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" on a prospective basis for
options granted after March 31, 2003.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which addresses
the accounting for share-based payment transactions in which a company receives
employee services in exchange for (a) equity instruments of the company or (b)
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of equity instruments. Under SFAS No.
123R companies are required to record compensation expense for all share-based
payment award transactions measured at fair value. This statement is effective
for quarters beginning after June 15, 2005. Effective April 1, 2003, the Company
adopted the fair value method of recording compensation expense related to all
stock options granted after March 31, 2003, in accordance with SFAS No. 123.
Accordingly, the fair value of stock options as determined on the date of grant
using the Black-Scholes option-pricing model, will be expensed over the vesting
period of the related stock options.

Several management estimates are needed to compute the fair value of the options
including anticipated life of the options, risk free interest rates, and
volatility of the Company's stock price. Currently, the Company estimates the
life of all options



                                       23
<PAGE>

granted assuming that the option will remain outstanding and not be exercised
until the end of its term. This results in the highest possible value of the
option. If the Company were to change its estimate of the option lives to
something less than the maximum term, then the fair value expense per share
would decrease by approximately $.01 to $.02 per month. If the Company changes
its estimate of the volatility percentage, the fair value expense per share
would change by approximately $.02 per percentage change in the volatility. If
the Company changes its estimate of the interest rate, the fair value expense
per share would change by approximately $.04 per percentage change in the
interest rate.

SFAS No. 123 requires the Company to provide pro-forma information regarding net
income (loss) and earnings (loss) per share amounts as if compensation cost for
the Company's employee and director stock options had been determined in
accordance with the fair market value-based method prescribed in SFAS No. 123.
The Company estimates the fair value of each stock option at the grant date by
using a Black-Scholes option-pricing model. The following assumptions were used
for options issued during the periods:

         Nine Months Ended            December 31, 2004      December 31, 2003
                                      -------------------   --------------------
         Dividend Yield               None                  None
         Volatility                   44.9% to 46%          41% to 45%
         Risk Free Interest Rate      3.38% to 4.12%        2.01% to 4.28%
         Expected Lives in Months     60 to 120             36 to 120

In addition to non-cash compensation expense related to new option issuances,
the Company also records non-cash compensation expense or income in accordance
with the Financial Accounting Standards Board Interpretation No. 44 ("FIN 44").
FIN 44 states that when an option is repriced or there is an outstanding loan
related to the exercise of an option, it is treated as a variable option and is
marked to market each quarter. Accordingly, any increase in the market price of
the Company's common stock over the exercise price of the option that was not
previously recorded is recorded as compensation expense at each reporting
period. If there is a decrease in the market price of the Company's common stock
compared to the prior reporting period, the reduction is recorded as
compensation income. Compensation income is limited to the original base
exercise price (the "Floor") of the options. Each period the Company records
non-cash compensation expense or income related to its analysis on approximately
6.8 million option shares. Assuming that the stock price exceeds the Floor on
all the variable option shares, a $0.01 increase or decrease in the Company's
common stock price results in an expense or income, respectively, of $68,000.
Due to the volatility of the market price of its common stock, the Company is
incapable of predicting whether this expense will increase or decrease in the
future.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk results primarily from fluctuations in
interest rates. The interest rates on the Company's outstanding debts to
SouthTrust Bank and Textron are 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% increase or decrease in market rates in effect on December 31,
2004 with respect to the Company's debt as of such date would increase or
decrease interest expense and hence reduce or increase net income of the Company
by approximately $141,000 per year or $35,000 per quarter.

The Company's sales during the nine-month periods ended December 31, 2004 and
2003, which were denominated in a currency other than U.S. dollars, were less
than 5% of gross sales and no net assets were maintained in a functional
currency other than U. S. dollars during such periods. However, further declines
in the U.S. dollar on the international market, may lead the Company's foreign
suppliers of casein to increase their U.S. dollar prices on future orders from
the Company. Therefore, while the Company believes that the effects of changes
in foreign currency exchange rates have not historically been significant to the
Company's operations or net assets, the Company is unable to forecast the
effects that foreign currency exchange rates may have on the Company's future
operations.


ITEM 4. CONTROLS AND PROCEDURES

As of the end of the fiscal quarter ended December 31, 2004, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO"), and the Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
the Company's disclosure controls and procedures to insure that the Company
records, processes, summarizes and reports in a timely and effective manner the
information required to be disclosed in reports filed with or submitted to the
Securities and Exchange Commission. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and



                                       24
<PAGE>

procedures were effective in timely bringing to their attention material
information related to the Company required to be included in the Company's
periodic Securities and Exchange Commission filings. Since the date of this
evaluation, there have been no material changes in the Company's internal
controls or in other factors that are reasonably likely to materially affect
those controls.























                                       25
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

In accordance with an exemption from registration under Regulation D promulgated
under the Securities Act of 1933, as amended, on October 6, 2004, the Company
completed a private placement of its Common Stock, $.01 par value, issuing a
total of 2,000,000 shares to Mr. Fredrick DeLuca (an existing shareholder of the
Company) for aggregate gross proceeds to the Company of $2,300,000. The purchase
price of the shares was $1.15 per share. Mr. DeLuca also received a warrant to
purchase up to 500,000 shares of common stock of the Company at an exercise
price of $1.15 per share for a period of five years. The closing sale price of
the common stock on the AMEX Stock Exchange on October 6, 2004 was $1.30. The
shares are restricted securities that have not been registered under the Act and
may not be offered or sold in the United States absent registration or
applicable exemptions and registration requirements. The Company has undertaken
the obligation to file a registration statement with the Securities and Exchange
Commission within 180 days of closing to register the shares issued in the
private placement and to include the shares underlying the warrants described
herein.

In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled in the Company's Own Stock," and the terms
of the warrants, the fair value of the warrants were accounted for as a
liability, with an offsetting reduction to the carrying value of the common
stock. The warrant liability will be reclassified to equity upon the effective
date of the registration statement.

The fair value of the warrants was estimated using the Black-Scholes
option-pricing model with the following assumptions: no dividends, risk-free
interest rate of 3.45%, contractual life of 5 years, and volatility of 46%. The
fair value of the warrants on October 6, 2004, was estimated to be $315,000. On
December 31, 2004, the fair value of the warrants was re-measured and estimated
to be $500,000. The increase of $185,000 was reflected as a charge to non-cash
compensation in the Statement of Operations in the quarter ended December 31,
2004.

<TABLE>
<CAPTION>
---------------------- --------------------- -------------------- --------------------- ---------------------
                                                                                         (d) Maximum number
                                                                                          (or Approximate
                                                                  (c) Total Number of     Dollar Value) of
                                                                  Shares Purchased as   Shares that May Yet
                                                                    Part of Publicly     Be Purchased Under
                       (a) Total Number of    (b) Average Price    Announced Plans or       the Plans or
       Period            Shares Purchased      Paid per Share           Programs              Programs
---------------------- --------------------- -------------------- --------------------- ---------------------
<S>                           <C>                  <C>
October 6, 2004 (1)           30,316               $75.20                 None                  None
---------------------- --------------------- -------------------- --------------------- ---------------------
</TABLE>

(1) The proceeds from the above mentioned private placement were used to redeem
the remaining 30,316 Series A convertible preferred shares held by the Series A
Preferred Holders in a privately negotiated transaction completed on October 6,
2004 and to pay the legal fees associated with the transaction. The Company
redeemed these Series A convertible preferred shares for a total purchase price
of $2,279,688 ($75.20 per share). The redeemed shares constituted all of the
Company's outstanding Series A convertible preferred shares and there are no
plans for purchases under any further plans or programs.


ITEM 3. Defaults Upon Senior Securities

Effective May 30, 2003, the Company obtained from Textron Financial Corporation
("Textron") a revolving credit facility (the "Textron Loan") in the maximum
principal amount of $7,500,000 pursuant to the terms and conditions of a Loan
and Security Agreement dated May 27, 2003 (the "Loan Agreement"). The Textron
Loan contains certain financial and operating covenants. Due to the $444,883
charge to operations related to the Separation and Settlement Agreement between
the Company and Christopher J. New, its former Chief Executive Officer, the
Company fell below the requirement for the adjusted tangible net worth and the
fixed charge coverage ratio covenants for the quarter ended September 30, 2004.
In a third amendment to the Textron Loan Agreement dated November 10, 2004,
Textron agreed to change a definition in the loan covenants, the effect of which
brought the Company back into compliance with both ratios. The Company
anticipates that it will be in compliance with these ratios, as amended, for the
foreseeable future based on current forecasts.




                                       26
<PAGE>

ITEM 6. Exhibits

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

Exhibit No  Exhibit Description
----------  -------------------

* 3.1       Restated Certificate of Incorporation of the Company as filed with
            the Secretary of State of the State of Delaware on December 23, 2002
            (Filed as Exhibit 3.2 on Form 10-Q for the fiscal quarter ended
            December 31, 2002.)

* 3.2       By-laws of the Company, as amended (Filed as Exhibit 3.2 to
            Registration Statement on Form S-18, No. 33-15893-NY.)

* 4.1       Stock Purchase Option Agreement and Stock Purchase Warrant by and
            between Excalibur Limited Partnership and BH Capital Investments,
            L.P. and Galaxy Nutritional Foods dated as of April 24, 2003 (Filed
            as Exhibit 10.52 on Form 10-Q for the fiscal quarter ended June 30,
            2003.)

* 4.2       Warrant to Purchase Securities of Galaxy Nutritional Foods, Inc.
            dated as of May 29, 2003 in favor of SouthTrust Bank (Filed as
            Exhibit 10.7 on Form 8-K filed June 2, 2003.)

* 4.3       Securities Purchase Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Fromageries Bel S.A. (Filed as
            Exhibit 10.8 on Form 8-K filed June 2, 2003.)

* 4.4       Registration Rights Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Fromageries Bel S.A. (Filed as
            Exhibit 10.9 on Form 8-K filed June 2, 2003.)

* 4.5       Securities Purchase Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as
            Exhibit 10.10 on Form 8-K filed June 2, 2003.)

* 4.6       Registration Rights Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as
            Exhibit 10.11 on Form 8-K filed June 2, 2003.)

* 4.7       Securities Purchase Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Apollo Capital Management Group,
            L.P. (Filed as Exhibit 10.12 on Form 8-K filed June 2, 2003.)

* 4.8       Registration Rights Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Apollo Capital Management Group,
            L.P. (Filed as Exhibit 10.13 on Form 8-K filed June 2, 2003.)

* 4.9       Securities Purchase Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Apollo MicroCap Partners, L.P.
            (Filed as Exhibit 10.14 on Form 8-K filed June 2, 2003.)

* 4.10      Registration Rights Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Apollo MicroCap Partners, L.P.
            (Filed as Exhibit 10.15 on Form 8-K filed June 2, 2003.)

* 4.11      Securities Purchase Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Ruggieri of Windermere Family
            Limited Partnership (Filed as Exhibit 10.16 on Form 8-K filed June
            2, 2003.)

* 4.12      Registration Rights Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Ruggieri of Windermere Family
            Limited Partnership (Filed as Exhibit 10.17 on Form 8-K filed June
            2, 2003.)

* 4.13      Securities Purchase Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Ruggieri Financial Pension Plan
            (Filed as Exhibit 10.18 on Form 8-K filed June 2, 2003.)

* 4.14      Registration Rights Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and Ruggieri Financial Pension Plan
            (Filed as Exhibit 10.19 on Form 8-K filed June 2, 2003.)

* 4.15      Securities Purchase Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and David Lipka (Filed as Exhibit
            10.20 on Form 8-K filed June 2, 2003.)



                                       27
<PAGE>

* 4.16      Registration Rights Agreement dated as of May 21, 2003 between
            Galaxy Nutritional Foods, Inc. and David Lipka (Filed as Exhibit
            10.21 on Form 8-K filed June 2, 2003.)

* 4.17      Stockholder Agreement dated as of October 13, 2003 between Galaxy
            Nutritional Foods, Inc. and Angelo S. Morini (Filed as Exhibit 10.55
            on Form 10-Q for the fiscal quarter ended September 30, 2003.)

* 4.18      Securities Purchase Agreement dated as of October 6, 2004 between
            Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as
            Exhibit 4.18 on Form 8-K filed October 8, 2004.)

* 4.19      Registration Rights Agreement dated as of October 6, 2004 between
            Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as
            Exhibit 4.19 on Form 8-K filed October 8, 2004.)

* 4.20      Warrant to Purchase Securities of Galaxy Nutritional Foods, Inc.
            dated as of October 6, 2004 in favor of Frederick A. DeLuca (Filed
            as Exhibit 4.20 on Form 8-K filed October 8, 2004.)

* 4.21      Stock Repurchase Agreement dated as of October 6, 2004 by and among
            Galaxy Nutritional Foods, Inc., BH Capital Investments L.P. and
            Excalibur Limited Partnership (Filed as Exhibit 4.21 on Form 8-K
            filed October 8, 2004.)

* 4.22      Registration Rights Agreement dated as of October 6, 2004 by and
            among Galaxy Nutritional Foods, Inc., BH Capital Investments L.P.
            and Excalibur Limited Partnership (Filed as Exhibit 4.22 on Form 8-K
            filed October 8, 2004.)

* 4.23      Warrant to Purchase Securities of Galaxy Nutritional Foods, Inc.
            dated as of October 6, 2004 in favor of BH Capital Investments L.P.
            (Filed as Exhibit 4.23 on Form 8-K filed October 8, 2004.)

* 4.24      Warrant to Purchase Securities of Galaxy Nutritional Foods, Inc.
            dated as of October 6, 2004 in favor of Excalibur Limited
            Partnership (Filed as Exhibit 4.24 on Form 8-K filed October 8,
            2004.)

* 10.1      Master Distribution and License Agreement dated as of May 22, 2003
            between Galaxy Nutritional Foods, Inc. and Fromageries Bel S.A.
            (Filed as Exhibit 10.22 on Form 8-K filed June 2, 2003.)

* 10.2      Loan and Security Agreement dated as of May 27, 2003 between Galaxy
            Nutritional Foods, Inc. and Textron Financial Corporation (Filed as
            Exhibit 10.1 on Form 8-K filed June 2, 2003.)

* 10.3      Patent, Copyright and Trademark Collateral Security Agreement dated
            as of May 27, 2003 between Galaxy Nutritional Foods, Inc. and
            Textron Financial Corporation (Filed as Exhibit 10.2 on Form 8-K
            filed June 2, 2003.)

* 10.4      Renewal Promissory Note in the principal amount of $10.131,984.85
            dated as of May 28, 2003 by Galaxy Nutritional Foods, Inc. in favor
            of SouthTrust Bank (Filed as Exhibit 10.3 on Form 8-K filed June 2,
            2003.)

* 10.5      Renewal Promissory Note in the principal amount of $501,000.00 dated
            as of May 28, 2003 by Galaxy Nutritional Foods, Inc. in favor of
            SouthTrust Bank (Filed as Exhibit 10.4 on Form 8-K filed June 2,
            2003.)

* 10.6      Amendment of Loan Agreement dated as of May 28, 2003 between Galaxy
            Nutritional Foods, Inc. and SouthTrust Bank (Filed as Exhibit 10.5
            on Form 8-K filed June 2, 2003.)

* 10.7      Amendment of Security Agreement dated as of May 28, 2003 between
            Galaxy Nutritional Foods, Inc. and SouthTrust Bank (Filed as Exhibit
            10.6 on Form 8-K filed June 2, 2003.)

* 10.8      Waiver Letter from Textron Financial Corporation to the Company
            dated August 13, 2003 (Filed as Exhibit 10.53 on Form 10-Q for the
            fiscal quarter ended June 30, 2003.)

* 10.9      Second Amended and Restated Employment Agreement dated as of October
            13, 2003 between Galaxy Nutritional Foods, Inc. and Angelo S. Morini
            (Filed as Exhibit 10.1 on Form 8-K filed October 20, 2003.)



                                       28
<PAGE>

* 10.10     Settlement Agreement dated May 6, 2004 between Galaxy Nutritional
            Foods, Inc. and Schreiber Foods, Inc. (Filed as Exhibit 10.1 on Form
            8-K filed May 11, 2004.)

* 10.11     Modification Letter on the Security Agreement dated as of May 21,
            2004 between Galaxy Nutritional Foods, Inc. and SouthTrust Bank
            (Filed as Exhibit 10.11 on Form 10-K for the fiscal year ended March
            31, 2004.)

* 10.12     Second Amendment to Loan and Security Agreement dated June 25, 2004
            between Galaxy Nutritional Foods, Inc. and Textron Financial
            Corporation (Filed as Exhibit 10.12 on Form 10-K for the fiscal year
            ended March 31, 2004.)

* 10.13     Third Amendment to Lease Agreement dated June 10, 2004 between
            Galaxy Nutritional Foods, Inc. and Cabot Industrial Properties, L.P.
            (Filed as Exhibit 10.13 on Form 10-K for the fiscal year ended March
            31, 2004.)

* 10.14     Separation and Settlement Agreement dated July 8, 2004 between
            Galaxy Nutritional Foods, Inc. and Christopher J. New (Filed as
            Exhibit 10.14 on Form 8-K filed July 13, 2004.)

* 10.15     Employment Agreement dated July 8, 2004 between Galaxy Nutritional
            Foods, Inc. and Michael E. Broll (Filed as Exhibit 10.15 on Form 8-K
            filed July 13, 2004.)

10.16       Third Amendment to Loan and Security Agreement dated November 10,
            2004 between Galaxy Nutritional Foods, Inc. and Textron Financial
            Corporation (Filed herewith.)

* 20.1      Audit Committee Charter (Filed as Exhibit 20.1 on Form 10-Q for the
            fiscal quarter ended September 30, 2003.)

* 20.2      Compensation Committee Charter (Filed as Exhibit 20.2 on Form 10-Q
            for the fiscal quarter ended September 30, 2003.)

31.1        Section 302 Certification of the Company's Chief Executive Officer
            (Filed herewith.)

31.2        Section 302 Certification of the Company's Chief Financial Officer
            (Filed herewith.)

32.1        Section 906 Certification of the Company's Chief Executive Officer
            (Filed herewith.)

32.2        Section 906 Certification of the Company's Chief Financial Officer
            (Filed herewith.)


*           Previously filed and incorporated herein by reference.







                                       29
<PAGE>

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                GALAXY NUTRITIONAL FOODS, INC.


Date: February 14, 2005         /s/ Michael E. Broll
                                --------------------------------------------
                                Michael E. Broll
                                Chief Executive Officer
                                (Principal Executive Officer)


Date: February 14, 2005         /s/ Salvatore J. Furnari
                                --------------------------------------------
                                Salvatore J. Furnari
                                Chief Financial Officer
                                (Principal Accounting and Financial Officer)





                                       30