UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q/A

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

(Mark One)

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

                  For the quarterly period ended June 30, 2005

                                       OR

|_|   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934

                          -----------------------------
                         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 August 18, 2005, there were 20,043,474 shares of common stock, $.01 par
value per share, outstanding.


                                       1
<PAGE>

                                EXPLANATORY NOTE

The  purpose  of this Form  10-Q/A is to amend  Part I,  Items 1, 2 and 4 of the
Quarterly  Report on Form 10-Q (the "Form  10-Q") of Galaxy  Nutritional  Foods,
Inc. (the  "Company") for its first fiscal quarter ended June 30, 2005, as filed
with the  Securities and Exchange  Commission on August 19, 2005.  Except as set
forth in this Form  10-Q/A,  this Form  10-Q/A  does not reflect any events that
occurred  after  the  filing  of the Form 10-Q or  modify,  amend or update  any
disclosures  contained in the Form 10-Q to reflect any subsequent events. Except
as set forth in this Form  10-Q/A,  the Company is not making any changes to, or
updating any disclosures contained in, the Form 10-Q.

This Form 10-Q/A is being  filed in  response to comments  that the Staff of the
Securities and Exchange  Commission  made to the Form 10-Q primarily  related to
the Company's  accounting for its warrants that were outstanding during the term
of its Series A convertible  preferred  stock,  from April 2001 through  October
2004.  The issue  relates to  accounting  for  securities  that are reflected as
income or expense through earnings as non-cash  charges.  These non-cash charges
do not affect the Company's revenues, cash flows from past or future operations,
or its  liquidity.  As  discussed  in Note 5 of the  financial  statements,  the
Company  has  reflected  a  net  decrease  in  additional   paid-in-capital  and
accumulated  deficit in the amount of $1,319,562  as of March 31, 2005.  For the
quarter ended June 30, 2004,  the Company has restated its financial  statements
to reflect a net loss of $521,611, which reflects an additional loss of $158,896
from  what was  previously  reported  for this  period  in the Form 10-Q for the
quarterly period ended June 30, 2005.

Additionally,  the Company  reclassified the $2,680,590 value of those shares of
common stock,  which the Company has  undertaken  the obligation to register for
resale pursuant to a registration rights agreement,  out of stockholders' equity
and into temporary  equity due to a change in estimate related to the assumption
that the maximum potential  liquidated  damages under such  registration  rights
agreement may be greater than the difference in fair values  between  registered
and unregistered shares.

In  addition,  this  Form  10-Q/A  also  updates  Part  I,  Item  4  to  reflect
management's  conclusion  that the changes  reflected  in Part I, Item 1 of this
Form 10-Q/A are the result of a material weakness relating to the accounting and
disclosure for complex and non-standard stockholders' equity transactions.


                                       2
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

                              Index to Form 10-Q/A
                       For the Quarter Ended June 30, 2005

                                                                        PAGE NO.
                                                                        --------

PART I.        FINANCIAL INFORMATION

     Item 1.   Financial Statements

         Balance Sheets                                                     4
         Statements of Operations                                           5
         Statement of Stockholders' Equity                                  6
         Statements of Cash Flows                                           7
         Notes to Financial Statements                                      8

     Item 2.   Management's Discussion and Analysis of
               Financial Condition and Results of Operations               18

     Item 4.  Controls and Procedures                                      33

PART II.       OTHER INFORMATION

     Item 6.    Exhibits                                                   34

SIGNATURES                                                                 38


                                       3
<PAGE>

                          PART I. FINANCIAL INFORMATION
                         GALAXY NUTRITIONAL FOODS, INC.
                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                                         JUNE 30,             MARCH 31,
                                                                            Notes          2005                 2005
                                                                           --------  ------------------   ------------------
                                                                                         RESTATED
                                                                                        (Unaudited)
                                  ASSETS
CURRENT ASSETS:
<S>                                                                            <C>       <C>                  <C>
  Cash                                                                                   $         --         $    561,782
  Trade receivables, net                                                       12           5,553,245            4,644,364
  Inventories                                                                               4,018,049            3,811,470
  Prepaid expenses and other                                                                  492,078              219,592
                                                                                         ------------         ------------

         Total current assets                                                              10,063,372            9,237,208

PROPERTY AND EQUIPMENT, NET                                                     7           9,872,074           18,246,445
OTHER ASSETS                                                                                  414,970              286,013
                                                                                         ------------         ------------

         TOTAL                                                                           $ 20,350,416         $ 27,769,666
                                                                                         ============         ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Line of credit                                                                2        $  4,736,456         $  5,458,479
  Book overdraft                                                                              541,317                   --
  Accounts payable                                                                          3,072,601            3,057,266
  Accrued and other current liabilities                                         3           1,660,631            2,130,206
  Current portion of accrued employment contract                               11             586,523              586,523
  Current portion of term notes payable                                         2           7,801,985            1,320,000
  Current portion of obligations under capital leases                                         154,502              194,042
                                                                                         ------------         ------------

         Total current liabilities                                                         18,554,015           12,746,516

ACCRUED EMPLOYMENT CONTRACT, less current portion                              11             846,240              993,305
TERM NOTES PAYABLE, less current portion                                        2                  --            6,921,985
OBLIGATIONS UNDER CAPITAL LEASES, less current portion                                         76,883               85,337
                                                                                         ------------         ------------

         Total liabilities                                                                 19,477,138           20,747,143
                                                                                         ------------         ------------

COMMITMENTS AND CONTINGENCIES                                                   4                  --                   --

TEMPORARY EQUITY:
   Common stock, subject to registration                                        4           2,680,590            2,220,590

STOCKHOLDERS' EQUITY:
  Common stock                                                                                175,435              164,115
  Additional paid-in capital                                                               68,361,776           65,838,227
  Accumulated deficit                                                                     (57,451,862)         (48,307,748)
                                                                                         ------------         ------------

                                                                                           11,085,349           17,694,594
  Less: Notes receivable arising from the exercise of stock options            11         (12,772,200)         (12,772,200)
        Treasury stock                                                                       (120,461)            (120,461)
                                                                                         ------------         ------------

         Total stockholders' equity (deficit)                                              (1,807,312)           4,801,933
                                                                                         ------------         ------------

         TOTAL                                                                           $ 20,350,416         $ 27,769,666
                                                                                         ============         ============
</TABLE>

                 See accompanying notes to financial statements


                                       4
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.
                            Statements of Operations
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                               JUNE 30,
                                                                   ---------------------------------
                                                        Notes          2005                 2004
                                                       ---------   -------------        ------------
                                                                                          RESTATED
<S>                                                       <C>      <C>                  <C>
NET SALES                                                          $  9,851,153         $ 11,191,678

COST OF GOODS SOLD                                                    7,582,855            8,251,330
                                                                   ------------         ------------
  Gross margin                                                        2,268,298            2,940,348
                                                                   ------------         ------------

OPERATING EXPENSES:
Selling                                                                 936,245            1,460,400
Delivery                                                                615,471              593,326
General and administrative, including $867,518 and
  $162,374 non-cash compensation related to stock         6
  based transactions                                                  1,601,530              795,716
Research and development                                                 91,042               72,686
Impairment of property and equipment                      7           7,896,554                   --
Cost of disposal activities                               8             255,011                   --
(Gain)/Loss on sale of assets                                              (636)                  --
                                                                   ------------         ------------
  Total operating expenses                                           11,395,217            2,922,128
                                                                   ------------         ------------

INCOME (LOSS) FROM OPERATIONS                                        (9,126,919)              18,220

OTHER INCOME (EXPENSE):
Interest expense                                                       (357,195)            (259,816)
Derivative expense                                        5                  --             (121,119)
Gain/(loss) on fair value of warrants                                   340,000             (158,896)
                                                                   ------------         ------------
    Total other income (expense)                                        (17,195)            (539,831)
                                                                   ------------         ------------

NET LOSS                                                           $ (9,144,114)        $   (521,611)

Less:
Preferred Stock Dividends                                 5                  --               42,392
Preferred Stock Accretion to Redemption Value             5                  --              500,644
                                                                   ------------         ------------

NET LOSS TO COMMON STOCKHOLDERS                                    $ (9,144,114)        $ (1,064,647)
                                                                   ============         ============



BASIC AND DILUTED NET LOSS PER COMMON SHARE               9        $      (0.49)        $      (0.07)
                                                                   ============         ============
</TABLE>

                 See accompanying notes to financial statements.


                                       5
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.
                       Statements of Stockholders' Equity
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                              Common Stock
                      ----------------------------                                            Notes
                                                                                            Receivable
                                                       Additional        Accumulated        for Common      Treasury
                          Shares       Par Value    Paid-In Capital        Deficit            Stock           Stock          Total
                      -------------------------------------------------------------------------------------------------------------
<S>                     <C>          <C>           <C>                <C>                <C>              <C>          <C>
Balance at March 31,    16,411,474   $  164,115    $    65,838,227    $   (48,307,748)   $  (12,772,200)  $ (120,461)  $  4,801,933
  2005

Exercise of warrants     1,130,000       11,300         1,257,700                 --                 --           --      1,269,000
Exercise of options          2,000           20             2,540                 --                 --           --          2,560
Fair value of
  stock-based
  transactions                  --           --         1,432,750                 --                 --           --      1,432,750
Non-cash compensation
  related to variable
  securities                    --           --          (169,441)                --                 --           --       (169,441)
Net loss                        --           --                --         (9,144,114)                --           --     (9,144,114)
                      -------------------------------------------------------------------------------------------------------------

Balance at June 30,
  2005                  17,543,474   $  175,435    $    68,361,776    $   (57,451,862)   $  (12,772,200)  $ (120,461)  $ (1,807,312)
                      =============================================================================================================
</TABLE>

                 See accompanying notes to financial statements.


                                       6
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.
                            Statements of Cash Flows
                                   (UNAUDITED)

<TABLE>
<CAPTION>
Three Months Ended June 30,                                               Notes         2005                 2004
                                                                         -------   --------------       -------------
                                                                                                           RESTATED
<S>                                                                       <C>        <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Loss                                                                           $(9,144,114)        $  (521,611)
  Adjustments to reconcile net loss to net cash from (used in)
    operating activities:
      Depreciation and amortization                                                      539,103             546,041
      Amortization of debt discount and financing costs                                   27,422              33,349
      Provision for losses on trade receivables                                          313,000             107,000
      Impairment of property and equipment and (gain)/loss on sale
        of assets                                                           7          7,895,919                  --
      Change in fair value of derivative instrument                         5                 --             121,119
      (Gain) Loss on fair value of warrants                                             (340,000)            158,896
      Non-cash compensation related to stock-based transactions           1,6            867,518             162,374
      (Increase) decrease in:
        Trade receivables                                                             (1,221,881)           (976,993)
        Inventories                                                                     (206,579)            (80,798)
        Prepaid expenses and other                                                      (272,486)           (281,686)
      Increase (decrease) in:
        Accounts payable                                                                  15,335           1,297,022
        Accrued and other liabilities                                                    123,360              13,325
                                                                                     -----------         -----------

   NET CASH FROM (USED IN) OPERATING ACTIVITIES                                       (1,403,403)            578,038
                                                                                     -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                                     (68,851)            (74,525)
  Proceeds from sale of equipment                                                          8,200                  --
                                                                                     -----------         -----------

   NET CASH FROM (USED IN) INVESTING ACTIVITIES                                          (60,651)            (74,525)
                                                                                     -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES:                                      10
  Increase in book overdrafts                                                            541,317                  --
  Net borrowings (payments) on line of credit                                           (722,023)             53,574
  Repayments on term notes payable                                                      (440,000)           (150,000)
  Principal payments on capital lease obligations                                        (47,994)            (67,487)
  Financing costs for long term debt                                                    (160,588)                 --
  Costs associated with issuance of common stock                                              --             (22,500)
  Proceeds from exercise of common stock options                                           2,560                  --
  Proceeds from exercise of common stock warrants                           5          1,729,000                  --
                                                                                     -----------         -----------

   NET CASH FROM (USED IN) FINANCING ACTIVITIES                                          902,272            (186,413)
                                                                                     -----------         -----------

NET INCREASE (DECREASE) IN CASH                                                         (561,782)            317,100

CASH, BEGINNING OF PERIOD                                                                561,782             449,679
                                                                                     -----------         -----------

CASH, END OF PERIOD                                                                  $        --         $   766,779
                                                                                     ===========         ===========
</TABLE>

                 See accompanying notes to financial statements.


                                       7
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.
                          Notes To Financial Statements
                                   (UNAUDITED)

(1)  Summary of Significant Accounting Policies

     The unaudited financial statements have been prepared by Galaxy Nutritional
     Foods,  Inc.  (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, 2005 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/A for the fiscal year ended March 31,  2005.  Interim  results of
     operations  for  the  three-month  period  ended  June  30,  2005  may  not
     necessarily be indicative of the results to be expected for the full year.

     Impairment of Long-Lived Assets

     In accordance with SFAS No. 144, "Accounting for the Impairment of Disposal
     of  Long-Lived  Assets,"  the  Company  evaluates  the  carrying  value  of
     long-lived assets when  circumstances  indicate the carrying value of those
     assets may not be fully recoverable.  The Company evaluates  recoverability
     of long-lived assets held for use by comparing the net carrying value of an
     asset group to the estimated  undiscounted cash flows (excluding  interest)
     during  the  remaining  life of the  asset  group.  If  such an  evaluation
     indicates  that the future  undiscounted  cash flows of certain  long-lived
     asset groups are not sufficient to recover the carrying value of such asset
     groups,  the assets are then  adjusted  to their fair  values.  The Company
     recorded an  impairment  of property and  equipment in the first quarter of
     fiscal 2006 as discussed more fully in Note 7.

     Stock Based Compensation

     The Company has three stock-based  employee  compensation  plans.  Prior to
     April 1, 2003, the Company  accounted for those plans under the recognition
     and measurement  provisions of Accounting  Principles Board Opinion No. 25,
     "Accounting  for Stock  Issued to  Employees,"  (APB No.  25),  and related
     Interpretations.

     Effective  April 1, 2003,  the Company  adopted the fair value  recognition
     provisions of 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,"
     prospectively  to all  employee  awards  granted on or after April 1, 2003.
     These  standards  require  the  Company  to provide  pro-forma  information
     regarding  net income  (loss) and earnings  (loss) per share  amounts as if
     compensation cost for all the Company's  employee and director  stock-based
     awards  had been  determined  in  accordance  with the  fair  value  method
     prescribed  in SFAS No.  123.  Awards  from the  Company's  plans vest over
     periods ranging from immediate to five years.  Therefore,  the cost related
     to stock-based compensation included in the determination of net income for
     the periods is less than that which would have been  recognized if the fair
     value  based  method  had been  applied to all  awards  since the  original
     effective date of SFAS No. 123.

     The Company  estimated the fair value of each stock-based  award during the
     periods  presented  by  using  the  Black-Scholes  pricing  model  with the
     following assumptions:

<TABLE>
<CAPTION>
              Three Months Ended:                  June 30, 2005          June 30, 2004
                                                  ---------------       -----------------
<S>                                                    <C>                   <C>
              Dividend Yield                           None                  None
              Volatility                               46.00%                47.80%
              Risk Free Interest Rate                  3.45%                 2.07%
              Expected Lives in Months                 1                     9
</TABLE>

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


                                       8
<PAGE>

                                                     THREE MONTHS ENDED
                                                          JUNE 30,
                                                   2005                2004
                                               -----------         -----------
Net loss to common stockholders as             $(9,144,114)        $(1,064,647)
  reported
  Add:  Stock-based compensation
  expense included in reported net loss            867,518             162,374
  Deduct:  Stock-based compensation
  expense determined under fair value
  based method for all awards                     (877,593)           (192,581)
                                               -----------         -----------
  Pro forma net loss to common
  stockholders                                 $(9,154,189)        $(1,094,854)
                                               ===========         ===========

Net loss per common share:
  Basic & Diluted - as reported                $     (0.49)        $     (0.07)
  Basic & Diluted - pro forma                  $     (0.49)        $     (0.07)

     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.

     Recent Accounting Pronouncements

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
     SFAS No.  151,  "Inventory  Costs,  an  amendment  of  Accounting  Research
     Bulletin No. 43, Chapter 4." SFAS No. 151 requires that abnormal amounts of
     idle  facility  expense,  freight,  handling  costs  and  wasted  materials
     (spoilage) be recorded as current period charges and that the allocation of
     fixed production  overheads to inventory be based on the normal capacity of
     the production  facilities.  SFAS No. 151 is effective  during fiscal years
     beginning after June 15, 2005,  although earlier  application is permitted.
     The Company  believes that the adoption of this  Statement  will not have a
     significant impact on the financial position, results of operations or cash
     flows of the Company.

     In December 2004, the 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.  SFAS No. 123R supercedes
     APB Opinion No. 25 and amends SFAS No. 95, "Statement of Cash Flows." Under
     SFAS No. 123R,  companies are required to record  compensation  expense for
     all  share-based  payment  award  transactions  measured  at fair  value as
     determined by an option  valuation model.  Currently,  the Company uses the
     Black-Scholes  pricing model to calculate the fair value of its share-based
     transactions.  This statement is effective for fiscal years beginning after
     June 15, 2005. Since the Company currently recognizes  compensation expense
     at fair value for share-based transactions in accordance with SFAS No. 123,
     it does not  anticipate  adoption of this  standard will have a significant
     impact on its financial  position,  results of  operations,  or cash flows.
     However,  the  Company  is still  evaluating  all  aspects  of the  revised
     standard.


                                       9
<PAGE>

     In December 2004,  the FASB issued SFAS No. 153,  "Exchanges of Nonmonetary
     Assets an Amendment of APB Opinion No. 29." SFAS No. 153 amends APB Opinion
     No. 29 to eliminate  the  exception  for  nonmonetary  exchanges of similar
     productive assets from being measured based on the fair value of the assets
     exchanged.  SFAS No. 153 now provides a general  exception for exchanges of
     nonmonetary assets that do not have commercial  substance.  SFAS No. 153 is
     effective for fiscal  periods  beginning  after June 15, 2005.  The Company
     believes  that the adoption of this  Statement  will not have a significant
     impact on its financial position, results of operations or cash flows.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
     Corrections - a replacement of APB Opinion No. 20 and SFAS No. 3." SFAS No.
     154 changes the  requirements  for the  accounting  for and  reporting of a
     change in  accounting  principle  and a change  required  by an  accounting
     pronouncement when the pronouncement  does not include specific  transition
     provisions.  SFAS No. 154 requires retrospective  application of changes as
     if the new  accounting  principle  had always  been  used.  SFAS No. 154 is
     effective for fiscal years  beginning  after December 15, 2005. The Company
     is  still  evaluating  all  aspects  of the  revised  standard  in order to
     evaluate the impact on its financial position and results of operations.

(2)  Line of Credit, Notes Payable and Going Concern

     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  (8.0% at June 30,  2005)
     calculated  on the average cash  borrowings  for the preceding  month.  The
     initial  term of the  Textron  loan  ends on May 26,  2006,  but this  loan
     automatically  renews for additional  one-year periods unless terminated by
     our Company or Textron through a written notice 90-days prior thereto or as
     otherwise  provided in the loan  agreement.  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 June 30,  2005,  the  outstanding  principal  balance  on the
     Textron Loan was $4,736,456.

     The  Textron  Loan  Agreement  contains  certain  financial  and  operating
     covenants.  On June 3, 2005, the Company executed a fourth amendment to the
     Textron Loan that  provided a waiver on all the  existing  defaults for the
     fiscal quarters ended December 31, 2004 and March 31, 2005, and amended the
     fixed  charge   coverage   ratio  and  the  adjusted   tangible  net  worth
     requirements  for periods  after March 31, 2005.  Additionally,  the fourth
     amendment allowed the Textron Loan to be in an over-advance position not to
     exceed  $750,000  until  July 31,  2005.  In  exchange  for the  waiver and
     amendments,  the  Company's  interest  rate on the Textron  Loan was set at
     Prime plus  4.75% and the  Company  paid a fee of  $50,000  in four  weekly
     installments of $12,500.

     On June 16,  2005,  the  Company  used a portion of the  proceeds  from the
     warrant exercises described in Note 5 to satisfy the $750,000  over-advance
     with Textron. In connection with the satisfaction of the over-advance,  the
     Company agreed to immediately  terminate Textron's obligation to permit any
     over-advances  under the Textron Loan,  which  obligation  was to expire on
     July 31, 2005.  With the  termination  of the  over-advance  facility,  the
     interest rate on the Textron Loan returned to its prior level of Prime plus
     1.75%.  On  June  30,  2005,   Textron  reduced  the  Company's   borrowing
     availability  under the line by $200,000 until they have time to review and
     approve the Company's  financial  forecasts that reflect the asset sale and
     outsourcing  arrangements  (as discussed in Note 8).  However,  there is no
     guarantee  if or when  they will lift  this  restriction  on the  Company's
     borrowing  availability.  Additionally,  the Company may experience further
     restrictions by Textron by virtue of reserves they may require, receivables
     they may deem  ineligible  or other rights they have under the Textron Loan
     Agreement.

     In August 2005,  due to the cost of disposal  activities  and impairment of
     property  and  equipment  (as  discussed  in  Notes 7 and 8),  the  Company
     determined that it fell below the requirement for the fixed charge coverage
     ratio and the adjusted  tangible net worth  requirements  under the Textron


                                       10
<PAGE>

     Loan  for  the  quarter  ended  June  30,  2005.  Although  these  covenant
     violations placed the Company in technical default on the loan, the Company
     has not received a notice of an event of default from Textron.  The Company
     is currently discussing its financial forecasts that reflect the asset sale
     and outsourcing  arrangements and certain waivers and loan modifications to
     the Textron  Loan  Agreement.  Until such time as the Company has  received
     formal waivers and loan  modifications,  Textron is allowing the Company to
     operate in a position  of default.  The  existence  of a default  under the
     Textron Loan would allow Wachovia, another one of the Company's lenders, as
     described  below,  to declare an event of default  under the existing  term
     loan based on a  cross-default  provision  in their loan  agreement.  If an
     agreement cannot be reached on the loan modifications, Textron and Wachovia
     could exercise their respective rights under their loan documents to, among
     other things, declare a default under the loans, accelerate the outstanding
     indebtedness  such that it would become  immediately  due and payable,  and
     pursue foreclosure of the Company's assets, which are pledged as collateral
     for such loans.  If such an event occurred with either Textron or Wachovia,
     it would be  substantially  more  difficult for the Company to  effectively
     continue the operation of its business, and it is unlikely that the Company
     would be able to continue as a going concern.

     Simultaneous  with the  closing of the Textron  Loan in May 2003,  Wachovia
     Bank, N.A. successor by merger to SouthTrust Bank ("Wachovia") extended the
     Company a new term loan in the principal  amount of  $2,000,000.  This term
     loan  was  consolidated  with the  Company's  March  2000  term  loan  with
     Wachovia,  which had a then outstanding principal balance of $8,131,985 for
     a total term loan amount of  $10,131,985.  This term loan is secured by all
     of the Company's  equipment and certain related assets.  Additionally,  the
     term loan bears interest at Wachovia's Base Rate plus 1% (7.25% at June 30,
     2005). As a result of the cross-default  provision,  the Wachovia term loan
     balance of $7,801,985  is classified as a current  liability as of June 30,
     2005.

     On June 30, 2005, the Company  entered into a Loan  Modification  Agreement
     with Wachovia regarding its term loan. The agreement modified the following
     terms of the loan:  1) the loan will  mature and be payable in full on July
     31, 2006 instead of June 1, 2009; 2) the principal  payments will remain at
     $110,000 per month with accrued  interest at  Wachovia's  Base Rate plus 1%
     instead of  increasing to $166,250 on July 1, 2005 as provided by the terms
     of the promissory note evidencing the loan; and 3) all covenants related to
     the Company's  tangible net worth, total liabilities to tangible net worth,
     and maximum  funded debt to EBITDA ratios are waived and  compliance is not
     required by the Company  through the maturity of the loan on July 31, 2006.
     In connection  with the agreement,  the Company  agreed to pay $60,000,  of
     which $30,000 was paid upon execution of the agreement and $30,000 was paid
     on August 1,  2005.  As  required  by the  terms of the  agreement,  if the
     Company  sells the  equipment  securing the loan,  the loan will be due and
     payable in full at the time of sale.

(3)  Accrued and Other Current Liabilities

     Accrued and other current liabilities are summarized as follows:

<TABLE>
<CAPTION>
                                                     June 30, 2005          March 31, 2005
                                                   ------------------   ---------------------
<S>                                                 <C>                     <C>
              Tangible personal property taxes      $   1,132,083           $   1,049,841
              Warrant liability                                --                 740,000
              Other                                       528,548                 340,365
                                                   ------------------   ---------------------
              Total                                 $   1,660,631           $   2,130,206
                                                   ==================   =====================
</TABLE>

(4)  Commitments and Contingencies

     In accordance with a registration  rights  agreement dated October 6, 2004,
     the Company  agreed that within 180 days it would file with the  Securities
     and  Exchange  Commission  and  obtain   effectiveness  of  a  registration
     statement that included  2,000,000 shares issued in a private placement and
     500,000 shares related to a stock  purchase  warrant.  Per the terms of the
     agreement,  if a  registration  statement was not filed,  or did not become
     effective  within  180  days,  then in  addition  to any other  rights  the
     investor may have, the Company would be required to pay certain  liquidated
     damages.  The Company filed a  registration  statement on Form S-3 on March
     14, 2005.  However,  this registration  statement has not yet been declared
     effective.  The Company  received  from the  investor an  extension of time
     until  September  1,  2005  to have  the  registration  statement  declared
     effective by the SEC.  Additionally,  the  investor  waived all damages and
     remedies  for failure to have an  effective  registration  statement  until
     September  1, 2005.  In the event that the  registration  statement  is not
     effective by  September 1, 2005,  the Company will be liable to pay $71,875
     (2.5%  times the  product of  2,500,000  registerable  shares and the share
     price  of $1.15  per  share)  every  thirty  days  until  the  registration
     statement becomes effective unless an additional extension is granted.

     The  Emerging  Issues  Task  Force  ("EITF")  is  currently  reviewing  the
     accounting for securities with liquidated damages clauses as stated in EITF
     05-04,  "The  Effect  of a  Liquidated  Damages  Clause  on a  Freestanding
     Financial  Instrument  Subject to EITF 00-19." There are currently  several
     views as to how the account for this type of  transaction  and the EITF has
     not yet  reached a  consensus.  In  accordance  with EITF  00-19 and 05-04,
     because the maximum potential  liquidated damages as described above may be


                                       11
<PAGE>

     greater  than  the  difference  in  fair  values  between   registered  and
     unregistered  shares, the value of the common stock subject to registration
     should be classified as temporary equity until the  registration  statement
     becomes  effective.  Based on the  above  determination,  the  Company  has
     reclassified  the $2,680,590  value of common stock subject to registration
     out of permanent equity and into temporary equity as of June 30, 2005.

(5)  Capital Stock

     Common Stock Issuances

     In accordance  with a warrant  agreement  dated April 10, 2003, the Company
     issued to Mr. Frederick  DeLuca, a greater than 10% shareholder,  a warrant
     to  purchase  up to  100,000  shares of common  stock of the  Company at an
     exercise  price of $1.70 per  share.  Additionally,  in  accordance  with a
     warrant agreement dated October 6, 2004, the Company issued to Mr. DeLuca a
     warrant to purchase up to 500,000  shares of common stock of the Company at
     an  exercise  price of $1.15 per  share.  Subsequently  in June  2005,  the
     Company agreed to reduce the per-share  exercise price on these warrants to
     $1.36 and $0.92,  respectively,  in order to induce Mr.  DeLuca to exercise
     his warrants. All of the warrants were exercised on June 16, 2005 for total
     proceeds of $596,000.

     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 above  warrant  for  500,000  shares of common
     stock, the fair value of the warrant was accounted for as a liability, with
     an offsetting reduction to the carrying value of the common stock. On March
     31,  2005,  the  fair  value  of  the  warrant  was  estimated   using  the
     Black-Scholes  pricing model to be $740,000 and on June 16, 2005,  the fair
     value was estimated to be $400,000.  The $340,000  change in fair value was
     reflected  as a gain  on the  fair  value  of  warrants  line  item  in the
     Statement of  Operations  during the three months ended June 30, 2005.  The
     warrant  liability  was moved to equity upon the exercise of the warrant as
     described above.

     On each of April 24, 2003 and October 6, 2004, BH Capital  Investments,  LP
     and Excalibur Limited  Partnership each received warrants to purchase up to
     250,000  shares of common  stock at an  exercise  price of $2.00 per share.
     Also,  Excalibur Limited  Partnership  received a warrant to purchase up to
     30,000  shares of common  stock at an exercise  price of $2.05 per share on
     June 26, 2002.  Subsequently in June 2005, the Company agreed to reduce the
     per-share  exercise  price on all such warrants to $1.10 in order to induce
     BH Capital  Investments,  LP and Excalibur Limited  Partnership to exercise
     their  warrants.  All of the warrants  were  exercised on June 16, 2005 for
     total proceeds of $1,133,000.

     The Company  used a portion of the proceeds  from the warrant  exercises to
     satisfy the  $750,000  over-advance  provided  by Textron  under the Fourth
     Amendment and Waiver to the Textron Loan Agreement,  as described in Note 2
     and the remaining proceeds from the warrant exercises were used for working
     capital purposes.

     In accordance  with the accounting  provisions of SFAS No. 123, the Company
     recorded  $1,024,500  in  non-cash  compensation  expense  related  to  the
     reduction in the exercise price of the warrants in June 2005.

     Preferred Stock Issuances and Restatement

     On April 6, 2001, the Company received from BH Capital Investments,  LP and
     Excalibur Limited  Partnership (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, 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.

     In total,  the Series A Preferred  Holders  converted  42,330 shares of the
     Series A convertible preferred stock plus accrued dividends, into 1,806,210
     shares of common stock prior to the  redemption of the Series A convertible
     preferred stock on October 6, 2004. The conversion prices ranged from $1.07
     to $1.75 based on the above formula.

     In connection with a Stock Repurchase  Agreement dated October 6, 2004, the
     Company redeemed the remaining 30,316 Series A convertible preferred shares
     held by the Series A Preferred Holders 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.


                                       12
<PAGE>

     The  Company  originally  concluded  under  EITF  00-19,   "Accounting  for
     Derivative Financial Instruments Indexed To, and Potentially Settled in the
     Company's Own Stock," that the conversion feature was conventional and that
     there was no need to separate  the  conversion  right during the period the
     Series A convertible  preferred shares were outstanding.  Subsequent to the
     redemption of the remaining  preferred  shares, it has been determined that
     certain features of the conversion  option resulted in treatment  different
     from that historically reflected.

     The  preferred  stock was a  fixed-income  security  with no  participating
     rights  and the  dividend  was 10% per annum in the  first  year and 8% per
     annum in the second,  third and fourth years.  Therefore,  consistent  with
     paragraph 61(l) of SFAS No. 133, "Accounting for Derivative Instruments and
     Hedging  Activities," the Company has concluded that the conversion  option
     was not clearly and closely related to the host instrument.  Ordinarily, an
     issuer  does not need to  separate a  conversion  right from a  convertible
     instrument.  However,  in accordance  with  paragraph 4 of EITF 00-19,  the
     Company has  determined  that due to the fact that the embedded  conversion
     option  contained a provision that could have resulted in a conversion into
     an indeterminable  number of common shares, that the conversion feature was
     in fact  "unconventional".  Further, since the conversion right embedded in
     the preferred stock has been considered a derivative, the related dividends
     are also  considered  derivative  instruments.  As a result,  the  embedded
     derivative  was a  liability  that was  required to be  separated  from the
     preferred stock and this liability should have been marked to market during
     reporting  periods.  The  fair  value  of the  derivative  instruments  was
     determined   using  the   Black-Scholes   pricing  model.   Based  on  this
     determination, the Company has reflected an increase in paid-in-capital and
     accumulated  deficit in the amount of $1,703,246 as of March 31, 2005 and a
     derivative  liability of $888,060 as of June 30, 2004. For the three months
     ended June 30,  2004,  the  Company  has  restated  to record a  derivative
     expense of $121,119 related to the change in the fair value of the embedded
     derivative instruments.

     Additionally,  since the  conversion of the Series A convertible  preferred
     stock could have resulted in a conversion into an indeterminable  number of
     common  shares,  the  Company  has  determined  that under the  guidance in
     paragraph 24 of EITF 00-19,  it was prohibited  from concluding that it had
     sufficient  authorized and unissued shares to net-share settle any warrants
     or options issued to non-employees. Therefore, the Company has reclassified
     to a  liability  the fair  value of all  warrants  and  options  issued  to
     non-employees  that were  outstanding  during the period  that the Series A
     convertible  preferred  stock was  outstanding  from  April 2001 to October
     2004.   The  fair  value  of  the  warrants  were   determined   using  the
     Black-Scholes  pricing  model.  Any  changes  in  the  fair  value  of  the
     securities  after the  initial  valuation  in April 2001  should  have been
     marked to market during reporting periods. Based on this determination, the
     Company  has  reflected  a  decrease  in  additional   paid-in-capital  and
     accumulated  deficit in the amount of ($1,319,562) as of March 31, 2005 and
     a warrant  liability of $823,794 as of June 30, 2004.  For the three months
     ended June 30, 2004,  the Company has restated to record a loss on the fair
     value of warrants of $158,896.

     The following  table  summarizes the changes in the Statement of Operations
     as of June 30, 2004:

<TABLE>
<CAPTION>
                                               As Previously
                                                Reported            Adjustment         As Restated
                                               -----------         -----------         -----------
<S>                                            <C>                 <C>                 <C>
Income From Operations                         $    18,220         $        --         $    18,220
  Interest Expense                                (259,816)                 --            (259,816)
  Derivative Expense                                    --            (121,119)           (121,119)
  Gain (loss) on fair value of warrants                 --            (158,896)           (158,896)
                                               -----------         -----------         -----------
Net Loss                                          (241,596)           (280,015)           (521,611)
  Less:
  Preferred Stock Dividends                         42,392                  --              42,392
  Preferred Stock Accretion to
     Redemption Value                              512,175             (11,531)            500,644
                                               -----------         -----------         -----------
Net Loss to Common Stockholders                $  (796,163)        $  (268,484)        $(1,064,647)
                                               ===========         ===========         ===========
Basic and Diluted Net Loss per Common
  Share                                        $     (0.05)        $     (0.02)        $     (0.07)
                                               ===========         ===========         ===========
</TABLE>

     The Series A Preferred  Holders had the right to receive on any outstanding
     share of  Series A  convertible  preferred  stock a ten  percent  dividend,
     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 months ended June
     30, 2004,  the Company  recorded  preferred  dividends  of $42,392,  on the
     outstanding shares of the Series A convertible preferred stock.


                                       13
<PAGE>

     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
     calculated  the  difference  between  the initial  carrying  value and this
     estimated  redemption  value.  The  difference  was then  accreted over the
     redemption  period (48 months beginning April 2001) using the straight-line
     method,  which  approximates the effective  interest method.  For the three
     months ended June 30, 2004, the Company recorded  $500,644,  related to the
     accretion of the redemption value of preferred stock.

(6)  Non-Cash Compensation Related to Stock-Based Transactions

     Effective April 1, 2003, the Company elected to record compensation expense
     measured at fair value for all stock-based award  transactions  (including,
     but not limited to,  restricted  stock  awards,  stock option  grants,  and
     warrant  issuances) on or after April 1, 2003 under the  provisions of SFAS
     No. 123.  Prior to April 1, 2003,  the Company only recorded the fair value
     of stock-based  awards granted to non-employees or non-directors  under the
     provisions  of SFAS No.  123.  The fair value of the  stock-based  award is
     determined on the date of grant using the  Black-Scholes  pricing model and
     is expensed over the vesting period of the related award. Prior to April 1,
     2003,  the Company  accounted  for its  stock-based  employee  and director
     compensation  plans  under  the  accounting  provisions  of APB  No.  25 as
     interpreted by FASB  Interpretation No. 44 ("FIN 44"). Any modifications of
     fixed stock options or awards granted to employees or directors  originally
     accounted  for  under  APB No. 25 may  result  in  additional  compensation
     expense under the provisions of FIN 44.

     In accordance with the above accounting  standards,  the Company calculates
     and records non-cash  compensation related to its securities in the general
     and administrative  expense line item in the Statements of Operations based
     on two primary items:

     a.  Stock-Based Award Issuances

     During the three months ended June 30, 2005 and 2004, the Company  recorded
     $1,036,959  and  $4,208,  respectively,  in non-cash  compensation  expense
     related  to  stock-based  transactions  that were  issued to and  vested by
     employees, officers, directors and consultants.

     b. Option  Modifications for Awards granted to Employees or Directors under
     APB No. 25

     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 market price of $2.05 per share. Prior
     to the repricing  modification,  the options were  accounted for as a fixed
     award under APB No. 25. In  accordance  with FIN 44, the  repricing  of the
     employee  stock  options  requires  additional  compensation  expense to be
     recognized  and adjusted in subsequent  periods for changes in the price of
     the  Company's  common stock that are in excess of the $2.05 stock price on
     the  date of  modification  (additional  intrinsic  value).  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 to
     reverse  all or a  portion  of the  expense  recognized  in prior  periods.
     Compensation  income is limited to the original  base  exercise  price (the
     intrinsic  value) of the options.  This variable  accounting  treatment for
     these modified stock options began with the quarter ended December 31, 2002
     and such variable  accounting  treatment  will  continue  until the related
     options have been  cancelled,  expired or  exercised.  There are  3,499,841
     outstanding  modified  stock  options  remaining as of June 30,  2005.  The
     Company recorded non-cash  compensation  expense/(income) of ($169,441) and
     $158,166 for the three  months ended June 30, 2005 and 2004,  respectively,
     related to the modified options described above.

(7)  Impairment of Property and Equipment

     In light of the Asset Sale and Outsourcing  Arrangements  discussed in Note
     8, the Company  determined  that it is more likely than not that a majority
     of its  fixed  assets  related  to  production  activities  will be sold or
     disposed  prior to the end of their  useful life.  These  assets  represent
     approximately  98% of the value of Property  and  Equipment.  Based on this
     determination,  SFAS No. 144, "Accounting for the Impairment of Disposal of
     Long-Term  Assets,"  requires  that the Company write down the value of its
     assets to their estimated fair values as of June 30, 2005. The Company will
     continue  to hold and use the assets  until they are sold.  Therefore,  all
     assets will  continue to be reported  and  depreciated  under  Property and
     Equipment in the Balance Sheet until they are sold.  The Company  estimated
     the fair value based on the sales price discussed below and the anticipated
     sales price  related to any other assets plus future cash flows  related to
     the assets from July 1, 2005 until the sale.  Based on this  estimate,  the
     Company  recorded an  impairment of property and equipment of $7,896,554 in
     order to reflect a net fair value for Property and  Equipment of $9,872,074
     at June 30, 2005.

(8)  Asset Sale and Outsourcing Arrangements

     On June 30, 2005, the Company entered into an Outsourcing  Supply Agreement
     (the  "Outsourcing  Agreement")  with Schreiber Foods,  Inc.  ("Schreiber")
     whereby  Schreiber  will  manufacture  and  distribute all of the Company's
     products.  The  Company  simultaneously  entered  into  an  Asset  Purchase
     Agreement with Schreiber whereby Schreiber will purchase  substantially all
     of  the  Company's  production  machinery  and  equipment  for a  total  of
     $8,700,000.


                                       14
<PAGE>

     The Asset Purchase  Agreement is scheduled to close on or about November 1,
     2005.  The closing is subject to the  satisfaction  of various  conditions,
     including  approval of the sale by the Company's  stockholders and approval
     by the Company's lenders.

     The  Outsourcing  Agreement  is for an initial  five-year  period  from the
     effective  date of  September  1, 2005 and is  renewable  at the  Company's
     option for up to two additional five-year periods. On or before November 1,
     2005,  Schreiber  will  purchase the  Company's  remaining  raw  materials,
     ingredients  and packaging at the Company's  cost.  Schreiber will bill the
     Company when it ships each order of finished products to the Company or its
     customers, based on a pre-determined price matrix.

     The  Outsourcing  Agreement  provides for a contingent  short-fall  payment
     obligation by the Company if a specified production level is not met during
     the second year of the Outsourcing  Agreement.  If a contingent  short-fall
     payment is accrued  after the second year,  it may be reduced at the end of
     the third year if the  production  level  during the third year exceeds the
     specified  level of production.  If the sale of the assets to Schreiber for
     $8,700,000  as  contemplated  by  the  Asset  Purchase   Agreement  is  not
     consummated,  then  the  Company  will  not be  required  to pay  any  such
     short-fall payment.

     If the  Company  does not  exercise  its  option to renew  the  Outsourcing
     Agreement  at  the  end  of  the  initial  five-year  period,  there  is  a
     cancellation  charge of $1.5 million.  If the Company does not exercise its
     option  to  renew  the  Outsourcing  Agreement  at the  end  of the  second
     five-year period,  there is a cancellation charge of $750,000.  If the sale
     of the assets to Schreiber  for  $8,700,000  as  contemplated  by the Asset
     Purchase  Agreement  is not  consummated,  then  the  Company  will  not be
     required to pay any such cancellation charge.

     The above  transactions were communicated to the employees on July 6, 2005.
     The  Company  is  currently  reviewing  the  costs  associated  with  these
     anticipated transactions and believes that they will have a material impact
     on the Company's financial position,  results of operations, and cash flows
     during its fiscal year ending March 31, 2006.  The Company will account for
     the costs  associated  with these  transactions in accordance with SFAS No.
     146,  "Accounting for Costs Associated with an Exit or Disposal  Activity,"
     because the above arrangements are planned and controlled by management and
     materially  change  the  manner in which  the  Company's  business  will be
     conducted.  In accordance with SFAS No. 146, costs associated with disposal
     activities should be reported as a reduction of income from operations. For
     the three  months ended June 30,  2005,  the Company  incurred and reported
     $255,011 as Costs of Disposal Activities in the Statement of Operations.

(9)  Earnings Per Share

     The following is a reconciliation of basic net earnings (loss) per share to
     diluted net earnings (loss) per share:

                                                    THREE MONTHS ENDED
                                                          JUNE 30,
                                                2005                  2004
                                             ------------         ------------
Net loss to common stockholders              $ (9,144,114)        $ (1,064,647)
                                             ============         ============

Weighted average shares outstanding -
  basic and diluted                            18,663,485           15,666,399
                                             ============         ============

Basic and diluted net loss per common
  share                                      $      (0.49)        $      (0.07)
                                             ============         ============

     Options for 5,059,809  shares and warrants for 655,356 shares have not been
     included in the  computation  of diluted net income (loss) per common share
     for the  three  months  ended  June  30,  2005,  as their  effect  would be
     antidilutive.  Potential conversion of Series A convertible preferred stock
     for  1,478,815  shares,  options  for  4,742,201  shares and  warrants  for
     1,242,856  shares have not been included in the  computation of diluted net
     income (loss) per common share for the three months ended June 30, 2004, as
     their effect would be antidilutive.


                                       15
<PAGE>

(10) 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.

<TABLE>
<CAPTION>
         Three months ended June 30,                               2005          2004
         -------------------------------------------------------------------------------
<S>                                                              <C>          <C>
         Non-cash financing and investing activities:

         Accrued preferred stock
         dividends                                               $    --      $ 42,392

         Accretion of discount on preferred stock                     --       500,644

         Cash paid for:
         Interest                                                 403,347      221,350
</TABLE>

(11) Related Party Transactions

     Angelo S. Morini

     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 he is no longer  involved in the daily  operations  of the Company.  He
     retains  the title of Founder  and has been named  Chairman  Emeritus.  Mr.
     Morini  continues  to be 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.

     Because  Mr.  Morini  is no  longer  performing  ongoing  services  for the
     Company,  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 were $1,830,329 of which $1,201,399  remained
     unpaid but accrued  ($366,305  as  short-term  liabilities  and $835,094 as
     long-term  liabilities) as of June 30, 2005. The long-term  portion will be
     paid out in nearly equal monthly installments ending in October 2008.

     In June  1999,  in  connection  with an  amended  and  restated  employment
     agreement for Mr. Morini, 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 single consolidated note is non-interest bearing
     and non-recourse and is secured by the 2,914,286  underlying  shares of the
     Company's common stock. Per the terms of the June 1999 Employment Agreement
     that was amended  and  restated  by the  October  2003  Second  Amended and
     Restated Employment Agreement between the Company and Mr. Morini, 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 stockholder.

     In the event that the  $12,772,200  loan is  forgiven,  the  Company  would
     reflect  this  amount  as  a  forgiveness  of  debt  in  the  Statement  of
     Operations. In the event that Mr. Morini is unable to pay the loan when due
     and the Company  forecloses on the shares,  the Company will reflect a loss
     on  collection  for the  amount,  if any,  that the value of the  2,914,286
     underlying  collateral shares are below the value of the note. Assuming the
     market price on June 30, 2005 of $2.08, the Company would reflect a loss of
     approximately  $6,710,000 in the Statement of Operations.  Although both of
     these scenarios will result in material losses to the Company's operations,
     it will not have any affect on the balance sheet since the $12,772,200 loan
     amount is already shown as a reduction to Stockholders' Equity.

     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.
     As of June 30, 2005, the remaining  unpaid but accrued balance was $231,364
     ($220,218 in short-term liabilities and $11,146 in long-term liabilities).

(12) Economic Dependence

     The Company had one customer that  accounted for nearly 12% of sales in the
     quarter ended June 30, 2005. As of June 30, 2005,  the amount due from this
     customer is approximately  10% of the balance of accounts  receivable.  The
     Company  had one  customer  that  accounted  for nearly 11% of sales in the
     quarter ended June 30, 2004. As of June 30, 2004,  the amount due from this
     customer is approximately 16% of the balance of accounts receivable.


                                       16
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

INFORMATION IN THIS MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND  RESULTS  OF   OPERATIONS   ("MD&A")  IS  INTENDED  TO  ENHANCE  A  READER'S
UNDERSTANDING  OF THE FINANCIAL  CONDITION,  CHANGES IN FINANCIAL  CONDITION AND
RESULTS OF OPERATIONS OF OUR COMPANY. THIS MD&A IS A SUPPLEMENT TO AND SHOULD BE
READ IN CONJUNCTION  WITH OUR 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 STATEMENTS RELATE TO FUTURE EVENTS OR OUR
FUTURE FINANCIAL PERFORMANCE.  THESE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR
CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT OUR INDUSTRY, MANAGEMENT'S
BELIEFS AND CERTAIN ASSUMPTIONS MADE BY OUR COMPANY. WORDS SUCH AS "ANTICIPATE,"
"EXPECT,"  "INTEND," "PLAN," "BELIEVE,"  "SEEK,"  "PROJECT,"  "ESTIMATE," "MAY,"
"WILL," AND  VARIATIONS  OF THESE WORDS OR SIMILAR  EXPRESSIONS  ARE INTENDED TO
IDENTIFY  FORWARD-LOOKING  STATEMENTS.  THESE  STATEMENTS  ARE NOT GUARANTEES OF
FUTURE  PERFORMANCE  AND  ARE  SUBJECT  TO  CERTAIN  RISKS,   UNCERTAINTIES  AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT.  THEREFORE, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM OUR HISTORICAL  RESULTS AND THOSE EXPRESSED OR FORECASTED IN ANY
FORWARD-LOOKING  STATEMENTS  AS A RESULT OF A VARIETY OF FACTORS,  INCLUDING BUT
NOT  LIMITED  TO,  COMPETITION  IN THE MARKET FOR OUR  PRODUCTS,  DEPENDENCE  ON
SUPPLIERS,  OUR MANUFACTURING  EXPERIENCE,  PRODUCTION DELAYS OR INEFFICIENCIES,
AND CHANGES IN  ACCOUNTING  STANDARDS.  WE UNDERTAKE NO  OBLIGATION  TO PUBLICLY
UPDATE OR REVISE ANY  FORWARD-LOOKING  STATEMENTS  FOR ANY  REASON,  EVEN IF NEW
INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.

Terms such as "fiscal  2006" or "fiscal  2005" refer to our fiscal  years ending
March 31, 2006 and 2005,  respectively.  Terms such as "first quarter,"  "second
quarter,"  "third  quarter," or "fourth  quarter"  refer to the fiscal  quarters
ending June 30, September 30, December 31 or March 31, respectively.

This MD&A contains the following sections:

      o     Restatement

      o     Business Environment

      o     Critical Accounting Policies

      o     Recent Accounting Pronouncements

      o     Results of Operations

      o     Liquidity and Capital Resources

Restatement

This Form 10-Q/A and the restated financial statements included herein reflect a
correction of our accounting and  disclosure  primarily  related to the warrants
that were  outstanding  during  the term of our Series A  convertible  preferred
stock, from April 2001 through October 2004. The issue relates to accounting for
securities that are reflected as income or expense through  earnings as non-cash
charges. These non-cash charges do not affect our revenues, cash flows from past
or future operations,  or our liquidity. As discussed in Note 5 of the financial
statements,   the  Company  has   reflected   a  net   decrease  in   additional
paid-in-capital  and accumulated deficit in the amount of $1,319,562 as of March
31,  2005.  For the quarter  ended June 30,  2004,  the Company has restated its
financial  statements  to  reflect a net loss of  $521,611,  which  reflects  an
additional loss of $158,896 from what was previously reported for this period in
the Form 10-Q for the quarterly period ended June 30, 2005.

Additionally,  the Company  reclassified the $2,680,590 value of those shares of
common stock,  which the Company has  undertaken  the obligation to register for
resale pursuant to a registration rights agreement,  out of stockholders' equity
and into temporary  equity due to a change in estimate related to the assumption
that the maximum potential  liquidated  damages under such  registration  rights
agreement may be greater than the difference in fair values  between  registered
and unregistered shares.

Business Environment

General

Galaxy  Nutritional  Foods,  Inc.  (our  "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.


                                       17
<PAGE>

Healthy Cheese and Alternative Cheese Industry

We are the market leader within our alternative  cheese  category niche,  but in
being  so,  the  category  increases  or  decreases  partly  as a result  of our
marketing  efforts.  We believe that the greatest source of future growth in the
cheese  alternative  category  will come  through  customers  shifting to cheese
alternatives  from natural cheese.  Rather than focusing  primarily on consumers
with a preference or medical condition predisposing them to non-dairy cheese and
comparing our products to other cheese alternative brands, we intend to focus on
educating  cheese  consumers on the healthy  attributes  of cheese  alternatives
versus traditional cheese.

We use several internal and external reports to monitor sales by brand, segment,
form and channel of sale to determine  which items 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,  we  analyze  trends in the
consumer marketplace and make decisions on which brands to promote.

Beginning in the second  quarter of fiscal 2006, we will launch a sales campaign
focused  on  the  following  three  primary   strategies:

     o    Consumer focused advertising. We plan to increase consumer advertising
          (in TV, magazine,  and event sponsorship) and consumer promotions (for
          example,  on-pack "cents off" coupons,  "cents off" coupons  delivered
          via  newspapers,   in-store  product  sampling,  and  product  benefit
          communication  at the  point of  purchase/shelf)  that  highlight  and
          communicate  the benefits of our products to meet the consumer  demand
          for low carbohydrate and high protein products.

     o    Increase  retailer  penetration  and  geographical  distribution.   By
          increasing  our  presence  on the store  shelves,  we seek to increase
          household penetration and build market share in specific markets.

     o    Increase brand awareness.  We seek to increase sales by increasing our
          customer  base and  generating  consumer  awareness of new products or
          flavors through product trials and generating more repeat purchases on
          our Veggie(TM) and Wholesome  Valley(R) brands through improved taste,
          color, aroma, texture and packaging.

We believe that the combination of "healthy" product attributes,  improved taste
and product functionality will lead to better than expected consumer experiences
with our products.  Our focus is to transfer those improved consumer experiences
into enhanced market share and increased sales of our higher margin products.

Recent Material Developments

     The Schreiber Transactions

     Asset Purchase Agreement

On June 30, 2005,  we entered into an Asset  Purchase  Agreement for the sale of
certain of our manufacturing and production  equipment to Schreiber Foods, Inc.,
a Wisconsin corporation ("Schreiber"), for $8.7 million in cash.

Other key terms of the transaction are as follows:

o Since  the  transaction  may  constitute  a sale of  substantially  all of our
assets,  the  transaction  will  be  subject  to  obtaining  approval  from  our
stockholders.

o The transaction is subject to other closing  conditions,  including  obtaining
approval  from our lenders,  Textron  Financial  Corporation  and Wachovia  Bank
(formerly SouthTrust Bank).

o  Subject  to the  satisfaction  of the  conditions  described  above and other
conditions as set forth in the Asset Purchase Agreement, the anticipated closing
date is November 1, 2005.

o If our  stockholders  do not  approve  the  transaction,  the  Asset  Purchase
Agreement  provides  for an  alternative  transaction  whereby  we would sell to
Schreiber  a  smaller  portion  of  the  assets,   which  would  not  constitute
substantially  all of our assets and  therefore  would not  require  stockholder
approval. The purchase price for this alternative sale would be $2,115,000. This
alternative sale is subject to obtaining approval from our lenders.


                                       18
<PAGE>

o If we are unable to obtain  approval  from our  lenders  with  respect to this
alternative  sale,  then we will  negotiate in good faith with Schreiber to make
the smaller  portion of the assets  available for  Schreiber's use on reasonably
acceptable terms, not to exceed a term of 180 days. This alternative arrangement
is also subject to obtaining approval from our lenders.

     The Outsourcing Agreement

On June 30, 2005, our Company and Schreiber entered into a Supply Agreement (the
"Outsourcing  Agreement"),  whereby we will purchase all of our requirements for
products from  Schreiber,  and Schreiber will  manufacture and distribute all of
our products.

Other key terms of the transaction are as follows:

o The  initial  term of the  Outsourcing  Agreement  is for five  years from the
effective  date of September  1, 2005,  and is renewable at our option for up to
two additional five-year periods.

o After  November  1,  2005 and  throughout  the  remainder  of the  Outsourcing
Agreement's term, Schreiber will be the sole source of supply of our products.

o If we do not exercise our option to renew the Outsourcing Agreement at the end
of the initial five-year period, there is a cancellation charge of $1.5 million.
If we do not exercise our option to renew the  Outsourcing  Agreement at the end
of the second five-year period,  there is a cancellation charge of $750,000.  If
the sale of the assets to Schreiber for $8,700,000, as contemplated by the Asset
Purchase  Agreement  described  above, is not  consummated,  then we will not be
required to pay any cancellation charge.

o On or before  November 1, 2005,  Schreiber will purchase our remaining  usable
raw materials, ingredients and packaging at our cost.

o The  Outsourcing  Agreement  provides  for  a  contingent  short-fall  payment
obligation by our Company if a specified  production level is not met during the
second year after the  effective  date.  If a contingent  short-fall  payment is
accrued after the second year, it may be reduced at the end of the third year if
the  production  level  during the third year  exceeds  the  specified  level of
production.  If  the  sale  of  the  assets  to  Schreiber  for  $8,700,000,  as
contemplated by the Asset Purchase Agreement,  is not consummated,  then we will
not be required to pay any such short-fall payment.

o Schreiber is required to deliver products to our Company or our customers that
are in compliance with our standards and specifications and all applicable laws.
Schreiber  will deliver all products  within 10 business  days of the  effective
date of such order, which is one business day after receipt of the order.

o After the transfer of all production responsibilities to Schreiber on November
1,  2005,  we may not  manufacture  any  products  governed  by the  Outsourcing
Agreement during the term of the Outsourcing Agreement.

o Schreiber  may not  manufacture  our  products or use any of our  intellectual
property other than pursuant to the terms of the Outsourcing Agreement.

o We may terminate the Outsourcing  Agreement if our stockholders do not approve
the  transaction  contemplated  by the Asset  Purchase  Agreement,  by providing
notice to Schreiber  within 30 days of the date that our  stockholders  vote on,
but do  not  approve,  the  transactions  contemplated  by  the  Asset  Purchase
Agreement.  The  effectiveness of such termination may not be more than 180 days
after the date of such notice.

o If we do  not  terminate  the  Outsourcing  Agreement  and we  are  unable  to
consummate an alternative  transaction with Schreiber (as described above) prior
to January 1, 2006,  then Schreiber may terminate the  Outsourcing  Agreement by
providing  written  notice  to our  Company  prior  to  February  1,  2006.  The
effectiveness  of such  termination may not be less than 180 days after the date
of such notice.

As indicated  above,  there are a number of conditions that must be met prior to
the consummation of these  transactions.  There can be no guarantee that we will
satisfy these  conditions  and,  therefore,  there can be no guarantee  that the
transactions will be consummated.


                                       19
<PAGE>

     Transition Challenges

The asset sale and  outsourcing  arrangement  with  Schreiber  are  subject to a
number  of  conditions  that  must be met  prior  to the  consummation  of these
transactions.  In addition to the closing  conditions  described  above, we will
face additional challenges during the transition.  These challenges include, but
are not limited to, the following:

     o    Coordinating  customer  shipments  while the inventory and  production
          equipment  is  in  transit  from  our   facilities  to  the  Schreiber
          facilities;

     o    Reserving  enough  inventory  on-hand to fill  customer  orders  while
          production equipment is in transit;

     o    Maintaining  consistent formulas and quality in our products after the
          transition;

     o    Having   enough  cash  to  build   inventory  and  pay  any  severance
          arrangements during the transition;

     o    Reduction of production  personnel and severance  arrangements related
          to these personnel; and

     o    In the event of a sale of the  assets  whereby  we would  not  receive
          enough sale  proceeds  to pay off our debt to our lenders in full,  we
          would need to  negotiate  with our lenders so that they would agree to
          release their liens on the assets. If they will not agree to do so, we
          may be required to raise  additional  funds to pay our lenders in full
          prior to their maturity dates.

     o    We may be  required  to  negotiate  with the  landlords  of our leased
          premises the  possibilities  of early lease  termination or subleasing
          our facilities.

Each one of these events must be  carefully  timed and  coordinated  in order to
avoid problems with cash flow,  litigation,  loss of customer  sales,  and other
tangible and intangible affects. However, we believe that the long-term benefits
in the transition from a manufacturing  company to a branded  marketing  company
will far outweigh  the  short-term  challenges  of the  transition.  Without the
cash-flow burden of carrying inventory and managing  manufacturing  overhead and
production  issues, we believe that we can focus a substantially  greater amount
of time and  resources  on the sale of our  products.  Additionally,  we plan to
enhance our  marketing  efforts in order to increase our consumer base and sales
volume.

     Transaction Effect

Assuming  that the sale of assets to Schreiber is completed in  accordance  with
the Asset  Purchase  Agreement and we continue to operate under the  Outsourcing
Agreement  with  Schreiber,  some of the effects of the  transaction  will be as
follows:

     o    We will no longer  be a  manufacturing  company,  but will be solely a
          branded marketing company.

     o    We have two facilities  that we lease in Orlando,  Florida.  After all
          production is moved  completely  to  Schreiber,  we may be required to
          have  discussions  with  our  landlords   regarding  the  use  of  our
          facilities.   We  are  still  exploring  our  options   regarding  the
          facilities,  which include,  but are not limited to: 1) negotiating an
          early  termination  with the  landlords;  2)  continuing to make lease
          payments  until  the end of the  lease  terms;  or 3)  subleasing  the
          facilities.

     o    We will be  eliminating  115  employee  positions  and  creating 5 new
          employee   positions.   Our  anticipated  total  number  of  full-time
          employees after December 1, 2005 will be 31.

     o    It is likely that the  majority,  if not all, of the proceeds from the
          sale of the assets will be paid to our  lenders.  In  particular,  our
          debt to Wachovia  Bank will be required to be paid in full.  Repayment
          of the  Wachovia  Bank debt will result in a reduction  of annual debt
          service payments in excess of $1,800,000.

     o    We will no longer have the carrying value of inventory nor need to use
          asset based  financing to support the production of inventory.  In the
          recent past, we averaged 50 to 60 days of sales in inventory.

     o    We will be able to take  advantage  of  Schreiber's  lower  production
          costs  rather  than the  high  production  costs of our  underutilized
          production facility.

     o    We anticipate  substantial  savings on delivery charges related to the
          distribution of our products to our customers.

     Debt Maturity Issues

We have  incurred  substantial  debt in  connection  with the  financing  of our
business.  The  aggregate  principal  amount  outstanding  under our two  credit
facilities  is  approximately  $12,764,538  as of August 18,  2005.  This amount
includes  a  revolving  line  of  credit  from  Textron  Financial   Corporation
("Textron")  in the amount of  $5,072,553  and a note  payable to Wachovia  Bank
("Wachovia")  in the amount of $7,691,985.  We anticipate that the proceeds from
the sale of our assets to  Schreiber  will pay the  Wachovia  term loan in full.
However,  in the event that the sale is not  completed as  anticipated,  we will
need to refinance  the Wachovia term loan on or before its maturity date of July
31, 2006.  The initial  term of the Textron loan ends on May 26, 2006,  but this
loan automatically  renews for additional  one-year periods unless terminated by
our Company or Textron  through a written  notice  90-days  prior  thereto or as
otherwise provided in the loan agreement.

In June 2005,  Textron  reduced  our  borrowing  availability  under our line by
$200,000 until they have time to review and approve our financial forecasts that
reflect  the  asset  sale and  outsourcing  arrangements.  However,  there is no
guarantee  if  or  when  they  will  lift  this  restriction  on  our  borrowing
availability. Additionally, we may experience further restrictions by Textron by
virtue of reserves  they may require,  receivables  they may deem  ineligible or
other rights they have under the Textron Loan Agreement.


                                       20
<PAGE>

     Loan Defaults and Going Concern

In  August  2005,  due to the Cost of  Disposal  Activities  and  Impairment  of
Property and Equipment, we determined that we fell below the requirement for the
fixed charge  coverage  ratio and the adjusted  tangible net worth  requirements
under the  Textron  Loan for the quarter  ended June 30,  2005.  Although  these
covenant  violations  placed us in  technical  default on the loan,  we have not
received  a  notice  of an event  of  default  from  Textron.  We are  currently
discussing our financial  forecasts that reflect the asset sale and  outsourcing
arrangements  and certain  waivers and loan  modifications  to the Textron  Loan
Agreement.  Until  such  time  as we  have  received  formal  waivers  and  loan
modifications,  Textron is allowing us to operate in a position of default.  The
existence of a default under the Textron Loan would allow Wachovia,  another one
of our lenders,  as described  below,  to declare an event of default  under our
existing term loan based on a  cross-default  provision in their loan agreement.
If an  agreement  cannot  be  reached  on the loan  modifications,  Textron  and
Wachovia could exercise their  respective  rights under their loan documents to,
among  other  things,  declare  a  default  under  the  loans,   accelerate  the
outstanding  indebtedness such that it would become immediately due and payable,
and pursue  foreclosure of our assets,  which are pledged as collateral for such
loans.  As a result of the  cross-default  provision,  the  Wachovia  balance of
$7,801,985 is classified as a current liability as of June 30, 2005.

If any such events occur with either  Textron or Wachovia,  and we are unable to
refinance or renew our existing credit facilities, or if additional financing is
not  available  on  terms  acceptable  to us,  it would  be  substantially  more
difficult for us to effectively  continue the operation of our business,  and it
is unlikely that we would be able to continue as a going concern.

     Del Sunshine LLC

Pursuant to an oral contract  manufacturing  and distribution  arrangement among
our Company, Del Sunshine LLC ("Del"), a Delaware limited liability company, and
Non-Dairy Specialty Foods, LLC ("Non-Dairy"), a Nevada limited liability company
and affiliate of Del, we began manufacturing  certain private label products for
Del and  delivering  them  directly to Del's  customers,  including  Del's major
customer,  Wal-Mart,  Inc. in April 2004.  These  private  label  products  were
produced  using  label  and  packaging  trademarks  owned  by Del.  Sales to Del
accounted  for 12% of our sales during fiscal 2005,  which  attributed to 65% of
the increase in sales over fiscal 2004. In the fourth quarter of fiscal 2005, we
reserved  nearly  $1,550,000  in accounts  receivable  and wrote off $210,000 in
inventory  related  to Del  based  upon our  determination  in April  2005  that
collection from Del was questionable as of March 31, 2005.

On April 11, 2005,  we executed  with Del a Trademark  License  Agreement and an
Assignment of Accounts Receivable  Agreement.  Pursuant to the Trademark License
Agreement,  Del  licensed  to us the rights in  certain  Del  trademarks,  which
allowed us to sell products  directly to Del's  customers,  including  Wal-Mart,
Inc. and other food retailers,  using such trademarks.  In consideration for the
license, we agreed to pay to Del a 5% royalty on the net sales of such products.
In accordance with the Trademark License Agreement,  we can offset any royalties
that we may owe to Del under the agreement  against our account  receivable  and
other amounts owed to us by Del.

Pursuant to the Assignment of Accounts Receivable Agreement,  Del assigned to us
any and all accounts  receivable  owed to Del by  Wal-Mart,  Inc. and other food
retailers,  plus  monies  owed to Del  under  current  purchase  orders.  It was
intended  that the  assignment  of the accounts  receivable  and purchase  order
amounts would offset,  in part, our account  receivable from Del. We also agreed
not to  commence  any legal  proceedings  against  Del or  Non-Dairy  to collect
amounts owed to us by them, excluding defenses and counterclaims  against Del or
Non-Dairy made in any legal proceeding brought by them.

The  effectiveness  of the Trademark  License  Agreement  and the  Assignment of
Accounts Receivable  Agreement was conditioned upon Del providing us with proof,
satisfactory  to us,  that  (a)  Del  would  be  transferring  to us  under  the
Assignment of Accounts  Receivable  Agreement  accounts  receivable and purchase
orders  in excess  of Four  Hundred  Thousand  Dollars  ($400,000)  and (b) that
Wal-Mart,  Inc.  would  consent  to the  transactions  contemplated  under  both
agreements.  Del has not satisfied either of the foregoing  conditions and we do
not believe that it is likely that Del will be able to satisfy the conditions in
the  future.  Although  we have  waived  the  conditions  as they  relate to the
Trademark  License  Agreement,  we have not  waived  them  with  respect  to the
Assignment of Accounts  Receivable  Agreement.  Currently,  we are exploring our
options in  addressing  the issues  with Del  related to the  effectiveness  and
continuation  of the  Assignment  of  Accounts  Receivable  Agreement  and Del's
payment of our account  receivable.  During the first quarter of fiscal 2006, we
accrued approximately $40,000 in royalties under the Trademark License Agreement
and offset them against the  receivable  owed to us by Del. On or about June 15,
2006, we ceased selling products under Del's trademarks.  However, the Trademark
License  Agreement  will  continue in effect until  September 30, 2005 unless we
extend it for up to two additional  6-month periods or terminate it sooner.  The
net amount owed to us by Del is approximately  $1.6 million as of June 30, 2005.
This amount has been fully reserved as uncollectible at June 30, 2005.


                                       21
<PAGE>

Measurements of Financial Performance

We focus on several items in order to measure our performance. In the short term
(1 to 3  years),  we  are  working  towards  obtaining  positive  trends  in the
following  areas:

     o    Operating cash flow

     o    Gross margin in dollars and % of gross sales

     o    Operating income excluding  certain  employment  contract expenses and
          non-cash compensation related to stock based transactions

     o    EBITDA excluding  certain  employment  contract  expenses and non-cash
          compensation related to stock based transactions

     o    Liquidity

     o    Net sales trends (as it relates to consumer demand)

     o    Key financial  ratios (such as accounts  receivable,  accounts payable
          and inventory turnover ratios)

     o    Other operating ratios and statistics

In the long term (over 3 years),  we are  striving  to generate  consistent  and
predictable net sales growth with increased gross margins,  while  incrementally
enhancing net cash flow from operations.

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. Our significant estimates include the allowance for
doubtful accounts  receivable,  provision for obsolete  inventory,  valuation of
deferred  taxes and valuation of  compensation  expense on options and warrants.
Although we believe 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 management  and the  methodology  for
estimates and assumptions are as follows:

Valuation of Accounts Receivable and Chargebacks

We record  revenue upon  shipment of products to our  customers  and  reasonable
assurance  of  collection  on the sale.  We  generally  provide  credit terms to
customers based on net 30-day terms.  We perform  ongoing credit  evaluations of
our  accounts  receivable  balances  and based on  historical  experience,  make
reserves for  anticipated  future customer  credits for  promotions,  discounts,
spoils, and other reasons.  In addition,  we evaluate the accounts for potential
uncollectible amounts based on a specific identification  methodology and record
a general reserve for all remaining balances.

Based on the age of the receivable, cash collection history and past dilution in
the  receivables,  we make an estimate of our 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,  we reserved $2,612,000 and $740,000 for
known and anticipated  future credits and doubtful accounts at June 30, 2005 and
2004, respectively.  The reserve is higher at June 30, 2005 primarily due to the
$1.6  million  reserve  for Del  Sunshine as  described  under  Recent  Material
Developments.  We believe that this estimate is reasonable,  but there can be no
assurance  that  our  estimate  will  not  change  given a  change  in  economic
conditions  or business  conditions  within the food  industry,  our  individual
customer base or our Company.

Inventory

Inventories are valued at the lower of cost or market.  Cost is determined using
a  weighted  average,  first-in,  first  out  method.  We review  our  inventory
valuation each month and write off the inventory related to obsolete and damaged
inventory.  In addition, we reduce the value of any finished good item to market
value when that value is believed to be 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 in deferred  tax
assets and liabilities during the period.


                                       22
<PAGE>

Valuation of Non-Cash Compensation

We have three stock-based  employee  compensation plans. Prior to April 1, 2003,
we accounted for those plans under the recognition and measurement provisions of
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees," (APB No. 25), and related Interpretations.

Effective  April 1, 2003,  we adopted the fair value  recognition  provisions of
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation," and apply SFAS No. 148,  "Accounting for Stock-Based
Compensation - Transition and Disclosure,"  prospectively to all employee awards
granted on or after  April 1,  2003.  Awards  from our plans  vest over  periods
ranging from immediate to five years. Therefore, the cost related to stock-based
compensation  included in the  determination of net income for periods in fiscal
2004 and 2005 is less than that  which  would have been  recognized  if the fair
value based method had been  applied to all awards since the original  effective
date of SFAS No. 123. The fair value of the stock-based  award  (including,  but
not limited to,  restricted  stock  awards,  stock  option  grants,  and warrant
issuances) is determined  on the date of grant using the  Black-Scholes  pricing
model  and is  expensed  over the  vesting  period  of the  related  award.  The
difference  between the proforma and reported net loss per common share  related
to the issuance of employee stock options during the three months ended June 30,
2005 and 2004 was nearly zero.

Several  management  estimates  are  needed  to  compute  the fair  value of the
stock-based  transactions  including anticipated life, risk free interest rates,
and volatility of our stock price. Currently, we estimate the life of all awards
granted  assuming  that the award will remain  outstanding  and not be exercised
until the end of its term.  This  results in the highest  possible  value of the
award.  If we were to change our estimate of the  anticipated  life to something
less than the maximum term, then the fair value expense per share would decrease
by  approximately  $.01 to $.02 per month.  If we were to change our estimate of
the  volatility  percentage,  the fair value  expense per share would  change by
approximately $.02 per percentage change in the volatility. If we were to change
our estimate of the interest rate, the fair value expense per share would change
by approximately $.03 per percentage change in the interest rate.

SFAS No. 123 requires that we provide pro-forma information regarding net income
(loss) and earnings (loss) per share amounts as if compensation cost for all our
employee and director  stock-based awards had been determined in accordance with
the fair value method prescribed in SFAS No. 123. We estimated the fair value of
each stock-based award (i.e.  restricted stock awards,  stock option grants, and
warrant  issuances)  during the  periods  presented  by using the  Black-Scholes
pricing model with the following assumptions:

      Three Months Ended:                    June 30, 2005      June 30, 2004
                                           -----------------  -----------------
      Dividend Yield                         None               None
      Volatility                             46.00%             47.80%
      Risk Free Interest Rate                3.45%              2.07%
      Expected Lives in Months               1                  9

In  addition  to  non-cash  compensation  expense  related  to  new  stock-based
transactions,  we also record non-cash  compensation  expense in accordance with
the Financial  Accounting  Standards Board ("FASB")  Interpretation No. 44 ("FIN
44") related to modifications in stock-based  transactions.  FIN 44 only relates
to original stock-based  transactions with our employees and directors that were
granted prior to April 1, 2003 and accounted for under the accounting provisions
of APB No. 25.

FIN 44  states  that  when an  option  is  repriced  or  there  are  items  that
effectively  reduce the price of an option,  it is treated as a variable  option
that is marked to market each quarter.  Accordingly,  any increase in the market
price of our 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 our common stock compared
to the prior reporting period, the reduction is recorded as compensation  income
to  reverse  all or a  portion  of the  expense  recognized  in  prior  periods.
Compensation  income  is  limited  to the  original  base  exercise  price  (the
intrinsic  value) of the options.  Each period we record  non-cash  compensation
expense or income  related to our analysis on  approximately  3.5 million option
shares.  Assuming that the stock price  exceeds the  intrinsic  value on all the
variable  option shares,  a $0.01 increase or decrease in our common stock price
results in an expense or income, respectively, of $35,000. Due to the volatility
of the market price of our common stock, we are incapable of predicting  whether
this expense will increase or decrease in the future.


                                       23
<PAGE>

Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151,  "Inventory  Costs, an amendment
of Accounting  Research  Bulletin No. 43, Chapter 4." SFAS No. 151 requires that
abnormal amounts of idle facility  expense,  freight,  handling costs and wasted
materials  (spoilage)  be  recorded  as  current  period  charges  and  that the
allocation  of fixed  production  overheads  to inventory be based on the normal
capacity of the production  facilities.  SFAS No. 151 is effective during fiscal
years beginning after June 15, 2005,  although earlier application is permitted.
We believe  that the  adoption  of this  Statement  will not have a  significant
impact on our financial position, results of operations or cash flows.

In December  2004,  the 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.  SFAS No. 123R supercedes APB Opinion No. 25 and
amends SFAS No. 95,  "Statement of Cash Flows."  Under SFAS No. 123R,  companies
are required to record  compensation  expense for all share-based  payment award
transactions  measured at fair value as determined by an option valuation model.
Currently, we use the Black-Scholes pricing model to calculate the fair value of
its  share-based  transactions.  This  statement is  effective  for fiscal years
beginning after June 15, 2005. Since we currently recognize compensation expense
at fair value for  share-based  transactions in accordance with SFAS No. 123, we
do not  anticipate  adoption of this standard will have a significant  impact on
our financial position,  results of operations,  or cash flows.  However, we are
still evaluating all aspects of the revised standard.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
an  Amendment  of APB Opinion No. 29." SFAS No. 153 amends APB Opinion No. 29 to
eliminate the exception for nonmonetary  exchanges of similar  productive assets
from being  measured based on the fair value of the assets  exchanged.  SFAS No.
153 now provides a general exception for exchanges of nonmonetary assets that do
not have  commercial  substance.  SFAS No. 153 is effective  for fiscal  periods
beginning  after June 15, 2005.  We believe that the adoption of this  Statement
will not  have a  significant  impact  on our  financial  position,  results  of
operations or cash flows.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections - a replacement  of APB Opinion No. 20 and SFAS No. 3." SFAS No. 154
changes the  requirements  for the  accounting  for and reporting of a change in
accounting  principle and a change required by an accounting  pronouncement when
the pronouncement does not include specific transition provisions.  SFAS No. 154
requires retrospective application of changes as if the new accounting principle
had always been used. SFAS No. 154 is effective for fiscal years beginning after
December 15, 2005. We are still  evaluating all aspects of the revised  standard
in order to  evaluate  the  impact on our  financial  position  and  results  of
operations.

Results of Operations

<TABLE>
<CAPTION>
                                             3-Months Ended
                             ------------------------------------------------     2005            2004
                                                                    $              %              %  of         %  of
June 30,                        2005             2004            Change          Change           Sales         Sales
-----------------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>               <C>                 <C>            <C>           <C>
Net Sales                    9,851,153        11,191,678        (1,340,525)        -12.0%          100.0%        100.0%
Cost of Goods Sold           7,582,855         8,251,330          (668,475)         -8.1%           77.0%         73.7%
                             ------------------------------------------------------------------------------------------
Gross Margin                 2,268,298         2,940,348          (672,050)        -22.9%           23.0%         26.3%
                             ==========================================================================================
</TABLE>

Net Sales

Net sales in the first  quarter of fiscal 2006  decreased  12% from net sales in
the first quarter of fiscal 2005  primarily due to a loss in sales volume during
the transition from indirect sales to Wal-Mart  through a private label customer
to direct  sales to Wal-Mart in April 2005.  During the first  quarter of fiscal
2005, this private label customer  accounted for approximately 11% of net sales.
However,  we are no  longer  selling  to this  customer  due to a shift in sales
between  customers (See Del Sunshine LLC under Recent Material  Developments for
further  details).  During the first  quarter of fiscal 2006,  sales to Wal-Mart
accounted for approximately 12% of net sales.  Private label and imitation sales
consist  primarily of products  that generate high sales volumes but lower gross
margins.  Sales also decreased in the first quarter of fiscal 2006 due to a lack
of significant promotions in this period compared to the first quarter of fiscal
2005 (see Selling below for further details).


                                       24
<PAGE>

Certain key  initiatives  and  tactical  actions  were  initiated by our Company
during  fiscal  2005 and will be  continued  throughout  fiscal  2006.  Such key
initiatives  and tactical  actions for fiscal 2006 include,  but are not limited
to, the following:

     o    Creating and  communicating a new more  meaningful  brand position for
          our  flagship  Veggie(TM)  Brand and adding new  products.  The recent
          focus  is to  highlight  the  superior  nutritional  factors  such  as
          cholesterol  and  trans-fat  free,  as well  as  targeting  a  broader
          universe of consumers.  We are attempting to attract incremental users
          by convincing prior users and light users of conventional  cheese that
          the Veggie(TM)  brand items can satisfy their needs with great tasting
          nutrition. This is a departure from our past product positioning where
          physiological  and  medical  requirements  were  a key  driver  in why
          consumers should buy the "healthy alternatives."

     o    Improving product quality in terms of taste, color, aroma, and texture
          of our Veggie(TM) and Rice slices product line.

     o    Reducing or eliminating most of our contract  manufacturing  customers
          due to the continued  high cost of certain raw materials  which result
          in gross margins that are below our acceptance level.

     o    Continued  emphasis and resource  allocation of our marketing strategy
          to increase sales through consumer  advertising (in TV, magazine,  and
          event  sponsorship)  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).  These  marketing  campaigns  will  launch in the
          second  quarter of fiscal 2006.  In fiscal 2005, we saw an increase in
          sales  through  our  consumer   advertising  and   promotions,   which
          highlighted and  communicated the benefits of our products to meet the
          consumer demand for low  carbohydrate  and high protein  products.  We
          experienced  an average 17% increase in sales in those  markets  where
          there were consumer- advertising promotions in fiscal 2005.

We use 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  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,  we make decisions on which brands to promote
and analyzes trends in the consumer marketplace.

We  anticipate  that our direct sales to Wal-Mart will increase from 2% of sales
in fiscal  2005 to a range  between  10% and 15% of sales in fiscal  2006.  This
increase is due to a shift in sales between customers rather than an increase in
product sales.  Prior to fiscal 2006, we produced certain private label products
for Del Sunshine who then sold the product to Wal-Mart.  Del Sunshine  accounted
for 12% of sales in fiscal 2005. In fiscal 2006, we began selling these products
directly to Wal-Mart instead of through Del Sunshine (See Del Sunshine LLC under
Recent Material Developments for further details),  and our sales to Wal-Mart in
the first quarter of fiscal 2006 accounted for 12% of our total net sales.

Based on our  current  projections,  we  anticipate  a moderate  growth in sales
through  improved  distribution  and  penetration  of our core  brands  into the
mainstream consumer markets.

Cost of Goods Sold

Cost of goods sold  increased  from 74% to 77% of net sales in the first quarter
of  fiscal  2005  compared  to the first  quarter  of fiscal  2006.  This  three
percentage  point increase in cost of goods sold was primarily due to the higher
raw  material  costs of casein.  However,  such costs were  partially  offset by
reduced  labor and  overhead  costs.  In  total,  cost of goods  sold  decreased
approximately  $668,000 due to approximately  $642,000 from lower sales volumes,
$170,000 from reduced direct labor expenses,  $287,000 in reduced overhead costs
offset by higher raw material costs of $431,000.  We experienced  lower costs in
direct labor and overhead costs as a result of improved production  efficiencies
and a change in the  method of  allocating  certain  overhead  costs to  various
departments.  Certain  allocation  costs are allocated based on a square footage
method.  As a result of lower square footage in our  production  areas in fiscal
2006  compared to prior fiscal years,  there is a higher  percentage of overhead
allocated to non-production departments beginning in April 2005.

The principal raw material  used by our Company is casein,  which  accounted for
approximately 55% and 42% of our raw material  purchases in the first quarter of
fiscal 2006 and 2005, respectively.  As casein is a significant component of our
product  formulation,  we are vulnerable to short-term and long-term  changes in
casein pricing, which at times has been volatile.

We  experienced a 20% increase in average  casein prices in the first quarter of
fiscal 2006 compared to average casein prices in fiscal 2005,  which resulted in
an increase in cost of goods of approximately  $2.7 million.  In fiscal 2006, we
are continuing to experience high casein prices. Based on current pricing trends
with our  suppliers,  we believe  that casein  prices will remain at  historical
highs at least through  September 30, 2005.  Every 10% increase in casein prices


                                       25
<PAGE>

over the  fiscal  2005  average  will  result  in an  annual  cost  increase  of
approximately  $1,100,000  assuming  the same amount of pounds  purchased  as in
fiscal 2005.  Casein prices are still high due to greater  worldwide  demand, as
well as lower  foreign  government  subsidies  and the  decline in the US Dollar
value  versus  the  Euro.  In order to  offset  the high  casein  costs,  we are
incorporating  alternative formula  modifications that maintain the integrity of
our product  benefits as well as reducing  costs in several  other raw materials
and  operational  labor  categories.  We  have  also  passed  along  some of the
increased  costs  to  our  customers  during  fiscal  2005  and  will  implement
additional price increases as appropriate.  However, these price increases often
cannot be passed on to the  customers at the same time or in  proportion  to the
increase in our costs and,  therefore,  we experience lower margins on the sales
of our products.

We  monitor  our  costs  and  production  efficiencies  through  various  ratios
including  pounds produced per hour and cost per pound sold and use these ratios
to make decisions in purchasing, production and setting sales prices.

In fiscal 2006, we expect our annual gross profit percentage to improve over the
annual fiscal 2005 levels despite the continued  increases in raw material costs
because we have implemented price increases on some of our products,  additional
sales growth is expected in our higher  margin  products and we have  eliminated
certain low margin private label manufacturing accounts.

EBITDA, (a non-GAAP measure):

<TABLE>
<CAPTION>
                                                               3-Months Ended
                                            -------------------------------------------------------------      2005        2004
June 30,                                        2005              2004            $ Change       % Change   % of Sales   % of Sales
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>               <C>                <C>              <C>         <C>        <C>
Gross Margin                                 2,268,298         2,940,348          (672,050)       -22.9%       23.0%      26.3%
                                            ---------------------------------------------------------------------------------------
Operating Expenses:
Selling                                        936,245         1,460,400          (524,155)       -35.9%        9.5%      13.0%
Delivery                                       615,471           593,326            22,145          3.7%        6.2%       5.3%
Employment contract expense (3)                     --                --                --          0.0%        0.0%       0.0%
General and administrative, including
 $867,518 and $162,374
non-cash stock compensation (2)              1,601,530           795,716           805,814        101.3%       16.3%       7.1%
Impairment of property & equipment           7,896,554                --         7,896,554        100.0%       80.2%       0.0%
(Gain)Loss on disposal of assets                  (636)               --              (636)      -100.0%        0.0%       0.0%
Cost of disposal activities                    255,011                --           255,011        100.0%        2.6%       0.0%
Research and development                        91,042            72,686            18,356         25.3%        0.9%       0.6%
                                            ---------------------------------------------------------------------------------------
Total operating expenses                    11,395,217         2,922,128         8,473,089        290.0%      115.7%      26.1%
                                            ---------------------------------------------------------------------------------------
Income (Loss) from Operations(1,4)          (9,126,919)           18,220        (9,145,139)    -50192.9%      -92.6%       0.2%

Other Income (Expense), Net
Interest expense, net                         (357,195)         (259,816)          (97,379)        37.5%       -3.6%      -2.3%
Derivative expense                                  --          (121,119)          121,119       -100.0%        0.0%      -1.1%
Gain/(Loss) on fair value of warrants          340,000          (158,896)          498,896       -314.0%        3.5%      -1.4%
Other                                               --                --                --          0.0%        0.0%       0.0%
                                            ---------------------------------------------------------------------------------------
Total                                          (17,195)         (539,831)          522,636        -96.8%       -0.2%      -4.8%
                                            ---------------------------------------------------------------------------------------

NET INCOME (LOSS) (1)                       (9,144,114)         (521,611)       (8,622,503)      1653.1%      -92.8%      -4.7%

Interest expense, net                          357,195           259,816            97,379         37.5%        3.6%       2.3%
Depreciation                                   539,103           546,041            (6,938)        -1.3%        5.5%       4.9%
                                            ---------------------------------------------------------------------------------------
EBITDA, (a non-GAAP measure) (1)            (8,247,816)          284,246        (8,532,062)     -3001.6%      -83.7%       2.5%
                                            =======================================================================================
</TABLE>

(1)      We utilize  certain  GAAP  measures  such as  Operating  Income and Net
         Income  and  certain  non-GAAP  measures  such as  EBITDA  and  exclude
         non-cash  compensation related to stock based transactions  included in
         general and  administrative  expenses and certain  employment  contract
         expenses  in order  to  compute  our key  financial  measures  that are
         reviewed by  management,  lenders and investors in order to effectively
         review our current  on-going  operations  and analyze trends related in
         our financial condition and results of operations.  Additionally, these
         measures  are key  factors  upon  which  we  prepare  our  budgets  and
         forecasts,  calculate  bonuses,  and  evaluate  loan  covenants.  These
         adjusted  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.


                                       26
<PAGE>

(2)      In our calculation of key financial  measures,  we exclude the non-cash
         compensation  related to  stock-based  transactions  because we believe
         that  this  item  does not  accurately  reflect  our  current  on-going
         operations.  Many times non-cash  compensation  is calculated  based on
         fluctuations in our stock price,  which can skew the financial  results
         dramatically  up and down.  The price of our common shares as traded on
         AMEX is outside our control and typically  does not reflect our current
         operations.  Additionally,  this item is excluded  by our lenders  when
         calculating compliance with loan covenants.

(3)      In our calculation of key financial measures, we exclude the employment
         contract  expenses  related to Angelo S. Morini and  Christopher J. New
         because we believe that these items do not reflect  expenses related to
         our current on-going operations. Additionally, these items are excluded
         by our lenders when calculating compliance with loan covenants.

(4)      Operating Income (Loss) has declined due to less dollars contributed by
         gross margin as discussed  above under sales and cost of goods sold and
         due to the increase in non-cash stock compensation expense as discussed
         below under general and administrative.

Selling

Selling  expenses were lower in the first quarter of fiscal 2006 compared to the
first  quarter of fiscal 2005 due to lower  promotion,  demonstration  and print
advertising  costs in the first quarter of fiscal 2006.  We anticipate  that the
selling  expenses will increase over 30% due to large  promotion and advertising
campaigns  that will be launched in the second  quarter of fiscal 2006.  We sell
our products through our internal sales force and an independent broker network.

Delivery

Delivery expense is primarily a function of sales. In the past, delivery expense
remained consistent at approximately 5% of net sales. However, this increased to
6% of net sales in the first  quarter of fiscal  2006 due to higher  fuel prices
and  surcharges  charged  by the  transportation  companies  and  due to  higher
overhead allocation charges as discussed under Cost Of Goods Sold.

After  the  anticipated  transfer  of all  production  and  distribution  of our
products to  Schreiber  by November  2005,  we expect our  delivery  expenses to
decrease significantly as a result of an agreed upon delivery price per pound of
product with Schreiber that is lower than our current delivery cost per pound of
product.

General and administrative

General and  administrative  expenses  increased  by  approximately  $705,000 in
non-cash  compensation related to stock-based  transactions,  as detailed below,
$33,000  in  insurance  costs due to higher  coverages  and  increased  premiums
effective in April 2005,  and $63,000 in  professional  fees for legal and audit
services due to additional contracts and SEC filings during the first quarter of
fiscal 2006.

Excluding  the  effects  of  non-cash   compensation   related  to   stock-based
transactions,  which  cannot  be  predicted,  we  anticipate  that  general  and
administrative  expenses  will be higher  than prior  year  levels for the first
three  quarters of fiscal 2006 due to the higher  insurance  costs and increased
audit  services  required.  However,  we expect that general and  administrative
expenses in the fourth quarter of fiscal 2006 will be significantly  reduced due
to the  non-recurrence  of the $1.6 million in bad debt expense that occurred in
the fourth quarter of fiscal 2005.

The change in non-cash compensation related to stock-based transactions that are
included in general and administrative expenses are detailed as follows:

<TABLE>
<CAPTION>
                                                           3-Months Ended
                                    ---------------------------------------------------------
June 30,                               2005             2004         $ Change       % Change
---------------------------------------------------------------------------------------------
<S>                                 <C>                  <C>         <C>             <C>
Stock-based award
compensation - initial
issuance                            1,036,959            4,208       1,032,751       24542.6%
Option modifications under
APB 25 awards                        (169,441)         158,166        (327,607)      -207.1%
                                    --------------------------------------------------------
Non-cash compensation related
to stock based transactions           867,518          162,374         705,144         434.3%
                                    ========================================================
</TABLE>


                                       27
<PAGE>

Effective April 1, 2003, we elected to record  compensation  expense measured at
fair value for all stock-based award  transactions  (including,  but not limited
to, restricted stock awards,  stock option grants,  and warrant issuances) on or
after  April 1, 2003 under the  provisions  of SFAS No.  123.  Prior to April 1,
2003,  we only  recorded  the  fair  value  of  stock-based  awards  granted  to
non-employees  or  non-directors  under the provisions of SFAS No. 123. The fair
value of the  stock-based  award is  determined  on the date of grant  using the
Black-Scholes  pricing  model and is  expensed  over the  vesting  period of the
related award. Prior to April 1, 2003, we accounted for our stock-based employee
and director compensation plans under the accounting provisions of APB No. 25 as
interpreted by FASB Interpretation No. 44 ("FIN 44"). Any modifications of fixed
stock options or awards granted to employees or directors  originally  accounted
for under APB No. 25 may result in  additional  compensation  expense  under the
provisions of FIN 44. FIN 44 covers specific events that occurred after December
15, 1998 and was effective as of July 1, 2000.

In  accordance  with the above  accounting  standards,  we calculate  and record
non-cash   compensation   related  to  our   securities   in  the   general  and
administrative  line item in our  Statements of Operations  based on two primary
items:

     a.  Stock-Based Award Issuances

     During  the  three  months  ended  June 30,  2005  and  2004,  we  recorded
     $1,036,959  and  $4,208,  respectively,  in non-cash  compensation  expense
     related  to  stock-based  transactions  that were  issued to and  vested by
     employees, officers, directors and consultants.

     b. Option  Modifications for Awards granted to Employees or Directors under
     APB No. 25

     On October  11,  2002,  we  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 market price of $2.05 per share. Prior
     to the repricing  modification,  the options were  accounted for as a fixed
     award under APB No. 25. In  accordance  with FIN 44, the  repricing  of the
     employee  stock  options  requires  additional  compensation  expense to be
     recognized  and adjusted in subsequent  periods for changes in the price of
     our common stock that are in excess of the $2.05 stock price on the date of
     modification  (additional  intrinsic  value). If there is a decrease in the
     market price of our common stock  compared to the prior  reporting  period,
     the  reduction  is  recorded  as  compensation  income to reverse  all or a
     portion of the expense recognized in prior periods.  Compensation income is
     limited to the original base exercise  price (the  intrinsic  value) of the
     options.  This  variable  accounting  treatment  for these  modified  stock
     options  began with the quarter  ended  December 31, 2002 and such variable
     accounting  treatment  will  continue  until the related  options have been
     cancelled,  expired or exercised.  There are 3,499,841 outstanding modified
     stock  options  remaining  as  of  June  30,  2005.  We  recorded  non-cash
     compensation  expense/(income)  of  ($169,441)  and  $158,166 for the three
     months ended June 30, 2005 and 2004, respectively,  related to the modified
     options described above.

Impairment of property and equipment

In light of the Asset Sale and  Outsourcing  Arrangements  discussed above under
Recent Material Developments, we determined that it is more likely than not that
a majority of our fixed assets related to production  activities will be sold or
disposed  prior  to  the  end of  their  useful  life.  These  assets  represent
approximately  98% of the  value  of  property  and  equipment.  Based  on  this
determination,  SFAS No.  144,  "Accounting  for the  Impairment  of Disposal of
Long-Term  Assets," requires that we write down the value of our assets to their
fair  values as of June 30,  2005.  We will  continue to hold and use the assets
until they are sold.  Therefore,  all assets will  continue  to be reported  and
depreciated  under  Property and  Equipment in the Balance  Sheet until they are
sold. We estimated the fair value based on the sales price in the Asset Purchase
Agreement  and the  anticipated  sales  price  related to any other  assets plus
future cash flows related to the assets from July 1, 2005 until the sale.  Based
on this  estimate,  we  recorded an  impairment  of property  and  equipment  of
$7,896,554 in the first quarter ended June 30, 2005.

Research and development

Research and  development  expense  increased  approximately  $15,000 due to the
addition of one employee to the  department  during the first  quarter of fiscal
2006.  The  remaining  $3,000  increase  was due  primarily  to higher  overhead
allocation  charges  during the first quarter of fiscal 2006 as discussed  under
Cost Of Goods Sold.

We  anticipate  that  there  may  be a  significant  increase  in  research  and
development  expenses  in  fiscal  2006  due to an  increase  in the  number  of
personnel in the department and renewed focus on developing new products for the
market.

Other income and expense

Interest expense increased  approximately  $97,000 due to higher prime rates (on
average  1.75%  higher)  and  3%  higher  rates  charged  by  Textron  Financial
Corporation  during May and June as further  described  below.  We are incurring
increased interest expense,  and anticipate further increases during fiscal 2006
compared to fiscal 2005 due to increases in the floating  interest rates used by
our lenders which are based on prevailing market interest rates.


                                       28
<PAGE>

Derivative expense represents the adjustment for the change in the fair value of
the embedded  derivative in our Series A convertible  preferred stock, which met
the criteria for  bifurcation  and separate  accounting  under SFAS No. 133. The
fair value of the  embedded  derivative  was computed  based on several  factors
including the  underlying  value of our common stock at the end of each quarter.
This expense was $121,119 in the first quarter of fiscal 2005,  but there was no
expense in the first  quarter of fiscal 2006  because  the Series A  convertible
preferred  stock was partially  converted and the remaining  shares  redeemed on
October 6, 2004.

Since the  conversion  of our Series A  convertible  preferred  stock could have
resulted in a conversion  into an  indeterminable  number of common  shares,  we
determined  that under the guidance in  paragraph 24 of EITF 00-19,  "Accounting
for Derivative Financial  Instruments Indexed To, and Potentially Settled in the
Company's Own Stock," we were  prohibited from concluding that we had sufficient
authorized  and  unissued  shares to  net-share  settle any  warrants or options
issued to  non-employees.  Therefore,  we  reclassified  to a liability the fair
value of all warrants and options issued to non-employees  that were outstanding
during the period that the Series A convertible  preferred stock was outstanding
from April 2001 to October 2004. Additionally, in accordance with EITF 00-19, if
a contract requires  settlement in registered shares, then it may be required to
record the value of the securities as a liability and/or temporary  equity.  Any
changes in the fair value of the securities based on the  Black-Scholes  pricing
model after the initial valuation are marked to market during reporting periods.
During the three  months  ended June 30,  3005 and 2004,  we  recorded a gain of
$340,000 and a loss of  ($158,896),  respectively,  related to the change in the
fair values of the warrants.

Assuming the  consummation  of the Asset Purchase  Agreement as discussed  under
Recent Material  Developments,  we expect that our debt to Wachovia Bank will be
paid in full and there will be a significant  reduction in interest  expense due
to lower debt balances in fiscal 2006 as compared to fiscal 2005.

Liquidity And Capital Resources

<TABLE>
<CAPTION>
                                                            3-Months Ended
                                      ---------------------------------------------------------
                                                                          $              %
June 30,                                2005              2004          Change         Change
-----------------------------------------------------------------------------------------------
<S>                                  <C>                 <C>           <C>               <C>
Cash from (used in) operating
activities                           (1,403,403)         578,038       (1,981,441)      -342.8%
Cash from (used in) investing
activities                              (60,651)         (74,525)          13,874        -18.6%
Cash from (used in) financing
activities                              902,272         (186,413)       1,088,685       -584.0%
                                     ----------------------------------------------------------
Net increase (decrease) in cash        (561,782)         317,100         (878,882)      -277.2%
                                     ==========================================================
</TABLE>

Operating and Investing Activities

Cash from  operating  activities  declined  in the first  quarter of fiscal 2006
primarily due to accounts  receivable  returning to its  historical  level.  The
accounts  receivable balance as of March 31, 2005 was lower than average for the
sales volume due to a large  reserve of nearly $1.6 million that was recorded as
of March 31, 2005 (See Del Sunshine LLC under Recent Material  Developments  for
further details). We are continually reviewing our collection practices, payment
terms to  vendors  and  inventory  levels  in order to  maximize  cash flow from
operations.

Cash used in investing  activities  primarily  relates to our purchase of office
and  manufacturing  equipment in each fiscal  period.  We do not  anticipate any
large  capital  expenditures  during  fiscal 2006,  but rather expect to receive
substantial  cash provided by investing  activities in the sale of a majority of
our production assets to Schreiber in the third quarter of fiscal 2006.

We expect to report positive cash flows from ongoing operations for fiscal 2006.
However,  we  anticipate  a decrease in cash flow as we begin to  outsource  our
production  late in the second quarter of fiscal 2006 as part of the outsourcing
transition described under Recent Material Developments. We will need additional
cash to build up finished good inventory  levels to maintain  standard orders to
customers  and to pay one-time  costs  associated  with the  transition  such as
severance  arrangements,  and contract  and lease  cancellation  fees.  Based on
current projections, we expect that much of the additional cash requirements, if
not all,  will be returned in the sale of our usable raw materials and packaging
inventory and  production  equipment to Schreiber in the third quarter of fiscal
2006.


                                       29
<PAGE>

Financing Activities

<TABLE>
<CAPTION>
                                                                 3-Months Ended
                                           -----------------------------------------------------------
                                                                                 $              %
June 30,                                       2005              2004          Change         Change
------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>             <C>            <C>
Net borrowings (payments) on line of
credit and bank overdrafts                   (180,706)          53,574         (234,280)      -437.3%
Payments of debt and capital leases &
associated costs                             (648,582)        (217,487)        (431,095)        198.2%
Issuances of stock & associated costs       1,731,560          (22,500)       1,754,060       -7795.8%
                                           -----------------------------------------------------------
Cash from (used in) financing
activities                                    902,272         (186,413)       1,088,685       -584.0%
                                           ===========================================================
</TABLE>

     Debt Financing

On May 27, 2003, we 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 our 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 our 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 our 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 (8.0% at June 30,  2005)  calculated  on the  average  cash
borrowings for the preceding month. The initial term of the Textron Loan ends on
May 26, 2006, but this loan automatically renews for additional one-year periods
unless  terminated by our Company or Textron  through a written  notice  90-days
prior  thereto or as otherwise  provided in the loan  agreement.  As of June 30,
2005, the outstanding principal balance on the Textron Loan was $4,736,456.

The Textron Loan Agreement  contains certain financial and operating  covenants.
On June 3,  2005,  we  executed  a fourth  amendment  to the  Textron  Loan that
provided a waiver on all the  existing  defaults for the fiscal  quarters  ended
December  31, 2004 and March 31,  2005,  and amended the fixed  charge  coverage
ratio and the adjusted  tangible net worth  requirements for periods after March
31, 2005.  Additionally,  the fourth amendment allowed the Textron Loan to be in
an over-advance position not to exceed $750,000 until July 31, 2005. In exchange
for the waiver and amendments,  our interest rate on the Textron Loan was set at
Prime plus 4.75% and we paid a fee of $50,000  in four  weekly  installments  of
$12,500.

On June 16, 2005, we used a portion of the proceeds  from the warrant  exercises
described below under Equity Financing to satisfy the $750,000 over-advance with
Textron.  In connection with the satisfaction of the over-advance,  we agreed to
immediately terminate Textron's obligation to permit any over-advances under the
Textron  Loan,  which  obligation  was to  expire  on July  31,  2005.  With the
termination of the over-advance  facility, the interest rate on the Textron Loan
returned  to its prior  level of Prime plus  1.75%.  On June 30,  2005,  Textron
reduced our borrowing  availability  under our line by $200,000  until they have
time to review and approve our financial  forecasts  that reflect the asset sale
and  outsourcing  arrangements.  However,  there is no guarantee if or when they
will lift this restriction on our borrowing availability.  Additionally,  we may
experience  further  restrictions  by  Textron  by virtue of  reserves  they may
require,  receivables  they may deem  ineligible or other rights they have under
the Textron Loan Agreement.

In  August  2005,  due to the Cost of  Disposal  Activities  and  Impairment  of
Property and Equipment, we determined that we fell below the requirement for the
fixed charge  coverage  ratio and the adjusted  tangible net worth  requirements
under the  Textron  Loan for the quarter  ended June 30,  2005.  Although  these
covenant  violations  placed us in  technical  default on the loan,  we have not
received  a  notice  of an event  of  default  from  Textron.  We are  currently
discussing our financial  forecasts that reflect the asset sale and  outsourcing
arrangements  and certain  waivers and loan  modifications  to the Textron  Loan
Agreement.  Until  such  time  as we  have  received  formal  waivers  and  loan
modifications,  Textron is allowing us to operate in a position of default.  The
existence of a default under the Textron Loan would allow Wachovia,  another one
of our lenders,  as described  below,  to declare an event of default  under our
existing term loan based on a  cross-default  provision in their loan agreement.
If an  agreement  cannot  be  reached  on the loan  modifications,  Textron  and
Wachovia could exercise their  respective  rights under their loan documents to,
among  other  things,  declare  a  default  under  the  loans,   accelerate  the
outstanding  indebtedness such that it would become immediately due and payable,
and pursue  foreclosure of our assets,  which are pledged as collateral for such
loans.  If such an event occurred with either Textron or Wachovia and additional
financing is not available on terms  acceptable to us, it would be substantially
more difficult for us to effectively continue the operation of our business, and
it is unlikely that we would be able to continue as a going concern.


                                       30
<PAGE>

Simultaneous  with the closing of the Textron Loan in May 2003,  Wachovia  Bank,
N.A. successor by merger to SouthTrust Bank ("Wachovia")  extended our Company a
new  term  loan in the  principal  amount  of  $2,000,000.  This  term  loan was
consolidated  with our March  2000 term  loan  with  Wachovia,  which had a then
outstanding  principal  balance of  $8,131,985  for a total term loan  amount of
$10,131,985.  This term loan is  secured  by all of our  equipment  and  certain
related  assets.  Additionally,  the term loan bears interest at Wachovia's Base
Rate plus 1% (7.25% at June 30, 2005). The balance  outstanding on the term loan
as of June 30, 2005 was  $7,801,985.  This  balance is  classified  as a current
liability due to the cross-default provision described above.

On June 30, 2005, we entered into a Loan  Modification  Agreement  with Wachovia
regarding its term loan. The agreement modified the following terms of the loan:
1) the loan will mature and be payable in full on July 31, 2006  instead of June
1, 2009;  2) the  principal  payments  will  remain at  $110,000  per month with
accrued  interest  at  Wachovia's  Base Rate plus 1%  instead of  increasing  to
$166,250  on July 1,  2005 as  provided  by the  terms  of the  promissory  note
evidencing  the loan;  and 3) all  covenants  related to our tangible net worth,
total  liabilities  to tangible  net worth,  and  maximum  funded debt to EBITDA
ratios are waived and  compliance  is not required by us through the maturity of
the loan on July 31, 2006. In connection  with the  agreement,  we agreed to pay
$60,000,  of which $30,000 was paid upon  execution of the agreement and $30,000
was paid on August 1, 2005.  As  required by the terms of the  agreement,  if we
sell  our  equipment   securing  the  loan  as  discussed  under  the  Schreiber
Transactions in Recent  Material  Developments  above,  the loan will be due and
payable in full at the time of sale.

     Equity Financing

In accordance  with a warrant  agreement  dated April 10, 2003, we issued to Mr.
Frederick  DeLuca, a greater than 10%  shareholder,  a warrant to purchase up to
100,000  shares of our  common  stock at an  exercise  price of $1.70 per share.
Additionally,  in accordance with a warrant  agreement dated October 6, 2004, we
issued to Mr.  DeLuca a warrant to purchase  up to 500,000  shares of our common
stock at an exercise  price of $1.15 per share.  Subsequently  in June 2005,  we
agreed to reduce the  per-share  exercise  price on these  warrants to $1.36 and
$0.92, respectively, in order to induce Mr. DeLuca to exercise his warrants. All
of the warrants were exercised on June 16, 2005 for total proceeds of $596,000.

On each of April 24, 2003 and October 6, 2004,  BH Capital  Investments,  LP and
Excalibur  Limited  Partnership each received warrants to purchase up to 250,000
shares  of our  common  stock at an  exercise  price of $2.00 per  share.  Also,
Excalibur Limited Partnership received a warrant to purchase up to 30,000 shares
of our common  stock at an exercise  price of $2.05 per share on June 26,  2002.
Subsequently  in June 2005, we agreed to reduce the per-share  exercise price on
all such  warrants  to $1.10 in order to induce BH Capital  Investments,  LP and
Excalibur  Limited  Partnership to exercise their warrants.  All of the warrants
were exercised on June 16, 2005 for total proceeds of $1,133,000.

In  accordance  with the  accounting  provisions  of SFAS No.  123,  we recorded
$1,024,500  in non-cash  compensation  expense  related to the  reduction in the
exercise price of the above mentioned warrants in June 2005.

We used a portion of the  proceeds  from the  warrant  exercises  to satisfy the
$750,000  over-advance provided by Textron under the Fourth Amendment and Waiver
to the  Textron  Loan  Agreement,  as  described  under Debt  Financing  and the
remaining  proceeds  from the warrant  exercises  were used for working  capital
purposes.

In accordance  with a registration  rights  agreement dated October 6, 2004 with
Mr.  Frederick  DeLuca,  we agreed  that  within 180 days we would file with the
Securities and Exchange  Commission and obtain  effectiveness  of a registration
statement  that  included  2,000,000  shares  issued in a private  placement and
500,000  shares  related  to a stock  purchase  warrant.  Per the  terms  of the
agreement,  if a  registration  statement  was  not  filed,  or did  not  become
effective  within 180 days,  then in addition to any other rights Mr. DeLuca may
have,  we  would be  required  to pay  certain  liquidated  damages.  We filed a
registration statement on Form S-3 on March 14, 2005. However, this registration
statement  has not yet been declared  effective.  We received from Mr. DeLuca an
extension  of time until  September 1, 2005 to have the  registration  statement
declared effective by the SEC.  Additionally,  Mr. DeLuca waived all damages and
remedies for failure to have an effective registration statement until September
1, 2005.  In the event  that the  registration  statement  is not  effective  by
September 1, 2005,  we will be liable to pay $71,875  (2.5% times the product of
2,500,000  registerable  shares and the share  price of $1.15 per  share)  every
thirty  days  until  the  registration  statement  becomes  effective  unless an
additional extension is granted.

Summary

Assuming that Textron allows us to continue to operate in a default position and
no further  material  restrictions or changes from our lenders,  we believe that
with the cash available on our credit  facilities and proceeds received from the
equity financings together with cash flow from current operations,  we will have
enough cash to meet our current liquidity needs for general  operations  through
June 30, 2006.


                                       31
<PAGE>

Based on current projections, we expect that much, if not all, of the additional
cash  requirements  for the  transition  charges  will come from the sale of our
usable raw  materials  and  packaging  inventory  and  production  equipment  to
Schreiber in the third quarter of fiscal 2006.

Item 4. Controls and Procedures

As of June 30, 2005, an evaluation was performed  under the supervision and with
the  participation  of our  management,  including the Chief  Executive  Officer
("CEO"),  and the Chief Financial  Officer ("CFO"),  of the effectiveness of the
design and operation of our  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,
our  management,  including  the CEO and  CFO,  concluded  that  our  disclosure
controls and  procedures  were effective in timely  bringing to their  attention
material  information  related to our  Company  required  to be  included in our
periodic  Securities  and Exchange  Commission  filings.  Since the date of this
evaluation,  there  have been no changes in our  internal  controls  or in other
factors that are reasonably likely to materially affect those controls.

Subsequent  to the date of our  evaluation,  each of our  Company's  CEO and CFO
considered the  restatement of the financial  statements and the  restatement of
the management's  discussion and analysis of financial conditions and results of
operations as presented in Part I, Items 1 and 2, respectively, included in this
Form 10-Q/A and concluded that such  restatements  were the result of a material
weakness  relating to the accounting and disclosure for complex and non-standard
stockholders'  equity  transactions.  To address our Company's material weakness
related  to  the  accounting   and  disclosure  for  complex  and   non-standard
stockholders'  equity  transactions,  we are in the  process  of  enhancing  our
internal  control  processes in order to be able to  comprehensively  review the
accounting and disclosure implications of such transactions on a timely basis.


                                       32
<PAGE>

                           PART II. OTHER INFORMATION

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  Wachovia  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.)


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<PAGE>

*     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.)

*     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.)

*     4.25     Asset  Purchase  Agreement  dated June 30,  2005  between  Galaxy
               Nutritional  Foods,  Inc. and  Schreiber  Foods,  Inc.  (Filed as
               Exhibit 4.25 on Form 8-K filed July 6, 2005.)

*    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 Wachovia  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 Wachovia  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  Wachovia  Bank  (Filed as
               Exhibit 10.5 on Form 8-K filed June 2, 2003.)


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<PAGE>

*    10.7      Amendment of Security  Agreement dated as of May 28, 2003 between
               Galaxy  Nutritional  Foods,  Inc.  and  Wachovia  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.)

*    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 Wachovia 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 as Exhibit  10.16 on Form 10-Q for the fiscal
               quarter ended December 31, 2004.)

*    10.17     Fourth  Amendment  to Loan and Security  Agreement  dated June 3,
               2005 between Galaxy Nutritional Foods, Inc. and Textron Financial
               Corporation  (Filed as  Exhibit  10.17 on Form 8-K filed June 22,
               2005.)

*    10.18     Letter  Agreement dated June 17, 2005 between Galaxy  Nutritional
               Foods, Inc. and Textron Financial  Corporation  (Filed as Exhibit
               10.18 on Form 8-K filed June 22, 2005.)

*    10.19     Supply  Agreement dated June 30, 2005 between Galaxy  Nutritional
               Foods,  Inc. and Schreiber Foods, Inc. (Filed as Exhibit 10.19 on
               Form 8-K filed July 6, 2005.)

*    10.20     Loan   Modification   Agreement  June  30,  2005  between  Galaxy
               Nutritional   Foods,   Inc.  and  Wachovia   Bank  N.A  (formerly
               SouthTrust Bank).  (Filed as Exhibit 10.19 on Form 8-K filed July
               6, 2005.)

*    14.1      Code of Ethics (Filed as Exhibit 14.1 on Form 10-K for the fiscal
               year ended March 31, 2005.)

*    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 our Chief Executive  Officer (Filed
               herewith.)

     31.2      Section 302  Certification of our Chief Financial  Officer (Filed
               herewith.)

     32.1      Section 906  Certification of our Chief Executive  Officer (Filed
               herewith.)

     32.2      Section 906  Certification of our Chief Financial  Officer (Filed
               herewith.)

*              Previously filed and incorporated herein by reference.


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<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: October 7, 2005                    /s/ Michael E. Broll
                                    ----------------------------------------

                                    Michael E. Broll
                                    Chief Executive Officer
                                    (Principal Executive Officer)

Date: October 7, 2005                   /s/ Salvatore J. Furnari
                                    ----------------------------------------
                                    Salvatore J. Furnari
                                    Chief Financial Officer
                                    (Principal Accounting and Financial Officer)


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