**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**









(Mark
      One)




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





**For
      the quarterly period ended September 30, 2007**





OR





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





For
      the
      transition period from_______ to ______





**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.
                  Employerincorporation
                  or organization)
              Identification
                  No.)**5955
                  T. G. Lee Blvd., Suite 201****Orlando,
                  Florida**
              **32822**(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 þ   NO  o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
      one):




Large
      accelerated filer o   Accelerated filer o    Non-accelerated
      filer þ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  YES
o    NO  þ





On
      November 12, 2007, there were 17,110,016 shares of common stock, $.01 par value
      per share, outstanding.








**GALAXY** **NUTRITIONAL FOODS, INC.**





**Index
      to Form 10-Q**


**For
      the Quarter Ended September 30, 2007**





**PAGE
                NO.****PART
                I. FINANCIAL INFORMATION****Item
                1.**
            
            **Financial
                Statements**Balance
                Sheets
            
            3Statements
                of Operations
            
            4Statement
                of Stockholders’ Deficit
            
            5Statements
                of Cash Flows
            
            6Notes
                to Financial Statements
            
            7**Item
                2.**
            
            **Management's
                Discussion and Analysis of **Financial
                Condition and Results of
                Operations****
            
            15**Item
                3.**
            
            **Quantitative
                and Qualitative Disclosures About Market Risk**
            
            24**Item
                4.**
            
            **Controls
                and Procedures**
            
            25**PART
                II. OTHER INFORMATION****Item
                1A.**
            
            **Risk
                Factors**
            
            26**Item
                6.**
            
            **Exhibits**
            
            28**SIGNATURES**
            
            
            
            32





2


**PART
      I. FINANCIAL INFORMATION**


**GALAXY
      NUTRITIONAL FOODS, INC.**


**Balance
      Sheets**




**SEPTEMBER
                30,**
            
            **MARCH
                31,****Notes**
            
            **2007**
            
            **2007****(UNAUDITED)****ASSETS****CURRENT
                ASSETS:**Cash
            
            
            
            
            $
            996,690
            
            $
            879,487Trade
                receivables, net
            
            
            
            
            
            2,894,117
            
            
            2,652,845Inventories,
                net
            
            
            
            
            
            198,444
            
            
            377,432Prepaid
                expenses and other
            
            
            
            
            
            218,788
            
            
            261,693Total
                current assets
            
            
            
            
            
            4,308,039
            
            
            4,171,457**PROPERTY
                AND EQUIPMENT, NET**
            
            
            
            
            
            78,990
            
            
            90,181**OTHER
                ASSETS**
            
            
            
            
            
            81,182
            
            
            102,980**TOTAL**
            
            
            
            
            $
            4,468,211
            
            $
            4,364,618




**LIABILITIES
                AND STOCKHOLDERS’ DEFICIT****CURRENT
                LIABILITIES:**Secured
                borrowings
            
            
            **2**
            
            $
            358,945
            
            $
            556,886Accounts
                payable
            
            
            
            
            
            1,251,530
            
            
            1,718,088Accrued
                and other current liabilities
            
            
            
            
            
            771,722
            
            
            823,258Current
                portion of accrued employment contracts
            
            
            **3**
            
            
            544,184
            
            
            366,305Total
                current liabilities
            
            
            
            
            
            2,926,381
            
            
            3,464,537**ACCRUED
                EMPLOYMENT CONTRACTS,**less
                current portion
            
            
            **3**
            
            
            18,229
            
            
            194,491**RELATED
                PARTY NOTE PAYABLE**
            
            
            **2**
            
            
            2,683,815
            
            
            2,677,144Total
                liabilities
            
            
            
            
            
            5,628,425
            
            
            6,336,172**COMMITMENTS
                AND CONTINGENCIES**
            
            
            **4**
            
            
            —
            
            
            —**STOCKHOLDERS’
                DEFICIT:**Common
                stock
            
            
            
            
            
            171,100
            
            
            171,100Additional
                paid-in capital
            
            
            
            
            
            70,167,149
            
            
            70,167,149Accumulated
                deficit
            
            
            
            
            
            (71,498,463
            )
            
            (72,309,803
            )Total
                stockholders’ deficit
            
            
            
            
            
            (1,160,214
            )
            
            (1,971,554
            )**TOTAL**
            
            
            
            
            $
            4,468,211
            
            $
            4,364,618





See
      accompanying notes to financial statements


3


**GALAXY
      NUTRITIONAL FOODS, INC.**


**Statements
      of Operations**


**(UNAUDITED)**




**THREE
                MONTHS ENDED** **SEPTEMBER
                30,**
            
            **SIX
                MONTHS ENDED**
              **SEPTEMBER
                30,****Notes**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                Sales
            
            
            
            
            $
            6,401,124
            
            $
            6,727,777
            
            $
            12,317,261
            
            $
            14,560,339Cost
                of Goods Sold
            
            
            
            
            
            3,740,838
            
            
            3,957,750
            
            
            7,201,206
            
            
            9,032,962**GROSS
                MARGIN**
            
            
            
            
            
            2,660,286
            
            
            2,770,027
            
            
            5,116,055
            
            
            5,527,377**OPERATING
                EXPENSES:**Selling
            
            
            
            
            
            940,833
            
            
            880,823
            
            
            1,830,241
            
            
            1,846,802Delivery
            
            
            
            
            
            262,018
            
            
            179,741
            
            
            508,863
            
            
            426,283General
                and administrative, including $0, $92,330, $0 and $98,160 non-cash
                compensation related to stock based transactions
            
            
            **5**
            
            
            587,501
            
            
            872,766
            
            
            1,211,117
            
            
            1,857,628Employment
                contract expense-general and administrative
            
            
            
            
            
            —
            
            
            —
            
            
            346,447
            
            
            —Research
                and development
            
            
            
            
            
            79,718
            
            
            44,449
            
            
            162,995
            
            
            86,783Reserve
                on stockholder note receivable
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            1,428,000Cost
                of disposal activities
            
            
            **1**
            
            
            —
            
            
            47,059
            
            
            —
            
            
            148,803Loss
                on disposal of assets
            
            
            
            
            
            —
            
            
            37,329
            
            
            —
            
            
            24,505Total
                operating expenses
            
            
            
            
            
            1,870,070
            
            
            2,062,167
            
            
            4,059,663
            
            
            5,818,804**INCOME
                (LOSS) FROM OPERATIONS**
            
            
            
            
            
            790,216
            
            
            707,860
            
            
            1,056,392
            
            
            (291,427
            )**OTHER
                EXPENSES:**Interest
                expense
            
            
            
            
            
            (117,875
            )
            
            (146,296
            )
            
            (233,052
            )
            
            (489,438
            )**INCOME
                (LOSS) BEFORE TAXES**
            
            
            
            
            
            672,341
            
            
            561,564
            
            
            823,340
            
            
            (780,865
            )Federal
                income tax expense
            
            
            
            
            
            (12,000
            )
            
            —
            
            
            (12,000
            )
            
            —**NET
                INCOME (LOSS)**
            
            
            
            
            $
            660,341
            
            $
            561,564
            
            $
            811,340
            
            $
            (780,865
            )**BASIC
                NET INCOME (LOSS) PER COMMON SHARE**
            
            
            **6**
            
            $
            0.04
            
            $
            0.03
            
            $
            0.05
            
            $
            (0.04
            )**DILUTED
                NET INCOME (LOSS) PER COMMON SHARE**
            
            
            **6**
            
            $
            0.03
            
            $
            0.03
            
            $
            0.04
            
            $
            (0.04
            )







See
      accompanying notes to financial statements.


4


**GALAXY
      NUTRITIONAL FOODS, INC.**


**Statement
      of Stockholders’ Deficit**


**Six
      Months Ended September 30, 2007**


**(UNAUDITED)**





Common
                StockShares
            
            Par
                Value
            
            Additional
              Paid-In
                Capital
            
            Accumulated
                Deficit
            
            TotalBalance
                at March 31, 2007
            
            
            17,110,016
            
            $
            171,100
            
            $
            70,167,149
            
            $
            (72,309,803
            )
            $
            (1,971,554
            )Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            811,340
            
            
            811,340Balance
                at September 30, 2007
            
            
            17,110,016
            
            $
            171,100
            
            $
            70,167,149
            
            $
            (71,498,463
            )
            $
            (1,160,214
            )




See
      accompanying notes to financial statements.


5


**GALAXY
      NUTRITIONAL FOODS, INC.**


**Statements
      of Cash Flows**


**(UNAUDITED)**





**Six
                Months Ended September 30,**
            
            **Notes**
            
            **2007**
            
            **2006****CASH
                FLOWS FROM (USED IN) OPERATING ACTIVITIES:**Net
                Income (Loss)
            
            
            
            
            $
            811,340
            
            $
            (780,865
            )Adjustments
                to reconcile net income (loss) to net cash from operating
                activities:Depreciation
                and amortization
            
            
            
            
            
            22,062
            
            
            106,097Amortization
                of debt discount and financing costs
            
            
            
            
            
            28,469
            
            
            242,047Provision
                for future credits and doubtful accounts on trade
                receivables
            
            
            
            
            
            (538,500
            )
            
            (619,150
            )Provision
                for loss on stockholder note receivable
            
            
            
            
            
            —
            
            
            1,428,000Loss
                on disposal of assets
            
            
            
            
            
            —
            
            
            24,505Non-cash
                compensation related to stock-based transactions
            
            
            
            
            
            —
            
            
            98,160(Increase)
                decrease in:Trade
                receivables
            
            
            
            
            
            297,228
            
            
            1,937,167Inventories,
                net
            
            
            
            
            
            178,988
            
            
            (9,642
            )Prepaid
                expenses and other
            
            
            
            
            
            42,905
            
            
            (186,996
            )Increase
                (decrease) in:Accounts
                payable
            
            
            
            
            
            (466,558
            )
            
            (948,851
            )Accrued
                and other liabilities
            
            
            
            
            
            (49,919
            )
            
            (624,398
            )**NET
                CASH FROM OPERATING ACTIVITIES**
            
            
            
            
            
            326,015
            
            
            666,074**CASH
                FLOWS FROM (USED IN) INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            
            
            
            (10,871
            )
            
            (9,638
            )Proceeds
                from sale of equipment
            
            
            
            
            
            —
            
            
            42,955Decrease
                in other assets
            
            
            
            
            
            —
            
            
            34,440**NET
                CASH FROM (USED IN) INVESTING ACTIVITIES**
            
            
            
            
            
            (10,871
            )
            
            67,757**CASH
                FLOWS FROM (USED IN) FINANCING ACTIVITIES:**Net
                payments on secured borrowings
            
            
            
            
            
            (197,941
            )
            
            (519,820
            )Borrowings
                on term notes payable
            
            
            
            
            
            —
            
            
            1,200,000Repayments
                on term notes payable
            
            
            
            
            
            —
            
            
            (1,200,000
            )Principal
                payments on capital lease obligations
            
            
            
            
            
            —
            
            
            (64,596
            )Financing
                costs for long term debt
            
            
            
            
            
            —
            
            
            (144,011
            )**NET
                CASH USED IN FINANCING ACTIVITIES**
            
            
            
            
            
            (197,941
            )
            
            (728,427
            )**NET
                INCREASE IN CASH**
            
            
            **7**
            
            
            117,203
            
            
            5,404**CASH,
                BEGINNING OF PERIOD**
            
            
            
            
            
            879,487
            
            
            435,880**CASH,
                END OF PERIOD**
            
            
            
            
            $
            996,690
            
            $
            441,284





See
      accompanying notes to financial statements.


6


**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”), in accordance with accounting principles generally
      accepted in the United States of America (“GAAP”) for interim financial
      information and applicable 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 GAAP
      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, 2007 balance sheet data was derived from the audited
      financial statements, but does not include all disclosures required by GAAP.
      These unaudited financial statements should be read in conjunction with the
      financial statements and notes included on Form 10-K for the fiscal year ended
      March 31, 2007. Interim results of operations for the six-month period ended
      September 30, 2007 may not necessarily be indicative of the results to be
      expected for the full year.





Revenue
      Recognition




Sales
      are
      recognized upon shipment of products to customers. The Company offers a right
      of
      return policy on certain products sold to certain retail customers in the
      conventional grocery stores and mass merchandising industry. If the product
      is
      not sold during its shelf life, the Company will allow a credit for the unsold
      merchandise. Since the shelf life of the Company’s products ranges from 4 months
      to one year, the Company historically averages less than 2% of gross sales
      in
      credits for unsold product. The Company’s reserve on accounts receivable takes
      these potential future credits into consideration. Certain expenses such as
      returns, slotting fees, rebates, coupons and other discounts are accounted
      for
      as a reduction to Revenues.





Disposal
      Costs




On
      December 8, 2005, the Company completed the sale of substantially all of its
      manufacturing and production equipment to Schreiber Foods, Inc., a Wisconsin
      corporation (“Schreiber”) for $8,700,000 in cash pursuant to an Asset Purchase
      Agreement dated June 30, 2005. In connection with the Asset Purchase Agreement,
      the Company also entered into a Supply Agreement with Schreiber (the “Supply
      Agreement”) on June 30, 2005 pursuant to which, Schreiber became the Company’s
      sole source of supply and distribution for substantially all of its products
      in
      November 2005.





The
      Company accounted for the costs associated with these transactions in accordance
      with SFAS No. 146, “ *Accounting
      for Costs Associated with an Exit or Disposal Activity,”* (“SFAS
      146”) because the above arrangements were planned and controlled by management
      and materially changed the manner in which the Company’s business was conducted.
      In accordance with SFAS 146, costs associated with disposal activities were
      reported as a reduction of income from operations.





The
      Company recorded accruals in connection with the asset sale and outsourcing
      of
      its manufacturing operations in fiscal 2006. The initial accruals included
      estimates pertaining to employee termination costs and abandonment of excess
      equipment and facilities and other potential costs. Given the significance
      and
      complexity of these activities, and the timing of the execution of such
      activities, the accrual process involved periodic reassessments of estimates
      made at the time the original decisions were made, including evaluating
      estimated employment terms, contract cancellation charges and real estate market
      conditions for sub-lease rents. Currently, there are no further costs that
      require estimates and any future disposal costs will be recorded as incurred
      in
      accordance with SFAS 146.





Non-Cash
      Compensation Related to Stock-Based Transactions




Effective
      April 1, 2006, the Company adopted SFAS
      No.
      123 (revised 2004), “ *Share-Based
      Payment,* ”
(“SFAS
      123R”). SFAS
      123R
      requires companies to measure the cost of employee services received in exchange
      for an award of equity instruments, including stock options, based on the
      grant-date fair value of the award and to recognize it as compensation expense
      over the period the employee is required to provide service in exchange for
      the
      award, usually the vesting period.





7





SFAS
      123R
      applies to new awards and to awards modified, repurchased, or cancelled after
      the effective date, as well as to the unvested portion of awards outstanding
      as
      of the effective date. The Company uses the Black-Scholes option-pricing model to
      value its new stock option grants under SFAS 123R, applying the “modified
      prospective method” for existing grants which requires the Company to value
      stock options prior to its adoption of SFAS 123R under the fair value method
      and
      expense the value over the requisite service period. SFAS 123R also requires
      the
      Company to estimate forfeitures in calculating the expense related to
      stock-based compensation. In addition, SFAS 123R requires the Company to reflect
      cash flows resulting from excess tax benefits related to those options as a
      cash
      inflow from financing activities rather than as a reduction of taxes
      paid.





The
      Black-Scholes option-pricing model
      requires subjective assumptions, including future stock price volatility and
      expected time to exercise, which greatly affect the calculated values. The
      risk-free rate is based on the U.S. Treasury zero-coupon rates with a remaining
      term equal to the expected term of the option. Expected volatilities are based
      on the historical volatility of the Company’s stock. Prior to April 1, 2006, the
      Company input the expected term of options granted based on the contractual
      life
      of the options granted. Upon adoption of SFAS 123R, the Company inputs the
      expected term of options granted based on information derived from historical
      data on employee exercises and post-vesting employment termination behavior.
      There is no expected dividend yield.  These factors could change in the
      future, which may affect the stock-based compensation expense in future periods.
      SFAS 123R also requires forfeitures to be estimated at the time of grant and
      revised, if necessary, in subsequent periods if actual forfeitures differ from
      those estimates. There were no issuances of stock awards during the three and
      six months ended September 30, 2007. Therefore, the Company did not make any
      assumptions under the
      Black-Scholes option-pricing  model
      during these periods.





The
      Company estimated the fair value of each stock-based award during the three
      and
      six month periods ended September 30, 3006 using the Black-Scholes pricing
      model
      with the following assumptions:




**Three
                Months Ended**
            
            **Six
                Months Ended****September
                30, 2006**
            
            **September
                30, 2006**Risk-free
                interest rate
            
            4.07-4.94
            %
            
            4.07-4.94
            %Volatility
            
            50.3-51.9
            %
            
            50.3-51.9
            %Expected
                life (months)
            
            36-60
            
            
            36-60Dividends
            
            None
            
            
            None





Stock-based
      compensation expense recognized during the period is based on the value of
      the
      portion of share-based payment awards that is ultimately expected to vest during
      the period, which approximates the requisite service period. Stock-based
      compensation expense recognized in the Company's Statements of Operations for
      the periods presented includes compensation expense for share-based payment
      awards granted prior to, but not yet vested as of March 31, 2006 based on the
      grant date fair value estimated in accordance with the pro forma provisions
      of
      SFAS 123 and compensation expense for the share-based payment awards granted
      subsequent to March 31, 2006 based on the grant date fair value estimated in
      accordance with the provisions of SFAS 123R. As stock-based compensation expense
      recognized in the Statement of Operations is based on awards ultimately expected
      to vest and to be exercised, it will be reduced for estimated forfeitures. There
      was
      no forfeiture rate applied to the stock-based compensation expense for the
      three
      and six months ended September 30, 2007 and 2006 as all options were fully
      vested and were able to be exercised.





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 net 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
      and
      warrants and conversion of convertible debt.





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
      trade receivables, inventory reserves, valuation of deferred taxes and valuation
      of non-cash compensation related to stock-based transactions. Actual results
      could differ from these estimates.




8





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 sells to customers
      throughout the United States and 12 other countries.





Recent
      Accounting Pronouncements




In
      June
      2007, the FASB ratified EITF Issue No. 07-03, "Accounting for Nonrefundable
      Advance Payments for Goods and Services Received for Use in Future Research
      and
      Development Activities." EITF 07-03 requires companies to defer nonrefundable
      advance payments for goods and services and to expense that advance payment
      as
      the goods are delivered or services are rendered. If the company does not expect
      to have the goods delivered or services performed, the advance should be
      expensed. EITF 07-03 is effective for fiscal years beginning after December
      15,
      2007. The Company is currently evaluating the impact of adopting EITF 07-03
      on
      its financial statements .





Income
      Taxes and Recently Adopted Accounting Pronouncement




The
      Company adopted the provisions of FASB issued Interpretation No. 48, *“Accounting
      for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
      109,”* (“FIN
      48”), on April 1, 2007. FIN
      48
      provides guidance on the financial statement recognition and measurement of
      a
      tax position taken or expected to be taken in a tax return. The
      Company has not recognized a liability as a result of the implementation of
      FIN
      48. A reconciliation of the beginning and ending amount of unrecognized tax
      benefits has not been provided since there is no unrecognized benefit as of
      the
      date of adoption. The Company has not recognized interest expense or penalties
      as a result of the implementation of FIN 48. If there were an unrecognized
      tax
      benefit, the Company would recognize interest accrued related to unrecognized
      tax benefits in interest expense and penalties in operating expenses. The
      Company files income tax returns in the U.S. federal jurisdiction and in various
      states.





Deferred
      income taxes are recognized for the tax consequences of temporary differences
      between the financial reporting bases and the tax bases of the Company’s assets
      and liabilities in accordance with SFAS No. 109, “ *Accounting
      for Income Taxes* .”
      Valuation allowances are established when necessary to reduce deferred tax
      assets to the amount expected to be realized. Income tax expense is the tax
      payable or refundable for the period plus or minus the change during the period
      in deferred tax assets and liabilities.





Financial
      Instruments




SFAS
      No.
      107, “ *Disclosures
      about Fair Value of Financial Instruments* ,”
      requires disclosure of fair value information about financial instruments.
      Fair
      value estimates discussed herein are based upon certain market assumptions
      and
      pertinent information available to management as of September 30,
      2007.





The
      respective carrying value of certain on-balance-sheet financial instruments
      approximated their fair values. These financial instruments include cash, trade
      receivables, accounts payable and accrued liabilities. Fair values were assumed
      to approximate carrying values for these financial instruments since they are
      short term in nature and their carrying amounts approximate fair values or
      they
      are receivable or payable on demand. The fair value of the Company’s secured
      borrowings and related party note payable is estimated based upon the quoted
      market prices for the same or similar instruments or on the current rates
      offered to the Company for debt with the same remaining maturities.




**(2)**  **Secured
      Borrowings and Related Party Note Payable**




Secured
      Borrowings




On
      June
      23, 2006, the
      Company entered into a Receivables Purchase Agreement with Commercial Finance
      Division, formerly known as Systran
      Financial Services Corporation, a subsidiary of Textron Financial Corporation
      (“Commercial Finance”), whereby Commercial Finance provides financing to the
      Company through advances against certain trade receivable invoices due to the
      Company (the “Commercial Finance Agreement”). The Commercial Finance Agreement
      is secured by the Company’s accounts receivable and all other assets. Generally,
      subject to a maximum principal amount of $3,500,000 which can be borrowed under
      the Commercial Finance Agreement, the amount available for borrowing is equal
      to 85%
      of
      the Company’s eligible accounts receivable invoices less a dilution reserve and
      any required fixed dollar reserves .
      The
      dilution and fixed dollar reserves are currently set at 7% and $100,000,
      respectively. Advances under the Commercial Finance Agreement bear interest
      at
      a variable
      rate equal to the prime rate plus 1.5% per annum (9.25% on September 30, 2007).
      The Company is also obligated to pay a $1,500 monthly service fee.




9





The
      initial term of the Commercial Finance Agreement ends on June 23, 2009 and
      may
      renew automatically for consecutive twelve-month terms unless terminated sooner.
      The Commercial Finance Agreement may be accelerated in the event of certain
      defaults by the Company including among other things, a default in the Company’s
      payment and/or performance of any obligation to Commercial Finance or any other
      financial institution, creditor, or bank; and any change in the conditions,
      financial or otherwise, of the Company which reasonably causes Commercial
      Finance to deem itself insecure. In such an event, interest on the Company’s
      borrowings would accrue at the greater of twelve percent per annum or the
      variable rate of prime plus 1.5% and the Company would be liable for an early
      termination premium ranging from 1% to 3%, depending upon the timing of such
      termination, of the maximum principal amount available under the Commercial
      Finance Agreement. As of September 30, 2007, the amount advanced under the
      Commercial Finance Agreement is $358,945.





In
      accordance with SFAS No. 140, *“Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Debt,”* the
      Company accounts for the Commercial Finance Agreement as a liability since
      it is
      a full-recourse agreement and the Company maintains effective control over
      the
      accounts receivable.





Related
      Party Note Payable




Pursuant
      to a Note Purchase Agreement dated July 19, 2006, the Company issued a new
      unsecured convertible note for $2,685,104 (the “Convertible Note”) to Mr.
      Frederick A. DeLuca. The proceeds from the Convertible Note were used to repay
      or refinance several notes totaling $2.4 million that matured on June 15, 2006
      and a $285,104 registration rights penalty owed to Mr. DeLuca. The Convertible
      Note accrues interest at 12.5% per annum. No interest or principal payments
      are
      required under the Convertible Note until its maturity. Principal, together
      with
      any accrued and unpaid interest, on the Convertible Note is convertible at
      any
      time prior to payment into shares of the Company’s common stock at a conversion
      price of $0.35 per share. The closing market price of the Company’s common stock
      as quoted on the OTC Bulletin Board on July 19, 2006 was $0.28. As additional
      consideration for making the loan, the Company issued Mr. DeLuca a warrant
      (the
“Warrant”) to purchase up to 200,000 shares of the Company’s common stock at an
      exercise price equal to $0.35 per share. The Warrant is fully vested and can
      be
      exercised on or before the expiration date of July 19, 2009. In July 2006,
      the
      Company recorded the $18,000 fair value of the Warrant as a discount to debt
      that is being amortized from July 2006 through October 2007.





Pursuant
      to a Note Modification Agreement dated March 14, 2007, the Company and Mr.
      DeLuca agreed to extend the maturity date of the Convertible Note from October
      19, 2007 to October 19, 2008. All other terms of the Convertible Note remain
      the
      same.





Pursuant
      to the Note Purchase Agreement dated July 19, 2006 and the Note Modification
      Agreement dated March 14, 2007, the Company’s Convertible Note together with any
      accrued and unpaid interest thereon, is convertible at any time prior to payment
      into shares of the Company’s common stock at a conversion price of $0.35 per
      share. As a result of the convertible features of the Convertible Note, Mr.
      DeLuca’s ownership in the Company may increase from approximately 23% to nearly
      52% by October 2008. The calculation of ownership assumes, among other things,
      that Mr. DeLuca converts the entire amount of principal and all accrued interest
      on the Convertible Note through October 19, 2008 into an aggregate of 9,861,364
      shares and exercises of all of his currently outstanding warrants into 500,000
      shares of the Company’s common stock.





The
      Company amortized $3,788 and $6,671 of debt discount to interest expense in
      the
      three and six months ended September 30, 2007, respectively. The Company
      amortized $2,840 and $129,819 related to debt discounts in the three and six
      months ended September 30, 2006, respectively. Additionally, the Company
      recorded interest expense related to related party notes of $85,774 and $170,616
      in the three and six months ended September 30, 2007, respectively. The Company
      recorded interest expense related to related party notes of $85,461 and $151,561
      in the three and six months ended September 30, 2006, respectively. As of
      September 30, 2007, the outstanding principal balance of $2,685,104 on the
      Convertible Note less the remaining debt discount of $1,289 is
      $2,683,815.








**(3)**  **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, 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. Mr. Morini remained a director of the Company until
      his resignation on March 8, 2007. Mr. Morini continues to be a stockholder
      in
      the Company. 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.




10





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 October 2003. The
      total
      estimated costs expensed under this agreement were $1,830,329 of which $379,147
      remained unpaid but accrued ($366,305 as short-term liabilities and $12,842
      as
      long-term liabilities) as of September 30, 2007. The obligation is being paid
      out in nearly equal monthly installments ending in October 2008.





Christopher
      Morini




On
      June
      1, 2007, Christopher Morini resigned from his position as Vice President of
      New
      Business Development in order to pursue other opportunities. In accordance
      with
      the Separation and General Release Agreement which became effective on June
      9,
      2007, between the Company and Mr. C. Morini, the Company accrued $346,447 for
      wages and payroll taxes and expensed them under Employment Contract
      Expense-General and Administrative in the Statement of Operations in June 2007.
      After an initial lump sum payment of approximately $100,087, the remaining
      obligation is being paid out in nearly equal bi-weekly installments through
      September 2008. As of September 30, 2007, $183,266 remained unpaid but accrued
      ($177,879 as short-term liabilities and $5,387 as long-term
      liabilities).








**(4)**  **Commitments
      and Contingencies**




Supply
      Agreement




In
      November 2005, Schreiber began manufacturing and distributing substantially
      all
      of the Company’s products in accordance with a Supply Agreement that was signed
      on June 30, 2005. Schreiber uses the Company’s formulas and processes to
      manufacture products for the Company’s customers. The prices for such products
      are based on cost plus a processing fee as determined by the parties from time
      to time. Other material terms of the Supply Agreement are as
      follows:




·  The
      initial term of the Supply Agreement is for a period of five years from the
      effective date of September 1, 2005 and is renewable at the Company’s option for
      up to two additional five-year periods (for a total term up to fifteen
      years). If the
      Company does not exercise its first option to extend the term, then the Company
      will be obligated to pay Schreiber $1,500,000. If the Company exercises its
      first option to extend the term, but does not exercise its second option to
      extend the term, then the Company will be obligated to pay Schreiber $750,000.




·  The
      Supply Agreement originally provided for a contingent short-fall payment
      obligation up to $8,700,000 by the Company if a specified production level
      was
      not met during the one-year period from September 1, 2006 to August 31, 2007.
      If
      a contingent short-fall payment was accrued after such one-year period, it
      could
      be reduced by the amount by which production levels in the one-year period
      from
      September 1, 2007 to August 31, 2008 exceeded the specified target level of
      production, if any. The short-fall payment is based on a formula that calculates
      the payment as follows: ((required pounds shipped - actual pounds shipped)
      /
      required pounds shipped) * $8,700,000. In November 2006, the Supply Agreement
      was amended so that the short-fall payment obligation would not be measured
      until the one-year period from September 1, 2009 to August 31, 2010, and the
      target level of production was reduced by approximately 22%.





Litigation




The
      Company is currently a party to certain legal proceedings, claims, disputes
      and
      litigation arising in the ordinary course of business. The Company currently
      believes that the ultimate outcome of these proceedings, individually and in
      the
      aggregate, will not have a material adverse affect on the Company's financial
      position, results of operations or cash flows. However, because of the nature
      and inherent uncertainties of litigation, should the outcome of these actions
      be
      unfavorable, the Company's business, financial condition, results of operations
      and cash flows could be materially and adversely affected.








**(5)**  **Non-Cash
      Compensation Related to Stock-Based Transactions**




Effective
      April 1, 2006, SFAS 123R applies to new awards and to awards modified,
      repurchased, or cancelled after the effective date, as well as to the unvested
      portion of awards outstanding as of the effective date. The Company uses the
      Black-Scholes option-pricing model to
      value its new stock option grants under SFAS 123R, applying the “modified
      prospective method” for existing grants which requires the Company to value
      stock options prior to its adoption of SFAS 123R under the fair value method
      and
      expense the value over the requisite service period.





11





Compensation
      cost arising from nonvested stock granted to employees and from non-employee
      stock awards is recognized as expense using the graded vesting attribution
      method over the vesting period. As of March 31, 2007, there was no remaining
      unrecognized compensation cost related to nonvested stock. Additionally, there
      were no stock-based transactions during the three and six months ended September
      30, 2007. Therefore, there was no stock-based compensation expense nor any
      unrecognized compensation cost related to nonvested stock for the three and
      six
      months ended September 30, 2007. For the three and six months ended September
      30, 2006, the Company’s stock-based compensation expense related to nonvested
      stock was $92,330 and $98,160.




The
      following table summarizes the Company’s plan
      and
      non-plan stock
      options outstanding as of September 30, 2007, as well as activity during the
      six
      months then ended:


**Shares**
              
              
              **Weighted-**
                **Average**
                **Exercise Price**
              
              
              **Weighted-**
                **Average**
                **Remaining
                  Contractual Term in Years**
              
              
              **Aggregate
                  Intrinsic Value**Outstanding
                  at March 31, 2007
              
              
              5,290,750
              
              $
              2.86Granted
              
              
              —
              
              
              —Exercised
              
              
              —
              
              
              —Forfeited
                  or expired
              
              
              (723,583
              )
              
              3.96Outstanding
                  at September 30, 2007
              
              
              4,567,167
              
              $
              2.69
              
              
              2.4
              
              $
              -0-Exercisable
                  at September 30, 2007
              
              
              4,567,167
              
              $
              2.69
              
              
              2.4
              
              $
              -0-




There
      were no options granted and thus no weighted-average fair value computed on
      options during the three and six months ended September 30, 2007. At September
      30, 2007, the aggregate intrinsic value of options outstanding and options
      exercisable was zero, because the market value of the underlying stock was
      below
      the average exercise price of all options. The closing price of the Company’s
      common stock on September 28, 2007 as quoted on the OTC Bulletin Board was
      $0.35
      per share. There were no options exercised during the three and six months
      ended
      September 30, 2007 and 2006; and therefore, no intrinsic value or cash received
      from option exercises. During the three and six months ended September 30,
      2006,
      there were 500,000 options granted at a weighted-average exercise price of
      $0.44
      per share with a weighted-average fair value of $0.18 per
      share.


12


**(6)** **Earnings
      Per Share**




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





****  ****    **** ****  ****




**THREE
                MONTHS ENDED**
              **SEPTEMBER
                30,**
            
            **SIX
                MONTHS
                ENDED**
              **SEPTEMBER
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                income (loss) - basic
            
            $
            660,341
            
            $
            561,564
            
            $
            811,340
            
            $
            (780,865
            )Plus
                interest on convertible related party note payable
            
            
            85,774
            
            
            67,128
            
            
            170,616
            
            
            —Net
                income (loss) - diluted
            
            $
            746,115
            
            $
            628,692
            
            $
            981,956
            
            $
            (780,865
            )Weighted
                average shares outstanding - basic
            
            
            17,110,016
            
            
            17,109,910
            
            
            17,110,016
            
            
            18,336,298Potential
                shares issued upon conversion of related party note
                payable
            
            
            8,590,734
            
            
            7,671,726
            
            
            8,348,329
            
            
            —Potential
                shares “in-the-money” under stock option and warrant
                agreements
            
            
            240,000
            
            
            —
            
            
            740,000
            
            
            —Less:
                Shares assumed repurchased under the treasury stock method
            
            
            (199,532
            )
            
            —
            
            
            (560,584
            )
            
            —Weighted
                average shares outstanding -diluted
            
            $
            25,741,218
            
            $
            24,781,636
            
            $
            25,637,761
            
            $
            18,336,298Basic
                net income (loss) per common share
            
            $
            0.04
            
            $
            0.03
            
            $
            0.05
            
            $
            (0.04
            )Diluted
                net income (loss) per common share
            
            $
            0.03
            
            $
            0.03
            
            $
            0.04
            
            $
            (0.04
            )




Options
      for 4,590,753 and 4,320,492 shares and warrants for 958,001 and 1,017,601 shares
      have not been included in the computation of diluted net income per common
      share
      for three and six months ended September 30, 2007, respectively, as their
      effects were antidilutive. Options for 5,313,977 shares and warrants for
      1,323,142 shares have not been included in the computation of diluted net income
      (loss) per common share for the three and six months ended September 30, 2006,
      as their effect would be antidilutive. Potential conversion of the related
      party
      note payable for 7,671,726 shares have not been included in the computation
      of
      diluted net income (loss) per common share for the six months ended September
      30, 2006, as their effect would be antidilutive.





**(7)**  **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.





**Six
                Months Ended September 30,**
            
            **2007**
            
            **2006**Non-cash
                financing and investing activities:Purchase
                of equipment through a capital lease
            
            $
            —
            
            $
            6,858Payment
                of note payable through issuance of revised note payable
            
            
            —
            
            
            1,200,000Payment
                of accrued liability through issuance of note payable
            
            
            —
            
            
            285,104Cancellation
                of treasury shares
            
            
            —
            
            
            1,344,461Cash
                paid for:Interest
            
            
            33,967
            
            
            191,530




**(8)**  **Economic
      Dependence and Segment Information**




The
      Company has one operating segment and sells to customers throughout the United
      States, Puerto Rico, and the U.S. controlled Virgin Islands (together considered
      the United States) and 12 foreign countries. For the three months ended
      September 30, 2007 and 2006, the Company’s gross sales were $6,918,513 and
      $7,370,859, respectively. For the six months ended September 30, 2007 and 2006,
      the Company’s gross sales were $13,428,113 and $16,078,505, respectively. Gross
      sales derived from foreign countries were approximately $787,000 and $920,000*,
      representing 11% and 12% of gross sales for the three months ended September
      30,
      2007 and 2006, respectively. Gross sales derived from foreign countries were
      approximately $1,751,000 and $1,844,000*, representing 13% and 11% of gross
      sales for the six months ended September 30, 2007 and 2006, respectively. Gross
      sales are attributed to individual countries based on the customer’s shipping
      address. The Company has no long-term assets located outside of the United
      States.




13





The
      following table sets forth the percentage of gross sales to each foreign
      country, which accounted for 10% or more of the Company’s foreign gross sales
      for the three and six months ended September 30, 2007 and 2006:




**THREE
                MONTHS
                ENDED**
              **SEPTEMBER
                30,**
            
            **SIX
                MONTHS ENDED**
              **SEPTEMBER
                30,****2007**
            
            **2006***
            
            **2007**
            
            **2006***Canada
            
            
            86.7
            %
            
            78.5
            %
            
            88.5
            %
            
            79.2
            %Other
            
            
            13.3
            %
            
            21.5
            %
            
            11.5
            %
            
            20.8
            %





*
      The
      sales to foreign countries for the three and six months ended September 30,
      2006, have been restated to remove sales to Puerto Rico and the US controlled
      Virgin Islands. Sales to Puerto Rico and the
      US
      controlled Virgin Islands are now
      included in domestic sales.





The
      Company had one customer that accounted for approximately 15% and 16% of gross
      sales for the three and six months ended September 30, 2007, respectively.
      The
      Company had one customer that accounted for approximately 13% and 12% of gross
      sales for the three and six months September 30, 2006, respectively. There
      were
      no customers whose balance outstanding was greater than 10% of accounts
      receivable as of September 30, 2007 and 2006.





Pursuant
      to the Supply Agreement with Schreiber, the Company purchased approximately
      97%
      and 96% of its total raw material purchases from Schreiber for the three and
      six
      months ended September 30, 2007, respectively, and approximately 92% and 98%,
      for the three and six months ended September 30, 2006,
      respectively.





14


**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. This Form 10-Q & MD&A contain forward-looking
      statements within the meaning of the federal securities laws that 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,” “could,” “should,” “potential,” or
“continue” or the negative or variations of these words or similar expressions
      are intended to identify forward-looking statements. Additionally, these
      forward-looking statements include, but are not limited to statements
      regarding:





·
            Improving
                cash flows from operations;




·
            Marketing
                our existing products and those under
                development;




·
            Our
                estimates of future revenue and
                profitability;




·
            Our
                expectations regarding future expenses, including cost of goods sold
                and
                the raw material cost of casein, in particular, delivery, selling,
                general
                and administrative, research and development expenses, and disposal
                costs;




·
            Our
                estimates regarding capital requirements and need for additional
                financing; and




·
            Competition
                in our market.




Although
      we believe that these forward-looking statements are reasonable at the time
      they
      are made, 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 those set forth under “Risk Factors”
and elsewhere in, or incorporated by reference into, this Form 10-Q and our
      Form
      10-K for the fiscal year ended March 31, 2007. We are not required and 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 2008”, “fiscal 2007” or “fiscal 2006” refer to our fiscal years
      ending March 31, 2008, 2007 and 2006, 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:




·
            Business
                Environment


·
            Critical
                Accounting Policies


·
            Results
                of Operations


·
            Liquidity
                and Capital Resources


·
            Recent
                Accounting Pronouncements




**Business
      Environment**





***General***




Galaxy
      Nutritional Foods, Inc. (our “Company”) is principally engaged in developing and
      globally marketing plant-based cheese alternatives, organic dairy and other
      organic and natural food products to grocery and natural foods retailers, mass
      merchandisers and foodservice accounts. *Veggie* ,
      the
      leading brand in the grocery cheese alternative category
      and our  Company’s
      top selling product group, is primarily merchandised in the produce section
      and
      provides calcium and protein without cholesterol, saturated fat or trans-fat.
      Other popular brands include: *Rice,
      Veggy, Vegan, Rice Vegan* and *Wholesome
      Valley* .
      We are
      dedicated to developing nutritious and delicious food products made with high
      quality natural ingredients that exceed the expectations of today’s health
      conscious consumers. Our Company headquarters are located in Orlando,
      Florida.




15





In
      fiscal
      2006, we determined that our manufacturing capacity was significantly in excess
      of our requirements and that it would be advantageous to outsource our
      manufacturing and distribution operations. On June 30, 2005, we entered into
      a
      Supply Agreement with Schreiber Foods, Inc., a Wisconsin corporation
      (“Schreiber”), whereby we agreed that Schreiber would become our sole source of
      supply for substantially all of our products. The initial term of the Supply
      Agreement is for a period of five years from the effective date of September
      1,
      2005 and is renewable at our option for up to two additional five-year periods
      (for a total term up to fifteen years). Schreiber uses our formulas and
      processes to manufacture our products for our customers. In November 2005,
      Schreiber began to deliver such products directly to our customers.




On
      December 8, 2005, we completed the sale of substantially all of our
      manufacturing and production equipment to Schreiber for $8,700,000 in cash
      pursuant to an Asset Purchase Agreement dated June 30, 2005. Our Company has
      now
      converted from a manufacturing company into a branded marketing company that
      will continue to develop, market and sell our products.




***Cheese
      Alternative Category***




We
      are
      the market leader within our cheese alternative category niche, but in being
      so,
      the category increases or decreases partly as a result of our marketing and
      pricing efforts. We believe that the greatest source of future growth in the
      cheese alternative category will come through consumers shifting to cheese
      alternatives from natural cheese. Our products typically sell at a premium
      over
      the price of natural cheese. Our strategy is to broaden the consumer base to
      include younger, less price sensitive consumers seeking products with overall
      health and nutrition attributes. Historically, our products and marketing
      efforts appealed to older consumers purchasing cheese alternatives for specific
      dietary concerns.





***Marketing***




We
      use
      several internal and external reports to monitor sales and profitability by
      product, brand, segment, form and channel of sale to determine the outside
      factors affecting the sales levels. These reports provide management information
      on which product, 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 analyze trends in the consumer
      marketplace.





In
      our
      fiscal 2007 marketing campaign, we worked to optimize our price based promotions
      by focusing on deeper, less frequent in-store discounts. Additionally, we
      continued special event marketing efforts. In the second half of fiscal 2007,
      we
      began an ongoing consumer print advertising campaign in national health and
      fitness publications including Weight Watchers and Shape. Product attributes
      and
      information on where to find our products were incorporated into a unified
      marketing message in our efforts to increase consumer education and awareness
      of
      cheese alternatives. In fiscal 2008, we are continuing our Veggie print
      advertising campaign to include Veggie brand advertisements in Shape, Women’s
      Health and Parenting. We also expanded print advertising to include specialty
      publications, including Vegetarian Times and VegNews to seek new consumers
      for
      our Rice, Veggy and Rice Vegan brands. Additionally, we implemented less
      frequent promotions but with deeper discounts to the consumers.





As
      we
      grow our marketing initiatives, valuable insights on campaign efficacy are
      gained and used to fine-tune our efforts. Such information is then used to
      increase our return on marketing expenditures by focusing on those efforts
      that
      increase brand and product awareness, increase consumer education and ultimately
      broaden the consumer base within the cheese alternative category.





***Measurements
      of Financial Performance***




On
      a
      monthly basis, we compare the statements of operations, balance sheets and
      statements of cash flows to budgeted expectations to identify variances and
      opportunities for cost savings. In addition, we analyze sales and profitability
      relative to budgeted amounts for individual products, brand groups, channels
      of
      distribution and individual customers. These reports are also tailored to
      provide us with information on promotional costs by product and customers.
      Areas
      that are performing below expectations are reviewed to determine actions that
      we
      can take to improve performance. Additionally, marketing uses this information
      to tailor our promotions to make them more effective and
      profitable.





We
      focus
      on several items in order to measure our performance. We are working towards
      obtaining and maintaining positive trends in the following areas:




·
            Operating
                cash flow


·
            Gross
                margin in dollars and % of gross sales


·
            Operating
                income excluding non-cash compensation related to stock-based transactions
                and disposal costs


·
            EBITDA
                excluding non-cash compensation related to stock-based transactions
                and
                disposal costs







16




·
            Volume
                and margin analysis by individual inventory
                items


·
            Key
                financial ratios (such as accounts receivable and accounts payable
                turnover ratios)




**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
      trade receivables which is made up of reserves for promotions, discounts and
      bad
      debts, inventory reserves, valuation of deferred taxes and valuation of
      compensation expense on stock-based awards. 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.





Management
      has discussed the selection of critical accounting policies and estimates with
      our Board of Directors, and the Board of Directors has reviewed our disclosure
      relating to critical accounting policies and estimates in this quarterly report
      on Form 10-Q. Our critical and significant accounting policies are described
      in
      Note 1 of our financial statements. The critical accounting policies used by
      management and the methodology for its estimates and assumptions are as
      follows:





***Valuation
      of Accounts Receivable and Chargebacks***




We
      record
      revenue upon shipment of products to our customers and upon 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. Based on historical experience, we make reserves for
      anticipated future customer credits for rebates, sales promotions, coupons,
      spoils and other reasons that relate to current period sales. 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 $956,000 and $1,152,000 for known
      and anticipated future credits and doubtful accounts at September 30, 2007
      and
      2006, respectively. 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 or reserve for inventory related to obsolete, discontinued
      and damaged goods. 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 item.





***Deferred
      Taxes***




Valuation
      allowances are established when necessary to reduce deferred tax assets to
      the
      amount expected to be realized. We have reserved our net deferred tax assets
      in
      full.





***Valuation
      of Non-Cash Stock-Based Compensation***




Effective
      April 1, 2006, we adopted Statement
      of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), “ *Share-Based
      Payment,* ”
(“SFAS
      123R”). SFAS
      123R
      requires companies to measure the cost of employee services received in exchange
      for an award of equity instruments, including stock options, based on the
      grant-date fair value of the award and to recognize it as compensation expense
      over the period the employee is required to provide service in exchange for
      the
      award, usually the vesting period.





SFAS
      123R
      applies to new awards and to awards modified, repurchased, or cancelled after
      the effective date, as well as to the unvested portion of awards outstanding
      as
      of the effective date. We use the Black-Scholes option-pricing model to
      value our new stock option grants under SFAS 123R, applying the “modified
      prospective method” for existing grants which requires us to value stock options
      prior to our adoption of SFAS 123R under the fair value method and expense
      the
      value over the requisite service period. SFAS 123R also requires us to estimate
      forfeitures in calculating the expense related to stock-based compensation.
      In
      addition, SFAS 123R requires us to reflect cash flows resulting from excess
      tax
      benefits related to those options as a cash inflow from financing activities
      rather than as a reduction of taxes paid.




17




From
      April 1, 2003 through March 31, 2006, we
      accounted for stock awards granted to employees and directors under the fair
      value recognition provisions of SFAS No. 123, “ *Accounting
      for Stock-Based Compensation,* ”
(“SFAS
      123”) and applied SFAS No. 148, *“Accounting
      for Stock-Based Compensation - Transition and Disclosure,* ”
(“SFAS
      148), prospectively to all employee and director awards granted on or after
      April 1, 2003. Prior to April 1, 2003, we
      accounted for stock awards granted to employees and directors under the
      recognition and measurement principles of Accounting Principles Board Opinion
      No. 25, *“Accounting
      for Stock Issued to Employees, and related Interpretations* ,”
(“APB
      25”) as
      interpreted by Financial Accounting Standards Board (“FASB”) Interpretation No.
      44 (“FIN 44”).





The
      Black-Scholes option-pricing model
      requires subjective assumptions, including future stock price volatility and
      expected time to exercise, which greatly affect the calculated values. The
      risk-free rate is based on the U.S. Treasury zero-coupon rates with a remaining
      term equal to the expected term of the option. Expected volatilities are based
      on the historical volatility of our stock. Prior to April 1, 2006, we input
      the
      expected term of options granted based on the contractual life of the options
      granted. For any new awards, we input the expected term of options granted
      based
      on information derived from historical data on employee exercises and
      post-vesting employment termination behavior. There is no expected dividend
      yield.  These factors could change in the future, which may affect the
      stock-based compensation expense in future periods. SFAS 123R also requires
      forfeitures to be estimated at the time of grant and revised, if necessary,
      in
      subsequent periods if actual forfeitures differ from those
      estimates.  There
      were no issuances of stock awards during the three months ended September 30,
      2007 and 2006. Therefore, we did not make any assumptions under the
      Black-Scholes option-pricing  model
      during these periods.





On
      an
      option with a risk-free interest rate of 5%, volatility of 45% and a term of
      60
      months, we would experience a $.01 change in the fair value if we were to change
      our estimate of the interest rate by two percentage points, the volatility
      percentage by five percentage points, or the expected term by five months.




**Results
      of Operations**





**3-Months
                Ended September 30,**
            
            **6-Months
                Ended September 30,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**
            
            **2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**Net
                Sales
            
            
            6,401,124
            
            
            6,727,777
            
            
            (326,653
            )
            
            -4.9
            %
            
            12,317,261
            
            
            14,560,339
            
            
            (2,243,078
            )
            
            -15.4
            %Cost
                of Goods Sold
            
            
            3,740,838
            
            
            3,957,750
            
            
            (216,912
            )
            
            -5.5
            %
            
            7,201,206
            
            
            9,032,962
            
            
            (1,831,756
            )
            
            -20.3
            %**Gross
                Margin**
            
            
            2,660,286
            
            
            2,770,027
            
            
            (109,741
            )
            
            -4.0
            %
            
            5,116,055
            
            
            5,527,377
            
            
            (411,322
            )
            
            -7.4
            %**Gross
                Profit %**
            
            
            41.6
            %
            
            41.2
            %
            
            
            
            
            
            
            
            41.5
            %
            
            38.0
            %





***Sales***




For
      the
      three months ended September 30, 2007 and 2006, our gross sales before
      discounts, returns and allowances were $6,918,513 and $7,370,859, respectively.
      For the six months ended September 30, 2007 and 2006, our gross sales before
      discounts, returns and allowances were $13,428,113 and $16,078,505,
      respectively. The following chart sets forth the percentage of gross sales
      derived from our product brands during the three and six months ended September
      30, 2007 and 2006:


****  ****


**THREE
                MONTHS
                ENDED**
              **SEPTEMBER
                30,**
            
            **SIX
                MONTHS ENDED**
              **SEPTEMBER
                30,**Brand
            
            2007
            
            2006
            
            2007
            
            2006Veggie
            
            
            68.3
            %
            
            58.7
            %
            
            67.5
            %
            
            56.9
            %Private
                Label, Imitation and Other
            
            
            9.8
            %
            
            19.9
            %
            
            10.4
            %
            
            22.4
            %Rice
            
            
            11.0
            %
            
            9.9
            %
            
            11.7
            %
            
            10.3
            %Veggy
            
            
            4.4
            %
            
            4.6
            %
            
            4.3
            %
            
            4.3
            %Wholesome
                Valley Organic
            
            
            3.1
            %
            
            3.5
            %
            
            2.6
            %
            
            3.1
            %Vegan
            
            
            3.4
            %
            
            3.4
            %
            
            3.5
            %
            
            3.0
            %





Net
      sales, after discounts, returns and allowances, in the three months ended
      September 30, 2007 decreased 5% compared to net sales in the three months ended
      September 30, 2006 primarily as a result of a strategic elimination of
      marginally profitable and unprofitable private label and imitation
      products that
      began in the first quarter of fiscal 2007 .
      In
      terms of gross sales dollars, sales of private label and imitation products
      were
      down approximately 54% from the three month period ended September 30, 2006
      to
      the three month period ended September 30, 2007. Sales of branded products
      were
      up approximately 6% over the same period. The three months ended September
      30,
      2007 marked the stabilization and increase in sales of our branded products
      as a
      result of our three step strategy to 1) implement consistent and more effective
      marketing efforts; 2) increase distribution and velocity per store; and 3)
      improve products with higher quality ingredients and new packaging.




18





Net
      sales, after discounts, returns and allowances, in the six months ended
      September 30, 2007 decreased 15% from net sales in the six months ended
      September 30, 2006, primarily due to the strategic elimination of marginally
      profitable and unprofitable private label and imitation products. In terms
      of
      gross sales dollars, sales of private label and imitation products were down
      approximately 61% from the six month period ended September 30, 2006 to the
      six
      month period ended September 30, 2007. Sales of branded products were down
      less
      than 4% over the same period.





We
      anticipate that our sales in fiscal 2008 will be lower than sales reported
      in
      fiscal 2007 reflecting the lower baseline sales projected after the elimination
      of the majority of the private label and imitation business.





***Cost
      of Goods Sold***




Cost
      of
      goods sold was approximately 58% and 59% of net sales in the three months ended
      September 30, 2007 and 2006, and 59% and 62% of net sales in the six months
      ended September 30, 2007 and 2006, respectively. This decrease in cost of goods
      sold as a percentage of net sales is primarily due to the increased margins
      as a
      result of the sales mix moving more heavily toward higher-margin branded
      products and away from lower-margin imitation and private label
      products.





Due
      to a
      current worldwide shortage and a weaker US Dollar in relation to the Euro,
      initial forecasts from our suppliers indicate a nearly 100% increase in the
      cost
      of casein, a dried skim milk protein and the principal raw ingredient used
      in
      most of our products, beginning in the third quarter of fiscal 2008. This
      drastic increase in supply costs is expected to substantially increase our
      cost
      of goods sold and correspondingly substantially reduce our gross margins through
      the remainder of our current fiscal year 2008. We currently anticipate that
      casein prices will remain at unusually high levels through the first quarter
      of
      fiscal 2009 before lowering. We recently implemented several strategic plans
      of
      action to at least partially minimize the negative effect of these anticipated
      casein price increases. These strategies include increasing customer pricing
      on
      certain affected product lines and reducing promotional spending and consumer
      advertising, as well as, expanding and accelerating the roll-out of new and
      current products which do not require casein.





***Gross
      Margin***




Although
      net sales declined a $327,000 or 5%, gross margin dollars in the three months
      ended September 30, 2007 declined only $110,000 or 4% compared to the three
      months ended September 30, 2006 due to the slight gross margin improvement
      from
      the three months ended September 30, 2006 to the three months ended September
      30, 2007. For the six month period ended September 30, 2007, gross margin
      dollars declined by only $411,000 (7%) from the six months ended September
      30,
      2006 despite a $2.2 million (15%) decline in net sales as gross margins
      increased from 38% for the six months ended September 30, 2006 to 42% for the
      six months ended September 30, 2007. This increase in gross margin percentage
      was a result of the change in our sales mix as discussed above under *Sales* .





Due
      to
      the rapid increase and amount of the increase in cost of goods sold, we do
      not
      expect that we will be able to pass this entire cost increase on to our
      consumers through immediate price increases. As a result, we anticipate that
      gross margins on a majority of our products will decline and that gross margins
      as a percentage of net sales for fiscal 2008 will be lower than our fiscal
      2007
      annual average. Additionally, we anticipate that our income from operations
      will
      be materially and adversely affected by the decline in gross
      margins.




***EBITDA***




We
      utilize certain GAAP measures such as Operating Income and Net Income and
      certain non-GAAP measures, in order to compute 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 to our financial
      condition and results of operations. The non-GAAP measures are key factors
      upon
      which we prepare and review our budgets and forecasts. In our calculation of
      key
      financial non-GAAP measures for adjusted Operating Income, adjusted Net Income
      and adjusted EBITDA, we exclude items such as non-cash compensation and reserves
      related to stock-based transactions, disposal costs and fixed asset impairment
      and disposal charges. 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.




19





**EBITDA*****(a
                non-GAAP measure):*****3-Months
                Ended September 30,**
            
            **6-Months
                Ended September 30,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**
            
            **2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**Net
                Sales
            
            
            6,401,124
            
            
            6,727,777
            
            
            (326,653
            )
            
            -4.9
            %
            
            12,317,261
            
            
            14,560,339
            
            
            (2,243,078
            )
            
            -15.4
            %Cost
                of Goods Sold
            
            
            3,740,838
            
            
            3,957,750
            
            
            (216,912
            )
            
            -5.5
            %
            
            7,201,206
            
            
            9,032,962
            
            
            (1,831,756
            )
            
            -20.3
            %**Gross
                Margin**
            
            
            2,660,286
            
            
            2,770,027
            
            
            (109,741
            )
            
            -4.0
            %
            
            5,116,055
            
            
            5,527,377
            
            
            (411,322
            )
            
            -7.4
            %**Operating
                Expenses:**Selling
            
            
            940,833
            
            
            880,823
            
            
            60,010
            
            
            6.8
            %
            
            1,830,241
            
            
            1,846,802
            
            
            (16,561
            )
            
            -0.9
            %Delivery
            
            
            262,018
            
            
            179,741
            
            
            82,277
            
            
            45.8
            %
            
            508,863
            
            
            426,283
            
            
            82,580
            
            
            19.4
            %General
                and administrative, including $0, $92,330, $0 and $98,160 non-cash
                stock
                compensation(1)
            
            
            587,501
            
            
            872,766
            
            
            (285,265
            )
            
            -32.7
            %
            
            1,211,117
            
            
            1,857,628
            
            
            (646,511
            )
            
            -34.8
            %Employment
                contract expense(2)
            
            
            -
            
            
            -
            
            
            -
            
            
            100.0
            %
            
            346,447
            
            
            -
            
            
            346,447
            
            
            100.0
            %Research
                and development
            
            
            79,718
            
            
            44,449
            
            
            35,269
            
            
            79.3
            %
            
            162,995
            
            
            86,783
            
            
            76,212
            
            
            87.8
            %Reserve
                on stockholder note receivable(2)
            
            
            -
            
            
            -
            
            
            -
            
            
            0.0
            %
            
            -
            
            
            1,428,000
            
            
            (1,428,000
            )
            
            -100.0
            %Cost
                of disposal activities(2)
            
            
            -
            
            
            47,059
            
            
            (47,059
            )
            
            -100.0
            %
            
            -
            
            
            148,803
            
            
            (148,803
            )
            
            -100.0
            %(Gain)/loss
                on disposal of assets(2)
            
            
            -
            
            
            37,329
            
            
            (37,329
            )
            
            -100.0
            %
            
            -
            
            
            24,505
            
            
            (24,505
            )
            
            -100.0
            %Total
                operating expenses
            
            
            1,870,070
            
            
            2,062,167
            
            
            (192,097
            )
            
            -9.3
            %
            
            4,059,663
            
            
            5,818,804
            
            
            (1,759,141
            )
            
            -30.2
            %**Income
                (Loss) from Operations**(3)
            
            
            790,216
            
            
            707,860
            
            
            82,356
            
            
            11.6
            %
            
            1,056,392
            
            
            (291,427
            )
            
            1,347,819
            
            
            -462.5
            %**Other
                Expenses:**Interest
                expense, net
            
            
            (117,875
            )
            
            (146,296
            )
            
            28,421
            
            
            -19.4
            %
            
            (233,052
            )
            
            (489,438
            )
            
            256,386
            
            
            -52.4
            %**Income
                (Loss) before Taxes**
            
            
            672,341
            
            
            561,564
            
            
            110,777
            
            
            19.7
            %
            
            823,340
            
            
            (780,865
            )
            
            1,604,205
            
            
            -205.4
            %Federal
                Income Tax Expense
            
            
            (12,000
            )
            
            -
            
            
            (12,000
            )
            
            100.0
            %
            
            (12,000
            )
            
            -
            
            
            (12,000
            )
            
            100.0
            %**NET
                INCOME (LOSS)**
            
            
            660,341
            
            
            561,564
            
            
            98,777
            
            
            17.6
            %
            
            811,340
            
            
            (780,865
            )
            
            1,592,205
            
            
            -203.9
            %Interest
                expense, net
            
            
            117,875
            
            
            146,296
            
            
            (28,421
            )
            
            -19.4
            %
            
            233,052
            
            
            489,438
            
            
            (256,386
            )
            
            -52.4
            %Taxes
            
            
            12,000
            
            
            -
            
            
            12,000
            
            
            100.0
            %
            
            12,000
            
            
            -
            
            
            12,000
            
            
            100.0
            %Depreciation
                and amortization
            
            
            11,091
            
            
            53,275
            
            
            (42,184
            )
            
            -79.2
            %
            
            22,062
            
            
            106,097
            
            
            (84,035
            )
            
            -79.2
            %**EBITDA**(*a
                non-GAAP measure)*
            
            
            801,307
            
            
            761,135
            
            
            40,172
            
            
            5.3
            %
            
            1,078,454
            
            
            (185,330
            )
            
            1,263,784
            
            
            -681.9
            %EBITDA,
                as a % of Net Sales
            
            
            12.5
            %
            
            11.3
            %
            
            
            
            
            
            
            
            8.8
            %
            
            -1.3
            %





(1)
            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 market price of our common shares is outside our control
                and
                typically does not reflect our current operations.


(2)
            In
                our calculation of key financial measures, we exclude the employment
                contract expenses related to Christopher Morini, the reserve on
                stockholder note receivable, disposal costs and fixed asset impairment
                charges because we believe that these items do not reflect expenses
                related to our current on-going operations. See below for a detailed
                description of these items.


(3)
            Operating
                Income has increased due to the completion of certain non-standard
                expenses such as the reserve on stockholder note receivable and disposal
                costs.




20


***Selling***




Selling
      expense is partly a function of sales through variable costs such as brokerage
      commissions and promotional costs and partly fixed with certain fixed costs
      for
      marketing campaigns and employee salaries and benefits. The 7% increase in
      selling expenses for the three months ended September 30, 2007 compared to
      the
      three months ended September 30, 2006 is primarily attributable to increased
      consumer advertising; specifically magazine advertising in healthy-women
      publications such as Shape, Women’s Health and Parenting. In addition, selling
      expenses increased from 13% of net sales during the three months ended September
      30, 2006 to 15% of net sales for the three months ended September 30, 2007.
      This
      increase is partially a result of the overall increase in selling expenses,
      but
      also results from the change in our sales mix. Nearly all of our promotional
      spending is directed toward our branded products and is therefore tied more
      to
      our branded sales levels rather than overall sales. As we have eliminated low
      margin private label and imitations sales, our selling expenses as a percentage
      of overall sales has increased.





For
      the
      six months ended September 30, 2007 compared to the six months ended September
      30, 2006, overall selling expenses are down approximately 1% while selling
      expense as a percentage of net sales increased from 13% of net sales in the
      six
      months ended September 30, 2006 to 15% of net sales in the six months ended
      September 30, 2007. This change is attributable to the shift in sales mix toward
      branded products and away from imitation and private label products.
      Historically, very little advertising and promotion costs were associated with
      the imitation and private label products. Accordingly, the elimination of these
      low-margin sales has very little impact on our selling expenses. Advertising
      and
      promotion costs for our branded products remained relatively consistent from
      the
      six months ended September 30, 2006 to the six months ended September 30, 2007.
      However, those expenditures are now on a lower sales base resulting in selling
      expenses being a higher percentage of sales.





We
      expect
      that fixed selling expense amounts for advertising and market research in fiscal
      2008 will be consistent with fiscal 2007. Therefore, we expect that fiscal
      2008
      selling expenses will increase as a percentage of sales compared to fiscal
      2007
      due to the lower sales volumes.





***Delivery***




Delivery
      expense is primarily a function of sales as our primary supplier drop-ships
      products to our customers and charges a fixed, per-pound contractual delivery
      fee that is subject to adjustment from time to time. Delivery costs increased
      from 3% of net sales for both the three and six month periods ended September
      30, 2006 to 4% of net sales for both the three and six month periods ended
      September 30, 2007. In September 2006, the per pound delivery rate charged
      by
      our primary supplier was adjusted upward to reflect current market conditions.
      Additionally, in order to improve customer service and reduce order lead times,
      we began storing and distributing inventory out of two additional distribution
      centers. As a result, our delivery costs increased as reflected in the higher
      delivery costs as a percentage of sales as noted above and we anticipate
      delivery expense for fiscal 2008 will remain higher than delivery costs in
      fiscal 2007.





***General
      and Administrative***




During
      the three and six months ended September 30, 2007, general and administrative
      expenses decreased approximately $285,000 and $647,000, respectively, compared
      to the three and six months ended September 30, 2006. The main contributors
      to
      this decrease were lower legal costs, lower audit and accounting costs, reduced
      depreciation and occupancy costs and no non-cash stock compensation. Legal
      costs
      were higher in the prior year periods primarily as a result of continued legal
      fees related to our exploration of strategic alternatives (including the
      potential sale of our Company that was abandoned in April 2006). As a result
      of
      the outsourcing of our manufacturing process, as well as the restructuring
      of
      our outstanding debt in June 2006, many of the time-consuming and complex
      accounting issues related to our operations were eliminated. This has resulted
      in a reduction of our audit and other accounting-related fees. Occupancy costs,
      including insurance, maintenance and utilities have decreased from the prior
      year periods as a result of the move of our corporate headquarters to a smaller
      facility in October 2006. Depreciation expense is lower due to less leasehold
      improvements and equipment in the smaller facility. We did not issue any stock
      awards in the three and six months ended September 30, 2007 and therefore,
      did
      not incur any non-cash compensation expense related to stock-based transactions
      compared to $92,330 and $98,160 in the three and six months ended September
      30,
      2006.





Excluding
      the effects of non-cash compensation related to stock-based transactions, which
      cannot be predicted, we anticipate that in fiscal 2008 general and
      administrative expenses will continue to be lower than total expense in fiscal
      2007. However, we anticipate that we will begin incurring additional costs
      related to the implementation of the requirements of Section 404 of The Sarbanes
      Oxley Act throughout fiscal 2008.




21




***Employment
      Contract Expense***




On
      June
      1, 2007, Christopher Morini resigned from his position as Vice President of
      New
      Business Development in order to pursue other opportunities. In accordance
      with
      the Separation and General Release Agreement which became effective on June
      9,
      2007, between our Company and Mr. C. Morini, we accrued $346,447 for wages
      and
      payroll taxes and expensed them under Employment Contract Expense-General and
      Administrative in the Statement of Operations in June 2007. After an initial
      lump sum payment of approximately $100,087, the remaining obligation is being
      paid out in nearly equal bi-weekly installments through September 2008.





***Research
      and Development***




Research
      and development expenses increased by approximately $35,000 or 79% for the
      three
      months ended September 30, 2007 and by approximately $76,000 or 88% for the
      six
      months ended September 30, 2007 when compared to the same periods of the prior
      year. This increase is primarily a result of costs associated with the
      reformulation of our Rice Shred products. We reformulated to make those products
      even more appealing to natural foods consumers. Additionally, we developed
      a new
      product line for our Wholesome Valley Organic brand during the current fiscal
      year. In the prior year, nearly all new product development projects, including
      reformulations to existing products, were postponed until our outsourcing
      partners understood our existing products. We anticipate that research and
      development costs will continue to be higher in fiscal 2008, based on current
      plans for product reformulations and new product development.





***Reserve
      on Stockholder Note Receivable***




In
      June
      1999, in connection with an amended and restated employment agreement for Angelo
      S. Morini, our founder and original Chief Executive Officer, we consolidated
      two
      full-recourse notes receivable ($1,200,000 from November 1994 and $11,572,200
      from October 1995) related to his purchase of 2,914,286 shares of our common
      stock into a single stockholder note receivable in the amount of $12,772,200
      that was due on June 15, 2006. This stockholder note receivable was non-interest
      bearing and non-recourse and was secured by the 2,914,286 shares of our common
      stock (the “Shares”).





For
      the
      fiscal year ended March 31, 2006, we reserved $10,120,200 against this
      stockholder note receivable under the assumption that we would not be able
      to
      collect proceeds in excess of the $2,652,000 value of the Shares as of such
      date. The value of the Shares was computed using the closing price of our common
      stock on March 31, 2006 of $0.91 multiplied by the 2,914,286 shares.





On
      June
      16, 2006, Mr. Morini failed to repay the non-recourse note obligation to our
      Company. On June 20, 2006, we delivered notice to Mr. Morini that we intended
      to
      exercise our rights to the Shares and retain all the Shares in full satisfaction
      of his obligations under the stockholder note receivable. On July 6, 2006,
      Mr.
      Morini consented to our acceptance of the Shares in full satisfaction of his
      obligations under the stockholder note receivable. Based upon the $0.42 closing
      price of our common stock as quoted on the OTC Bulletin Board on June 16, 2006,
      the Shares had an approximate value of $1,224,000 on such date. Accordingly,
      we
      recorded an additional expense of $1,428,000 in June 2006 in order to record
      the
      additional decline in the value of the Shares from its $2,652,000 value as
      of
      March 31, 2006. In July 2006, we cancelled the Shares along with 30,443 other
      treasury shares.





Although
      this expense resulted in a material loss to our operations, it did not have
      any
      affect on the balance sheet since the stockholder note receivable was already
      shown as a reduction to Stockholders’ Deficit.





***Cost
      of Disposal Activities***




We
      accounted for the costs associated with the disposal of our manufacturing
      operations in accordance with SFAS No. 146, “ *Accounting
      for Costs Associated with an Exit or Disposal Activity,”* because
      the arrangements were planned and controlled by management and materially
      changed the manner in which our business was conducted. We report our disposal
      costs for the period as Costs of Disposal Activities in the Statement of
      Operations. There were no further disposal costs in the three and six months
      ended September 30, 2007. Disposal costs during the three and six months ended
      September 30, 2006 were $47,059 and $148,803, respectively. Currently, we do
      not
      anticipate any additional disposal costs, but if they do occur, we intend to
      expense them as incurred.





***Interest
      Expense***




Interest
      expense decreased by approximately $28,000 or 19% and $256,000 or 52% in the
      three and six months ended September 30, 2007 compared to the three and six
      months ended September 30, 2006, respectively. The decrease in interest expense
      for the three months ended September 30, 2007 is a result of lower overall
      borrowing levels in the current period compared to the prior period. The
      decrease in interest expense for the six months ended September 30, 2007 is
      a
      result of lower interest rates (including the effects of discount amortization)
      after refinancing all of our outstanding debt in June 2006, as well as lower
      overall borrowing levels in the current six month period. In the six months
      ended September 30, 2007, we experienced a decrease in interest expense related
      to our debt facilities of approximately $41,000 due to lower average outstanding
      principal balances. Amortization of loan costs decreased by approximately
      $91,000 due to lower loan fees charged by our new lenders. Additionally,
      pursuant to several Note and Warrant Purchase Agreements entered into in fiscal
      2006 and fiscal 2007, we issued warrants to purchase up to 800,000 shares of
      our
      common stock. We recorded the initial fair value of the warrants of $18,000
      and
      $444,731 in fiscal 2007 and fiscal 2006, respectively, as a discount to debt.
      Amortization of this non-cash debt discount decreased by approximately $124,000
      in the six months ended September 30, 2007 compared to the six months ended
      September 30, 2006.




22




We
      anticipate that our interest expense will decrease an average of approximately
      40% in fiscal 2008, due to lower debt balances, lower loan fees and lower
      non-cash debt discount amortization. Our current loan facility with Commercial
      Finance Division accrues interest based on a variable prime plus rate. Prime
      rate is currently at 7.50% and it is uncertain if this will change during the
      remainder of fiscal 2008. Any changes in the prime rate would further affect
      our
      interest expense in fiscal 2008.





**Liquidity
      and Capital Resources**




**6-Months
                Ended September 30,**
            
            **2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**Cash
                from operating activities
            
            
            326,015
            
            
            666,074
            
            
            (340,059
            )
            
            -51.1
            %Cash
                from (used in) investing activities
            
            
            (10,871
            )
            
            67,757
            
            
            (78,628
            )
            
            -116.0
            %Cash
                used in financing activities
            
            
            (197,941
            )
            
            (728,427
            )
            
            530,486
            
            
            -72.8
            %Net
                increase in cash
            
            
            117,203
            
            
            5,404
            
            
            111,799
            
            
            2068.8
            %





***Future
      Capital Needs***




With
      the
      reduction in overall debt and lender fees, we expect to see annual interest
      savings of approximately $300,000 in fiscal 2008. As discussed under *Cost
      of Goods Sold* ,
      we are
      anticipating a substantial increase in our product costs that we will not be
      able to pass on to the consumers immediately. Therefore, we will be using more
      cash to support operations, but still anticipate that we will continue to
      provide positive operating cash flow for fiscal 2008. With the positive
      operating cash flow and large amount of funds available on our credit facility
      discussed below, we believe that we have enough cash to meet our current
      liquidity needs during fiscal 2008.





***Operating
      and Investing Activities***




Cash
      from
      operating activities in the first six months of fiscal 2008 primarily came
      from
      operating profits that were offset by cash used to pay down accounts payable
      which decreased from $1,718,000 at March 31, 2007 to $1,251,000 at September
      30,
      2007. We have payment terms of 20 days after shipment from the primary supplier
      of our products. Depending upon the timing of sales and shipments, our accounts
      payable balance with this vendor can change significantly on a day-to-day basis.
      The reduction of our overall accounts payable balance, and the cash used to
      reduce that balance, from March 31, 2007 to September 30, 2007 is a reflection
      of the timing of shipments and payments during the first six months of fiscal
      2008.





In
      the
      first six months of fiscal 2008, cash used in investing activities related
      to
      our purchase of office equipment. Cash provided from investing activities in
      the
      first six months of fiscal 2007 came primarily from the sales of fixed assets
      and the refund of various security deposits related to the termination of our
      lease at our prior operating facility in November 2006. We do not anticipate
      any
      large capital expenditures or deposits during fiscal 2008.





***Financing
      Activities***





**6-Months
                Ended September 30,**
            
            **2007**
            
            **2006**Net
                borrowings (payments) on line of credit and bank
                overdrafts
            
            
            (197,941
            )
            
            (519,820
            )Issuances
                of debt
            
            
            -
            
            
            1,200,000Payments
                of debt and capital leases
            
            
            -
            
            
            (1,408,607
            )Cash
                from financing activities
            
            
            (197,941
            )
            
            (728,427
            )





23




Debt
      Financing




On
      June
      23, 2006, we
      entered into a Receivables Purchase Agreement with Commercial Finance Division,
      formerly known as Systran
      Financial Services Corporation, a subsidiary of Textron Financial Corporation
      (“Commercial Finance”), whereby Commercial Finance provides financing to our
      Company through advances against certain trade receivable invoices due to our
      Company (the “Commercial Finance Agreement”). The Commercial Finance Agreement
      is secured by our accounts receivable and all other assets. Generally, subject
      to a maximum principal amount of $3,500,000 which can be borrowed under the
      Commercial Finance Agreement, the amount available for borrowing is equal to 85%
      of
      our eligible accounts receivable invoices less a dilution reserve and any
      required fixed dollar reserves .
      The
      dilution and fixed dollar reserves are currently set at 7% and $100,000,
      respectively. Advances under the Commercial Finance Agreement bear interest
      at
      a variable
      rate equal to the prime rate plus 1.5% per annum (9.25% on September 30, 2007).
      We are also obligated to pay a $1,500 monthly service fee.





The
      initial term of the Commercial Finance Agreement ends on June 23, 2009 and
      may
      renew automatically for consecutive twelve-month terms unless terminated sooner.
      The Commercial Finance Agreement may be accelerated in the event of certain
      defaults by our Company including among other things, a default in our payment
      and/or performance of any obligation to Commercial Finance or any other
      financial institution, creditor, or bank; and any change in the conditions,
      financial or otherwise, of our Company which reasonably causes Commercial
      Finance to deem itself insecure. In such an event, interest on our borrowings
      would accrue at the greater of twelve percent per annum or the variable rate
      of
      prime plus 1.5% and we would be liable for an early termination premium ranging
      from 1% to 3%, depending upon the timing of such termination, of the maximum
      principal amount available under the Commercial Finance Agreement. As of
      September 30, 2007, the amount advanced under the Commercial Finance Agreement
      is $358,945. The net amount of cash used to reduce the Commercial Finance
      Agreement for the six months ended September 30, 2007 and 2006 was $197,941
      and
      $519,820, respectively.





**Recent
      Accounting Pronouncements**




In
      June
      2007, the FASB ratified EITF Issue No. 07-03, "Accounting for Nonrefundable
      Advance Payments for Goods and Services Received for Use in Future Research
      and
      Development Activities." EITF 07-03 requires companies to defer nonrefundable
      advance payments for goods and services and to expense that advance payment
      as
      the goods are delivered or services are rendered. If the company does not expect
      to have the goods delivered or services performed, the advance should be
      expensed. EITF 07-03 is effective for fiscal years beginning after December
      15,
      2007. We are currently evaluating the impact of adopting EITF 07-03 on our
      financial statements .





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





Our
      exposure to market risk results primarily from fluctuations in interest rates.
      The interest rate on our outstanding debt to Commercial Finance as of September
      30, 2007 is floating and based on the prevailing market interest rate. For
      market-based debt, interest rate changes generally do not affect the market
      value of the debt but do impact future interest expense and hence earnings
      and
      cash flows, assuming other factors remain unchanged. A theoretical 1% increase
      or decrease in market rates in effect on September 30, 2007 with respect to
      our
      debt balances as of such date would increase or decrease interest expense and
      hence reduce or increase the net income of our Company by approximately $3,600
      per year.




Our
      sales
      during the six months ended September 30, 2007 and 2006, which were denominated
      in a currency other than U.S. Dollars, were less than 10% of gross sales and
      no
      net assets were maintained in a functional currency other than U. S. Dollars
      during such periods. While we believe that the effects of changes in foreign
      currency exchange rates have not historically been significant to our operations
      or net assets, we are unable to forecast the effects that foreign currency
      exchange rates may have on our future operations.





We
      are
      exposed to price risk related to forecasted purchases of certain commodities,
      such as casein, that we primarily use in our products. Accordingly, we try
      to
      enter into purchase contracts to “lock-in” prices on these commodities. These
      contracts generally qualify for the normal purchase exception under SFAS
      No. 133, *Accounting for Derivative Instruments and Hedging Activities* ,
      (“SFAS
      133”) and are, therefore, not subject to its provisions. We do not utilize any
      commodity futures or options to hedge the price of commodities. Therefore,
      we
      are exposed to the volatility of our raw materials since our Supply Agreement
      with Schreiber is based on cost plus a processing fee.





24





**Item
      4. Controls and Procedures**





As
      of
      September 30, 2007, 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
      we
      record, process, summarize and report 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. During the quarter ended September 30, 2007, there
      were no changes in our internal controls over financial reporting or in other
      factors that materially affected, or are reasonably likely to materially affect
      those controls.





25


**PART
      II. OTHER INFORMATION**





**Item
      1A.**  **Risk
      Factors**





Statements
      other than historical information contained in this Form 10-Q are considered
      “forward-looking statements” as defined under the Private Securities Litigation
      Reform Act of 1995. 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,” “could,” “should,” “potential,” or “continue” or the negative or
      variations of these words or similar expressions are intended to identify
      forward-looking statements. Although we believe that these forward-looking
      statements are reasonable at the time they are made, 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 statement as a result of a variety of factors as set
      forth below. We are not required and 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.





In
      addition to the other information in this Form 10-Q and risk factors previously
      disclosed in our Annual Report on Form 10-K for the year ended March 31, 2007,
      the following are some of the factors as of November 12, 2007, that could cause
      our Company’s actual results to differ materially from the expected results
      described in or underlying our Company’s forward-looking statements. These
      factors should be considered carefully while evaluating our business and
      prospects. If any of the following risks actually occur, they could seriously
      harm our business, financial condition, results of operations or cash flows.





***We
      may be required to pay substantial penalties under our Supply Agreement and
      may
      not have the ability to do so.***




The
      initial term of the Supply Agreement with Schreiber is for a period of five
      years from the effective date of September 1, 2005 and is renewable at our
      option for up to two additional five-year periods (for a total term up to
      fifteen years). If we do not exercise our first option to extend the term,
      then
      we will be obligated to pay Schreiber $1,500,000. If we exercise our first
      option to extend the term, but do not exercise our second option to extend
      the
      term, then we will be obligated to pay Schreiber $750,000.




Additionally,
      the Supply Agreement originally provided for a contingent short-fall payment
      obligation up to $8,700,000 by our Company if a specified production level
      was
      not met during the one-year period from September 1, 2006 to August 31, 2007.
      If
      a contingent short-fall payment was accrued after such one-year period, it
      could
      be reduced by the amount by which production levels in the one-year period
      from
      September 1, 2007 to August 31, 2008 exceeded the specified target level of
      production, if any. The short-fall payment is based on a formula that calculates
      the payment as follows: ((required pounds shipped - actual pounds shipped)
      /
      required pounds shipped) * $8,700,000. In November 2006, the Supply Agreement
      was amended so that the short-fall payment obligation would not be measured
      until the one-year period from September 1, 2009 to August 31, 2010, and the
      target level of production was reduced by approximately 22%.




Although
      we have significantly improved our gross margins by discontinuing production
      of
      low margin products, our total sales (and the corresponding volume of our
      products being produced) have been substantially reduced.  We will need to
      greatly increase our present production volume before the measuring period
      from
      September 1, 2009 to August 31, 2010 in order to avoid a substantial shortfall
      payment.  Based on our present production volume, the estimated short-fall
      payment could exceed $6,400,000 .





In
      either
      event, we may not have the ability to pay the required penalty and Schreiber
      may
      use its contractual rights in order to collect and may cease production and
      shipment of our products. Such an action would have a material adverse affect
      on
      the liquidity and financial condition of our Company and it is unlikely that
      we
      would be able to continue as a going concern .





***The
      main ingredient in many of our products is a commodity item and subject to
      volatility. Price increases for this commodity would adversely affect our
      business.***




Our
      Supply Agreement with Schreiber is based on cost plus a processing fee. Currently,
      the major cost ingredient in our products is casein, a dried skim milk protein
      that is purchased from foreign suppliers. Because we purchase casein from
      foreign suppliers, its availability is subject to a variety of factors,
      including but not limited to, trade regulations, foreign supply and exchange
      rate fluctuations. These factors could have an adverse effect on our business
      and our ability to compete with competitors that do not rely on foreign
      suppliers. We cannot assure you that we could obtain casein from U.S. sources
      if
      the foreign supply of casein were reduced or terminated. Even if we could obtain
      casein from U.S. sources, the prices for the casein would likely be
      significantly higher than we are paying now. Any of these events would
      negatively affect our business, results of operations and cash
      flows.




26




Due
      to a
      current worldwide shortage and a weaker US Dollar in relation to the Euro,
      initial forecasts from our suppliers indicate a nearly 100% increase in the
      cost
      of casein beginning in the third quarter of fiscal 2008. This drastic increase
      in supply costs is expected to substantially increase our cost of goods sold
      and
      correspondingly substantially reduce our gross margins through the remainder
      of
      our current fiscal year 2008. We currently anticipate that casein prices will
      remain at unusually high levels through the first quarter of fiscal 2009 before
      lowering. We recently implemented several strategic plans of action to at least
      partially minimize the negative effect of these anticipated casein price
      increases. These strategies include increasing customer pricing on certain
      affected product lines and reducing promotional spending and consumer
      advertising, as well as, expanding and accelerating the roll-out of new and
      current products which do not require casein.





***A
      private investor owns a large percentage of the outstanding shares, which could
      materially limit the ownership rights of investors.***




As
      of
      November 12, 2007, Frederick DeLuca, a private investor, owned approximately
      23%
      of our outstanding common stock and held warrants and a convertible note which,
      if exercised with accrued and unpaid interest on the convertible note as of
      such
      date and assuming the exercise of no other outstanding options or warrants,
      would give him ownership of approximately 50% of our outstanding common stock.
      Investors who purchase common stock in our Company may be unable to elect any
      specific members of the board of directors or exercise significant control
      over
      us or our business as a result of Mr. Deluca’s ownership. Additionally, Mr.
      DeLuca may be able to exercise significant influence over our policies and
      Board
      composition.




***Stockholders
      may experience further dilution.***


We
      have a
      substantial number of outstanding options and warrants and a convertible note
      to
      acquire shares of common stock. As of November 12, 2007, we have a total of
      14,673,943 shares reserved for future issuance upon exercise of options or
      warrants and conversion of the convertible note. None of these securities are
      “in the money,” as of such date. “In the money” generally means that the current
      market price of the common stock is above the exercise price of the shares
      subject to the option, warrant or note conversion. The issuance of common stock
      upon the exercise of these options and warrants or note conversion could
      adversely affect the market price of the common stock or result in substantial
      dilution to our existing stockholders. In addition, any future securities
      issuances by our Company could
      result in the issuance, or potential issuance, of a significant amount of equity
      securities that will cause substantial dilution to our stockholders,
      particularly given the current low trading price of our common
      stock.





***We
      may not be able to implement Section 404 of the Sarbanes-Oxley Act on a timely
      basis.***




The
      Securities and Exchange Commission (the “SEC”), as directed by Section 404 of
      The Sarbanes Oxley Act (“SOX 404”), adopted rules generally requiring each
      public company to include a report of management on the company’s internal
      controls over financial reporting in its annual report on Form 10-K that
      contains an assessment by management of the effectiveness of the company’s
      internal controls over financial reporting. This requirement will first apply
      to
      our annual report on Form 10-K for the fiscal year ending March 31, 2008. In
      addition, the company’s independent registered accounting firm must attest to
      and report on management’s assessment of the effectiveness of the company’s
      internal controls over financial reporting. This requirement will first apply
      to
      our annual report on Form 10-K for the fiscal year ending March 31,
      2009.





We
      have
      not yet completed SOX 404 implementation. In the past, we have discovered,
      and
      may in the future discover, areas of our internal controls that need
      improvement. We have engaged an outside consultant and will be incurring
      incremental costs in order to complete the work required by Section 404.
      However, there can be no assurance that we will be able to complete
      implementation of SOX 404 on a timely basis.





Additionally,
      upon completion of a SOX 404 plan, we may not be able to conclude that our
      internal controls over financial reporting are effective, or in the event that
      we conclude that our internal controls are effective, our independent
      accountants may disagree with our assessment beginning with the fiscal year
      ending March 31, 2009 and may issue a report that is qualified. This could
      subject our Company to regulatory scrutiny and a loss of public confidence
      in
      our internal controls. Any failure to implement required new or improved
      controls, or difficulties encountered in their implementation, could negatively
      affect our operating results or cause us to fail to meet our reporting
      obligations.




27


**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.)*
              
              4.18
              
              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
              
              Investor
                  relations contract between Galaxy Nutritional Foods, Inc. and R.J.
                  Falkner
                  dated as of September 29, 2004 (Filed as Exhibit 4.25 on Form S-3
                  filed
                  March 14, 2005.)*
              
              4.26
              
              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.)*
              
              4.27
              
              Warrant
                  to Purchase Securities of Galaxy Nutritional Foods, Inc. dated
                  July 19,
                  2006 in favor of Frederick A. DeLuca (Filed as Exhibit 4.27 on
                  Form 8-K
                  filed July 25, 2006.)*
              
              4.28
              
              Convertible
                  Note in the principal amount of $2,685,104.17 dated as of July
                  19, 2006 by
                  Galaxy Nutritional Foods, Inc. in favor of Frederick A. DeLuca
                  (Filed as
                  Exhibit 4.26 on Form 8-K filed July 25, 2006.)*
              
              10.1
              
              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.)*
              
              10.2
              
              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.)
  28
  *
              
              10.3
              
              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.)*
              
              10.12
              
              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. Portions of the Supply Agreement have been
                  omitted
                  as indicated by asterisks pursuant to a request for confidential
                  treatment
                  in accordance with Section 552(b)(4) of the Freedom of Information
                  Act
                  ("FOIA"), 5 U.S.C. 552(b)(4) (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
                  10.20 on Form 8-K filed July 6, 2005.)*
              
              10.21
              
              Termination,
                  Settlement and Release Agreement dated July 20, 2005 between Galaxy
                  Nutritional Foods, Inc. and Fromageries Bel S.A. (Filed as Exhibit
                  10.21
                  on Form 8-K filed July 26, 2005.)*
              
              10.22
              
              Note
                  and Warrant Purchase Agreement dated September 12, 2005 between
                  Galaxy
                  Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as Exhibit
                  10.22 on
                  Form 8-K filed September 16, 2005.)*
              
              10.23
              
              Note
                  and Warrant Purchase Agreement dated September 28, 2005 between
                  Galaxy
                  Nutritional Foods, Inc. and Conversion Capital Master, Ltd. (Filed
                  as
                  Exhibit 10.23 on Form 8-K filed October 4, 2005.)*
              
              10.24
              
              Note
                  and Warrant Purchase Agreement dated September 28, 2005 between
                  Galaxy
                  Nutritional Foods, Inc. andSRB
                  Greenway Capital, L.P.(Filed as Exhibit 10.24 on Form 8-K filed October 4, 2005.)*
              
              10.25
              
              Note
                  and Warrant Purchase Agreement dated September 28, 2005 between
                  Galaxy
                  Nutritional Foods, Inc. andSRB
                  Greenway Capital (Q.P.), L.P.(Filed as Exhibit 10.25 on Form 8-K filed October 4, 2005.)*
              
              10.26
              
              Note
                  and Warrant Purchase Agreement dated September 28, 2005 between
                  Galaxy
                  Nutritional Foods, Inc. andSRB
                  Greenway Offshore Operating Fund, L.P.(Filed as Exhibit 10.26 on Form 8-K filed October 4, 2005.)
  29
  *
              
              10.27
              
              First
                  Amendment to Note and Warrant Purchase Agreement dated October
                  7, 2005
                  between Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca
                  (Filed as
                  Exhibit 10.27 on Form 10-Q for the fiscal quarter ended September
                  30,
                  2005.)*
              
              10.28
              
              Fifth
                  Amendment to Loan and Security Agreement dated November 14, 2005
                  between
                  Galaxy Nutritional Foods, Inc. and Textron Financial Corporation
                  (Filed as
                  Exhibit 10.28 on Form 10-Q for the fiscal quarter ended September
                  30,
                  2005.)*
              
              10.29
              
              Sixth
                  Amendment to Loan and Security Agreement dated May 26, 2006 between
                  Galaxy
                  Nutritional Foods, Inc. and Textron Financial Corporation (Filed
                  as
                  Exhibit 10.29 on Form 8-K filed June 1, 2006.)*
              
              10.30
              
              Receivables
                  Purchase Agreement, together with Addendum, dated June 23, 2006
                  between
                  Galaxy Nutritional Foods, Inc. and Systran Financial Services Corporation
                  (Filed as Exhibit 10.30 on Form 8-K filed June 29, 2006.)*
              
              10.31
              
              Note
                  Purchase Agreement dated July 19, 2006 between Galaxy Nutritional
                  Foods,
                  Inc. and Frederick A. DeLuca (Filed as Exhibit 10.31 on Form 8-K
                  filed
                  July 25, 2006.)*
              
              10.32
              
              Termination
                  Agreement dated July 31, 2006 between Galaxy Nutritional Foods,
                  Inc. and
                  CLP Industrial Properties (Filed as Exhibit 10.32 on Form 8-K filed
                  August
                  3, 2006.)*
              
              10.33
              
              Non-plan
                  Option to Purchase Securities of Galaxy Nutritional Foods, Inc.
                  dated
                  August 7, 2006 in favor of Peter J. Jungsberger (Filed as Exhibit
                  10.33 on
                  Form 10-Q for the fiscal quarter ended June 30, 2006.)*
              
              10.34
              
              Non-plan
                  Option to Purchase Securities of Galaxy Nutritional Foods, Inc.
                  dated
                  August 7, 2006 in favor of Robert S. Mohel (Filed as Exhibit 10.34
                  on Form
                  10-Q for the fiscal quarter ended June 30, 2006.)*
              
              10.35
              
              Non-plan
                  Option to Purchase Securities of Galaxy Nutritional Foods, Inc.
                  dated
                  August 17, 2006 in favor of David H. Lipka (Filed as Exhibit 10.35
                  on Form
                  8-K filed August 21, 2006.)*
              
              10.36
              
              Non-plan
                  Option to Purchase Securities of Galaxy Nutritional Foods, Inc.
                  dated
                  August 17, 2006 in favor of Michael E. Broll (Filed as Exhibit
                  10.36 on
                  Form 8-K filed August 21, 2006.)*
              
              10.37
              
              Non-plan
                  Option to Purchase Securities of Galaxy Nutritional Foods, Inc.
                  dated
                  August 17, 2006 in favor of Angelo S. Morini (Filed as Exhibit
                  10.37 on
                  Form 8-K filed August 21, 2006.)*
              
              10.38
              
              Sublease
                  Agreement dated October 3, 2006 between Galaxy Nutritional Foods,
                  Inc. and
                  Oracle Corporation (Filed as Exhibit 10.38 on Form 8-K filed October
                  10,
                  2006.)*
              
              10.39
              
              Letter
                  Agreement accepted November 9, 2006 between Galaxy Nutritional
                  Foods, Inc.
                  and Schreiber Foods, Inc. amending the Supply Agreement dated June
                  30,
                  2005 between the parties. Portions of the Letter Agreement have
                  been
                  omitted as indicated by asterisks pursuant to a request for confidential
                  treatment in accordance with Section 552(b)(4) of the Freedom of
                  Information Act ("FOIA"), 5 U.S.C. 552(b)(4) (Filed as Exhibit
                  10.39 on
                  Form 10-Q for the fiscal quarter ended September 30, 2006.)*
              
              10.40
              
              Note
                  Modification Agreement dated March 14, 2007 between Galaxy Nutritional
                  Foods, Inc. and Frederick A. DeLuca (Filed as Exhibit 10.40 on
                  Form 8-K
                  filed March 20, 2007.)*
              
              10.41
              
              Second
                  Amendment to the Employment Agreement dated May 3, 2007 between
                  Galaxy
                  Nutritional Foods, Inc. and Michael E. Broll. (Filed as Exhibit
                  10.38 on
                  Form 8-K filed May 9, 2007.)*
              
              10.42
              
              First
                  Amendment to Receivables Purchase Agreement dated March 28, 2007
                  between
                  Galaxy Nutritional Foods, Inc. and Systran Financial Services Corporation
                  (Filed as Exhibit 10.42 on Form 10-K filed June 7, 2007.)*
              
              10.43
              
              Separation
                  and General Release Agreement dated June 1, 2007 between Galaxy
                  Nutritional Foods, Inc. and Christopher Morini (Filed as Exhibit
                  10.43 on
                  Form 10-K filed June 7, 2007.)
  30
  *
              
              14.1
              
              Code
                  of Ethics (Filed as Exhibit 14.1 on Form 10-K filed June 7,
                  2007.)*
              
              16.1
              
              Letter
                  from BDO Seidman, LLP to the SEC dated July 24, 2006(Filed
                  as Exhibit 16.1 on Form 8-K filed July 24, 2006.)*
              
              16.2
              
              Letter
                  from Cross, Fernandez & Riley, LLP to the SEC dated July 24, 2006
                  (Filed as Exhibit 16.1 on Form 8-K filed July 24, 2006.)*
              
              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.




31


**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: November 14, 2007
            By:
            /s/ Michael
              E. BrollMichael
              E. BrollChief Executive Officer
              (Principal Executive
                Officer)


Date:
              November 14, 2007
            By:
            /s/ Salvatore
              J. FurnariSalvatore
              J. FurnariChief Financial Officer
              (Principal Accounting and Financial
                Officer)





32