**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 December 31, 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
      February 8, 2008, there were 17,110,016 shares of common stock, $.01 par value
      per share, outstanding.




1





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





**Index
      to Form 10-Q**


**For
      the Quarter Ended December 31, 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**
            26**Item
                4.**
            **Controls
                and Procedures**
            26**PART
                II.****OTHER
                INFORMATION****Item
                1A.**
            **Risk
                Factors**
            27**Item
                4.**
            **Submission
                of Matters to a Vote of Security Holders**
            30**Item
                5.**
            **Other
                Information**
            30**Item
                6.**
            **Exhibits**
            31**SIGNATURES**
            
            35








2





**PART
      I. FINANCIAL INFORMATION**


**GALAXY
      NUTRITIONAL FOODS, INC.**


**Balance
      Sheets**




**DECEMBER
                  31,**
              
              **MARCH
                  31,****Notes**
              
              **2007**
              
              **2007****(UNAUDITED)****ASSETS****CURRENT
                  ASSETS:**Cash
              
              
              
              
              $
              1,442,261
              
              $
              879,487Trade
                  receivables, net
              
              
              
              
              
              2,581,702
              
              
              2,652,845Inventories,
                  net
              
              
              
              
              
              100,558
              
              
              377,432Prepaid
                  expenses and other
              
              
              
              
              
              264,700
              
              
              261,693Total
                  current assets
              
              
              
              
              
              4,389,221
              
              
              4,171,457**PROPERTY
                  AND EQUIPMENT, NET**
              
              
              
              
              
              70,706
              
              
              90,181**OTHER
                  ASSETS**
              
              
              
              
              
              74,823
              
              
              102,980**TOTAL**
              
              
              
              
              $
              4,534,750
              
              $
              4,364,618**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIT****CURRENT
                  LIABILITIES:**Secured
                  borrowings
              
              
              **2**
              
              $
              --
              
              $
              556,886Accounts
                  payable
              
              
              
              
              
              1,409,884
              
              
              1,718,088Accrued
                  and other current liabilities
              
              
              
              
              
              878,888
              
              
              823,258Current
                  portion of accrued employment contracts
              
              
              **3**
              
              
              423,569
              
              
              366,305Related
                  party note payable
              
              
              **3**
              
              
              2,685,104
              
              
              --Total
                  current liabilities
              
              
              
              
              
              5,397,445
              
              
              3,464,537**ACCRUED
                  EMPLOYMENT CONTRACTS,**less
                  current portion
              
              
              **3**
              
              
              2,154
              
              
              194,491**RELATED
                  PARTY NOTE PAYABLE**
              
              
              **2**
              
              
              --
              
              
              2,677,144Total
                  liabilities
              
              
              
              
              
              5,399,599
              
              
              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
              
              
              
              
              
              (71,203,098
              )
              
              (72,309,803
              )Total
                  stockholders’ deficit
              
              
              
              
              
              (864,849
              )
              
              (1,971,554
              )**TOTAL**
              
              
              
              
              $
              4,534,750
              
              $
              4,364,618




See
      accompanying notes to financial statements


3


**GALAXY
      NUTRITIONAL FOODS, INC.**


**Statements
      of Operations**


**(UNAUDITED)**




**THREE
                MONTHS
                ENDED**
            
            **NINE
                MONTHS
                ENDED****DECEMBER
                31,**
            
            **DECEMBER
                31,****Notes**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                Sales
            
            
            
            
            $
            6,446,099
            
            $
            6,110,619
            
            $
            18,763,360
            
            $
            20,670,958Cost
                of Goods Sold
            
            
            
            
            
            4,145,200
            
            
            3,417,232
            
            
            11,346,406
            
            
            12,450,194**GROSS
                MARGIN**
            
            
            
            
            
            2,300,899
            
            
            2,693,387
            
            
            7,416,954
            
            
            8,220,764**OPERATING
                EXPENSES:**Selling
            
            
            
            
            
            871,797
            
            
            775,043
            
            
            2,702,038
            
            
            2,621,845Delivery
            
            
            
            
            
            263,923
            
            
            217,431
            
            
            772,786
            
            
            643,714General
                and administrative, including $0, $10,000, $0 and $108,160 non-cash
                compensation related to stock based transactions
            
            
            **5**
            
            
            672,530
            
            
            639,030
            
            
            1,883,647
            
            
            2,496,658Employment
                contract expense-general and administrative
            
            
            **3**
            
            
            --
            
            
            --
            
            
            346,447
            
            
            --Research
                and development
            
            
            
            
            
            86,511
            
            
            47,345
            
            
            249,506
            
            
            134,128Reserve
                on stockholder note receivable
            
            
            
            
            
            --
            
            
            --
            
            
            --
            
            
            1,428,000Cost
                of disposal activities
            
            
            **1**
            
            
            --
            
            
            134,744
            
            
            --
            
            
            283,547Loss
                on disposal of assets
            
            
            
            
            
            512
            
            
            19,775
            
            
            512
            
            
            44,280Total
                operating expenses
            
            
            
            
            
            1,895,273
            
            
            1,833,368
            
            
            5,954,936
            
            
            7,652,172**INCOME
                FROM OPERATIONS**
            
            
            
            
            
            405,626
            
            
            860,019
            
            
            1,462,018
            
            
            568,592INTEREST
                EXPENSE
            
            
            
            
            
            (110,261
            )
            
            (133,835
            )
            
            (343,313
            )
            
            (623,273
            )**INCOME
                (LOSS) BEFORE TAXES**
            
            
            
            
            
            295,365
            
            
            726,184
            
            
            1,118,705
            
            
            (54,681
            )FEDERAL
                INCOME TAX EXPENSE
            
            
            
            
            
            --
            
            
            --
            
            
            (12,000
            )
            
            --**NET
                INCOME (LOSS)**
            
            
            
            
            $
            295,365
            
            $
            726,184
            
            $
            1,106,705
            
            $
            (54,681
            )**BASIC
                NET INCOME (LOSS) PER COMMON SHARE**
            
            
            **6**
            
            $
            0.02
            
            $
            0.04
            
            $
            0.06
            
            $
            0.00**DILUTED
                NET INCOME (LOSS) PER COMMON SHARE**
            
            
            **6**
            
            $
            0.01
            
            $
            0.03
            
            $
            0.05
            
            $
            0.00




See
      accompanying notes to financial statements.


4


**GALAXY
      NUTRITIONAL FOODS, INC.**


**Statement
      of Stockholders’ Deficit**


**Nine
      Months Ended December 31, 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
            
            
            --
            
            
            --
            
            
            --
            
            
            1,106,705
            
            
            1,106,705Balance
                at December 31, 2007
            
            
            17,110,016
            
            $
            171,100
            
            $
            70,167,149
            
            $
            (71,203,098
            )
            $
            (864,849
            )




See
      accompanying notes to financial statements.


5


**GALAXY
      NUTRITIONAL FOODS, INC.**


**Statements
      of Cash Flows**


**(UNAUDITED)**




**Nine
                Months Ended December 31,**
            
            **Notes**
            
            **2007**
            
            **2006****CASH
                FLOWS FROM (USED IN) OPERATING ACTIVITIES:**Net
                Income (Loss)
            
            
            
            
            $
            1,106,705
            
            $
            (54,681
            )Adjustments
                to reconcile net income (loss) to net cash from operating
                activities:Depreciation
                and amortization
            
            
            
            
            
            33,308
            
            
            130,102Amortization
                of debt discount and financing costs
            
            
            
            
            
            36,117
            
            
            256,546Provision
                for future credits and doubtful accounts on trade
                receivables
            
            
            
            
            
            (632,500
            )
            
            (253,150
            )Inventory
                reserve
              Provision
                for loss on stockholder note receivable
            
            
            
            
            
            5,615
              --
            
            
            --
              1,428,000Loss
                on disposal of assets
            
            
            
            
            
            512
            
            
            44,280Non-cash
                compensation related to stock-based transactions
            
            
            
            
            
            --
            
            
            108,160(Increase)
                decrease in:Trade
                receivables
            
            
            
            
            
            703,643
            
            
            1,356,545Inventories,
                net
            
            
            
            
            
            271,259
            
            
            (66,946
            )Prepaid
                expenses and other
            
            
            
            
            
            (3,007
            )
            
            (176,477
            )Increase
                (decrease) in:Accounts
                payable
            
            
            
            
            
            (308,204
            )
            
            (1,317,088
            )Accrued
                and other liabilities
            
            
            
            
            
            (79,443
            )
            
            (675,201
            )**NET
                CASH FROM OPERATING ACTIVITIES**
            
            
            
            
            
            1,134,005
            
            
            780,090**CASH
                FLOWS FROM (USED IN) INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            
            
            
            (14,345
            )
            
            (22,854
            )Proceeds
                from sale of equipment
            
            
            
            
            
            --
            
            
            45,455Decrease
                in other assets
            
            
            
            
            
            --
            
            
            34,923**NET
                CASH FROM (USED IN) INVESTING ACTIVITIES**
            
            
            
            
            
            (14,345
            )
            
            57,524**CASH
                FLOWS FROM (USED IN) FINANCING ACTIVITIES:**Net
                payments on secured borrowings
            
            
            
            
            
            (556,886
            )
            
            (745,225
            )Borrowings
                on term notes payable
            
            
            
            
            
            --
            
            
            1,200,000Repayments
                on term notes payable
            
            
            
            
            
            --
            
            
            (1,200,000
            )Principal
                payments on capital lease obligations
            
            
            
            
            
            --
            
            
            (62,826
            )Financing
                costs for long term debt
            
            
            
            
            
            --
            
            
            (144,011
            )**NET
                CASH USED IN FINANCING ACTIVITIES**
            
            
            
            
            
            (556,886
            )
            
            (952,062
            )**NET
                INCREASE (DECREASE) IN CASH**
            
            
            **7**
            
            
            562,774
            
            
            (114,448
            )**CASH,
                BEGINNING OF PERIOD**
            
            
            
            
            
            879,487
            
            
            435,880**CASH,
                END OF PERIOD**
            
            
            
            
            $
            1,442,261
            
            $
            321,432





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 nine-month period ended
      December 31, 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
      nine months ended December 31, 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
      nine month periods ended December 31, 3006 using the Black-Scholes pricing
      model
      with the following assumptions:




**Three
                Months Ended**
            
            **Nine
                Months Ended****December
                31, 2006**
            
            **December
                31, 2006**Risk-free
                interest rate
            
            
            4.52
            %
            
            4.07-4.94
            %Volatility
            
            
            48.7
            %
            
            50.3-51.9
            %Expected
                life (months)
            
            
            120
            
            
            36-120Dividends
            
            
            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 nine months ended December 31, 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
      December 2007, the Financial
      Accounting Standards Board (“FASB”) issued
      SFAS No. 141 (revised), *“Business
      Combinations,”* (“SFAS
      141(R)”). SFAS 141(R) changes the accounting for business combinations including
      the measurement of acquirer shares issued in consideration for a business
      combination, the recognition of contingent consideration, the accounting for
      pre-acquisition gain and loss contingencies, the recognition of capitalized
      in-process research and development, the accounting for acquisition-related
      restructuring cost accruals, the treatment of acquisition related transaction
      costs and the recognition of changes in the acquirer’s income tax valuation
      allowance. SFAS 141(R) is effective for fiscal years beginning after
      December 15, 2008, with early adoption prohibited. The Company is currently
      evaluating the impact of the pending adoption of SFAS 141(R) on its results
      of
      operations and financial condition.





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 .





In
      February 2007, the FASB issued SFAS No. 159, *"The
      Fair Value Option for Financial Assets and Financial
      Liabilities,"* (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial
      instruments and certain other items at fair value. SFAS 159 is effective for
      fiscal years beginning after November 15, 2007, with early adoption permitted.
      The Company is currently evaluating the effect, if any, the adoption of SFAS
      159
      will have on its financial statements, results of operations and cash
      flows.





In
      September 2006, the FASB issued SFAS No. 157, *“Fair
      Value Measurements,”* (“SFAS
      157”). SFAS 157 simplifies and codifies guidance on fair value measurements
      under generally accepted accounting principles. This standard defines fair
      value, establishes a framework for measuring fair value and prescribes expanded
      disclosures about fair value measurements. SFAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years, with early adoption permitted. The
      Company is currently evaluating the effect, if any, the adoption of SFAS 157
      will have on its financial statements, results of operations and cash
      flows.





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 December 31,
      2007.




9





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 (8.75% on December
      31,
      2007). However, the Commercial Finance Agreement requires a $4,500 minimum
      monthly interest charge to be assessed. The Company is 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 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 December 31, 2007, there were no amounts advanced
      under
      the Commercial Finance Agreement.





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 was 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.




10





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 $1,289 and $7,960 of debt discount to interest expense in
      the
      three and nine months ended December 31, 2007, respectively. The Company
      amortized $3,600 and $133,419 related to debt discounts in the three and nine
      months ended December 31, 2006, respectively. Additionally, the Company recorded
      interest expense related to the related party note of $85,774 and $256,390
      in
      the three and nine months ended December 31, 2007, respectively. The Company
      recorded interest expense related to related party notes of $85,774 and $237,335
      in the three and nine months ended December 31, 2006. As of December 31, 2007,
      the outstanding principal balance on the Convertible Note is
      $2,685,104.




(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.





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 $289,111
      remained unpaid but accrued as a current liability as of December 31, 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
      February 2009. As of December 31, 2007, $136,612 remained unpaid but accrued
      ($134,458 as current liabilities and $2,154 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%.




11




Stay,
      Severance, Sales Bonus Plan


On
      December 10, 2007, the Company adopted a Stay Bonus, Severance Bonus and Sales
      Bonus Plan (the “Plan”) to provide incentives and protections to certain key
      executives and directors in connection with a possible sale of the Company.
      The
      Plan provides for a stay bonus pool up to $475,000 to be paid following the
      Company’s receipt of a definitive purchase offer (as defined in the Plan) upon
      the earlier of the consummation of a sale of the Company pursuant to such
      purchase offer or the termination of the purchase offer (other than as a result
      of a breach by the Company). The stay bonus pool is to be paid $125,000 to
      David
      H. Lipka, the Company’s Chairman, and $100,000 to Michael E. Broll, the
      Company’s Chief Executive Officer. The remaining $250,000 of the stay bonus pool
      is currently unallocated and may be granted to other key executives at the
      discretion of Messrs Lipka and Broll. The Plan also provides for a severance
      bonus of $125,000 to be paid to David H. Lipka and $100,000 to be paid to
      Michael E. Broll in the event their positions are terminated other than for
      Cause (as defined in the Plan) or they resign within one year after the
      consummation of a sale of the Company. Finally, the Plan provides for a sales
      bonus pool to be determined based on a range of selling prices. The sales bonus
      pool will range from a minimum of $250,000 if the sale is in excess of a
      specified minimum sales target and will increase up to a maximum of 1.8% of
      the
      total sales price. The sales bonus pool will be allocated 55.5% to David H.
      Lipka and 44.5% to Michael E. Broll upon the consummation of a sale of the
      Company. The Plan was approved unanimously by the Board of Directors and
      separately by the two independent members of the Board.





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.





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 nine months ended December
      31, 2007. Therefore, there was no stock-based compensation expense nor any
      unrecognized compensation cost related to nonvested stock for the three and
      nine
      months ended December 31, 2007. For the three and nine months ended December
      31,
      2006, the Company’s stock-based compensation expense related to nonvested stock
      was $10,000 and $108,160.




12


The
      following table summarizes the Company’s plan
      and
      non-plan stock
      options outstanding as of December 31, 2007, as well asactivity during the
      nine
      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
              
              
              (1,644,501
              )
              
              3.18Outstanding
                  at December 31, 2007
              
              
              3,646,249
              
              
              2.72
              
              
              2.7
              
              
              -0-Exercisable
                  at December 31, 2007
              
              
              3,646,249
              
              
              2.72
              
              
              2.7
              
              
              -0-




There
      were no options granted and thus no weighted-average fair value computed on
      options during the three and nine months ended December 31, 2007. At December
      31, 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 December 31, 2007 as quoted on the OTC Bulletin Board was $0.26
      per share. There were no options exercised during the three and nine months
      ended December 31, 2007 and 2006; and therefore, no intrinsic value or cash
      received from option exercises. During the three months ended December 31,
      2006,
      there were 40,000 options granted at a weighted-average exercise price of $0.38
      per share with a weighted-average fair value of $0.25 per share. During the
      nine
      months ended December 31, 2006, there were 540,000 options granted at a
      weighted-average exercise price of $0.44 per share with a weighted-average
      fair
      value of $0.19 per share.




**(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**
            
            **NINE
                MONTHS
                ENDED****DECEMBER
                31,**
            
            **DECEMBER
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                income (loss) - basic
            
            $
            295,365
            
            $
            726,184
            
            $
            1,106,705
            
            $
            (54,681
            )Plus
                interest on convertible related party note payable
            
            
            85,774
            
            
            85,774
            
            
            256,390
            
            
            152,902Net
                income (loss) - diluted
            
            $
            381,139
            
            $
            811,958
            
            $
            1,363,095
            
            $
            98,221Weighted
                average shares outstanding - basic
            
            
            17,110,016
            
            
            17,109,910
            
            
            17,110,016
            
            
            17,926,015Potential
                shares issued upon conversion of related party note
                payable
            
            
            8,835,803
            
            
            7,863,519
            
            
            8,348,329
            
            
            7,671,726Potential
                shares “in-the-money” under stock option and warrant
                agreements
            
            
            --
            
            
            723,043
            
            
            740,000
            
            
            277,891Less:
                Shares assumed repurchased under the treasury stock method
            
            
            --
            
            
            (652,400
            )
            
            (662,069
            )
            
            (251,005
            )Weighted
                average shares outstanding -diluted
            
            $
            25,945,819
            
            $
            25,044,072
            
            $
            25,536,276
            
            $
            25,624,627Basic
                net income (loss) per common share
            
            $
            0.02
            
            $
            0.04
            
            $
            0.06
            
            $
            0.00Diluted
                net income (loss) per common share
            
            $
            0.01
            
            $
            0.03
            
            $
            0.05
            
            $
            0.00




Options
      for 4,352,124 and 4,150,420 shares and warrants for 1,158,001 and 997,662 shares
      have not been included in the computation of diluted net income per common
      share
      for three and nine months ended December 31, 2007, respectively, as their
      effects were antidilutive.




13




Options
      for 4,797,975 and 4,920,837 shares and warrants for 1,123,142 and 1,127,469
      shares have not been included in the computation of diluted net income (loss)
      per common share for the three and nine months ended December 31, 2006,
      respectively, 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.





**Nine
                Months Ended December 31,**
            
            **2007**
            
            **2006**Non-cash
                financing and investing activities:Purchase
                of equipment through a capital lease
            
            $
            --
            
            $
            5,088Payment
                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
            
            
            50,805
            
            
            225,091




**(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 December
      31, 2007 and 2006, the Company’s gross sales were $6,888,900 and $6,647,852,
      respectively. For the nine months ended December 31, 2007 and 2006, the
      Company’s gross sales were $20,317,013 and $22,726,357, respectively. Gross
      sales derived from foreign countries were approximately $999,000 and $785,000*,
      representing 15% and 12% of gross sales for the three months ended December
      31,
      2007 and 2006, respectively. Gross sales derived from foreign countries were
      approximately $2,759,000 and $2,633,000*, representing 14% and 12% of gross
      sales for the nine months ended December 31, 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.





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 nine months ended December 31, 2007 and 2006:




**THREE
                MONTHS
                ENDED**
            
            **NINE
                MONTHS
                ENDED****DECEMBER
                31,**
            
            **DECEMBER
                31,****2007**
            
            **2006***
            
            **2007**
            
            **2006***Canada
            
            
            85
            %
            
            85
            %
            
            87
            %
            
            81
            %Other
            
            
            15
            %
            
            15
            %
            
            13
            %
            
            19
            %





*
      The
      sales to foreign countries for the three and nine months ended December 31,
      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 16% of gross sales
      for
      the three and nine months ended December 31, 2007. The Company had one customer
      that accounted for approximately 15% and 13% of gross sales for the three and
      nine months December 31, 2006, respectively. There were no customers whose
      balance outstanding was greater than 10% of accounts receivable as of December
      31, 2007 or 2006.





Pursuant
      to the Supply Agreement with Schreiber, the Company purchased approximately
      100%
      and 99% of its total raw material purchases from Schreiber for the three and
      nine months, respectively, ended December 31, 2007 and 2006.





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”) develops and globally markets plant
      based cheese alternatives, organic dairy and other organic and natural food
      products to grocery and natural foods retailers, mass merchandisers and
      foodservice accounts. Galaxy Nutritional Foods Veggie(R), 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: Galaxy Nutritional Foods Rice(R), Veggy(R), Vegan(R), Rice Vegan(R),
      and Wholesome Valley Organic(R). Galaxy Nutritional Foods, Inc. is dedicated
      to
      developing nutritious and delicious food products made with high quality natural
      ingredients that exceed the expectations of today’s health conscious consumers.
      We are also committed to reducing its environmental impact
      as part of an Eat Green for Body & Earth(TM) program that offsets
      carbon emissions associated with product shipping and emphasizes the use of
      organic ingredients. Our Company headquarters are located in Orlando,
      Florida, and our common stock is quoted on the OTC Bulletin Board under the
      symbol “GXYF.”




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 fifteen years from June 30, 2005 to June 30, 2020.
      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 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






16






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


·
            Volume
                and margin analysis by individual inventory
                items


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





***Debt
      Maturity Issues***


Pursuant
      to a Note Purchase Agreement dated July 19, 2006 as modified on March 14, 2007,
      we issued a new unsecured convertible note for $2,685,104 (the “Convertible
      Note”) to Mr. Frederick A. DeLuca. The Convertible Note together with any
      accrued and unpaid interest thereon, is convertible at the election of Mr.
      DeLuca, at any time on or prior to October 19, 2008 into shares of our common
      stock at a conversion price of $0.35 per share. If Mr. DeLuca does not choose
      to
      convert this Convertible Note into stock and does not extend the maturity date
      of the Convertible Note, then we will be required to pay principal plus accrued
      interest thereon in the amount of $3,451,478 on October 19, 2008. With our
      current cash balances and the ability to borrow additional funds on our
      Commercial Finance Agreement, we have the ability to repay a substantial portion
      of this obligation, but it will not be enough to repay the entire amount owed.
      If Mr. DeLuca does not convert some or all of the Convertible Note or we do
      not
      repay, refinance or amend the existing Convertible Note, then our inability
      to
      pay would trigger a default. In addition to Mr. DeLuca pursuing remedies for
      collection of such indebtedness, interest would begin accruing at the rate
      of
      17.5%. Additionally, a default on the Convertible Note would trigger a cross
      default in our Commercial Finance Agreement which can then be terminated by
      Commercial Finance. Any outstanding balance owed under the Commercial Finance
      Agreement could become immediately due and payable and bear interest at 12%
      in
      addition to other fees and penalties. Therefore, a default on the Convertible Note would have a material adverse affect on the
      liquidity and financial condition of our Company and we may not be able to
      continue as a going concern. Management will be initiating discussions with
      Mr.
      DeLuca regarding extending the maturity, refinancing and/or converting all
      or a
      portion of the Convertible Note into equity on or before its maturity in October
      2008, but there can be no assurances that we will be successful in our
      negotiations.





***Rising
      Cost of Goods***


Casein
      is
      a dried skim milk protein that is the principal raw ingredient used in most
      of
      our products. In the third quarter of fiscal 2008, the average price of casein
      increased more than 50% compared to the average price in the first half of
      fiscal 2008. We anticipate that the average price of casein will increase
      another 33% or more in the fourth quarter of fiscal 2008. Although we recently
      implemented several strategic plans of action in an effort to at least partially
      minimize the negative effect of these anticipated casein price increases, we
      anticipate that for the remainder of fiscal 2008, gross margins on a majority
      of
      our products will continue to decline.  We further anticipate that gross
      margins as a percentage of net sales for fiscal 2008 will be approximately
      four
      to eight percentage points lower than our fiscal 2007 annual average.
      Additionally, we anticipate that our income from operations will continue to
      be
      materially and adversely affected by the decline in gross margins.




**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.




17





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 $862,000 and $1,518,000 for known
      and anticipated future credits and doubtful accounts at December 31, 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 since we have not established a history of taxable income.





***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.




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 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 and nine months ended
      December 31, 2007. Therefore, we did not make any assumptions under the
      Black-Scholes option-pricing  model
      during these periods.





18


The
      Company estimated the fair value of each stock-based award during the three
      and
      nine month periods ended December 31, 3006 using the Black-Scholes pricing
      model
      with the following assumptions:




**Three
                Months Ended**
            
            **Nine
                Months Ended****December
                31, 2006**
            
            **December
                31, 2006**Risk-free
                interest rate
            
            
            4.52
            %
            
            4.07-4.94
            %Volatility
            
            
            48.7
            %
            
            50.3-51.9
            %Expected
                life (months)
            
            
            120
            
            
            36-120Dividends
            
            
            None
            
            
            None





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 December 31,**
            
            **9-Months
                Ended December 31,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**
            
            **2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**Net
                Sales
            
            
            6,446,099
            
            
            6,110,619
            
            
            335,480
            
            
            5.5
            %
            
            18,763,360
            
            
            20,670,958
            
            
            (1,907,598
            )
            
            -9.2
            %Cost
                of Goods Sold
            
            
            4,145,200
            
            
            3,417,232
            
            
            727,968
            
            
            21.3
            %
            
            11,346,406
            
            
            12,450,194
            
            
            (1,103,788
            )
            
            -8.9
            %**Gross
                Margin**
            
            
            2,300,899
            
            
            2,693,387
            
            
            (392,488
            )
            
            -14.6
            %
            
            7,416,954
            
            
            8,220,764
            
            
            (803,810
            )
            
            -9.8
            %**Gross
                Profit %**
            
            
            35.7
            %
            
            44.1
            %
            
            
            
            
            
            
            
            39.5
            %
            
            39.8
            %


***Sales***


For
      the
      three months ended December 31, 2007 and 2006, the Company’s gross sales before
      discounts, returns and allowance were $6,888,900 and $6,647,852, respectively.
      For the nine months ended December 31, 2007 and 2006, the Company’s gross sales
      before discounts, returns and allowances were $20,317,013 and $22,726,357,
      respectively. The following chart sets forth the percentage of gross sales
      derived from our product brands during the three and nine months ended December
      31, 2007 and 2006:


****  ****


**THREE
                MONTHS
                ENDED**
            
            **NINE
                MONTHS
                ENDED****DECEMBER
                31,**
            
            **DECEMBER
                31,****Brand**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**Veggie
            
            
            65.2
            %
            
            66.7
            %
            
            66.7
            %
            
            59.7
            %Private
                Label, Imitation and Other
            
            
            10.3
            %
            
            11.5
            %
            
            10.4
            %
            
            19.2
            %Rice
            
            
            12.9
            %
            
            11.0
            %
            
            12.1
            %
            
            10.5
            %Veggy
            
            
            4.2
            %
            
            4.0
            %
            
            4.3
            %
            
            4.2
            %Wholesome
                Valley Organic
            
            
            3.4
            %
            
            3.2
            %
            
            2.8
            %
            
            3.2
            %Vegan
            
            
            4.0
            %
            
            3.6
            %
            
            3.7
            %
            
            3.2
            %





Net
      sales, after discounts, returns and allowances, in the three months ended
      December 31, 2007 increased 5% compared to net sales in the three months ended
      December 31, 2006. In terms of gross sales dollars, sales of private label
      and
      imitation products were down approximately 7% from the three month period ended
      December 31, 2006 to the three month period ended December 31, 2007. Sales
      of
      branded products were up approximately 5% over the same period. The three months
      ended December 31, 2007 continued 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.





Net
      sales, after discounts, returns and allowances, in the nine months ended
      December 31, 2007 decreased 9% from net sales in the nine months ended December
      31, 2006, primarily due to the strategic elimination of marginally profitable
      and unprofitable private label and imitation products in the first half of
      fiscal 2007. In terms of gross sales dollars, sales of private label and
      imitation products were down approximately 52% from the nine month period ended
      December 31, 2006 to the nine month period ended December 31, 2007. Sales of
      branded products were down less than 1% over the same period.




19





We
      anticipate that our annual sales in fiscal 2008 will be lower than annual 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 64% and 56% of net sales in the three months ended
      December 31, 2007 and 2006, and 61% and 60% of net sales in the nine months
      ended December 31, 2007 and 2006, respectively. This increase in cost of goods
      sold as a percentage of net sales is primarily due to increased prices in
      casein. Casein is a dried skim milk protein that is the principal raw ingredient
      used in most of our products. In the third quarter of fiscal 2008, the average
      price of casein increased more than 50% compared to the average price in the
      first half of fiscal 2008. We anticipate that the average price of casein will
      increase another 33% or more in the fourth quarter of fiscal 2008.





Due
      to a
      current worldwide shortage and a weaker US Dollar in relation to the Euro,
      forecasts from our suppliers indicate these historically high casein prices
      will
      remain at least through the end of fiscal 2008 and the beginning of fiscal
      2009.
      This dramatic 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 fiscal 2008.





We
      recently implemented several strategic plans of action in an effort to at least
      partially minimize the negative effect of these anticipated casein price
      increases. These strategies include reducing promotional spending and consumer
      advertising and increasing customer pricing on certain affected product lines,
      as well as, reformulating existing products to reduce the amount of required
      casein and expanding and accelerating the roll-out of new products which do
      not
      require casein.





***Gross
      Margin***


Gross
      margins declined 15% and 10% in the three and nine months ended December 31,
      2007 compared to the three and nine months ended December 31, 2006,
      respectively. In the three months ended December 31, 2007, gross profit declined
      8 percentage points from 44% to 36%. This decrease in gross margins and profits
      is primarily due to the rapid increase in the cost of goods sold as stated
      above, and to a smaller extent additional inventory write-offs for some out
      of
      date and obsolete inventory. We do not believe that we are able to pass this
      entire cost increase on to our consumers through immediate price increases
      without causing substantial reductions in our sales volumes.





We anticipate that for the remainder of fiscal 2008, gross margins on a majority
      of
      our products will continue to decline. We further anticipate that
      gross margins as a percentage of net sales for fiscal 2008 will be approximately
      four to eight percentage points lower than our fiscal 2007 annual average.
      Additionally, we anticipate that our income from operations will continue to
      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 loss on disposal of
      assets. 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.




**EBITDA
                (a non-GAAP measure):****3-Months
                Ended December 31,**
            
            **9-Months
                Ended December 31,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**
            
            **2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change**Net
                Sales
            
            
            6,446,099
            
            
            6,110,619
            
            
            335,480
            
            
            5.5
            %
            
            18,763,360
            
            
            20,670,958
            
            
            (1,907,598
            )
            
            -9.2
            %Cost
                of Goods Sold
            
            
            4,145,200
            
            
            3,417,232
            
            
            727,968
            
            
            21.3
            %
            
            11,346,406
            
            
            12,450,194
            
            
            (1,103,788
            )
            
            -8.9
            %**Gross
                Margin**
            
            
            2,300,899
            
            
            2,693,387
            
            
            (392,488
            )
            
            -14.6
            %
            
            7,416,954
            
            
            8,220,764
            
            
            (803,810
            )
            
            -9.8
            %




20




**EBITDA
                (a non-GAAP measure):****3-Months
                  Ended December 31,**
            
            **9-Months
                Ended December 31,****2007**
            
            **2006**
            
            **$****Change**
            
            **%****Change**
            
            **2007**
            
            **2006**
            
            **$****Change**
            
            **%****Change****Operating
                Expenses:**Selling
            
            
            871,797
            
            
            775,043
            
            
            96,754
            
            
            12.5
            %
            
            2,702,038
            
            
            2,621,845
            
            
            80,193
            
            
            3.1
            %Delivery
            
            
            263,923
            
            
            217,431
            
            
            46,492
            
            
            21.4
            %
            
            772,786
            
            
            643,714
            
            
            129,072
            
            
            20.1
            %General
                and administrative, including $0, $10,000, $0 and $108,160 non-cash
                stock
                compensation(1)
            
            
            672,530
            
            
            639,030
            
            
            33,500
            
            
            5.2
            %
            
            1,883,647
            
            
            2,496,658
            
            
            (613,011
            )
            
            -24.6
            %Employment
                contract expense(2)
            
            
            -
            
            
            -
            
            
            -
            
            
            0.0
            %
            
            346,447
            
            
            -
            
            
            346,447
            
            
            100.0
            %Research
                and development
            
            
            86,511
            
            
            47,345
            
            
            39,166
            
            
            82.7
            %
            
            249,506
            
            
            134,128
            
            
            115,378
            
            
            86.0
            %Reserve
                on stockholder note receivable(2)
            
            
            -
            
            
            -
            
            
            -
            
            
            0.0
            %
            
            -
            
            
            1,428,000
            
            
            (1,428,000
            )
            
            -100.0
            %Cost
                of disposal activities(2)
            
            
            -
            
            
            134,744
            
            
            (134,744
            )
            
            -100.0
            %
            
            -
            
            
            283,547
            
            
            (283,547
            )
            
            -100.0
            %Loss
                on disposal of assets(2)
            
            
            512
            
            
            19,775
            
            
            (19,263
            )
            
            -97.4
            %
            
            512
            
            
            44,280
            
            
            (43,768
            )
            
            -98.8
            %Total
                operating expenses
            
            
            1,895,273
            
            
            1,833,368
            
            
            61,905
            
            
            3.4
            %
            
            5,954,936
            
            
            7,652,172
            
            
            (1,697,236
            )
            
            -22.2
            %**Income
                from Operations**(3)
            
            
            405,626
            
            
            860,019
            
            
            (454,393
            )
            
            -52.8
            %
            
            1,462,018
            
            
            568,592
            
            
            893,426
            
            
            157.1
            %Interest
                expense, net
            
            
            (110,261
            )
            
            (133,835
            )
            
            23,574
            
            
            -17.6
            %
            
            (343,313
            )
            
            (623,273
            )
            
            279,960
            
            
            -44.9
            %**Income
                (Loss) before Taxes**
            
            
            295,365
            
            
            726,184
            
            
            (430,819
            )
            
            -59.3
            %
            
            1,118,705
            
            
            (54,681
            )
            
            1,173,386
            
            
            -2145.9
            %Federal
                Income Tax Expense
            
            
            -
            
            
            -
            
            
            -
            
            
            0.0
            %
            
            (12,000
            )
            
            -
            
            
            (12,000
            )
            
            100.0
            %**NET
                INCOME (LOSS)**
            
            
            295,365
            
            
            726,184
            
            
            (430,819
            )
            
            -59.3
            %
            
            1,106,705
            
            
            (54,681
            )
            
            1,161,386
            
            
            -2123.9
            %Interest
                expense, net
            
            
            110,261
            
            
            133,835
            
            
            (23,574
            )
            
            -17.6
            %
            
            343,313
            
            
            623,273
            
            
            (279,960
            )
            
            -44.9
            %Taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            0.0
            %
            
            12,000
            
            
            -
            
            
            12,000
            
            
            100.0
            %Depreciation
                and amortization
            
            
            11,246
            
            
            24,005
            
            
            (12,759
            )
            
            -53.2
            %
            
            33,308
            
            
            130,102
            
            
            (96,794
            )
            
            -74.4
            %**EBITDA**(*a
                non-GAAP measure)*
            
            
            416,872
            
            
            884,024
            
            
            (467,152
            )
            
            -52.8
            %
            
            1,495,326
            
            
            698,694
            
            
            796,632
            
            
            114.0
            %EBITDA,
                as a % of Net Sales
            
            
            6.5
            %
            
            14.5
            %
            
            
            
            
            
            
            
            8.0
            %
            
            3.4
            %




(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 loss on disposal
                of assets
                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 non-recurrence of certain non-standard
                expenses such as the reserve on stockholder note receivable and disposal
                costs.





***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 12% increase in
      selling expenses for the three months ended December 31, 2007 compared to the
      three months ended December 31, 2006 is primarily attributable to increased
      consumer advertising; specifically magazine advertising in healthy-women
      publications such as Shape, Women’s Health and Parenting and increased brokerage
      costs as a result of higher sales in the three months ended December 31, 2007.
      Selling expenses only increased 3% during the nine months ended December 31,
      2007 compared to the nine months ended December 31, 2006 due to the increased
      consumer advertising.




21





Selling
      expenses increased from 13% of net sales during the three and nine months ended
      December 31, 2006 to 14% of net sales for the three and nine months ended
      December 31, 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. 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.





We
      expect
      that fixed selling expense amounts for advertising and market research in fiscal
      2008 will be consistent with fiscal 2007, but 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 the nine month period ended December 31, 2006 compared
      to 4% of net sales for the nine month period ended December 31, 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 1% beginning in the third quarter of fiscal 2007.
      Delivery costs for the three months ended December 31, 2007 and 2006 reflect
      the
      current average of 4% of net sales. We anticipate delivery expense for fiscal
      2008 will remain at approximately 4% of net sales.





***General
      and Administrative***


During
      the three months ended December 31, 2007, general and administrative expenses
      increased approximately $34,000 compared to the three months ended December
      31,
      2006. This increase was due to salary increases that became effective during
      this fiscal year and bonus accruals during the three months ended December
      31,
      2007. During the nine months ended December 31, 2007, general and administrative
      expenses decreased approximately $613,000 compared to the nine months ended
      December 31, 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 primarily in the first half of fiscal
      2008. 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.
      Additionally, bad debt expense declined over $75,000 due to improved collection
      efforts. We did not issue any stock awards in the three and nine months ended
      December 31, 2007 and therefore, did not incur any non-cash compensation expense
      related to stock-based transactions compared to $10,000 and $108,160 in the
      three and nine months ended December 31, 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 the remainder of fiscal 2008 and into fiscal
      2009.





***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 February 2009.




***Research
      and Development***


Research
      and development expenses increased by approximately $39,000 or 83% for the
      three
      months ended December 31, 2007 and by approximately $115,000 or 86% for the
      nine
      months ended December 31, 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 these products to
      make
      them 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 new product development and existing product reformulations to improve
      taste and quality and to possibly reduce casein content.




22





***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 nine months
      ended December 31, 2007. Disposal costs during the three and nine months ended
      December 31, 2006 were $134,744 and $283,547, 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 $24,000 or 18% and $280,000 or 45% in the
      three and nine months ended December 31, 2007 compared to the three and nine
      months ended December 31, 2006, respectively. The decrease in interest expense
      for the three months ended December 31, 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 nine months ended December 31, 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 nine month period. In the nine months
      ended December 31, 2007, we experienced a decrease in interest expense related
      to our debt facilities of approximately $59,000 due to lower average outstanding
      principal balances. Amortization of loan costs decreased by approximately
      $95,000 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 $126,000
      in the nine months ended December 31, 2007 compared to the nine months ended
      December 31, 2006.




We
      anticipate that our interest expense will decrease an average of approximately
      40% in fiscal 2008, due to lower interest rates, 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 6.0% 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.




23






**Liquidity
      and Capital Resources**




**9-Months
                Ended December 31,**
            
            **2007**
            
            **2006**
            
            **$**
              **Change**
            
            **%**
              **Change**Cash
                from (used in) operating activities
            
            
            1,134,005
            
            
            780,090
            
            
            353,915
            
            
            45.4
            %Cash
                from (used in) investing activities
            
            
            (14,345
            )
            
            57,524
            
            
            (71,869
            )
            
            -124.9
            %Cash
                used in financing activities
            
            
            (556,886
            )
            
            (952,062
            )
            
            395,176
            
            
            -41.5
            %Net
                increase (decrease) in cash
            
            
            562,774
            
            
            (114,448
            )
            
            677,222
            
            
            -591.7
            %




***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 provide positive
      operating cash flow for fiscal 2008.





Pursuant
      to a Note Purchase Agreement dated July 19, 2006 as modified on March 14, 2007,
      we issued a new unsecured convertible note for $2,685,104 (the “Convertible
      Note”) to Mr. Frederick A. DeLuca. The Convertible Note together with any
      accrued and unpaid interest thereon, is convertible at the election of Mr.
      DeLuca, at any time on or prior to October 19, 2008 into shares of our common
      stock at a conversion price of $0.35 per share. If Mr. DeLuca does not choose
      to
      convert this Convertible Note into stock and does not extend the maturity date
      of the Convertible Note, then we will be required to pay principal plus accrued
      interest thereon in the amount of $3,451,478 on October 19, 2008. With our
      current cash balances and the ability to borrow additional funds on our
      Commercial Finance Agreement, we have the ability to repay a substantial portion
      of this obligation, but it will not be enough to repay the entire amount owed.
      If Mr. DeLuca does not convert some or all of the Convertible Note or we do
      not
      repay, refinance or amend the existing Convertible Note, then our inability
      to
      pay would trigger a default. In addition to Mr. DeLuca pursuing remedies for
      collection of such indebtedness, interest would begin accruing at the rate
      of
      17.5%. Additionally, a default on the Convertible Note would trigger a cross
      default in our Commercial Finance Agreement which can then be terminated by
      Commercial Finance. Any outstanding balance owed under the Commercial Finance
      Agreement could become immediately due and payable and bear interest at 12%
      in
      addition to other fees and penalties. Therefore, a default on the Convertible Note would have a material adverse affect on the
      liquidity and financial condition of our Company and we may not be able to
      continue as a going concern. Management will be initiating discussions with
      Mr.
      DeLuca regarding extending the maturity, refinancing and/or converting all
      or a
      portion of the Convertible Note into equity on or before its maturity in October
      2008, but there can be no assurances that we will be successful in our
      negotiations.





***Operating
      and Investing Activities***


Cash
      from
      operating activities in the nine months ended December 31, 2007 primarily came
      from operating profits from the sale of our products.





In
      the
      first nine months of fiscal 2008, cash used in investing activities related
      to
      our purchase of office equipment. Cash provided from investing activities in
      the
      first nine 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***


**9-Months
                Ended December 31,**
            
            **2007**
            
            **2006**Net
                borrowings (payments) on line of credit and bank
                overdrafts
            
            
            (556,886
            )
            
            (745,225
            )Issuances
                of debt
            
            
            -
            
            
            1,200,000Payments
                of debt and capital leases
            
            
            -
            
            
            (1,406,837
            )Issuances
                of stock & associated costs
            
            
            -
            
            
            -Cash
                used in financing activities
            
            
            (556,886
            )
            
            (952,062
            )




24




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 (8.75% on December
      31,
      2007). However, the Commercial Finance Agreement requires a $4,500 minimum
      monthly interest charge to be assessed. 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. Although
      we
      had approximately $1.6 million available to draw pursuant to this Commercial
      Finance Agreement as of December 31, 2007, there were no amounts advanced,
      because we did not need additional cash on such date. The net amount of cash
      used to reduce the Commercial Finance Agreement for the nine months ended
      December 31, 2007 and 2006 was $556,886 and $745,225, respectively.




**Recent
      Accounting Pronouncements**





In
      December 2007, the Financial
      Accounting Standards Board (“FASB”) issued
      SFAS No. 141 (revised), *“Business
      Combinations,”* (“SFAS
      141(R)”). SFAS 141(R) changes the accounting for business combinations including
      the measurement of acquirer shares issued in consideration for a business
      combination, the recognition of contingent consideration, the accounting for
      pre-acquisition gain and loss contingencies, the recognition of capitalized
      in-process research and development, the accounting for acquisition-related
      restructuring cost accruals, the treatment of acquisition related transaction
      costs and the recognition of changes in the acquirer’s income tax valuation
      allowance. SFAS 141(R) is effective for fiscal years beginning after
      December 15, 2008, with early adoption prohibited. The Company is currently
      evaluating the impact of the pending adoption of SFAS 141(R) on its results
      of
      operations and financial condition.





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 .





In
      February 2007, the FASB issued SFAS No. 159, *"The
      Fair Value Option for Financial Assets and Financial
      Liabilities,"* (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial
      instruments and certain other items at fair value. SFAS 159 is effective for
      fiscal years beginning after November 15, 2007, with early adoption permitted.
      We are currently evaluating the effect, if any, the adoption of SFAS 159 will
      have on our financial statements, results of operations and cash
      flows.





In
      September 2006, the FASB issued SFAS No. 157, *“Fair
      Value Measurements,”* (“SFAS
      157”). SFAS 157 simplifies and codifies guidance on fair value measurements
      under generally accepted accounting principles. This standard defines fair
      value, establishes a framework for measuring fair value and prescribes expanded
      disclosures about fair value measurements. SFAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years, with early adoption permitted. We
      are
      currently evaluating the effect, if any, the adoption of SFAS 157 will have
      on
      our financial statements, results of operations and cash flows.





25





**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 December
      31, 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 December 31, 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 depending on the
      outstanding balance of our secured borrowings.




Our
      sales
      during the nine months ended December 31, 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. Based
      on
      current production levels, every $.10 increase in casein prices results in
      an
      annual increase of over $400,000 in costs of goods sold.




**Item
      4. Controls and Procedures**





As
      of
      December 31, 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 December 31, 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.





26


**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 February 8, 2008, 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.





***If
      we terminate our Supply Agreement, we may be required to pay substantial
      penalties.***


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. Either
      penalty would have a material adverse affect on the liquidity and financial
      condition of our Company. We
      are in
      negotiations with Schreiber regarding an amendment to the existing Supply
      Agreement that would change, among other things, the initial term and the
      related penalties thereon.




***We
      may be required to pay substantial short-fall penalties under our Supply
      Agreement.***


The
      Supply Agreement with Schreiber 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 would 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 .





We
      may not have the ability to pay the required short-fall payment 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 .





We
      are in
      negotiations with Schreiber regarding an amendment to the existing Supply
      Agreement that would change, among other things, the production requirement
      and
      related short-fall penalty.




27





***The
      main ingredient in many of our products is subject to volatility and limited
      availability. Price increases for this commodity 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 have paid historically. Any of these events would
      negatively affect our business, results of operations and cash flows.





Additionally,
      due to a current worldwide shortage and a weaker US Dollar in relation to the
      Euro, the average price of casein increased more than 50% in our third quarter
      of fiscal 2008 compared to the average price in the first half of fiscal 2008.
      We anticipate that the average price of casein will increase another 33% or
      more
      in the fourth quarter of fiscal 2008. We
      recently implemented several strategic plans of action in an effort to at least
      partially minimize the negative effect of these anticipated casein price
      increases. These strategies include reducing promotional spending and consumer
      advertising and increasing customer pricing on certain affected product lines,
      as well as, reformulating existing products to reduce the amount of required
      casein and expanding and accelerating the roll-out of new products which do
      not
      require casein. Although we implemented these strategic plans of action, we
      anticipate that gross margins on a majority of our products will continue to
      decline for the remainder of fiscal 2008.  We further anticipate
      that gross margins as a percentage of net sales for fiscal 2008
      will be approximately four to eight percentage points lower than our
      fiscal 2007 annual average. Additionally, we anticipate that our income from
      operations will continue to be materially and adversely affected by the decline
      in gross margins.





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


As
      of
      February 8, 2008, 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 51% 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 February 8, 2008, we have a total of
      14,949,010 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 be required to repay our convertible note to Mr. DeLuca and may not have
      the
      ability to do so.***


Pursuant
      to a Note Purchase Agreement dated July 19, 2006 as modified on March 14, 2007,
      we issued a new unsecured convertible note for $2,685,104 (the “Convertible
      Note”) to Mr. Frederick A. DeLuca. The Convertible Note together with any
      accrued and unpaid interest thereon, is convertible at the election of Mr.
      DeLuca, at any time on or prior to October 19, 2008 into shares of our common
      stock at a conversion price of $0.35 per share. If Mr. DeLuca does not choose
      to
      convert this Convertible Note into stock and does not extend the maturity date
      of the Convertible Note, then we will be required to pay principal plus accrued
      interest thereon in the amount of $3,451,478 on October 19, 2008. With our
      current cash balances and the ability to borrow additional funds on our
      Commercial Finance Agreement, we have the ability to repay a substantial portion
      of this obligation, but it will not be enough to repay the entire amount owed.
      If Mr. DeLuca does not convert some or all of the Convertible Note or we do
      not
      repay, refinance or amend the existing Convertible Note, then our inability
      to
      pay would trigger a default. In addition to Mr. DeLuca pursuing remedies for
      collection of such indebtedness, interest would begin accruing at the rate
      of
      17.5%.




28





Additionally,
      a default on the Convertible Note would trigger a cross default in our
      Commercial Finance Agreement which can then be terminated by Commercial Finance.
      Any outstanding balance owed under the Commercial Finance Agreement could become
      immediately due and payable and bear interest at 12% in addition to other fees
      and penalties. Therefore, a default on the Convertible Note would have a material adverse affect on the
      liquidity and financial condition of our Company and we may not be able to
      continue as a going concern. Management will be initiating discussions with
      Mr.
      DeLuca regarding extending the maturity, refinancing and/or converting all
      or a
      portion of the Convertible Note into equity on or before its maturity in October
      2008, but there can be no assurances that we will be successful in our
      negotiations.





***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. The
      SEC has proposed a one-year extension for the auditor attestation requirement.
      If this proposal is approved, we will not be required to acquire an auditor
      attestation until our fiscal year ending March 31, 2010.





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.


29


**ITEM
      4.**  **Submission
      of Matters to a Vote of Security Holders**





We
      held
      our annual stockholder meeting on January 18, 2008. As of the record date on
      December 3, 2007, there were 17,110,016 shares of our common stock issued,
      outstanding and eligible to vote. In this meeting, the shareholders voted on
      and
      approved the following proposals:





1.
            To
                elect four directors for a term of one year each, until the next
                annual
                meeting of stockholders and until their successors are elected and
                qualify. The board members were voted in with the following number
                of
                votes for their election:




**Votes
                Cast**
            **Votes****Director**
            **FOR**
            **WITHHELD**David
                H. Lipka
            12,904,268
            659,131Michael
                E. Broll
            12,998,532
            564,867Peter
                J. Jungsberger
            13,015,294
            548,105Robert
                S. Mohel
            13,011,687
            551,712




2.
            To
                ratify the retention of Cross, Fernandez and Riley, LLP as the independent
                registered public accounting firm of the Company for the fiscal year
                ending March 31, 2008. The vote tabulation for this proposal was
                as
                follows: VOTES CAST FOR -13,433,438;
                VOTES CAST AGAINST - 104,609; ABSTENTIONS - 25,352; BROKER NON-VOTES
                -
                none.




**ITEM
      5.**  **Other
      Information**





On
      November 28, 2007, the Board, through a Written Unanimous Consent, amended
      ARTICLE VI, Section 1 as reported on Form 8-K filed on December 3, 2007. On
      February 6, 2008, the Board approved the Amended and Restated Bylaws of Galaxy
      Nutritional Foods, Inc. dated February 6, 2008 which is attached as Exhibit
      3.2
      of this Quarterly Report on Form 10-Q. This Amended and Restated Bylaws for
      our
      Company updated multiple sections, including the name of our Company,
      substantially rewrote Article V related to indemnification, and modernized
      the
      language from our prior bylaws dated May 15, 1987.





30


**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
              
              Amended
                  and Restated Bylaws of Galaxy Nutritional Foods, Inc. dated February
                  6,
                  2008 (*Filed
                  herewith.*)*
              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.)
  31
  *
              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.)
  32
  *
              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.)
  33
  10.44
              
              Third
                  Amendment to the Employment Agreement dated December 10, 2007 between
                  Galaxy Nutritional Foods, Inc. and Michael E. Broll (*Filed
                  herewith.*)10.45
              
              Stay,
                  Severance and Sales Bonus Plan effective December 10, 2007 (*Filed
                  herewith.*)*
              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.


34


**SIGNATURES**




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


**GALAXY NUTRITIONAL FOODS,
              INC.**Date: February 12, 2008
            
            
            /s/
                Michael E. BrollMichael
              E. BrollChief Executive
              Officer(Principal Executive
              Officer)Date: February 12, 2008
            
            
            /s/
                Salvatore J. FurnariSalvatore
              J. FurnariChief Financial
              Officer(Principal Accounting andFinancial
              Officer)


35