FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

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


                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002


                          -----------------------------
                         COMMISSION FILE NUMBER 0-16251

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


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

            2441 VISCOUNT ROW
             ORLANDO, FLORIDA                                 32809
  (Address of principal executive offices)                 (Zip Code)

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.    YES  X   NO
                                                 ---     ---

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

     On November 8, 2002, there were 12,131,295  shares of Common Stock $.01 par
value per share, outstanding.

<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

                               INDEX TO FORM 10-Q
                      FOR QUARTER ENDED SEPTEMBER 30, 2002

                                                                        PAGE NO.
                                                                        --------
PART I.   FINANCIAL INFORMATION

   ITEM 1. FINANCIAL STATEMENTS

     Balance Sheets                                                            3
     Statements of Operations                                                  4
     Statement of Stockholders' Equity                                         5
     Statements of Cash Flows                                                  6
     Notes to Financial Statements                                          7-12

   ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS                   13-20

   ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK         20

   ITEM 4. CONTROLS AND PROCEDURES                                            20

PART II.  OTHER INFORMATION

   ITEM 1. LEGAL PROCEEDINGS                                                  21

   ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                          21

   ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                    22

   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                22

   ITEM 5. OTHER INFORMATION                                                  22

   ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                   23

SIGNATURES & CERTIFICATIONS                                                   26

<PAGE>

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

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,     MARCH 31,
                                                                   2002            2002
                                                               ------------    ------------
                                                                (UNAUDITED)
<S>                                                            <C>             <C>
               ASSETS

CURRENT ASSETS:
   Cash                                                        $      1,673    $        168
   Trade receivables, net                                         4,940,825       5,283,187
   Inventories                                                    5,246,933       5,748,652
   Prepaid expenses and other                                       592,680         555,520
                                                               ------------    ------------

      Total current assets                                       10,782,111      11,587,527

PROPERTY AND EQUIPMENT, NET                                      23,329,032      24,180,636
OTHER ASSETS                                                        641,551         479,387
                                                               ------------    ------------

      TOTAL                                                    $ 34,752,694    $ 36,247,550
                                                               ============    ============


               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Book overdrafts                                             $    383,571    $  1,192,856
   Line of credit                                                 4,899,822       5,523,875
   Accounts payable                                               3,255,176       5,399,143
   Accrued liabilities                                            1,709,502         994,341
   Current portion of term notes payable                          2,035,436       1,809,000
   Current portion of subordinated note payable                   4,000,000              --
   Current portion of obligations under capital leases              391,363         349,380
                                                               ------------    ------------

      Total current liabilities                                  16,674,870      15,268,595

TERM NOTES PAYABLE, less current portion                          8,107,734       8,391,535
SUBORDINATED NOTE PAYABLE                                                --       3,385,770
OBLIGATIONS UNDER CAPITAL LEASES, less current portion              556,820         734,156
                                                               ------------    ------------

      Total liabilities                                          25,339,424      27,780,056
                                                               ------------    ------------

COMMITMENTS AND CONTINGENCIES                                            --              --

REDEEMABLE CONVERTIBLE PREFERRED STOCK                            2,222,258       2,156,311

STOCKHOLDERS' EQUITY:
   Common stock                                                     121,313         115,400
   Additional paid-in capital                                    59,840,075      60,717,914
   Accumulated deficit                                          (39,877,715)    (41,629,470)
                                                               ------------    ------------

                                                                 20,083,673      19,203,844
   Less: Notes receivable arising from the exercise of stock
         options and sale of common stock                       (12,772,200)    (12,772,200)
      Treasury stock, 26,843 shares, at cost                       (120,461)       (120,461)
                                                               ------------    ------------

      Total stockholders' equity                                  7,191,012       6,311,183
                                                               ------------    ------------

      TOTAL                                                    $ 34,752,694    $ 36,247,550
                                                               ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED               SIX MONTHS ENDED
                                         SEPTEMBER 30,                   SEPTEMBER 30,
                                 ----------------------------    ----------------------------
                                     2002            2001            2002            2001
                                 ------------    ------------    ------------    ------------
<S>                              <C>               <C>           <C>             <C>
NET SALES                        $ 10,117,995      11,372,764    $ 20,164,393    $ 23,174,433

COST OF GOODS SOLD                  7,047,230       9,547,698      14,283,734      18,169,634
                                 ------------    ------------    ------------    ------------
   Gross margin                     3,070,765       1,825,066       5,880,659       5,004,799
                                 ------------    ------------    ------------    ------------

OPERATING EXPENSES:
Selling                             1,401,342       1,895,611       2,459,673       3,516,096
Delivery                              511,954         570,362       1,083,516       1,212,621
Non-cash compensation related
   to options & warrants           (1,348,089)      2,051,638      (2,985,350)      3,629,267
General and administrative            747,243       1,589,994       1,588,749       2,410,541
Research and development               56,440          44,540         114,214          97,856
                                 ------------    ------------    ------------    ------------
   Total operating expenses         1,368,890       6,152,145       2,260,802      10,866,381
                                 ------------    ------------    ------------    ------------

INCOME (LOSS) FROM OPERATIONS       1,701,875      (4,327,079)      3,619,857      (5,861,582)

Interest expense                      969,630         689,844       1,868,102       1,397,112
                                 ------------    ------------    ------------    ------------

NET INCOME (LOSS)                $    732,245      (5,016,923)   $  1,751,755    $ (7,258,694)

Preferred Stock Dividends              70,000          87,500         140,000         534,400
Preferred Stock Accretion to
   Redemption Value                  (102,888)        789,377          74,697         667,491
                                 ------------    ------------    ------------    ------------

NET INCOME (LOSS) AVAILABLE TO
   COMMON SHAREHOLDERS           $    765,133    $ (5,893,800)   $  1,537,058    $ (8,460,585)
                                 ============    ============    ============    ============

BASIC NET INCOME (LOSS) PER
   COMMON SHARE                  $       0.06    $      (0.59)   $       0.13    $      (0.84)
                                 ============    ============    ============    ============

DILUTED NET INCOME (LOSS) PER
   COMMON SHARE                  $       0.06    $      (0.59)   $       0.13    $      (0.84)
                                 ============    ============    ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                Common Stock                                              Notes
                        ----------------------------    Additional      Accumulated   Receivable for     Treasury
                            Shares       Par Value   Paid-In Capital      Deficit      Common Stock        Stock           Total
                        ------------------------------------------------------------------------------------------------------------
<S>                       <C>           <C>            <C>             <C>             <C>             <C>             <C>
Balance at
   March 31, 2002         11,540,041    $    115,400   $ 60,717,914    $(41,629,470)   $(12,772,200)   $   (120,461)   $  6,311,183

Exercise of options            1,000              10          4,240              --              --              --           4,250
Issuance of common stock     586,773           5,868      2,304,159              --              --              --       2,310,027
Issuance of common stock
   under employee stock
   purchase plan               3,481              35          9,709                                                           9,744
Issuance of warrants              --              --         70,000              --              --              --          70,000
Non-cash compensation
   related to options
   under non-recourse
   note receivable                --              --     (3,060,000)             --              --              --      (3,060,000)
Dividends on
   preferred stock                --              --       (140,000)             --              --              --        (140,000)
Accretion of discount
   on preferred stock                                       (65,947)             --              --              --         (65,947)
Net income                        --              --             --       1,751,755              --              --       1,751,755
                        ------------------------------------------------------------------------------------------------------------

Balance at
   September 30, 2002     12,131,295    $    121,313   $ 59,840,075    $(39,877,715)   $(12,772,200)   $   (120,461)   $  7,191,012
                        ============================================================================================================
</TABLE>

                See accompanying notes to financial statements.

                                       5
<PAGE>

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,                                         2002            2001
                                                                   ------------    ------------
<S>                                                                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income (Loss)                                               $  1,751,755    $ (7,258,694)
   Adjustments to reconcile net income (loss) to net
    cash from (used in) operating activities:
      Depreciation and amortization                                   1,138,945       1,045,613
      Amortization of debt discount                                     614,230         204,744
      Provision for losses on trade receivables                         158,300         475,000
      Non-cash compensation related to options under
       non-recourse note receivable                                  (3,060,000)      3,621,143
      Amortization of consulting and director fee expense
       paid through issuance of common stock warrants                    74,650           8,124
      (Increase) decrease in:
         Trade receivables                                              184,062        (672,527)
         Inventories                                                    501,719       3,998,117
         Prepaid expenses and other                                     (37,160)         78,232
      Increase (decrease) in:
         Accounts payable                                              (953,465)     (2,342,338)
         Accrued liabilities                                            575,161         215,052
                                                                   ------------    ------------

   NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                  948,197        (627,534)
                                                                   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                  (192,578)       (371,439)
   Increase in other assets                                            (166,814)             --
                                                                   ------------    ------------

   NET CASH USED IN INVESTING ACTIVITIES                               (359,392)       (371,439)
                                                                   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Increase (decrease) in book overdrafts                              (809,285)        201,874
   Net payments on line of credit                                      (624,053)     (1,844,384)
   Borrowings on term note payable                                      500,000              --
   Repayments on term notes payable                                    (904,840)       (458,964)
   Principal payments on capital lease obligations                     (230,116)        (90,357)
   Proceeds from issuance of common stock, net of offering costs      1,476,744       3,017,745
   Proceeds from exercise of common stock options                         4,250          19,521
   Proceeds from issuance of preferred stock, net of costs                   --       2,900,959
                                                                   ------------    ------------

   NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                 (587,300)      3,746,394
                                                                   ------------    ------------

NET INCREASE IN CASH                                                      1,505       2,747,421

CASH, BEGINNING OF YEAR                                                     168             500
                                                                   ------------    ------------

CASH, END OF YEAR                                                  $      1,673    $  2,747,921
                                                                   ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       6
<PAGE>

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

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------
     The unaudited financial statements have been prepared by the Company, under
     the rules and  regulations of the Securities and Exchange  Commission.  The
     accompanying  financial statements contain all normal recurring adjustments
     which  are,  in  the  opinion  of   management,   necessary  for  the  fair
     presentation  of  such  financial   statements.   Certain  information  and
     disclosures  normally  included  in the  financial  statements  prepared in
     accordance with generally accepted accounting  principles have been omitted
     under such rules and  regulations  although the Company  believes  that the
     disclosures are adequate to make the information  presented not misleading.
     The  March  31,  2002  balance  sheet  data was  derived  from the  audited
     financial  statements,  but does not  include all  disclosures  required by
     accounting  principles  generally accepted in the United States of America.
     These unaudited financial statements should be read in conjunction with the
     financial  statements  and notes  included on Form 10-K for the fiscal year
     ended March 31,  2002.  Interim  results of  operations  for the  six-month
     period ended  September 30, 2002 may not  necessarily  be indicative of the
     results to be expected for the full year.

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

     Use of Estimates
     ----------------
     The  preparation  of financial  statements  in conformity  with  accounting
     principles  generally  accepted  in the United  States of America  requires
     management  to make  estimates  and  assumptions  that affect the  reported
     amounts of assets and liabilities  and disclosure of contingent  assets and
     liabilities at the date of the financial statements and reported amounts of
     revenues and expense during the reporting period. The Company's significant
     estimates  include the  allowance  for  doubtful  accounts  receivable  and
     valuation of deferred taxes and warrants.  Actual results could differ from
     those estimates.

     New Accounting Pronouncements
     -----------------------------
     In July 2002, the Financial  Accounting  Standards  Board  ("FASB")  issued
     Statement of Financial  Accounting  Standards  ("SFAS") No. 146 "Accounting
     for Costs Associated with Exit or Disposal  Activities," which is effective
     January 1, 2003.  SFAS 146 provides than an exit cost liability  should not
     always be recorded at the date of an entity's  commitment  to an exit plan,
     but instead should be recorded when the obligation is incurred. An entity's
     commitment to a plan, by itself,  does not create an obligation  that meets
     the definition of a liability. The Company does not expect SFAS 146 to have
     a material impact on its financial condition and results of operations.

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

     Segment Information
     -------------------
     The Company does not identify  separate  operating  segments for management
     reporting  purposes.  The  results  of  operations  are the  basis on which
     management evaluates operations and makes business decisions. The Company's
     sales are generated primarily within the United States of America.

(2)  INVENTORIES
     -----------
     Inventories are summarized as follows:

                                    September 30,  March 31,
                                        2002         2002
                                     ----------   ----------
                                    (UNAUDITED)
     Raw materials                   $2,704,513   $2,482,458
     Finished goods                   2,542,420    3,266,194
                                     ----------   ----------
     Total                           $5,246,933   $5,748,652
                                     ==========   ==========

                                       7
<PAGE>

(3)  LINE OF CREDIT AND NOTES PAYABLE
     --------------------------------
     As of September  30, 2002,  the Company had a line of credit with a maximum
     principal amount of $7.5 million from FINOVA Capital  Corporation  ("FINOVA
     Capital"),  the  proceeds of which are for working  capital  purposes.  The
     amount that the  Company can borrow  under the line of credit is based on a
     formula of up to 80% of eligible  accounts  receivable plus 50% of eligible
     inventories not to exceed $3 million, as defined in the agreement. Pursuant
     to a certain Amendment and Limited Waiver to Security  Agreement dated June
     26, 2002, the inventory  advance rate  decreases by 1% per month  beginning
     July 1,  2002 from a level of 50% at June 30,  2002 to 37% by the  maturity
     date (47% at  September  30,  2002).  The line of credit is  secured by all
     accounts  receivable,   inventory,  machinery,  equipment,  trademarks  and
     patents  owned  by  the  Company.   Interest  is  payable  monthly  on  the
     outstanding  draws  on the line of  credit  at a rate of  prime  plus  four
     percent  (8.75% at September 30, 2002).  The line of credit expires on July
     1, 2003, at which time the entire outstanding  principal amount of the line
     of credit, and all accrued but unpaid interest thereon,  is due and payable
     in full. As of September 30, 2002, the Company had an  outstanding  balance
     of $4,899,822 under this line.

     On September 30, 1999, the Company obtained a $4 million  subordinated loan
     from FINOVA  Mezzanine  Capital,  Inc.  ("FINOVA  Mezzanine").  The Company
     received loan proceeds in the amount of $3,620,000  after paying loan costs
     of  $380,000.   Amounts  outstanding  under  the  loan  are  secured  by  a
     subordinated  lien on substantially  all of the Company's assets. A balloon
     payment of the entire  principal  amount of the loan,  and all  accrued but
     unpaid interest thereon,  is due upon maturity on July 1, 2003. Interest on
     the loan is payable monthly at a rate of 15.5% per annum. In  consideration
     of the loan, the Company  issued to FINOVA  Mezzanine a warrant to purchase
     915,000  shares  of our  common  stock  (of  which  100,000  shares  remain
     unexercised) at an exercise price of $3.41 per share which  represented 80%
     of the fair  value of our stock on the date the  warrant  was  issued.  The
     warrant was valued at $786,900  which was  recorded as a debt  discount and
     was amortized to interest  expense from the date of issuance of the note to
     an  original  earlier  maturity  date of the note in  October  2002.  As of
     September  30, 2002,  this  discount  has been fully  amortized to interest
     expense and the Company had an outstanding balance of $4,000,000 under this
     loan.

     The line of credit and  subordinated  loan described  above contain certain
     financial  and  operating  covenants.  In June 2002,  the Company  notified
     FINOVA  Capital and FINOVA  Mezzanine that it had failed to comply with the
     minimum  operational  cash flow to  contractual  debt service ratio and the
     funded  debt  to  EBITDA  ratio.  FINOVA  Capital  agreed  to  waive  those
     violations  for the fiscal year ended March 31, 2002 and the fiscal quarter
     ended June 30,  2002 and to amend such  covenants  for the fiscal  quarters
     beginning July 1, 2002,  pursuant to a certain Amendment and Limited Waiver
     to Security  Agreement dated June 26, 2002. FINOVA Mezzanine also agreed to
     waive the  violations  of its covenants for the fiscal year ended March 31,
     2002 and the  fiscal  quarter  ended  June  30,  2002,  and to amend  those
     covenants for future fiscal quarters  pursuant to a letter  agreement dated
     June 26, 2002 and amendments to the subordinated notes. In consideration of
     the waivers and covenant  amendments,  the Company agreed to pay a facility
     fee of  $413,500,  which was  deemed  fully  earned on June 26,  2002.  The
     facility  fee is payable as  follows:  $172,500  is due and  payable on the
     earliest of (a) July 1, 2003, (b) the occurrence of an event of default, or
     (c) the date on which the Company  repays either all of the  obligations to
     FINOVA  Capital  under the Loan  Agreement or any portion of the  principal
     obligations to FINOVA  Mezzanine under the FINOVA Mezzanine loan documents,
     with the balance of $241,000 due and payable  only upon FINOVA  Mezzanine's
     exercise of its remaining 100,000  warrants.  The Company was in compliance
     with all revised covenants for the quarter ended September 30, 2002.

     In March 2000, the Company obtained a $10 million term loan from SouthTrust
     Bank,  N.A. This note bears  interest at prime rate (4.75% at September 30,
     2002)  and  is  due in  monthly  principal  installments  of  $93,000  plus
     interest. In a letter agreement dated September 27, 2002, the bank deferred
     the four principal payments, due in June 2002 through September 2002, until
     the  maturity  of the note.  The note  matures in March  2005.  The balance
     outstanding on this note as of September 30, 2002 was $8,593,734. This term
     loan is secured by certain machinery and equipment.

     In  October  2000,  the  Company's  president  guaranteed  a  $1.5  million
     short-term  bridge  loan that it obtained  from  SouthTrust  Bank,  N.A. by
     pledging one million of his shares of the Company's  common stock to secure
     the loan.  Interest on this note is at the prime rate  (4.75% at  September
     30,  2002).  The loan is being paid down by monthly  principal  payments of
     $50,000 plus interest.  In a letter agreement dated September 27, 2002, the
     bank  deferred  the  four  principal  payments,  due in June  2002  through
     September 2002, until the maturity of the note. The note matures in October
     2003.  The balance  outstanding  on this note as of September  30, 2002 was
     $900,000.

                                       8
<PAGE>

     The term loan and the short-term  bridge loan from  SouthTrust  Bank,  N.A.
     contain  certain  financial  and  operating  covenants.  The Company was in
     violation of all  financial  covenants at March 31, 2002. On June 27, 2002,
     the Company received a waiver for the year ended March 31, 2002 and for all
     future periods through July 1, 2003.

     In March 2002,  Angelo Morini,  the Company's Chief  Executive  Officer and
     President,  obtained  a  personal  home  equity  line of credit  and loaned
     $330,000 to the Company in order for it to pay down certain  notes  payable
     that were coming due. This loan bears interest at prime (4.75% at September
     30, 2002) and is due on or before June 15, 2006.

     On June 26,  2002,  the  Company  signed a  $550,000  promissory  note with
     Excalibur Limited Partnership, one of the holders of the Company's Series A
     Preferred Stock. In consideration of the note, the Company issued Excalibur
     Limited  Partnership  a warrant to purchase  30,000 shares of Common Stock,
     which are  exercisable  until June 26,  2007 at a price  equal to $5.50 per
     share. This note was non-interest bearing assuming that it was repaid on or
     before July 26,  2002.  This note was  secured by 250,000  shares of Common
     Stock owned by the Angelo S. Morini,  the Company's Chief Executive Officer
     and President.  In consideration  of his guarantee and related pledge,  the
     Company  granted Mr.  Morini  stock  options to acquire  289,940  shares of
     Common  Stock at an  exercise  price of $5.17  (110% of market)  per share.
     These  options have  subsequently  been repriced to $2.05 (See Note 9), and
     shall expire on July 1, 2007. On June 26, 2002,  the Company  received loan
     proceeds  in the amount of  $500,000 in cash.  The  additional  $50,000 was
     retained by Excalibur  Limited  Partnership as payment for consulting  fees
     due to  Excalibur  Limited  Partnership  in  accordance  with a  consulting
     agreement  entered into on June 26, 2002,  which expires December 31, 2002.
     This  note was paid in full on June  28th from  proceeds  derived  from the
     issuance of common stock as discussed in Note 5.

     On August 15,  2002,  the Company  signed a $347,475  promissory  note with
     Target Container,  Inc. in satisfaction of its accounts payable  obligation
     to this  vendor.  This note  bears  interest  at 7% per annum and is due in
     twelve equal monthly  installments of $30,066.  The balance  outstanding on
     this note as of September 30, 2002 was $319,436.

(4)  COMMITMENTS AND CONTINGENCIES
     -----------------------------
     On May 17,  2002,  Schreiber  Foods,  Inc. of Green Bay  Wisconsin  filed a
     lawsuit  against the Company in the federal  district court for the Eastern
     District of  Wisconsin  ("Wisconsin  lawsuit"),  being Case No.  02-C-0498,
     alleging various acts of patent  infringement.  The Complaint  alleges that
     the  Company's   machines  for  wrapping  of  individual   cheese   slices,
     manufactured by Kustner Industries, S.A. of Switzerland, known as models KE
     and KD, and the  Company's  machines  for  producing  individually  wrapped
     slices  manufactured  by Hart Design  Mfg.,  Inc. of Green Bay,  Wisconsin,
     infringe  unspecified claims of U.S. Patents Nos. 5,440,860,  5,701,724 and
     6,085,680. Additionally, the Complaint refers to U.S. Patent No. 5,112,632,
     but it does not explicitly allege infringement of that patent;  because the
     case is in the earliest  stages,  there has not yet been an  opportunity to
     determine  whether  Schreiber  Foods  intends  to  pursue   allegations  of
     infringement of the 5,112,632  Patent against the Company.  Schreiber Foods
     is seeking a preliminary and permanent  injunction  prohibiting the Company
     from further  infringing  acts and is also seeking damages in the nature of
     either lost profits or reasonable royalties.

     On or about  July 10,  2002,  the  Company  filed a Motion to  Dismiss  the
     Wisconsin  lawsuit on the grounds that  Schreiber  Technologies,  Inc., not
     Schreiber  Foods,  is the owner of the asserted  patents.  Also on July 10,
     2002, the Company filed a Declaratory  Judgment  action  against  Schreiber
     Technologies, Inc. in the federal court for the Middle District of Florida,
     being case No.  02-CV-784,  seeking a declaration that the Company does not
     infringe   these   patents   and/or   that  the  patents  are  invalid  and
     unenforceable.  Schreiber Foods has opposed the Motion to Dismiss  claiming
     that it reacquired  ownership of the patents.  Schreiber  Technologies  has
     moved to  dismiss  the  Florida  action  claiming  that it does not own the
     patents.

     The  Company  is not in a  position  at this time to  express a view on the
     likelihood  that it will  succeed  in its  position,  nor in the  amount of
     damages that might be awarded  against it should it be unsuccessful in that
     regard.

(5)  CAPITAL STOCK
     -------------
     On April 6, 2001, in accordance with an exemption from  registration  under
     Regulation D promulgated under the Securities Act of 1933, as amended,  the
     Company  received  proceeds  of  approximately  $3,082,000  less  costs  of
     $181,041  for the  issuance  of  72,646  shares of the  Company's  Series A
     convertible  preferred  stock  and  warrants  to  purchase  shares  of  the
     Company's  common  stock.  The shares are subject to certain  designations,
     preferences and rights, including the right to convert each preferred share
     into ten shares of common stock,  the right to a ten percent stock dividend
     after one year of issuance  payable in shares of  preferred  stock,  and an
     eight percent stock dividend for

                                       9
<PAGE>

     the subsequent three years  thereafter  payable in either cash or shares of
     preferred  stock.  The per share conversion price is the lower of (x) $4.08
     or (y) 95% of the  average  of the two  lowest  closing  bid  prices on the
     American Stock Exchange of the common stock out of the fifteen trading days
     prior to conversion.  The liquidation preference of each preferred share is
     $48.18 plus accrued dividends ($54.93 at September 30, 2002).

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

     For the six months  ended  September  30,  2002 and 2001,  the  Company has
     recorded accrued  dividends of $140,000 for the 8% preferred stock dividend
     and  $175,000  for the  10%  preferred  stock  dividend,  respectively,  in
     connection  with the  issuance of the  preferred  stock and  warrants.  The
     Company recorded a discount on preferred stock of $2,003,770 related to the
     beneficial conversion feature  ($1,449,370),  the fair value of the initial
     warrants  ($277,200) and redemption  warrants ($277,200) and the fair value
     of the mandatory  redemption  price.  The excess of the initial  redemption
     value of  $4,391,861  over  the  initial  carrying  value  of  $523,830  is
     $3,868,031  and is  being  accreted  and  recorded  as  dividends  over the
     redemption  period (48 months beginning April 2001) using the straight line
     method, which approximates the effective interest method. In addition,  the
     redemption  value is  recalculated  every  quarter  based on changes in the
     Company's stock price. The resulting change in the redemption value is then
     added to or subtracted  from the $3,868,031  initial amount to be accreted.
     For the six months ended September 30, 2002 and 2001, the Company  recorded
     $74,697 and $667,491,  respectively,  related to the beneficial  conversion
     feature of accrued  dividends and the accretion of the redemption  value of
     preferred  stock.  As of September  30, 2002,  the value of the  redeemable
     convertible preferred stock is $2,222,258.

     In accordance  with Regulation D and pursuant to a certain Common Stock and
     Warrants  Purchase  Agreement dated June 28, 2002, the Company sold 367,647
     shares of Common Stock on June 28, 2002 for $4.08 (85% of an average market
     price) and issued warrants to purchase  122,549 shares of Common Stock at a
     price  equal to $5.52  per share to  Stonestreet  Limited  Partnership.  In
     connection  with such sale, the Company issued 7,812 shares of Common Stock
     to  Stonestreet  Corporation  and  4,687  shares  of  Common  Stock  to H&H
     Securities Limited in exchange for their services as finders. Per the terms
     of the agreement,  the Company received net proceeds of $930,000, after the
     repayment  of a $550,000  promissory  note dated June 26,  2002 in favor of
     Excalibur  Limited  Partnership  and  payment  of $20,000  for  Stonestreet
     Limited  Partnership's  costs and expenses related to the purchase of these
     shares of Common Stock.

     In accordance  with Section 4(2) of the Securities Act of 1933, as amended,
     and pursuant to a Food Service Brokerage Agreement dated June 25, 2002, the
     Company  issued  141,221  shares  of  Common  Stock  for $4.08 per share on
     September  9, 2002 to  certain  food  brokers  in  consideration  for prior
     services rendered valued at $576,179.

     In accordance  with Section 4(2) of the Securities Act of 1933, as amended,
     and pursuant to a Securities  Purchase Agreement dated August 27, 2002, the
     Company  issued  65,404  shares  of  Common  Stock  for  $4.08 per share in
     settlement of an outstanding payable to Hart Design and Manufacturing, Inc.
     in the amount of $266,848.

(6)  RELATED PARTY TRANSACTIONS
     --------------------------
     In March 2002,  Angelo Morini,  the Company's Chief  Executive  Officer and
     President,  obtained  a  personal  home  equity  line of credit  and loaned
     $330,000 to the Company in order for it to pay down certain  notes  payable
     that were coming due. This loan bears interest at prime (4.75% at September
     30,  2002) and is due on or  before  June 15,  2006.  On May 24,  2002,  in
     consideration  of this  personal  loan  to the  Company  and his  continued
     guarantee and related  pledge of one million of his shares of the Company's
     common  stock for the loan with  SouthTrust  Bank,  N.A.  (See Note 3), the
     Company  granted Mr.  Morini stock options to acquire  1,163,898  shares of
     Common  Stock at an  exercise  price of $5.72  (110% of market)  per share.
     These  options have  subsequently  been repriced to $2.05 (See Note 9), and
     shall expire on May 24, 2012.

     On July 1, 2002, in  consideration of his guarantee and related pledge on a
     $550,000  promissory note with Excalibur Limited  Partnership (See Note 3),
     the Company  granted Mr. Morini stock options to acquire  289,940 shares of
     Common  Stock at an  exercise  price of $5.17  (110% of market)  per share.
     These  options have  subsequently  been repriced to $2.05 (See Note 9), and
     shall expire on July 1, 2007.

                                       10
<PAGE>

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

<TABLE>
<CAPTION>
                                                            Three months ended               Six months ended
                                                               September 30,                   September 30,
                                                       ----------------------------    ----------------------------
                                                           2002            2001            2002            2001
                                                       ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>
     Net income (loss) available to common
       shareholders                                    $    765,133    $ (5,893,800)   $  1,537,058    $ (8,460,585)
                                                       ============    ============    ============    ============

     Weighted average shares outstanding - basic         11,978,691      10,048,447      11,764,984      10,033,874
       "In-the-money" shares under stock option
        agreements                                        1,420,502              --       1,792,771              --
       "In-the-money" shares under stock warrant
        agreements                                          245,000              --         335,429              --
     Less: Shares assumed repurchased under treasury
       stock method                                      (1,544,310)             --      (1,677,333)             --
                                                       ------------    ------------    ------------    ------------

     Weighted average shares outstanding - diluted       12,099,883      10,048,447      12,215,851      10,033,874
                                                       ============    ============    ============    ============

     Basic net income (loss) per common share          $       0.06    $      (0.59)   $       0.13    $      (0.84)
                                                       ============    ============    ============    ============

     Diluted net income (loss) per common share        $       0.06    $      (0.59)   $       0.13    $      (0.84)
                                                       ============    ============    ============    ============
</TABLE>

     Potential  conversion  of Series A preferred  stock for  1,359,660  shares,
     options for  2,872,220  and  2,499,951  shares and warrants for 410,570 and
     320,141  shares have not been  included in the  computation  of diluted net
     income (loss) per common share for the three and six months ended September
     30, 2002,  respectively,  as their effect would be antidilutive.  Potential
     conversion  of Series A  preferred  stock for 710,420  shares,  options for
     2,781,845 shares,  and warrants for 1,050,214 shares have not been included
     in the  computation  of diluted net income  (loss) per common share for the
     three and six months ended  September  30,  2001,  as their effect would be
     antidilutive.

(8)  SUPPLEMENTAL CASH FLOW INFORMATION
     ----------------------------------
     For purposes of the statement of cash flows, all highly liquid  investments
     with a  maturity  date of three  months or less are  considered  to be cash
     equivalents.

<TABLE>
<CAPTION>
          Six months ended September 30,                                       2002         2001
     ----------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>
          Non-cash financing and investing activities:
          Amortization of consulting and directors fees paid through
             issuance of common stock warrants                              $   74,650   $    8,124
          Purchase of equipment through capital lease obligations and
             term notes payable                                                 94,763           --
          Reduction in accounts payable through issuance of notes payable      347,475           --
          Reduction in accounts payable through issuance of common
             stock                                                             843,027           --
          Discount related to preferred stock                                       --    2,020,734

          Accrued preferred stock dividends                                    140,000      175,000
          Beneficial conversion feature related to preferred stock
             dividends                                                           8,750       45,400
          Accretion of discount on preferred stock                              65,947      622,091
          Preferred dividends recorded for preferred
             shareholder waiver received in exchange for
             issuance of common stock                                               --      359,400

          Cash paid for:
          Interest                                                           1,317,039    1,203,820
          Income taxes                                                          51,037           --
</TABLE>

                                       11
<PAGE>

(9)  SUBSEQUENT EVENTS
     -----------------
     On October 11, 2002 through  unanimous  consent of the Board of  Directors,
     the Company repriced all outstanding  options granted to employees prior to
     this date (4,284,108  shares at former prices ranging from $2.84 to $10.28)
     to the market price of $2.05 per share. In addition,  the Company  repriced
     the  outstanding  warrants held by current  consultants  prior to this date
     (291,429 shares at former prices ranging from $3.31 to $5.50) to the market
     price of $2.05 per  share.  This  stock  option  repricing  will  result in
     variable  accounting  treatment for these stock options in future  periods.
     Variable  accounting  treatment  will result in  unpredictable  stock-based
     compensation  expense or income  depending on fluctuations in quoted prices
     for the  Company's  common  stock.  Assuming  no  options or  warrants  are
     exercised or canceled,  a $0.01 increase in the Company's  stock price will
     result in a non-cash compensation expense of approximately $46,000.

                                       12
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

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

The following  discussion and analysis  should be read in  conjunction  with the
Financial  Statements and Notes thereto appearing  elsewhere in this report. The
following  discussion contains certain  forward-looking  statements,  within the
meaning of the "safe-harbor"  provisions of the Private Securities Reform Act of
1995, the attainment of which involves  various risks and  uncertainties.  These
forward-looking statements are based on our current expectations,  estimates and
projections  about our industry,  management's  beliefs and certain  assumptions
made  by  us.  Forward-looking  statements  may  be  identified  by  the  use of
forward-looking   terminology  such  as  "may",  "will",  "expect",   "believe",
"estimate",  "anticipate",  "continue",  or similar  terms,  variations of these
terms or the negative of those terms.  These  statements  are not  guarantees of
future  performance  and  are  subject  to  certain  risks,   uncertainties  and
assumptions  that are difficult to predict.  Therefore,  our actual  results may
differ materially from those described in these  forward-looking  statements due
to among other  factors,  competition  in our  product  markets,  dependence  on
suppliers,   our   manufacturing   experience,    and   production   delays   or
inefficiencies.   We   undertake   no   obligation   to  update   publicly   any
forward-looking  statements  for any  reason,  even if new  information  becomes
available or other events occur in the future.

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

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 revenues and expense during the
reporting period. The Company's  significant estimates include the allowance for
doubtful  accounts  receivable  and  valuation of deferred  taxes and  warrants.
Actual results could differ from those estimates.

The Company records revenue upon shipment of products to its customers and there
is reasonable  assurance of collection on the sale. It provides  credit terms to
customers  usually based on net 30 days.  The Company  performs  ongoing  credit
evaluations of its accounts receivable and makes reserves for anticipated future
credits that will be issued to its customers for promotions,  discounts, spoils,
etc., based on historical  experience.  In addition,  the Company  evaluates the
accounts  for  potential   uncollectible   amounts.  The  reserve  for  accounts
receivable is then adjusted to reflect  these  estimates.  At September 30, 2002
and March 31, 2002, the Company had reserved approximately $815,000 and $678,000
for known and anticipated future credits and doubtful  accounts.  During the six
months ended  September  30, 2002 and 2001,  the Company  recorded  $158,300 and
$475,000,  respectively,  of expense  related to anticipated  future credits and
doubtful accounts.

Inventories  are  valued  at  the  lower  of  cost  (weighted   average,   which
approximates FIFO) or market.  The Company reviews its inventory  valuation each
month  and  writes  down  the  inventory  for  potential  obsolete  and  damaged
inventory.  In addition, the inventory value is reduced to market value when the
known sales price is less than the cost of the inventory.

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.

Statement of Financial Accounting Standards No. 123 ("FAS 123"),  Accounting for
Stock Based Compensation, requires the Company to report compensation expense on
warrants issued to non-employees for services  rendered,  in accordance with the
fair value based method  prescribed  in FAS 123. The Company  estimates the fair
value  of  each  warrant  based  on the  expected  vesting  due  to  performance
requirements  set forth in the  warrant  or  service  agreement  and life of the
warrant  by  using a  Black-Scholes  option-pricing  model  with  the  following
assumptions used in the fiscal 2003 option-pricing

                                       13
<PAGE>

model: no dividend yield, 37% volatility,  risk-free interest rate of 4.06%, and
expected  lives of five years.  Assumptions  used for grants in fiscal 2002:  no
dividend yield, 38% volatility,  risk-free interest rate ranging from 4.75%, and
expected lives of ten years.

RESULTS OF OPERATIONS

During  fiscal year 2000,  the  Company  experienced  increasing  demand for its
products but was unable to fill all of the orders it received due, in part, to a
lack of  production  capacity.  During  the latter  part of fiscal  2001 and the
beginning of fiscal 2002,  the Company  significantly  increased its  production
capacity by purchasing and installing  additional  production  equipment for six
new  production  lines that included two slice lines, a chunk cheese line, a cup
line, a string cheese line, and a shred line. This equipment enables the Company
to produce new products,  improve product  quality,  and increase the production
volume of existing  products.  The  installation  of the  equipment  was delayed
significantly  due to late shipments by manufacturers  and problems  configuring
the machines to meet the manufacturing needs of our unique line of products, but
was completed by September  2001.  Because of the delays in the  installation of
the equipment, the Company experienced excess overhead costs and downtime during
the first and second quarters of fiscal 2002,  which resulted in increased costs
and reduced cash flows for those periods.  Additionally,  although a substantial
portion of the purchase price and installation costs incurred in connection with
the new equipment was financed  through a loan  obtained from  SouthTrust  Bank,
N.A., the Company used nearly all of the excess cash that the Company had at the
time to purchase  and install the new  equipment.  As a result of the large cash
outlays related to this expansion along with the delays in new product shipment,
the Company experienced  shortfalls in cash that affected nearly every aspect of
its  operations  in fiscal  2002.  In fiscal  2003,  the Company has returned to
positive cash flow levels through efficiencies in production, purchase discounts
and  additional  cost  reductions.  All  excess  cash has  been  put  back  into
operations to improve the Company's operations and financial position.

NET SALES  were  $10,117,995  in the three  months  ended  September  30,  2002,
compared to net sales of  $11,372,764  for the three months ended  September 30,
2001, a decrease of 11%. The Company  experienced an overall decrease of 13% for
the first six months of fiscal 2003  compared to the same period in fiscal 2002.
Although  sales in fiscal 2003 is a decrease  from the sales levels in the first
half of fiscal 2002,  the sales are at the same level  (approx.  $10 million) as
they were for the fourth  quarter ended fiscal 2002. The decrease in fiscal 2003
sales compared to fiscal 2002 is attributed to the significant reduction in cash
flows in fiscal 2002 as described  above.  As a result of the cash shortages and
short shipments,  the Company made a strategic  product mix decision and decided
to focus on its  higher-margin  brand name  products  under the Veggie brand and
turn away  certain  private  label  business.  While  demand  for the  Company's
products and private  label  business  continues  to increase,  sales growth was
maintained at lower levels so that the Company can grow profitably.

COSTS OF GOODS SOLD were $7,047,230  representing 70% of net sales for the three
months ended  September 30, 2002,  compared with  $9,547,698 or 84% of net sales
for the same period ended  September 30, 2001.  These costs  represented 71% and
78% of net sales for the six months ended September 2002 and 2001, respectively.
There was an overall decrease in costs of $3,885,900 in the six months of fiscal
2003  compared  to  fiscal  2002.  This  decrease  in direct  materials  cost is
primarily  the result of several  factors:  (a) a  decrease  of $2.4  million in
proportion to the decrease in sales,  (b) the completed  installation of the new
equipment in fiscal 2002 resulted in an increase of $186,000 in depreciation and
personal property taxes in the first half of fiscal 2003.  However,  in response
to the  additional  efficiencies  that the new equipment is now  providing,  the
Company  substantially  decreased  the number of  production  personnel  late in
fiscal  2002,  which  caused  labor-related  expenses to decrease  approximately
$886,000  in the first  quarter of fiscal  2003,  (c) a decrease  of $600,000 in
inventory write-offs.  In the second quarter of fiscal 2002, the Company changed
its production focus by scaling back its product mix to 200 core items that made
up nearly 98% of sales. As a result of the change in focus, the Company provided
for a $600,000 reserve for potential obsolete and slow moving inventory; and (d)
a decrease of $200,000 in raw material costs due to improved  vendor  relations,
lower raw material costs and purchase discounts. Now that the equipment is fully
operational and the labor crews are trained,  the Company is seeing improved run
rates with more,  high-quality product produced per hour. This resulted in gross
margin increasing from the annual rate of 19% in fiscal 2002 to 29% in the first
six  months  of  fiscal  2003.  The  Company  expects  that  with its  increased
efficiencies  in labor,  production and purchasing  along with tight controls on
product mix, it will continue to sustain its improved margins in fiscal 2003.

SELLING  expenses were  $1,401,342  and  $2,459,673 for the three and six months
ended September 30, 2002, respectively,  compared with $1,895,611 and $3,516,096
for the three and six months ended September 30, 2001, respectively,  a decrease
of 26% and 30% in the  respective  periods.  The  decrease in expenses is due to
further reductions in advertising

                                       14
<PAGE>

and promotional  expenses of  approximately  $709,000 in the first six months of
fiscal 2003 compared to the same period in fiscal 2002. In 2002, more promotions
were  directed  to provide  incentives  to our direct  customers  for brand item
purchases.  In addition, the Company experienced a decrease  (approximately 13%)
in brokerage  and salary costs  proportional  to the decrease in net sales and a
decrease in travel costs in excess of $104,000.  The Company expects that fiscal
2003  selling  expenses  will  continue to remain at levels below that of fiscal
2002  expenses  based  on  the  Company's   current  plan  for  advertising  and
promotional  allowances  that are  granted on volume  purchases  rather  than on
individual item discounts.

DELIVERY  expenses  were  $511,954 and  $1,083,516  for the three and six months
ended  September 30, 2002,  respectively,  compared with $570,362 and $1,212,621
for the same periods ended September 30, 2001. Delivery expenses  approximate 5%
of net sales each  period.  The  decrease  in  delivery  costs is  primarily  in
proportion to the decrease in net sales.

NON-CASH  COMPENSATION  RELATED  TO  OPTIONS  AND  WARRANTs  showed an income of
$1,348,089 and $2,985,350 for the three and six months ended September 30, 2002,
respectively,  compared to an expense of $2,051,638 and $3,629,267 for the three
and six months ended September 30, 2001, respectively.  The Financial Accounting
Standards  Board issued  Interpretation  No. 44 ("FIN 44"),  which clarifies the
application of APB Opinion 25 relating to the accounting consequences of various
modifications  to fixed  stock  options.  FIN 44  states  that when an option is
repriced,  it is  treated  as a  variable  option  and is marked to market  each
quarter.  In  accordance  with FIN 44,  the  underlying  options  related to the
$12,772,200 note receivable from Angelo S. Morini, the Company's Chief Executive
Officer and  President,  are  treated as variable  due to the nature of the note
being a non-interest bearing and non-recourse note. Accordingly, any differences
between the  exercise  price of the options  ($4.38) and the market price of the
Company's  common  stock is recorded as  compensation  income or expense at each
reporting  period.  During the six months ended  September 30, 2002,  the market
value of the Company's  stock decreased from $5.43 at March 31, 2002 to $3.14 at
September 30, 2002. Therefore, the Company recorded a $3,060,000 decrease in the
compensation  related  to this  decrease  in stock  value to the floor of $4.38.
Additionally,  the Company  recorded a $74,650 expense related to the fair value
of  warrants  issued  for  consulting  services.  During  the six  months  ended
September 30, 2001, the market value of the Company's stock increased from $4.76
at March  31,  2001 to $6.00 at  September  30,  2001.  Therefore,  the  Company
recorded a $3,629,267  increase in the compensation  related to this increase in
stock value. Additionally, the Company recorded an $8,124 expense related to the
fair value of warrants issued for consulting services.  Due to the volatility of
the market price of the Company's  common  stock,  it is incapable of predicting
whether this expense will increase or decrease in the future.  A $0.01  increase
or decrease in the Company's common stock price results in an expense or income,
respectively, of $29,143.

On October 11, 2002 through  unanimous  consent of the Board of  Directors,  the
Company repriced all outstanding options granted to employees prior to this date
(4,284,108  shares at former prices  ranging from $2.84 to $10.28) to the market
price of $2.05 per share.  In addition,  the Company  repriced  the  outstanding
warrants  held by  current  consultants  prior to this date  (291,429  shares at
former  prices  ranging  from $3.31 to $5.50) to the  market  price of $2.05 per
share. This stock option repricing will result in variable accounting  treatment
for these stock options in future periods.  Variable  accounting  treatment will
result in unpredictable  stock-based compensation expense or income depending on
fluctuations  in quoted  prices for the  Company's  common  stock.  Assuming  no
options or warrants are exercised or canceled, a $0.01 increase in the Company's
stock  price will  result in a non-cash  compensation  expense of  approximately
$46,000.


GENERAL AND  ADMINISTRATIVE  expenses were $747,243 and $1,588,749 for the three
and six months ended September 30, 2002, respectively,  compared with $1,589,994
and  $2,410,541  for the same periods  ended  September  30, 2001, a 53% and 34%
respective  decrease.  The decrease was  primarily due to a decrease in bad debt
expense and personnel  costs in 2003 along with a general  reduction in standard
administrative  expenses due to cost cutting measures  implemented at the end of
fiscal 2002.

RESEARCH AND  DEVELOPMENT  expenses  were $56,440 and $114,214 for the three and
six months ended  September  30, 2002,  respectively,  compared with $44,540 and
$97,856 for the three and six months ended September 30, 2001,  respectively,  a
27% and 17%  respective  increase.  This  increase is primarily  the result of a
change in the  allocation  of general  overhead  costs to this  department.  The
Company expects that these expenses will remain at this level throughout  fiscal
2003.

INTEREST  expense  increased  $470,990  or 34% in the first six months of fiscal
2003 compared to the first six months of fiscal 2002. This increase was $279,786
or 41% for the three  months  ended  September  30,  2002  compared to the three
months ended September 30, 2001. On September 30, 1999, the Company entered into
a  $4,000,000  subordinated  note payable with FINOVA  Mezzanine  Capital,  Inc.
("FINOVA Mezzanine"). This debt currently bears interest at a rate of

                                       15
<PAGE>

15.5% and includes an original issuance discount of $786,900, which is amortized
as  interest  expense  over the term of the  debt.  In  connection  with  FINOVA
Mezzanine's  warrant  exercise and transfer of 815,000  shares of the  Company's
Common Stock, the Company agreed to guarantee the price at which the shares were
sold to the  public at $4.41 per  share.  The actual  price  received  by FINOVA
Mezzanine  was $3.25 per share and the  difference of $945,400 was recorded as a
debt discount and is being amortized over the remaining term of the subordinated
note.  During the six months  ended  September  30, 2002 and 2001,  $614,230 and
$204,743,  respectively,  of the total debt discount of $1,732,300 was amortized
to interest expense.  This non-cash  amortization  increased by $409,487 because
the period of this loan was shortened by FINOVA  Mezzanine in a waiver issued in
November  2001.  In  addition,  the loan  fees  amortized  to  interest  expense
increased  approximately $303,000 during the six months ended September 30, 2002
due to additional loan costs and the shortened loan periods. The increase in the
above mentioned  amortization was offset by a decrease of approximately $242,000
in  interest  expense  as a result of lower debt  balances  during  fiscal  2003
compared to fiscal 2002.  See "Debt  Financing"  below for further detail on the
Company's outstanding debts and interest rates thereon.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING  ACTIVITIES - Net cash from operating  activities was $948,197 for the
six months ended  September  30, 2002  compared to net cash used of $627,534 for
the same period ended  September 30, 2001. The increase in cash from  operations
is  primarily  attributable  to a net income of  $1,751,755  reduced by non-cash
items of $1,073,875  (or  $677,880)  evidencing  the improved  gross margins and
reduction  in cash  operating  expenditures  in fiscal  2003 along with  further
reductions in inventory  levels.  In fiscal 2002, the Company used a significant
portion of its cash to  decrease  its  amounts  payable  to vendors  and to fund
operating losses.

INVESTING  ACTIVITIES - Net cash used in investing  activities  totaled $359,392
for the six  months  ended  September  30,  2002  compared  to net cash  used of
$371,439  for the same  period  ended  September  30,  2001.  The cash  used for
investing  activities  during fiscal 2003 resulted from the increase in deferred
loan costs related to the FINOVA Capital and FINOVA  Mezzanine  loans as further
discussed  below and the purchase of  equipment.  These  deferred loan costs are
capitalized  and expensed to interest over the life of the loans.  The cash used
in fiscal 2002 was all used to purchase equipment.

FINANCING ACTIVITIES - Net cash flows used by financing activities were $587,300
for the six months ended  September 30, 2002 compared to cash flows  provided by
financing activities of $3,746,394 for the same period ended September 30, 2001.
During the first quarter of fiscal 2003, the Company received loan proceeds from
Excalibur Limited Partnership in the amount of $500,000 in cash. The proceeds of
which were used to pay down a portion of the  Company's  outstanding  debt under
its term loan from  SouthTrust  Bank,  N.A.  In  addition,  the  Company  raised
$1,500,000  through the issuance of common stock (as further  discussed  below).
These  proceeds  were  used to pay off its  term  loan  from  Excalibur  Limited
Partnership  and for working  capital  purposes.  The Company used its cash from
operating  activities  to reduce the balance of the Company's  outstanding  debt
under  its line of  credit  from  FINOVA  Capital.  The large  cash  flows  from
financing  activities  during  the six  months  ended  September  30,  2001 were
primarily the result of the issuance of common and preferred stock. The majority
of these  proceeds were used to pay down the line of credit from FINOVA  Capital
and to finance the Company's operating activities in fiscal 2002.

Debt Financing
As of  September  30,  2002,  the  Company  had a line of credit  with a maximum
principal amount of $7.5 million from FINOVA Capital  Corporation,  the proceeds
of which are for  working  capital  purposes.  The amount  that the  Company can
borrow  under the line of credit is based on a formula of up to 80% of  eligible
accounts  receivable plus 50% of eligible  inventories not to exceed $3 million,
as defined in the agreement.  Pursuant to a certain Amendment and Limited Waiver
to Security  Agreement dated June 26, 2002, the inventory advance rate decreases
by 1% per month  beginning  July 1, 2002 from a level of 50% at June 30, 2002 to
37% by the maturity  date (47% at  September  30,  2002).  The line of credit is
secured by all accounts receivable,  inventory, machinery, equipment, trademarks
and patents owned by the Company. Interest is payable monthly on the outstanding
draws on the line of  credit  at a rate of prime  plus  four  percent  (8.75% at
September 30, 2002).  The line of credit  expires on July 1, 2003, at which time
the entire  outstanding  principal amount of the line of credit, and all accrued
but unpaid  interest  thereon,  is due and payable in full.  As of September 30,
2002, the Company had an outstanding balance of $4,899,822 under this line.

On September 30, 1999, the Company obtained a $4 million  subordinated loan from
FINOVA Mezzanine to finance additional  working capital and capital  improvement
needs.  The Company  received loan  proceeds in the amount of  $3,620,000  after
paying loan costs of $380,000. Amounts outstanding under the loan are secured by
a subordinated  lien on  substantially  all of the Company's  assets.  A balloon
payment of the entire principal amount of the loan, and all

                                       16
<PAGE>

accrued but unpaid  interest  thereon,  is due upon  maturity in July 2003.  The
interest rate  applicable to the loan was increased  from 11.5% to 13.5% in July
2001. In February 2002, the interest rate increased to 15.5%.  In  consideration
of the loan,  the  Company  issued to FINOVA  Mezzanine  a warrant  to  purchase
915,000 shares of our common stock at an exercise price of $3.41 per share which
represented  80% of the fair  value of our  stock  on the date the  warrant  was
issued.  The warrant,  valued at $786,900,  was recorded as a debt  discount was
amortized  to  interest  expense  from  the date of  issuance  of the note to an
original  earlier maturity date of the note in October 2002. As of September 30,
2002, the discount has been fully amortized to interest  expense and the Company
had an outstanding principal balance of $4,000,000 under this loan.

On December 26, 2000, the FINOVA Mezzanine exercised a portion of the warrant to
purchase  815,000  shares of Common  Stock at a price of $3.41  per  share.  The
Company  received  from the exercise of the warrant net proceeds of  $2,452,329,
after paying transaction costs of $326,822. In connection with this transaction,
the Company agreed to reimburse  FINOVA  Mezzanine for brokerage  commission and
other expenses incurred by it, in connection with the sale of the 815,000 shares
to the  public,  which were sold at a price of $3.25 per share.  These costs and
expenses were recorded as a reduction in the proceeds received from the exercise
of the warrants.  In addition,  the Company agreed to guarantee the price ($4.41
per  share) at which the  shares  would be sold to the  public.  The  difference
between the actual price received by FINOVA Mezzanine ($3.25) and the guaranteed
price ($4.41) was  $945,400,  which was recorded as a debt discount and is being
amortized over the remaining term of the  subordinated  note. The  consideration
for the difference  between the exercise price of $3.41 and the guaranteed price
of $4.41 was $815,000.  FINOVA  Mezzanine agreed to finance such amount under an
additional  subordinated  term loan which was  payable in full on  December  29,
2001.  However,  the Company obtained an extension for a fee of $55,000 and made
payments of $30,000 per  business day through  February 28, 2002,  at which time
the additional loan was paid in full.  During the six months ended September 30,
2002 and 2001, $614,230 and $204,743,  respectively, of the total debt discounts
of $1,732,300 were amortized to interest  expense.  At September 30, 2002, there
were no remaining unamortized debt discounts and the remaining principal balance
due on the notes was $4,000,000.

The line of credit  and  subordinated  loans  described  above  contain  certain
financial and operating  covenants.  In June 2002, the Company  notified  FINOVA
Capital  and  FINOVA  Mezzanine  that it had failed to comply  with the  minimum
operational  cash flow to contractual  debt service ratio and the funded debt to
EBITDA ratio.  FINOVA  Capital  agreed to waive those  violations for the fiscal
year ended  March 31,  2002 and the fiscal  quarter  ended June 30,  2002 and to
amend such covenants for the fiscal quarters beginning July 1, 2002, pursuant to
a certain  Amendment  and Limited  Waiver to Security  Agreement  dated June 26,
2002. FINOVA Capital extended the maturity date from October 15, 2002 to July 1,
2003, removed any prepayment penalties, reduced the credit line from $13 million
to $7.5 million,  reduced the inventory limit from $6 million to $3 million, and
will reduce the inventory  advance rate by 1% per month  beginning  July 1, 2002
(from a level  of 50% at June  30,  2002 to 37% by the  maturity  date).  FINOVA
Mezzanine  also agreed to waive the  violations  of its covenants for the fiscal
year ended March 31, 2002 and the fiscal  quarter  ended June 30,  2002,  and to
amend those covenants for future fiscal quarters  pursuant to a letter agreement
dated June 26, 2002 and amendments to the  subordinated  notes. In consideration
of the waivers and covenant amendments, the Company agreed to pay a facility fee
of $413,500, which was deemed fully earned on June 26, 2002. The facility fee is
payable as follows:  $172,500 is due and payable on the  earliest of (a) July 1,
2003,  (b) the  occurrence of an event of default,  or (c) the date on which the
Company  repays either all of the  obligations  to FINOVA Capital under the Loan
Agreement or any portion of the principal  obligations to FINOVA Mezzanine under
the FINOVA  Mezzanine  loan  documents,  with the  balance of  $241,000  due and
payable only upon FINOVA Mezzanine's exercise of its remaining 100,000 warrants.
The Company was in compliance  with all revised  covenants for the quarter ended
September 30, 2002.

In March 2000,  the Company  obtained a $10  million  term loan from  SouthTrust
Bank,  N.A. This note bears interest at prime rate (4.75% at September 30, 2002)
and is due in monthly  principal  installments  of $93,000 plus  interest.  In a
letter  agreement dated September 27, 2002, the bank deferred the four principal
payments,  due in June 2002 through  September  2002,  until the maturity of the
note. The note matures in March 2005. The balance outstanding on this note as of
September  30, 2002 was  $8,593,734.  This note was used to pay off a prior term
loan and to finance  approximately  $7.5 million in new  equipment  purchases to
expand our production capacity, including the new production equipment purchased
and installed throughout fiscal 2001 and the beginning of fiscal 2002. This term
loan is secured by certain machinery and equipment,  including the Company's new
production equipment.

In October 2000,  Angelo S. Morini,  the Company's Chief  Executive  Officer and
President,  guaranteed  a $1.5 million  short-term  bridge loan that the Company
obtained from SouthTrust Bank, N.A. by pledging one million of his shares of the
Company's Common Stock to secure the loan. Interest on this note is at the prime
rate (4.75% at March 31, 2002).

                                       17
<PAGE>

The loan is being  paid down by  monthly  principal  payments  of  $50,000  plus
interest.  In a letter agreement dated September 27, 2002, the bank deferred the
four principal  payments,  due in June 2002 through  September  2002,  until the
maturity of the note. The note matures in October 2003. The balance  outstanding
on this note as of September  30, 2002 was  $900,000.  In  consideration  of his
guarantee and related  pledge,  the Company  granted Mr. Morini stock options to
acquire  343,125 shares of Common Stock at an exercise price of $3.88 per share.
These options have  subsequently  been repriced to $2.05 (See Note 9), and shall
expire on December 15, 2010.

The term loan and the short-term  bridge loan from SouthTrust Bank, N.A. contain
certain financial and operating  covenants.  The Company was in violation of all
financial  covenants at March 31, 2002. On June 27, 2002, the Company received a
waiver for the year ended March 31, 2002 and for all future periods through July
1, 2003.

In March  2002,  Angelo  Morini,  the  Company's  Chief  Executive  Officer  and
President, obtained a personal home equity line of credit and loaned $330,000 to
the Company in order for it to pay down certain  notes  payable that were coming
due. This loan bears  interest at prime (4.75% at September 30, 2002) and is due
on or before June 15, 2006.

On May 24, 2002, in  consideration  of this personal loan to the Company and his
continued  guarantee  and  related  pledge of one  million  of his shares of the
Company's common stock for the loan with SouthTrust Bank, N.A. (See Note 3), the
Company granted Mr. Morini stock options to acquire  1,163,898  shares of Common
Stock at an exercise  price of $5.72 (110% of market) per share.  These  options
have  subsequently  been repriced to $2.05 (See Note 9), and shall expire on May
24, 2012.

On June 26, 2002, the Company signed a $550,000  promissory  note with Excalibur
Limited  Partnership,  one of the  holders of the  Company's  Series A Preferred
Stock.  In  consideration  of the note,  the Company  issued  Excalibur  Limited
Partnership  a warrant to  purchase  30,000  shares of Common  Stock,  which are
exercisable  until June 26, 2007 at a price equal to $5.50 per share.  This note
was non-interest bearing assuming that it was repaid on or before July 26, 2002.
This note was secured by 250,000  shares of Common  Stock owned by the Angelo S.
Morini, the Company's Chief Executive Officer and President. In consideration of
his guarantee and related  pledge,  the Company granted Mr. Morini stock options
to acquire 289,940 shares of Common Stock at an exercise price of $5.17 (110% of
market) per share.  These options have  subsequently been repriced to $2.05 (See
Note 9),  and shall  expire  on July 1,  2007.  On June 26,  2002,  the  Company
received loan proceeds in the amount of $500,000 in cash. The additional $50,000
was retained by Excalibur Limited Partnership as payment for consulting fees due
to Excalibur  Limited  Partnership  in  accordance  with a consulting  agreement
entered into on June 26, 2002,  which expires  December 31, 2002.  This note was
paid in full on June 28th from  proceeds  derived  from the  issuance  of common
stock as discussed below.

On August 15, 2002,  the Company signed a $347,475  promissory  note with Target
Container,  Inc. in  satisfaction  of its accounts  payable  obligation  to this
vendor.  This note  bears  interest  at 7% per annum and is due in twelve  equal
monthly installments of $30,066.

Equity Financing
On April 6,  2001,  the  Company  issued to BH  Capital  Investments,  L.P.  and
Excalibur Limited Partnership, in accordance with an exemption from registration
under  Regulation D  promulgated  under the  Securities  Act of 1933, as amended
("Regulation  D"), (i) an aggregate of 72,646 shares of the  Company's  Series A
convertible  preferred stock,  $0.01 par value (the "Series A Preferred Stock"),
and (ii) warrants to purchase  shares of the Common Stock, at an aggregate sales
price of  approximately  $3,082,000.  The Series A Preferred Stock is subject to
certain  designations,  preferences  and rights set forth in our  Certificate of
Designations,  Preferences and Rights of Series A Convertible  Preferred  Stock,
including  the right to convert  such shares into shares of Common  Stock at any
time, at a current conversion rate (subject to appropriate  adjustment for stock
splits,  stock  dividends,  recapitalizations  and  other  events)  equal to the
quotient of:

     o    $48.18, plus all accrued dividends that are then unpaid for each share
          of Series A Preferred Stock then held by the holder,

     divided by,

     o    the  lesser of (x) $4.08 or (y) 95% of the  average  of the two lowest
          closing bid prices on the American  Stock Exchange of the Common Stock
          out of the  fifteen  trading  days  immediately  prior to  conversion;
          provided  that,  in certain  circumstances,  such  amount may not fall
          below $3.10.

                                       18
<PAGE>

In no case,  however,  shall any holder of Series A Preferred Stock be permitted
to convert Series A Preferred Stock in an amount that would cause such holder to
beneficially own, in the aggregate,  such number of shares of Common Stock which
would exceed 9.99% of the aggregate outstanding shares of Common Stock.

In  connection  with the issuance of the Series A Preferred  Stock,  the Company
also granted to BH Capital  Investments,  L.P. and Excalibur Limited Partnership
warrants to purchase an aggregate of 120,000 shares of common stock. The initial
warrants  were  exercisable  for a period of five years from April 6, 2001, at a
per share exercise price of $5.30.  Pursuant to a letter agreement dated October
5, 2001,  the Company  agreed to issue  additional  warrants  to acquire  60,000
shares of its Common Stock at an exercise price of $5.86 per share to each of BH
Capital Investments, L.P. and Excalibur Limited Partnership. In exchange for the
warrants, BH Capital Investments,  L.P. and Excalibur Limited Partnership agreed
to  provide  us certain  consulting  services,  including  the  introduction  of
potential  customers in Canada.  Subsequently,  the Company agreed to reduce the
per  share  exercise  price on all the  warrants  to $2.67 in order to induce BH
Capital  Investments,  L.P. and Excalibur Limited  Partnership to exercise their
warrants and to gain their required approval for a private placement. On January
17,  2002,  BH Capital  Investments,  L.P.  and  Excalibur  Limited  Partnership
exercised all 240,000 for a total of $640,800.

In accordance with Regulation D and pursuant to a Securities  Purchase Agreement
dated as of September  24, 2001,  Hare & Co. f/b/o John Hancock  Small Cap Value
Fund, an affiliate of John Hancock Advisors,  Inc.,  purchased 522,648 shares of
Common  Stock and warrants to purchase  140,000  shares of Common  Stock,  at an
aggregate sales price of $3,000,000.  The warrants held by Hare & Co. f/b/o John
Hancock  Small Cap Value  Fund were  exercisable  at a price per share  equal to
$6.74 until September 25, 2006.  Subsequently,  the Company agreed to reduce the
per share  exercise price on all the warrants to $4.50 in order to induce Hare &
Co. f/b/o John Hancock Small Cap Value Fund to exercise their  warrants.  All of
the warrants were  exercised in January 2002 at a price of $4.50 per share for a
total of $630,000.

In  accordance  with  Regulation D and pursuant to certain  Securities  Purchase
Agreements  dated January 17, 2002 with FNY Millenium  Partners,  LP,  Millenium
Global  Offshore  Ltd.,  Potomac  Capital  Partners,  LP,  and  Potomac  Capital
International  Ltd.,  the Company sold 158,095  shares of Common Stock for $4.74
(95% of an average market price) and issued  warrants to purchase  39,524 shares
of  Common  Stock at a price  equal to $5.74  per  share.  Pursuant  to the same
Securities  Purchase  Agreements dated January 17, 2002, the Company sold 12,270
shares of Common  Stock for $4.74  (95% of an average  market  price) and issued
warrants to purchase  3,068 shares of Common Stock at a price equal to $5.74 per
share to its officers  Angelo S. Morini,  Christopher  New, LeAnn  Hitchcock and
Kulbir  Sabharwal.  All of the warrants are exercisable  until January 17, 2007.
The Company  received  total  proceeds of $808,212  related to the sale of these
shares of Common Stock.

In  accordance  with  Regulation  D and  pursuant to a certain  Common Stock and
Warrants Purchase Agreement dated June 28, 2002, the Company sold 367,647 shares
of Common Stock for $4.08 (85% of an average  market price) and issued  warrants
to purchase  122,549  shares of Common Stock at a price equal to $5.52 per share
to Stonestreet  Limited  Partnership.  In connection with such sale, the Company
issued 7,812 shares of Common Stock to Stonestreet  Corporation and 4,687 shares
of Common  Stock to H&H  Securities  Limited in exchange  for their  services as
finders.  Per the terms of the agreement,  the Company  received net proceeds of
$930,000,  after the repayment of a $550,000 promissory note dated June 26, 2002
in favor of Excalibur Limited Partnership and payment of $20,000 for Stonestreet
Limited Partnership's costs and expenses related to the purchase of these shares
of Common Stock.

In accordance  with Section 4(2) of the Securities Act of 1933, as amended,  and
pursuant to a Food Service Brokerage  Agreement dated June 25, 2002, the Company
issued  141,221  shares of Common Stock for $4.08 per share on September 9, 2002
to certain food brokers in consideration  for prior services  rendered valued at
$576,179.

In accordance  with Section 4(2) of the Securities Act of 1933, as amended,  and
pursuant to a Securities  Purchase  Agreement dated August 27, 2002, the Company
issued  65,404  shares of Common Stock for $4.08 per share in  settlement  of an
outstanding  payable to Hart  Design and  Manufacturing,  Inc.  in the amount of
$266,848.

Management  believes  that with the  proceeds  received in  connection  with its
credit  facilities  and equity  financings  together with cash flow from current
operations,  the Company will have enough cash to meet its fiscal 2003 liquidity
needs  based  on  current  operation  levels.  However,  substantial  additional
financing  is  necessary  to meet the demands of expected  future  higher  sales
volumes and to refinance the FINOVA Capital and FINOVA Mezzanine loans that will
mature in July

                                       19
<PAGE>

2003.  The  Company is  currently  conducting  negotiations  and is in the final
approval phase with a potential new third party lender that would replace FINOVA
Capital as our  primary  asset-based  lender.  In the event  that  FINOVA is not
replaced  before the quarter ended December 31, 2002, the Company  believes that
it will remain in compliance  with the new FINOVA loan covenants  established in
the June 26, 2002 waiver and amendment documents.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The interest on the Company's debt to FINOVA Capital  Corporation and SouthTrust
Bank N.A. is floating and based on the prevailing  market  interest  rates.  For
market-based  debt,  interest  rate  changes  generally do not affect the market
value of the debt but do impact future  interest  expense and hence earnings and
cash flows, assuming other factors remain unchanged.  A theoretical 1% change in
market  rates in effect on  September  30,  2002 with  respect to the  Company's
anticipated  debt as of such date  would  increase  interest  expense  and hence
reduce net income of the Company by approximately $36,000 per quarter.

The Company's  fiscal 2002 and 2001 sales  denominated  in a currency other than
U.S.  dollars were less than 5% of total sales and no net assets were maintained
in a functional  currency  other than U. S.  dollars at  September  30, 2002 and
2001.  The  effects  of  changes  in  foreign  currency  exchange  rates has not
historically been significant to the Company's operations or net assets.

ITEM 4. CONTROLS AND PROCEDURES

Within ninety (90) days prior to the filing of this report,  an  evaluation  was
performed  under the  supervision  and with the  participation  of the Company's
management, including the President and Chief Executive Officer ("CEO"), and the
Chief  Financial  Officer  ("CFO"),  of  the  effectiveness  of the  design  and
operation of the Company's disclosure controls and procedures to insure that the
Company  records,  processes,  summarizes  and reports in a timely and effective
manner  the  information  required  to be  disclosed  in  reports  filed with or
submitted to the Securities and Exchange  Commission.  Based on that evaluation,
the  Company's  management,  including  the  CEO and  CFO,  concluded  that  the
Company's  disclosure  controls and procedures were effective in timely bringing
to their attention  material  information  related to the Company required to be
included in the Company's periodic  Securities and Exchange  Commission filings.
Since the date of this evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly  affect
those controls.

                                       20
<PAGE>

                           PART II. OTHER INFORMATION
                           --------------------------
                         GALAXY NUTRITIONAL FOODS, INC.

ITEM 1. LEGAL PROCEEDINGS

On May 17, 2002,  Schreiber  Foods,  Inc. of Green Bay Wisconsin filed a lawsuit
against the Company in the federal  district  court for the Eastern  District of
Wisconsin ("Wisconsin lawsuit"), being Case No. 02-C-0498, alleging various acts
of patent  infringement.  The Complaint alleges that the Company's  machines for
wrapping of individual cheese slices,  manufactured by Kustner Industries,  S.A.
of  Switzerland,  known as  models KE and KD,  and the  Company's  machines  for
producing  individually wrapped slices manufactured by Hart Design Mfg., Inc. of
Green  Bay,  Wisconsin,   infringe  unspecified  claims  of  U.S.  Patents  Nos.
5,440,860,  5,701,724 and 6,085,680.  Additionally, the Complaint refers to U.S.
Patent No.  5,112,632,  but it does not explicitly  allege  infringement of that
patent.  Because the case is in the earliest  stages,  there has not yet been an
opportunity to determine whether  Schreiber Foods intends to pursue  allegations
of infringement of the 5,112,632 Patent against the Company.  Schreiber Foods is
seeking a preliminary  and  permanent  injunction  prohibiting  the Company from
further infringing acts and is also seeking damages in the nature of either lost
profits or reasonable royalties.  On or about July 10, 2002, the Company filed a
Motion  to  Dismiss  the  Wisconsin   lawsuit  on  the  grounds  that  Schreiber
Technologies,  Inc., not Schreiber Foods, is the owner of the asserted  patents.
Also on July 10, 2002, the Company filed a Declaratory  Judgment  action against
Schreiber  Technologies,  Inc. in the federal  court for the Middle  District of
Florida,  being case No. 02-CV-784,  seeking a declaration that the Company does
not   infringe   these   patents   and/or  that  the  patents  are  invalid  and
unenforceable.  Schreiber Foods has opposed the Motion to Dismiss  claiming that
it  reacquired  ownership of the patents.  Schreiber  Technologies  has moved to
dismiss the Florida action claiming that it does not own the patents.

The '860 and '724  Patents--and the Kustner machines for producing  individually
wrapped  slices--were  the subject of a lawsuit  commenced  by Schreiber in 1997
against  Beatrice Foods and others in the Eastern  District of Wisconsin,  being
Case No.  97-CV-11.  Schreiber  alleges that the machines  that were at issue in
that case are similar to the Kustner machines in use by the Company. In the 1997
lawsuit,  the matter was tried to a jury,  which found the  Kustner  machines to
infringe and awarded  Schreiber  $26 million in a verdict of August 25, 1998. On
March 30, 2000, however,  the judge reversed that verdict,  entered a finding of
no  infringement  on the part of Beatrice,  and  dismissed  the case.  Schreiber
appealed  that  order to the Court of Appeals  for the  Federal  Circuit,  which
entered its judgment on appeal on February 27, 2002.  The appeals court reversed
the action of the trial court,  found that  substantial  evidence  supported the
jury's finding of infringement, and ordered the jury verdict reinstated. Kustner
Industries  has informed the Company that a petition for certiorari is currently
before the Supreme Court and that it is considering additional judicial options.
Schreiber has also commenced a similar action against Borden,  Inc., and others,
in March 2002, but no result has yet been reached in that case.

Several  years  prior to the filing of the  lawsuit  against  the  Company,  the
Company   modified  the  seals  on  its  Kustner  machines  to  make  them  more
technologically  safe and  superior.  The seals on the two Hart Design  machines
were modified by the manufacturer from the standard Hart Design configuration at
Galaxy's request and were delivered to the Company as modified.

The  Company  believes  that  these  modifications  are such  that the  modified
machines do not literally infringe upon any of the identified  patents,  and the
Company will  vigorously  defend this position.  However,  a formal opinion from
patent counsel has not yet been obtained to that regard, given the recent filing
date of the lawsuit. Therefore, the Company is not in a position at this time to
express a view on the  likelihood  that it will succeed in its position,  nor in
the amount of damages that might be awarded against it should it be unsuccessful
in that regard.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In  accordance  with  Regulation  D and  pursuant to a certain  Common Stock and
Warrants Purchase Agreement dated June 28, 2002, the Company sold 367,647 shares
of Common Stock for $4.08 (85% of an average  market price) and issued  warrants
to purchase  122,549  shares of Common Stock at a price equal to $5.52 per share
to Stonestreet  Limited  Partnership.  In connection with such sale, the Company
issued 7,812 shares of Common Stock to Stonestreet  Corporation and 4,687 shares
of Common  Stock to H&H  Securities  Limited in exchange  for their  services as
finders.  Registration of all of these shares,  including the shares  underlying
the warrants, is to be completed within 120 days of issuance. Per the

                                       21
<PAGE>

terms of the agreement, the Company received net proceeds of $930,000, after the
repayment  of a  $550,000  promissory  note  dated  June  26,  2002 in  favor of
Excalibur  Limited  Partnership and payment of $20,000 for  Stonestreet  Limited
Partnership's  costs and  expenses  related to the  purchase of these  shares of
Common  Stock.  The Company used the $930,000 in net proceeds to pay $13,000 for
its own legal fees  related  to the  financing  and the  remainder  for  working
capital purposes.

In accordance  with Section 4(2) of the Securities Act of 1933, as amended,  and
pursuant to a Food Service Brokerage  Agreement dated June 25, 2002, the Company
issued  141,221  shares of Common Stock for $4.08 per share on September 9, 2002
to certain food brokers in consideration  for prior services  rendered valued at
$576,179.

In accordance  with Section 4(2) of the Securities Act of 1933, as amended,  and
pursuant to a Securities  Purchase  Agreement dated August 27, 2002, the Company
issued  65,404  shares of Common Stock for $4.08 per share in  settlement  of an
outstanding  payable to Hart  Design and  Manufacturing,  Inc.  in the amount of
$266,848.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

In June 2002, the Company  notified FINOVA Capital and FINOVA  Mezzanine that it
had failed to comply with the minimum  operational cash flow to contractual debt
service  ratio and the funded debt to EBITDA  ratio.  FINOVA  Capital  agreed to
waive those  violations  for the fiscal year ended March 31, 2002 and the fiscal
quarter ended June 30, 2002 and to amend such covenants for the fiscal  quarters
beginning  July 1, 2002,  pursuant to a certain  Amendment and Limited Waiver to
Security  Agreement  dated June 26, 2002.  FINOVA Capital  extended the maturity
date from October 15, 2002 to July 1, 2003,  removed any  prepayment  penalties,
reduced the credit line from $13 million to $7.5 million,  reduced the inventory
limit from $6 million to $3 million,  and will reduce the inventory advance rate
by 1% per month  beginning July 1, 2002 (from a level of 50% at June 30, 2002 to
37% by the maturity date).  FINOVA Mezzanine also agreed to waive the violations
of its covenants for the fiscal year ended March 31, 2002 and the fiscal quarter
ended June 30, 2002,  and to amend those  covenants for future  fiscal  quarters
pursuant  to a letter  agreement  dated  June 26,  2002  and  amendments  to the
subordinated notes. In consideration of the waivers and covenant amendments, the
Company agreed to pay a facility fee of $413,500,  which was deemed fully earned
on June 26, 2002.  The  facility fee is payable as follows:  $172,500 is due and
payable on the earliest of (a) July 1, 2003,  (b) the  occurrence of an event of
default,  or (c)  the  date  on  which  the  Company  repays  either  all of the
obligations  to FINOVA  Capital  under the Loan  Agreement or any portion of the
principal  obligations  to FINOVA  Mezzanine  under the  FINOVA  Mezzanine  loan
documents,  with the  balance  of  $241,000  due and  payable  only upon  FINOVA
Mezzanine's  exercise  of its  remaining  100,000  warrants.  The Company was in
compliance with all revised covenants for the quarter ended September 30, 2002.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE

ITEM 5. OTHER INFORMATION

NONE

                                       22
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

EXHIBIT NO     EXHIBIT DESCRIPTION
----------     -------------------

 *3.1          Certificate of Incorporation of the Company, as amended (Filed as
               Exhibit 3.1 to the Company's Registration Statement on Form S-18,
               No. 33-15893-NY, incorporated herein by reference.)

 *3.2          Amendment to Certificate of Incorporation  of the Company,  filed
               on  February  24, 1992  (Filed as Exhibit  4(b) to the  Company's
               Registration  Statement on Form S-8, No.  33-46167,  incorporated
               herein by reference.)

 *3.3          By-laws of the Company,  as amended  (Filed as Exhibit 3.2 to the
               Company's  Registration  Statement on Form S-18, No. 33-15893-NY,
               incorporated herein by reference.)

 *3.4          Amendment to Certificate of Incorporation  of the Company,  filed
               on  January  19,  1994  (Filed as  Exhibit  3.4 to the  Company's
               Registration   Statement  on  Form  SB-2,   No.   33-80418,   and
               incorporated herein by reference.)

 *3.5          Amendment to Certificate of Incorporation  of the Company,  filed
               on July 11,  1995 (Filed as Exhibit 3.5 on Form 10-KSB for fiscal
               year ended March 31, 1996, and incorporated herein by reference.)

 *3.6          Amendment to Certificate of Incorporation  of the Company,  filed
               on January  31,  1996  (Filed as Exhibit  3.6 on Form  10-KSB for
               fiscal  year ended March 31,  1996,  and  incorporated  herein by
               reference.)

 *3.7          Amendment to Certificate of Incorporation  of the Company,  filed
               on  November  16,  2000,  effective  November  17, 2000 (Filed as
               Exhibit 3.1 to Registration  Statement on Form S-3 filed November
               28, 2000, and incorporated herein by reference.)

 *3.8          Certificate of  Designations,  Preferences and Rights of Series A
               Convertible  Preferred  Stock  filed on April 5,  2001  (Filed as
               Exhibit 3.8 on Form 10-K/A for fiscal year ended March 31,  2001,
               and incorporated herein by reference.)

 *4.3          Stock Purchase  Warrant issued to Excalibur  Limited  Partnership
               dated as of June 26, 2002.  (Filed as Exhibit 4.3 to Registration
               Statement on Form S-3 filed September 30, 2002.)

 *4.4          Registration  Rights  Agreement  dated as of June 28, 2002 by and
               among the Registrant,  Stonestreet Limited Partnership, Excalibur
               Limited  Partnership,  H&H  Securities  Limited  and  Stonestreet
               Corporation.  (Filed as Exhibit 4.4 to Registration  Statement on
               Form S-3 filed September 30, 2002.)

 *4.5          Purchase Agreement dated as of August 27, 2002 by and between the
               Registratnt  and Hart Design & Mfg, Inc. (Filed as Exhibit 4.5 to
               Registration Statement on Form S-3 filed September 30, 2002.)

 *4.6          Form of Subscription  Agreement by and between the Registrant and
               those food brokers named in the selling  stockholders  section of
               this   Registration   Statement.   (Filed  as   Exhibit   4.6  to
               Registration  Statement on Form S-3 filed  September  30,  2002.)
               *4.8 Common Stock and Warrants Purchase  Agreement by and between
               the Company and Stonestreet  Limited  Partnership  dated June 28,
               2002  (Filed as Exhibit  4.8 on Form 10-K for  fiscal  year ended
               March 31, 2002, and incorporated herein by reference.)

 *4.9          Stock Purchase Warrant issued to Stonestreet Limited Partnership,
               dated June 28, 2002 (Filed as Exhibit 4.9 on Form 10-K for fiscal
               year ended March 31, 2002, and incorporated herein by reference.)

*10.1          Second Amendment to the Security  Agreement with Finova Financial
               Services  dated June 1998 (Filed as Exhibit 10.1 on Form 10-K for
               fiscal  year ended March 31,  1999,  and  incorporated  herein by
               reference.)

                                       23
<PAGE>

*10.2          Third Amendment to the Security  Agreement with Finova  Financial
               Services  dated December 1998 (Filed as Exhibit 10.2 on Form 10-K
               for fiscal year ended March 31, 1999, and incorporated  herein by
               reference.)

*10.3          Term Loan Agreement with  Southtrust Bank dated March 2000 (Filed
               as Exhibit  10.3 on Form  10-K/A for fiscal  year ended March 31,
               2000, and incorporated herein by reference.)

*10.4          Cabot Industrial  Properties L.P. Lease dated July 1999 (Filed as
               Exhibit 10.4 on Form 10-K/A for fiscal year ended March 31, 2000,
               and incorporated herein by reference.)

*10.6          Third Amendment to Lease Agreement,  dated as of August 14, 2001,
               by and between  Anco  Company  and the Company  (Filed as Exhibit
               10.6 on Form  10-K/A for fiscal year ended  March 31,  2001,  and
               incorporated herein by reference.)

*10.7          Amendment and Limited Waiver to Security  Agreement,  dated as of
               July 13,  2001,  by and between  the  Company and FINOVA  Capital
               Corporation (Filed as Exhibit 10.7 on Form 10-Q/A for the quarter
               ended September 30, 2001, and incorporated herein by reference.)

*10.8          Waiver Letter from FINOVA Mezzanine Capital,  Inc. to the Company
               dated as of July 12, 2001  (Filed as Exhibit  10.8 on Form 10-Q/A
               for the quarter ended September 30, 2001, and incorporated herein
               by reference.)

*10.9          Amended and Restated  Secured  Promissory  Note in the  principal
               amount of $815,000,  dated as of July 13, 2001, by the Company in
               favor of FINOVA Mezzanine Capital, Inc. (Filed as Exhibit 10.9 on
               Form  10-Q/A  for the  quarter  ended  September  30,  2001,  and
               incorporated herein by reference.)

*10.10         Second  Amended  and  Restated  Secured  Promissory  Note  in the
               principal amount of $4,000,000, dated as of July 13, 2001, by the
               Company  in favor of FINOVA  Mezzanine  Capital,  Inc.  (Filed as
               Exhibit 10.10 on Form 10-Q/A for the quarter ended  September 30,
               2001, and incorporated herein by reference.)

*10.11         Amendment and Limited Waiver to Security  Agreement,  dated as of
               November 14, 2001, by and between the Company and FINOVA  Capital
               Corporation  (Filed  as  Exhibit  10.11  on Form  10-Q/A  for the
               quarter ended  September  30, 2001,  and  incorporated  herein by
               reference.)

*10.12         Intellectual  Property Security  Agreement,  dated as of November
               14,  2001,  by  and  between  the  Company  and  FINOVA   Capital
               Corporation  (Filed  as  Exhibit  10.12  on Form  10-Q/A  for the
               quarter ended  September  30, 2001,  and  incorporated  herein by
               reference.)

*10.13         Waiver Letter from FINOVA Mezzanine Capital,  Inc. to the Company
               dated as of November  14,  2001  (Filed as Exhibit  10.13 on Form
               10-Q/A for the quarter ended September 30, 2001, and incorporated
               herein by reference.)

*10.14         Allonge to Second Amended and Restated  Secured  Promissory Note,
               dated as of November 14, 2001,  by the Company in favor of FINOVA
               Mezzanine  Capital,  Inc.  (Filed as Exhibit 10.14 on Form 10-Q/A
               for the quarter ended September 30, 2001, and incorporated herein
               by reference.)

*10.15         Amendment and Limited Waiver to Security  Agreement,  dated as of
               February 13, 2002, by and between the Company and FINOVA  Capital
               Corporation  (Filed as Exhibit 10.15 of Form 10-Q for the quarter
               ended December 31, 2001, and incorporated herein by reference.)

*10.16         Waiver Letter from FINOVA Mezzanine Capital,  Inc. to the Company
               dated as of February  13,  2002  (Filed as Exhibit  10.16 of Form
               10-Q for the quarter ended  December 31, 2001,  and  incorporated
               herein by reference.)

                                       24
<PAGE>

*10.17         Allonge to Second Amended and Restated  Secured  Promissory  Note
               dated as of February 13, 2002,  by the Company in favor of FINOVA
               Mezzanine Capital,  Inc. (Filed as Exhibit 10.17 of Form 10-Q for
               the quarter ended December 31, 2001, and  incorporated  herein by
               reference.)

*10.18         Amendment and Limited Waiver to Security  Agreement,  dated as of
               June 26,  2002,  by and between  the  Company and FINOVA  Capital
               Corporation  (Filed as Exhibit 10.18 on Form 10-K for fiscal year
               ended March 31, 2002, and incorporated herein by reference.)

*10.19         Amendment and Limited Waiver to Loan  Agreement  dated as of June
               26,  2002,  by and  between  the  Company  and  FINOVA  Mezzanine
               Capital,  Inc.  (Filed as  Exhibit  10.19 on Form 10-K for fiscal
               year ended March 31, 2002, and incorporated herein by reference.)

*10.20         Allonge to Second Amended and Restated  Secured  Promissory  Note
               dated as of June 26,  2002,  by the  Company  in favor of  FINOVA
               Mezzanine  (Filed as Exhibit  10.20 on Form 10-K for fiscal  year
               ended March 31, 2002, and incorporated herein by reference.)

 10.25         Letter  from  SouthTrust  Bank,  N.A.  dated  September  27, 2002
               regarding  principal  deferment on  $10,000,000  Promissory  Note
               (Filed herewith).

 10.26         Letter  from  SouthTrust  Bank,  N.A.  dated  September  27, 2002
               regarding  principal  deferment  on  $1,500,000  Promissory  Note
               (Filed herewith).

 10.30         Promissory  Note payable to Angelo S. Morini dated March 28, 2002
               (Filed herewith).

 10.31         Promissory  Note payable to Target  Container,  Inc. dated August
               15, 2002 (Filed herewith).

*10.40         Non-qualified  stock  option  agreement  between  the Company and
               Angelo S. Morini  dated May 24,  2002 (Filed as Exhibit  10.40 on
               Form  10-Q  for the  fiscal  quarter  ended  June 30,  2002,  and
               incorporated herein by reference.)

*10.41         Stock  purchase  warrant  issued to Douglas  Walsh dated June 11,
               2002 (Filed as Exhibit 10.41 on Form 10-Q for the fiscal  quarter
               ended June 30, 2002, and incorporated herein by reference.)

*10.42         Incentive  stock  option   agreement   between  the  Company  and
               Salvatore J. Furnari  dated July 8, 2002 (Filed as Exhibit  10.42
               on Form 10-Q for the  fiscal  quarter  ended June 30,  2002,  and
               incorporated herein by reference.)

*10.43         Non-qualified  stock  option  agreement  between  the Company and
               Angelo S. Morini  dated July 1, 2002  (Filed as Exhibit  10.43 on
               Form  10-Q  for the  fiscal  quarter  ended  June 30,  2002,  and
               incorporated herein by reference.)

 99.1          Certification  of the  Company's  Chief  Executive  Officer dated
               November 8, 2002 (Filed herewith.)

 99.2          Certification  of the  Company's  Chief  Financial  Officer dated
               November 8, 2002 (Filed herewith.)

*    Previously Filed

REPORTS ON FORM 8-K
-------------------

There  was one  report  on Form 8-K  dated  July 8,  2002  whereby  the  Company
disclosed that LeAnn Hitchcock  changed her position with the Company from Chief
Financial Officer to SEC Compliance and Auditing Manager. Salvatore Furnari, the
Company's  Controller,  then  assumed  the  role  and  responsibilities  of  the
Company's Chief Financial Officer. There were no other reports on Form 8-k filed
during the three months ended September 30, 2002.


                                       25
<PAGE>

                                   SIGNATURES
                                   ----------

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

                                        GALAXY NUTRITIONAL FOODS, INC.


Date: November 8, 2002                  /s/Angelo S. Morini
                                        -----------------------------------
                                        Angelo S. Morini
                                        Chairman, Chief Executive Officer
                                        and President
                                        (Principal Executive Officer)


Date: November 8, 2002                  /s/ Salvatore J. Furnari
                                        -----------------------------------
                                        Salvatore J. Furnari
                                        Chief Financial Officer
                                        (Principal Financial Officer)

                                       26
<PAGE>

I, Angelo S. Morini, certify that:
     1.   I  have  reviewed  this  quarterly  report  on  Form  10-Q  of  Galaxy
          Nutritional Foods, Inc.("the registrant");
     2.   Based on my  knowledge,  this  quarterly  report  does not contain any
          untrue  statement of a material  fact or omit to state a material fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this quarterly report;
     3.   Based on my  knowledge,  the  financial  statements,  other  financial
          information  included in this quarterly report,  fairly present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this quarterly report;
     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:
          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               quarterly report is being prepared;
          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and
          c)   presented  in this  quarterly  report our  conclusions  about the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;
     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation  to the  registrant's  auditors and the
          audit committee of registrant's board of directors:
          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors and material
               weaknesses in internal controls; and
          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and
     6.   The  registrant's  other  certifying  officers and I have indicated in
          this quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.


                                 /s/ Angelo S. Morini
                                 --------------------
                                 Angelo S. Morini
                                 Chairman, President and Chief Executive Officer
                                 November 8, 2002

                                       27
<PAGE>

I, Salvatore J. Furnari, certify that:
     1.   I  have  reviewed  this  quarterly  report  on  Form  10-Q  of  Galaxy
          Nutritional Foods, Inc.("the registrant");
     2.   Based on my  knowledge,  this  quarterly  report  does not contain any
          untrue  statement of a material  fact or omit to state a material fact
          necessary to make the statements  made, in light of the  circumstances
          under which such  statements were made, not misleading with respect to
          the period covered by this quarterly report;
     3.   Based on my  knowledge,  the  financial  statements,  other  financial
          information  included in this quarterly report,  fairly present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this quarterly report;
     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:
          a)   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               quarterly report is being prepared;
          b)   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and
          c)   presented  in this  quarterly  report our  conclusions  about the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;
     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation  to the  registrant's  auditors and the
          audit committee of registrant's board of directors:
          a)   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors and material
               weaknesses in internal controls; and
          b)   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and
     6.   The  registrant's  other  certifying  officers and I have indicated in
          this quarterly report whether or not there were significant changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.


                                     /s/ Salvatore J. Furnari
                                     ------------------------
                                     Salvatore J. Furnari
                                     Chief Financial Officer
                                     November 8, 2002

                                       28
<PAGE>