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

                                    FORM 10-Q

                                   ----------

(Mark One)

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

                  For the quarterly period ended June 30, 2006

                                       OR

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

                 For the transition period from _______ to ______

                         Commission File Number 1-15345

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

            Delaware                                              25-1391475
 (State or other jurisdiction of                              (I.R.S. 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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):

Large accelerated filer |_|   Accelerated filer |_|   Non-accelerated filer |X|

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

      On August 11, 2006, there were 17,109,894 shares of common stock, $.01 par
value per share, outstanding.

<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

                               Index to Form 10-Q
                       For the Quarter Ended June 30, 2006

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

  Item 1.   Financial Statements

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

  Item 2. Management's Discussion and Analysis of
          Financial Condition and Results of Operations                   16

  Item 3. Quantitative and Qualitative Disclosures About Market Risk      27

  Item 4. Controls and Procedures                                         27

PART II.    OTHER INFORMATION

  Item 1A.  Risk Factors                                                  28

  Item 6.   Exhibits                                                      30

SIGNATURES                                                                34


                                       2

<PAGE>

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

<TABLE>
<CAPTION>
                                                                    JUNE 30,        MARCH 31,
                                                          Notes       2006            2006
                                                          -----   ------------   ------------
                                                                  (unaudited)
<S>                                                         <C>   <C>            <C>
                                  ASSETS
CURRENT ASSETS:
  Cash                                                            $    719,436   $    435,880
  Trade receivables, net                                             3,212,483      4,018,806
  Inventories                                                          290,269        273,528
  Prepaid expenses and other                                           166,228         70,717
                                                                  ------------   ------------
        Total current assets                                         4,388,416      4,798,931
PROPERTY AND EQUIPMENT, NET                                            173,527        226,349
ASSETS HELD FOR SALE                                                    56,200         61,950
OTHER ASSETS                                                           232,423        162,840
                                                                  ------------   ------------
        TOTAL                                                     $  4,850,566   $  5,250,070
                                                                  ============   ============
                  LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Secured borrowings                                        3     $  2,087,256   $  1,919,002
  Accounts payable                                                   2,033,599      2,665,963
  Accrued disposal costs                                    4          420,204        480,404
  Accrued and other current liabilities                                330,238        542,811
  Related party notes payable                               3               --      2,273,021
  Current portion of accrued employment contracts           5          378,596        434,114
  Current portion of obligations under capital leases                   14,766         20,231
                                                                  ------------   ------------
        Total current liabilities                                    5,264,659      8,335,546
ACCRUED EMPLOYMENT CONTRACTS, less current portion          5          468,658        559,677
RELATED PARTY NOTE PAYABLE                                  3        2,685,104             --
OBLIGATIONS UNDER CAPITAL LEASES, less current portion                  23,404         37,507
                                                                  ------------   ------------
        Total liabilities                                            8,441,825      8,932,730
                                                                  ------------   ------------
COMMITMENTS AND CONTINGENCIES                               6               --             --
STOCKHOLDERS' DEFICIT:
  Common stock                                                         200,546        200,546
  Additional paid-in capital                                        71,351,386     71,345,556
  Accumulated deficit                                              (73,798,730)   (72,456,301)
                                                                  ------------   ------------
                                                                    (2,246,798)      (910,199)
  Less: Notes receivable arising from the exercise of
          stock options                                     5               --     (2,652,000)
        Treasury stock                                      5       (1,344,461)      (120,461)
                                                                  ------------   ------------
          Total stockholders' deficit                               (3,591,259)    (3,682,660)
                                                                  ------------   ------------
          TOTAL                                                   $  4,850,566   $  5,250,070
                                                                  ============   ============

</TABLE>

                 See accompanying notes to financial statements


                                       3

<PAGE>

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                     JUNE 30,
                                                            -------------------------
                                                    Notes       2006          2005
                                                    -----    ----------    ----------
<S>                                                   <C>   <C>           <C>
NET SALES                                                   $ 7,832,562   $ 9,851,153
COST OF GOODS SOLD                                            5,075,212     7,582,855
                                                            -----------   -----------
  Gross margin                                                2,757,350     2,268,298
                                                            -----------   -----------
OPERATING EXPENSES:
Selling                                                         965,979       936,245
Delivery                                                        246,542       615,471
General and administrative, including $5,830 and
  $867,518 non-cash compensation related to stock
  based transactions                                  7         984,862     1,667,472
Research and development                                         42,334        91,042
Reserve on stockholder note receivable                5       1,428,000            --
Cost of disposal activities                           4         101,744       189,069
Impairment of equipment                                              --     7,896,554
(Gain)/loss on sale of assets                                   (12,824)         (636)
                                                            -----------   -----------
  Total operating expenses                                    3,756,637    11,395,217
                                                            -----------   -----------
LOSS FROM OPERATIONS                                           (999,287)   (9,126,919)
OTHER INCOME (EXPENSE):
Interest expense                                               (343,142)     (357,195)
Gain/(loss) on fair value of warrants                                --       340,000
                                                            -----------   -----------
    Total other income (expense)                               (343,142)      (17,195)
                                                            -----------   -----------
NET LOSS                                                    $(1,342,429)  $(9,144,114)
                                                            ===========   ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE           8     $     (0.07)  $     (0.49)
                                                            ===========   ===========
</TABLE>

                 See accompanying notes to financial statements.


                                       4

<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.
                       Statement of Stockholders' Deficit
                        Three Months Ended June 30, 2006
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               Notes
                           Common Stock                                     Receivable
                       ---------------------     Additional                     for
                                       Par        Paid-In     Accumulated      Common      Treasury
                         Shares       Value       Capital       Deficit        Stock         Stock         Total
                       ----------   --------   -----------   ------------   -----------   ----------    -----------
<S>                    <C>          <C>        <C>           <C>            <C>           <C>           <C>
Balance at March 31,
  2006                 20,054,623   $200,546   $71,345,556   $(72,456,301)  $(2,652,000)  $  (120,461)  $(3,682,660)
Fair value of
  stock-based
  transactions                 --         --         5,830            --             --            --         5,830
Reserve on
  stockholder note
  receivable                   --         --            --            --      1,428,000            --     1,428,000
Value of returned
  shares transferred
  to treasury stock            --         --            --            --      1,224,000    (1,224,000)           --
Net loss                       --         --            --     (1,342,429)           --            --    (1,342,429)
                       ----------   --------   -----------   ------------   -----------   -----------   -----------
Balance at June 30,
  2006                 20,054,623   $200,546   $71,351,386   $(73,798,730)  $        --   $(1,344,461)  $(3,591,259)
                       ==========   ========   ===========   ============   ===========   ===========   ===========
</TABLE>

                 See accompanying notes to financial statements.


                                       5

<PAGE>

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

<TABLE>
<CAPTION>
                                                                     Three Months Ended June 30,
                                                                  ---------------------------------
                                                                  Notes      2006           2005
                                                                  -----   -----------   -----------
<S>                                                                 <C>   <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Loss                                                                $(1,342,429)  $(9,144,114)
  Adjustments to reconcile net loss to net cash from (used in)
    operating activities:
      Depreciation and amortization                                            52,822       539,103
      Amortization of debt discount and financing costs                       228,308        27,422
      Provision for promotional deductions and losses on trade
        receivables                                                          (774,987)      313,000
      Provision for loss on stockholder note receivable                     1,428,000            --
      (Gain) loss on disposal of assets                                       (12,824)    7,895,918
      (Gain) loss on fair value of warrants                                        --      (340,000)
      Non-cash compensation related to stock-based transactions                 5,830       867,518
      (Increase) decrease in:
        Trade receivables                                                   1,581,310    (1,221,881)
        Inventories                                                           (16,741)     (206,579)
        Prepaid expenses and other                                            (95,511)     (272,486)
      Increase (decrease) in:
        Accounts payable                                                     (632,364)       15,335
        Accrued and other liabilities                                        (134,206)      123,360
                                                                          -----------   -----------
   NET CASH FROM (USED IN) OPERATING ACTIVITIES                               287,208    (1,403,404)
                                                                          -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:                               9
  Purchase of property and equipment                                               --       (68,850)
  Proceeds from sale of equipment                                              21,855         8,200
  (Increase) decrease in other assets                                         (44,775)           --
                                                                          -----------   -----------
   NET CASH FROM (USED IN) INVESTING ACTIVITIES                               (22,920)      (60,650)
                                                                          -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase in book overdrafts                                                      --       541,317
  Net borrowings (payments) on secured borrowings                             168,254      (722,023)
  Repayments on term notes payable                                                 --      (440,000)
  Principal payments on capital lease obligations                             (22,849)      (47,994)
  Financing costs for long term debt                                         (126,137)     (160,588)
  Proceeds from exercise of common stock options                                   --         2,560
  Proceeds from exercise of common stock warrants, net of costs                    --     1,729,000
                                                                          -----------   -----------
   NET CASH FROM (USED IN) FINANCING ACTIVITIES                                19,268       902,272
                                                                          -----------   -----------
NET INCREASE (DECREASE) IN CASH                                               283,556      (561,782)
CASH, BEGINNING OF PERIOD                                                     435,880       561,782
                                                                          -----------   -----------
CASH, END OF PERIOD                                                       $   719,436   $        --
                                                                          ===========   ===========
</TABLE>

                 See accompanying notes to financial statements.


                                       6

<PAGE>

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

(1)   Basis of Presentation

      The unaudited financial statements have been prepared by Galaxy
      Nutritional Foods, Inc. (the "Company"), in accordance with accounting
      principles generally accepted in the United States of America ("GAAP") for
      interim financial information and applicable rules and regulations of the
      Securities and Exchange Commission. The accompanying financial statements
      contain all normal recurring adjustments which are, in the opinion of
      management, necessary for the fair presentation of such financial
      statements. Certain information and disclosures normally included in the
      financial statements prepared in accordance with GAAP have been omitted
      under such rules and regulations although the Company believes that the
      disclosures are adequate to make the information presented not misleading.
      The March 31, 2006 balance sheet data was derived from the audited
      financial statements, but does not include all disclosures required by
      GAAP. These unaudited financial statements should be read in conjunction
      with the financial statements and notes included on Form 10-K for the
      fiscal year ended March 31, 2006. Interim results of operations for the
      three-month period ended June 30, 2006 may not necessarily be indicative
      of the results to be expected for the full year.

      During fiscal 2006, the Company transitioned its manufacturing and
      distribution operations to an outside supplier. In November 2005,
      Schreiber Foods, Inc., a Wisconsin corporation ("Schreiber"), began
      manufacturing and distributing substantially all of the Company's products
      in accordance with a Supply Agreement that was signed on June 30, 2005.
      The prices for such products are based on cost plus a processing fee as
      determined by the parties from time to time. Additionally, in December
      2005, the Company sold substantially all of its manufacturing and
      production equipment to Schreiber for $8,700,000 in cash pursuant to an
      Asset Purchase Agreement dated June 30, 2005.

      The Company has incurred substantial losses in recent years and, as a
      result, has a stockholders deficit of $3,591,259 as of June 30, 2006.
      Losses for the years ended March 31, 2006, 2005 and 2004 were $24,148,553,
      $3,859,783 and $3,299,277, respectively. The Company's ability to continue
      as a going concern depended upon successfully obtaining sufficient cash
      resources to refinance its $2.4 million of unsecured related party notes
      payable that matured on June 15, 2006 and obtaining positive cash flow
      from operations to sustain normal business operations.

      The Company's current business plan eliminates certain low margin private
      label and Galaxy imitation business from its sales mix. The elimination of
      these low margin items and the elimination of excess overhead that was
      part of the Company's former manufacturing operations has resulted in
      higher gross margins and produced positive cash flows from operations in
      the three months ended June 30, 2006.

      As a result of the successful refinancing of the $2.4 million short-term
      notes and line of credit for the Company's receivables financing (See Note
      3) and the positive cash flow that the Company is currently experiencing
      from operations, management believes that the Company has sufficient cash
      resources to meet its current liquidity needs.

      Use of Estimates

      The preparation of financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the financial statements and reported amounts
      of revenues and expense during the reporting period. The Company's
      significant estimates include the allowance for doubtful accounts
      receivable, which is made up of reserves for promotions, discounts and bad
      debts, reserve on stockholder note receivable, provision for obsolete
      inventory, valuation of deferred taxes, valuation of compensation expense
      on options and warrants, and accruals for disposal costs. Actual results
      could differ from those estimates.

      Reclassifications

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


                                       7

<PAGE>

(2)   Summary of Significant Accounting Policies

      Revenue Recognition

      Sales are recognized upon shipment of products to customers. The Company
      offers a right of return policy on certain products sold to certain retail
      customers in the conventional grocery stores and mass merchandising
      industry. If the product is not sold during its shelf life, the Company
      will allow a credit for the unsold merchandise. Since the shelf life of
      the Company's products range from 6 months to one year, the Company
      historically averages less than 2% in credits for unsold product. The
      Company's reserve on accounts receivable takes these potential future
      credits into consideration. Certain expenses such as slotting fees,
      rebates, coupons and other discounts are accounted for as a reduction to
      Revenues.

      Disposal Costs

      The Company has recorded accruals in connection with the asset sale and
      outsourcing arrangements with Schreiber Foods, Inc. These accruals include
      estimates pertaining to employee termination costs and abandonment of
      excess equipment and facilities and other potential costs. Actual costs
      may differ from these estimates or the Company's estimates may change. In
      accordance with SFAS No. 146, "Accounting for Costs Associated with Exit
      or Disposal Activities," costs associated with restructuring activities
      are recognized when they are incurred rather than at the date of a
      commitment to an exit or disposal plan. Given the significance and
      complexity of these activities, and the timing of the execution of such
      activities, the accrual process involves periodic reassessments of
      estimates made at the time the original decisions were made, including
      evaluating estimated employment terms, contract cancellation charges and
      real estate market conditions for sub-lease rents. The Company will
      continually evaluate the adequacy of the remaining liabilities under its
      restructuring initiatives. Although the Company believes that these
      estimates accurately reflect the costs of its activities, actual results
      may differ, thereby requiring the Company to record additional provisions
      or reverse a portion of such provisions.

      Stock Based Compensation

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

      SFAS No. 123R applies to new awards and to awards modified, repurchased,
      or cancelled after the effective date, as well as to the unvested portion
      of awards outstanding as of the effective date. The Company uses the
      Black-Scholes model to value its new stock option grants under SFAS No.
      123R, applying the "modified prospective method" for existing grants which
      requires the Company to value stock options prior to its adoption of SFAS
      No. 123R under the fair value method and expense the unvested portion over
      the remaining vesting period. SFAS No. 123R also requires the Company to
      estimate forfeitures in calculating the expense related to stock-based
      compensation. In addition, SFAS No. 123R requires the Company to reflect
      cash flows resulting from the tax benefits related to tax deductions in
      excess of the compensation cost recognized for those options to be
      classified as a cash inflow from financing activities and a cash outflow
      from operating activities.

      Prior to April 1, 2006 and beginning April 1, 2003, the Company accounted
      for stock awards granted to employees under the fair value recognition
      provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and
      applied SFAS No. 148, "Accounting for Stock-Based Compensation -
      Transition and Disclosure," prospectively to all employee awards granted
      on or after April 1, 2003. Prior to April 1, 2003, the Company accounted
      for stock awards granted to employees under the recognition and
      measurement principles of Accounting Principles Board Opinion No. 25,
      "Accounting for Stock Issued to Employees, and related Interpretations."
      As a result, no compensation expense was previously recognized for stock
      options granted to employees prior to April 1, 2003 other than as related
      to option grants to employees and directors below the fair market value of
      the underlying stock at the date of grant or as related to subsequent
      modifications to option grants to employees and directors.

      The Black-Scholes model also requires subjective assumptions, including
      future stock price volatility and expected time to exercise, which greatly
      affect the calculated values. The risk-free rate is based on the U.S
      Treasury rates in effect during the corresponding period of grant.
      Expected volatilities are based on the historical volatility of the
      Company's stock. In the past, the Company input the expected life of
      options granted as the contractual life of the options granted. For any
      new awards, the Company will input the expected term of options granted
      based on information derived from historical data on employee exercises
      and post-vesting employment termination behavior. There is no expected
      dividend yield. These factors could change in the future, which would
      affect the stock-based compensation expense in future periods. SFAS No.
      123R requires forfeitures to be estimated at the time of grant and
      revised, if necessary, in subsequent periods if actual forfeitures differ
      from those estimates.


                                       8

<PAGE>

      The Company's financial statements for the three months ended June 30,
      2006 reflect the impact of SFAS No. 123R. In accordance with the modified
      prospective transition method, the Company's financial statements for
      prior periods have not been restated to reflect, and do not include, the
      impact of SFAS No. 123R.

      Stock-based compensation expense recognized during the period is based on
      the value of the portion of share-based payment awards that is ultimately
      expected to vest during the period. Stock-based compensation expense
      recognized in the Company's Statements of Operations for the three months
      ended June 30, 2006 included compensation expense for share-based payment
      awards granted prior to, but not yet vested as of March 31, 2006 based on
      the grant date fair value estimated in accordance with the pro forma
      provisions of SFAS 123 and compensation expense for the share-based
      payment awards granted subsequent to March 31, 2006 based on the grant
      date fair value estimated in accordance with the provisions of SFAS No.
      123R. As stock-based compensation expense recognized in the Statement of
      Operations is based on awards ultimately expected to vest, it will be
      reduced for estimated forfeitures. There were no new option grants during
      the three months ended June 30, 2006 and therefore, there was no
      forfeiture rate applied to the stock-based compensation expense in this
      period. In the Company's pro forma information required under SFAS 123 for
      the periods prior to April 1, 2006, the Company accounted for forfeitures
      as they occurred.

      The following table summarizes nonvested plan and non-plan stock options
      as of June 30, 2006, as well as activity for the three months then ended.

                                  Three Months Ended
                                     June 30, 2006
                                 --------------------
                                            Weighted
                                            Average
                                           Grant Date
                                  Shares   Fair Value
                                 -------   ----------
Beginning of period               53,000      $0.51
Granted                               --         --
Vested                           (50,000)      0.44
Forfeited                             --         --
                                 -------      -----
End of period                      3,000      $1.76
                                 =======      =====

      Compensation cost arising from nonvested stock granted to employees and
      from non-employee stock awards is recognized as expense using the graded
      vesting attribution method over the vesting period. As of June 30, 2006,
      there was $330 of total unrecognized compensation cost related to
      nonvested stock. That cost is expected to be recognized in the second
      quarter of fiscal 2007. For the three months ended June 30, 2006, the
      Company's total stock-based compensation expense was $5,830.

      The following table summarizes plan and non-plan stock options outstanding
      as of June 30, 2006 as well as activity during the three months then
      ended:

<TABLE>
<CAPTION>
                                         Three Months Ended
                                            June 30, 2006          Weighted-
                                     --------------------------     Average
                                                   Weighted-       Remaining
                                                    Average       Contractual       Aggregate
                                      Shares     Exercise Price      Term       Intrinsic Value
                                     ---------   --------------   -----------   ---------------
<S>                                  <C>              <C>           <C>               <C>
Outstanding at beginning of period   4,846,406        $3.12
Granted                                     --           --
Exercised                                   --           --
Forfeited                              (32,429)        2.04
                                     ---------        -----
Outstanding at end of period         4,813,977        $3.13         3.1 Years         $0
                                     =========        =====         =========        ===
Exercisable at end of period         4,810,977        $3.13         3.1 Years         $0
                                     =========        =====         =========        ===
</TABLE>


                                       9

<PAGE>

      At June 30, 2006, the aggregate intrinsic value of options outstanding and
      options exercisable was zero, because the market value of the underlying
      stock was below the exercise price of all options. There were no options
      granted and thus no average fair value computed during the three months
      ended June 30, 2006 and 2005.

      Pro Forma Information for Periods Prior to April 1, 2006

      The Company estimated the fair value of each stock-based award during the
      three months ended June 30, 2005 as if compensation cost for all the
      Company's employee and director stock-based awards had been determined in
      accordance with the fair value method prescribed in SFAS No. 123. The fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model. The risk-free rate is based on the U.S
      Treasury rates in effect during the corresponding period of grant.
      Expected volatilities are based on the historical volatility of the
      Company's stock. Expected life of options granted is computed using the
      contractual life of the options granted. There is no expected dividend
      yield. The Company estimated the fair value of each stock-based award
      using the Black-Scholes pricing model with the following assumptions:

                          Three Months Ended
                             June 30, 2005
                          ------------------
Risk-free interest rate           3.45%
Volatility                       46.00%
Expected life (months)            1.00
Dividends                         None

      The following table illustrates the effect on net loss and net loss per
      share for the three months ended June 30, 2005 as if the Company's
      stock-based compensation had been determined based on the fair value at
      the grant dates for awards made prior to April 1, 2006, under those plans
      and consistent with SFAS 123:

                                                              Three Months Ended
                                                                 June 30, 2005
                                                              ------------------
Net loss as reported                                             $(9,144,114)
Add: Stock-based compensation included in reported net loss          867,518
Deduct: Stock-based compensation under fair-value based
  method for all awards                                             (877,593)
                                                                 -----------
Pro forma net loss                                               $(9,154,189)
                                                                 ===========
Pro forma basic and diluted net loss per common share:
Pro forma net loss per common share - basic and diluted          $     (0.49)
                                                                 ===========
Reported net loss per common share - basic and diluted           $     (0.49)
                                                                 ===========

      Segment Information

      The Company does not identify separate operating segments for management
      reporting purposes. The results of operations are the basis on which
      management evaluates operations and makes business decisions. The Company
      sells to customers throughout the United States and 14 other countries.

      Recent Accounting Pronouncements

      In July 2006, the FASB issued Interpretation No. 48, "Accounting for
      Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109"
      ("FIN 48"). FIN 48 provides guidance on the financial statement
      recognition and measurement of a tax position taken or expected to be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosures, and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      impact of this standard on its financial statements.

(3)   Secured Borrowings and Related Party Notes Payable

      Secured Borrowings

      On June 23, 2006, the Company entered into a Receivables Purchase
      Agreement with Systran Financial Services Corporation, a subsidiary of
      Textron Financial Corporation ("Systran"), whereby Systran will provide
      financing to the Company through advances against certain trade receivable
      invoices due to the Company (the "Systran Agreement"). The Systran
      Agreement is secured by the Company's accounts receivable and all other
      assets. Generally, subject to a maximum principal amount of $3,500,000
      which can be borrowed under the Systran Agreement, the amount available
      for borrowing is equal to 85% of the Company's eligible accounts
      receivable invoices less a dilution reserve and any required fixed dollar
      reserves. The dilution and fixed dollar reserves have been initially set
      at 7% and $100,000, respectively. Advances under the Systran Agreement
      bear interest at a variable rate equal to the prime rate plus 1.5% per
      annum (9.75% on June 30, 2006). The Company paid a one-time closing fee of
      $35,000 and is also obligated to pay a $1,500 monthly service fee. The
      initial term of the Systran Agreement ends on June 23, 2009 and may renew
      automatically for consecutive twelve-month terms unless terminated sooner.


                                       10

<PAGE>

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

      On June 23, 2006, Systran advanced $2,379,262 under the Systran Agreement
      of which $1,839,086 was used to pay in full and terminate the Company's
      obligations under its line of credit with Textron Financial Corporation
      which was to terminate on June 27, 2006 pursuant to a Sixth Amendment to
      the Textron Loan Agreement that was executed on May 26, 2006. The Sixth
      Amendment provided for an extension of the Textron Loan from May 26, 2006
      until June 27, 2006 and reduced the maximum principal amount which could
      be borrowed under the Textron Loan to $3,000,000. In exchange for the
      amendment and extension, the Company paid a fee of $10,000. As of June 30,
      2006, advances under the Systran Agreement totaled $2,087,256.

      Related Party Notes Payable

      Pursuant to a Note and Warrant Purchase Agreement dated September 12,
      2005, the Company received $1,200,000 as a loan from Mr. Frederick A.
      DeLuca, a greater than 10% shareholder. In October 2005, pursuant to
      several Note and Warrant Purchase Agreements dated September 28, 2005, the
      Company received a $600,000 loan from Conversion Capital Master, Ltd., a
      $485,200 loan from SRB Greenway Capital (Q.P.), L.P., a $69,600 loan from
      SRB Greenway Capital, L.P. and a $45,200 loan from SRB Greenway Offshore
      Operating Fund, L.P. The combined total of these loans was $2,400,000. The
      loans were evidenced by unsecured promissory notes (the "Notes") held by
      the above referenced parties (the "Note Holders"). The Notes required
      monthly interest-only payments at 3% above the bank prime rate of interest
      per the Federal Reserve Bank and matured on June 15, 2006.

      The Company did not have the short-term liquidity to pay its related party
      Note Holders on the $2.4 million Notes that matured on June 15, 2006 in
      accordance with their original terms. The Company received a letter on
      June 20, 2006 from all of the Note Holders, other than Mr. DeLuca,
      notifying the Company that its failure to pay the amounts due and owing on
      the maturity date constitutes a default under $1.2 million of the Notes
      held by those Note Holders. Pursuant to the terms of the Notes, since the
      Company did not cure the default within 10 days after receipt of the
      notice of default, it was obligated to pay interest at the default rate of
      8% above the Prime Rate beginning July 1, 2006. The Company amortized the
      final $126,979 of debt discount costs related to the above transaction in
      the three months ended June 30, 2006.

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

      As a result of the subsequent refinancing, the $2,685,104 of short-term
      obligations was reclassified to long-term debt as of June 30, 2006.

(4)   Disposal Activities

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


                                       11

<PAGE>

      The Company is accounting for the costs associated with these transactions
      in accordance with SFAS No. 146, "Accounting for Costs Associated with an
      Exit or Disposal Activity," because the above arrangements were planned
      and controlled by management and materially change the manner in which the
      Company's business will be conducted. In accordance with SFAS No. 146,
      costs associated with disposal activities should be reported as a
      reduction of income from operations. The above transactions were
      communicated to the Company's employees on July 6, 2005. During the year
      ended March 31, 2006, all 104 employee positions related to the
      manufacturing and distribution of the Company's products were eliminated.
      The remaining employee termination costs are expected to be paid in fiscal
      2007. In December 2005, the Company abandoned its distribution facility
      and the production portion of its administrative facility and accrued
      $396,197 related to abandonment of these facilities. This amount was
      calculated as the present value of the remaining lease rentals, reduced by
      the estimated market value of sublease rentals. The actual expense will
      exceed this estimate for the time that the Company does not sublease these
      facilities. Other exit costs consist primarily of legal and professional
      fees related to the disposal activities and maintenance costs on the
      abandoned facilities.

      As of June 30, 2006, the Company has accrued the following costs
      associated with the above transactions:

<TABLE>
<CAPTION>
                                        Employee
                                      Termination     Excess     Other Exit
                                         Costs      Facilities      Costs       Total
                                      -----------   ----------   ----------   ---------
<S>                                    <C>          <C>          <C>          <C>
Accrued Balance March 31, 2005         $      --    $      --    $      --    $      --
Charges                                       --           --      189,069      189,069
Payments                                      --           --     (189,069)    (189,069)
                                       ---------    ---------    ---------    ---------
Accrued Balance, June 30, 2005                --           --           --           --
Charges                                  359,774           --      124,425      484,199
Payments                                      --           --     (124,425)    (124,425)
                                       ---------    ---------    ---------    ---------
Accrued Balance, September 30, 2005      359,774           --           --      359,774
Charges                                   51,638      396,197      221,101      668,936
Payments                                (204,847)          --     (221,101)    (425,948)
                                       ---------    ---------    ---------    ---------
Accrued Balance, December 31, 2005       206,565      396,197           --      602,762
Charges                                   39,590      122,282      142,414      304,286
Payments                                (220,277)    (168,530)     (37,837)    (426,644)
                                       ---------    ---------    ---------    ---------
Accrued Balance, March 31, 2006           25,878      349,949      104,577      480,404
Charges                                       --       88,955       12,789      101,744
Payments                                  (7,257)    (136,260)     (18,427)    (161,944)
                                       ---------    ---------    ---------    ---------
Accrued Balance, June 30, 2006         $  18,621    $ 302,644    $  98,939    $ 420,204
                                       =========    =========    =========    =========
</TABLE>

      The Company reports its disposal costs for the period as Costs of Disposal
      Activities in the Statement of Operations. A summary of the total disposal
      costs incurred is as follows:

<TABLE>
<CAPTION>
                                      Employee
                                    Termination     Excess     Other Exit
                                       Costs      Facilities      Costs        Total
                                    -----------   ----------   ----------   ----------
<S>                                   <C>          <C>          <C>         <C>
Three Months Ended June 30, 2005      $     --     $     --     $189,069    $  189,069
                                      ========     ========     ========    ==========
Three Months Ended June 30, 2006            --       88,955       12,789       101,744
                                      ========     ========     ========    ==========
Total Costs Incurred from
  inception through June 30, 2006     $451,002     $607,434     $689,798    $1,748,234
                                      ========     ========     ========    ==========
</TABLE>

      The Company anticipates that in future periods, there will be additional
      disposal costs related to professional fees, contract cancellation charges
      and higher lease abandonment charges to reflect the cost of abandoned
      facilities that were not subleased during the period.


                                       12

<PAGE>

      Effective April 15, 2006 through October 31, 2006, the Company entered
      into a sublease agreement for a portion of its unused manufacturing
      facility and parking spaces whereby it expects to receive approximately
      $83,901 in rental income to offset its lease payment obligations in fiscal
      2007.

(5)   Related Party Transactions

      Angelo S. Morini

      In a Second Amended and Restated Employment Agreement effective October
      13, 2003, Angelo S. Morini the Company's Founder, Vice-Chairman and
      President resigned from his positions with the Company as Vice Chairman
      and President and he is no longer involved in the daily operations of the
      Company. He retains the title of Founder and has been named Chairman
      Emeritus. Mr. Morini continues to be a stockholder and a member of the
      Company's Board of Directors. Additionally, he may carry out special
      assignments designated to him by the Chairman of the Board. The agreement
      is for a five-year period beginning October 13, 2003 and provides for an
      annual base salary of $300,000, plus standard health insurance benefits,
      club dues and an auto allowance.

      Because Mr. Morini is no longer performing ongoing services for the
      Company, the Company accrued and expensed the five-year cost of this
      agreement in October 2003. The total estimated costs expensed under this
      agreement were $1,830,329 of which $834,963 remained unpaid but accrued
      ($366,305 as short-term liabilities and $468,658 as long-term liabilities)
      as of June 30, 2006. The long-term portion is being paid out in nearly
      equal monthly installments ending in October 2008.

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

      On June 16, 2006, Mr. Morini failed to repay the non-recourse note
      obligation to the Company. The 2,914,286 shares being held as collateral
      were deemed to be no longer outstanding and thus considered as treasury
      stock. On June 20, 2006, the Company delivered notice to Mr. Morini that
      it intended to exercise its rights to the Shares and retain all the Shares
      in full satisfaction of his obligations under the stockholder note
      receivable. On July 6, 2006, Mr. Morini consented to the Company's
      acceptance of the Shares in full satisfaction of his obligations under the
      stockholder note receivable. Based upon the $0.42 closing price of the
      Company's common stock as quoted on the OTC Bulletin Board on June 16,
      2006, the Shares had an approximate value of $1,224,000 on such date.
      Accordingly, the Company recorded an additional expense of $1,428,000 in
      the three months ended June 30, 2006 in order to record the additional
      decline in the value of the Shares from its $2,652,000 value as of March
      31, 2006. As of June 30, 2006, the value of the Shares is reflected in the
      treasury stock balance of $1,344,461. In July 2006, the Company cancelled
      the Shares along with its other 30,443 treasury shares.

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

      Christopher J. New

      On July 8, 2004, Christopher J. New resigned from his position as Chief
      Executive Officer in order to pursue other opportunities. In accordance
      with the Separation and Settlement Agreement between the Company and Mr.
      New, the Company recorded $444,883 related to the employment contract
      expense in July 2004. This settlement is being paid out in nearly equal
      installments over two years payable on the Company's regular payroll
      dates. As of June 30, 2006, the remaining unpaid and accrued balance
      reflected in short-term liabilities was $12,291.

(6)   Commitments and Contingencies

      Supply Agreement

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

            o The initial term of the Supply Agreement is for a period of five
      years from the effective date of September 1, 2005 and is renewable at the
      Company's option for up to two additional five-year periods (for a total
      term of up to fifteen years). Since October 2005, Schreiber has begun to
      purchase the Company's remaining raw materials, ingredients and packaging
      at cost. If the Company does not exercise its first option to extend the
      term, then the Company will be obligated to pay Schreiber $1,500,000. If
      the Company has exercised the first option to extend the term, but does
      not exercise its second option to extend the term, then the Company will
      be obligated to pay Schreiber $750,000.


                                       13

<PAGE>

            o The Supply Agreement provides for a contingent short-fall payment
      obligation by the Company if a specified production level is not met
      during the one-year period from September 1, 2006 to August 31, 2007. If a
      contingent short-fall payment is accrued after such one-year period, it
      may be reduced by the amount by which production levels in the one-year
      period from September 1, 2007 to August 31, 2008 exceeds the specified
      target level of production, if any.

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

      Effective April 1, 2006, SFAS No. 123R applies to new awards and to awards
      modified, repurchased, or cancelled after the effective date, as well as
      to the unvested portion of awards outstanding as of the effective date.
      The Company uses the Black-Scholes model to value its new stock option
      grants under SFAS No. 123R, applying the "modified prospective method" for
      existing grants which requires the Company to value stock options prior to
      its adoption of SFAS No. 123R under the fair value method and expense the
      unvested portion over the remaining vesting period. For the three months
      ended June 30, 2006, the Company's total stock-based compensation expense
      was $5,830.

      Prior to April 1, 2006 and beginning April 1, 2003, the Company accounted
      for stock awards granted to employees under the fair value recognition
      provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and
      applied SFAS No. 148, "Accounting for Stock-Based Compensation -
      Transition and Disclosure," prospectively to all employee awards granted
      on or after April 1, 2003. Prior to April 1, 2003, the Company accounted
      for stock awards granted to employees under the recognition and
      measurement principles of Accounting Principles Board Opinion No. 25,
      "Accounting for Stock Issued to Employees, and related Interpretations"
      ("APB No. 25"). As a result, no compensation expense was previously
      recognized for stock options granted to employees prior to April 1, 2003
      other than as related to option grants to employees and directors below
      the fair market value of the underlying stock at the date of grant or as
      related to subsequent modifications to option grants to employees and
      directors. For the three months ended June 30, 2005, the Company's total
      stock-based compensation expense was $867,518 including an expense of
      $1,036,959 for awards valued pursuant to SFAS No. 123 and income of
      $169,441 for modification of awards valued pursuant to APB No. 25.

(8)   Earnings Per Share

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

                                            THREE MONTHS ENDED
                                                 JUNE 30,
                                        -------------------------
                                            2006          2005
                                        -----------   -----------
Net loss to common stockholders         $(1,342,429)  $(9,144,114)
                                        ===========   ===========
Weighted average shares outstanding -
  basic and diluted                      19,576,163    18,663,485
                                        ===========   ===========
Basic and diluted net loss per common
  share                                 $     (0.07)  $     (0.49)
                                        ===========   ===========

      Options for 4,813,977 and 5,059,809 shares and warrants for 1,133,142 and
      655,356 shares have not been included in the computation of diluted net
      loss per common share for the three months ended June 30, 2006 and 2005,
      respectively, as their effect would be antidilutive.

(9)   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.


                                       14

<PAGE>

Three months ended June 30,                       2006       2005
---------------------------------------------   --------   --------
Non-cash financing and investing activities:
Purchase of equipment through a capital lease   $  3,281   $     --
Cash paid for:
Interest                                         115,067    375,924

(10)  Economic Dependence and Segment Information

      The Company has one operating segment and sells to customers throughout
      the United States and 14 other countries. For the three months ended June
      30, 2006 and 2005, the Company's gross sales were $8,734,538 and
      $10,703,035, respectively. Gross sales derived from foreign countries were
      approximately $1,119,536 and $1,091,565 representing 13% and 10% of total
      sales for the three months ended June 30, 2006 and 2005, respectively.
      Gross sales are attributed to individual countries based on the customer's
      shipping address. The Company has no long-term assets located outside of
      the United States.

      The following table sets forth the percentage of foreign gross sales to
      each country, which accounted for 10% or more of the Company's foreign
      gross sales for the three months ended June 30, 2006 and 2005:

              Percentage of Gross Foreign Sales
                 Three Months Ended June 30,
              ---------------------------------
Country               2006     2005
-------               ----     ----
Canada                66.0%    45.4%
Puerto Rico           15.8%    30.0%

      The Company had two customers that accounted for approximately 22% of
      gross sales for the three months June 30, 2006. There were no customers
      whose balance outstanding was greater than 10% of accounts receivable as
      of June 30, 2006. The Company had one customer that accounted for
      approximately 12% of sales in the three months ended June 30, 2005. As of
      June 30, 2005, the amount due from this customer was approximately 10% of
      the balance of accounts receivable.

      For the three months ended June 30, 2006, the Company purchased nearly
      100% of its inventory for sale to customers from Schreiber. For the three
      months ended June 30, 2005, the Company did not have any supplier that
      comprised more than 10% of total raw material purchases.

(11)  Subsequent Events

      Effective July 31, 2006, the Company entered into a lease termination
      agreement with its landlord, CLP Industrial Properties, regarding its
      unused leased distribution facilities whereby the landlord released the
      Company from $1,068,869 in future payment obligations from August 1, 2006
      through July 31, 2009 under the terms of its current operating lease, in
      exchange for a termination fee of $228,859 payable as follows: $128,859
      upon the effective date, followed by payments of $75,000 and $25,000
      thirty and forty-five days thereafter, respectively.

      On August 7, 2006, the Board of Directors the Company appointed two new
      directors, Mr. Peter J. Jungsberger and Mr. Robert S. Mohel. As a result
      of these appointments, all vacancies on the Company's Board of Directors
      have been filled. The current Board consists of three independent
      directors (including Messrs. Jungsberger and Mohel) and two inside
      directors. Upon their appointment, the Board of Directors issued to each
      Mr. Jungsberger and Mr. Mohel an option to purchase up to 100,000 shares
      of the Company's common stock with an exercise price of $0.45 (110% of the
      $.041 market price as quoted on the OTC Bulletin Board on August 7, 2006).
      The options are immediately vested and expire on August 7, 2011.


                                       15

<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

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

Information in this Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") is intended to enhance a reader's
understanding of the financial condition, changes in financial condition and
results of operations of our company. This MD&A is a supplement to and should be
read in conjunction with our financial statements and notes thereto appearing
elsewhere in this report. This Form 10-Q & MD&A contain forward-looking
statements within the meaning of the federal securities laws that relate to
future events or our future financial performance. These forward-looking
statements are based on our current expectations, estimates and projections
about our industry, management's beliefs and certain assumptions made by our
company. Words such as "anticipate," "expect," "intend," "plan," "believe,"
"seek," "project," "estimate," "may," "will," "could," "should," "potential," or
"continue" or the negative or variations of these words or similar expressions
are intended to identify forward-looking statements. Additionally, these
forward-looking statements include, but are not limited to statements regarding:

      o     Improving cash flows from operations;

      o     Marketing our existing products and those under development;

      o     Our estimates of future revenue and profitability;

      o     Our expectations regarding future expenses, including cost of goods
            sold, delivery, selling, general and administrative, research and
            development expenses, and disposal costs;

      o     Our estimates regarding capital requirements and our needs for
            additional financing; and

      o     Competition in our market.

Although we believe that these forward-looking statements are reasonable at the
time they are made, these statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual results may differ materially from our
historical results and those expressed or forecasted in any forward-looking
statements as a result of a variety of factors, including those set forth under
"Risk Factors" and elsewhere in, or incorporated by reference into, this Form
10-Q. We are not required and undertake no obligation to publicly update or
revise any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.

Terms such as "fiscal 2007" or "fiscal 2006" refer to our fiscal years ending
March 31, 2007 and 2006, respectively. Terms such as "first quarter," "second
quarter," "third quarter," or "fourth quarter" refer to the fiscal quarters
ending June 30, September 30, December 31, or March 31, respectively.

This MD&A contains the following sections:

      o     Business Environment

      o     Basis of Presentation

      o     Critical Accounting Policies

      o     Results of Operations

      o     Liquidity and Capital Resources

      o     Recent Accounting Pronouncements

Business Environment

General

Galaxy Nutritional Foods, Inc. (our "Company") is principally engaged in
developing and globally marketing plant-based cheese and dairy alternatives, as
well as processed organic cheese and cheese food to grocery and natural foods
retailers, mass merchandisers and foodservice accounts. Veggie, the leading
brand in the grocery cheese alternative category and our Company's top selling
product group, is primarily merchandised in the produce section and provides
calcium and protein without cholesterol, saturated fat or trans-fat. Other
popular brands include: Rice, Veggy, Vegan, and Wholesome Valley. We are
dedicated to developing nutritious products to meet the taste and dietary needs
of today's increasingly health conscious consumers. Our company headquarters are
located in Orlando, Florida.


                                       16

<PAGE>

In fiscal 2006, we determined that the manufacturing capacity was significantly
in excess of our requirements and that it would be advantageous to outsource
manufacturing and distribution operations. On June 30, 2005, Galaxy Nutritional
Foods, Inc. and Schreiber Foods, Inc., a Wisconsin corporation ("Schreiber"),
entered into a Supply Agreement, whereby we agreed that Schreiber would become
our sole source of supply for substantially all of our products. In November
2005, Schreiber began to deliver such products directly to our customers.

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

Cheese Alternative Category

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

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

In fiscal 2006, we launched a regional consumer marketing campaign to educate
conventional cheese users on the benefits and location of Galaxy branded
products. The campaign drivers included traditional consumer advertising, price
based promotions, secondary placement and event marketing.

The consumer focused advertising included a 30 second TV commercial in key
markets on major networks including Food Network, Lifetime, Travel Channel,
Oxygen and USA during September 2005 and January 2006. Price based promotions
included a cents off coupon in free standing inserts distributed in major
regional newspapers in September 2005 and January 2006. We also tested secondary
placement with select retailers in Florida, Los Angeles and Chicago. Event
marketing included sponsorship of the Komen Race for the Cure in New York and
Houston. This provided an opportunity to educate women on the benefits of cheese
alternatives and introduce them to our brands with samples, coupons and product
information.

The fiscal 2006 marketing campaign provided valuable insight as to what types of
marketing efforts produced short-term and long-term benefits for brand
recognition and accomplished our goal of increasing consumer education in order
to broaden the consumer base within the cheese alternative category. We are
using the results from fiscal 2006, to focus the fiscal 2007 marketing campaign
as we enter the year as a branded marketing company.

Recent Material Developments

      Debt Refinancing

On June 23, 2006, we entered into a Receivables Purchase Agreement with Systran
Financial Services Corporation, a subsidiary of Textron Financial Corporation
("Systran"), whereby Systran will provide financing to our Company through
advances against certain trade receivable invoices due to our Company (the
"Systran Agreement"). On June 23, 2006, Systran advanced $2,379,262 under the
Systran Agreement of which $1,839,086 was used to pay in full and terminate our
obligations under our line of credit with Textron Financial Corporation which
was to terminate on June 27, 2006.

Pursuant to a Note Purchase Agreement dated July 19, 2006, we issued a new
unsecured convertible note for $2,685,104 (the "Convertible Note") to Frederick
A. DeLuca, a greater than 10% shareholder. The proceeds from the Convertible
Note were used to repay or refinance $2,400,000 in unsecured promissory notes
that matured on June 15, 2006 (including one such note in the principal amount
of $1,200,000 owned by Mr. DeLuca) and a $285,104 registration rights penalty
owed to Mr. DeLuca.

See Debt Financing under Liquidity and Capital Resources for additional
information on the above refinancing.


                                       17

<PAGE>

      Outsourcing Effect

We believe that the long-term benefits in the transition from a manufacturing
company to a branded marketing company will substantially outweigh the
short-term costs of the transition. Without the cash-flow burden of carrying
inventory and managing manufacturing overhead and production issues, we believe
that we can focus a greater amount of time and resources on the sale of our
products. Additionally, we plan to enhance our marketing efforts in order to
increase our consumer base.

Some of the effects of the transaction are as follows:

      o     We are solely a branded marketing company without any manufacturing
            and distribution functions.

      o     In December 2005, we ceased to use the manufacturing portion of our
            main leased facility in Orlando, Florida where our administrative
            offices are located, but we plan to stay in this location through
            the end of our lease in November 2006. If the lease is not
            terminated sooner, future lease payments due on this facility are
            approximately $267,000 for the balance of the term. Effective April
            15, 2006 through October 31, 2006, we entered into a sublease
            agreement for a portion of our unused manufacturing facility and
            parking spaces whereby we expect to receive approximately $83,901 in
            rental income to offset our lease payment obligations in fiscal
            2007.

      o     In December 2005, we abandoned our distribution facility that had a
            lease termination date of July 31, 2009. Effective July 31, 2006, we
            entered into a lease termination agreement with our landlord, CLP
            Industrial Properties, regarding our unused leased distribution
            facilities whereby the landlord released us from $1,068,869 in
            future payment obligations from August 1, 2006 through July 31, 2009
            under the terms of our current operating lease, in exchange for a
            termination fee of $228,859.

      o     We eliminated 104 employee positions related to the manufacturing
            and distribution of our products and created 2 new employee
            positions. We now maintain 30 full time positions.

      o     We used the proceeds from the sale of our manufacturing equipment to
            reduce a substantial portion of our outstanding debt and
            liabilities. Repayment of these liabilities will result in annual
            interest savings in excess of $800,000.

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

      o     We anticipate substantial savings on delivery charges related to the
            distribution of our products to our customers. In the first quarter
            of fiscal 2007, delivery expenses amounted to 3% of net sales
            compared to 6% of net sales in the first quarter of fiscal 2006.

      o     We anticipate substantial savings on costs of goods sold and
            improved gross margins as a result of reduced overhead and lower
            material costs In the first quarter of fiscal 2007, gross margin was
            approximately 35% of net sales compared to 23% of net sales in the
            first quarter of fiscal 2006.

Measurements of Financial Performance

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

      o     Operating cash flow

      o     Gross margin in dollars and % of gross sales

      o     Operating income excluding non-cash compensation related to stock
            based transactions, disposal costs and fixed asset impairment
            charges

      o     EBITDA excluding non-cash compensation related to stock based
            transactions, disposal costs and fixed asset impairment charges

      o     Liquidity

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

Basis Of Presentation

We have incurred substantial losses in recent years and, as a result, have a
stockholders deficit of $3,591,259 as of June 30, 2006. Losses for the years
ended March 31, 2006, 2005 and 2004 were $24,148,553, $3,859,783 and $3,299,277,
respectively. Additionally, we received a report from our independent
accountants relating to our audited financial statements as of March 31, 2006
containing a paragraph stating that because we were then in default of our notes
payable, had suffered recurring losses from operations and at March 31, 2006 had
deficiencies in working capital and equity, there was substantive doubt as to
our ability to continue as a going concern. Our ability to continue as a going
concern depended upon successfully obtaining sufficient cash resources to
refinance our $2.4 million of unsecured notes payable that matured on June 15,
2006 and obtaining positive cash flow from operations to sustain normal business
operations.


                                       18

<PAGE>

Our current business plan eliminates certain low margin private label and Galaxy
imitation business from our sales mix. The elimination of these low margin items
and the elimination of excess overhead that was part of our former manufacturing
operations should continue to result in higher gross margins with lower
operating costs and produce positive cash flows from operations in fiscal 2007.

As a result of the successful refinancing of the $2.4 million short-term notes
and line of credit for our receivables financing and the positive cash flow that
we are currently experiencing from operations, we believe that we have
sufficient cash resources to meet our current liquidity needs. Therefore, our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America assuming that we will
continue on a going concern basis. This assumes the realization of assets and
the satisfaction of liabilities in the normal course of business.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of income and expense during the
reporting periods presented. Our significant estimates include the allowance for
doubtful accounts receivable, reserve on stockholder note receivable, provision
for obsolete inventory, valuation of deferred taxes, valuation of compensation
expense on options and warrants, and accruals for disposal costs. Although we
believe that these estimates are reasonable, actual results could differ from
those estimates given a change in conditions or assumptions that have been
consistently applied.

Management has discussed the selection of critical accounting policies and
estimates with our Board of Directors and the Board of Directors has reviewed
our disclosure relating to critical accounting policies and estimates in this
quarterly report on Form 10-Q. Our significant accounting policies are described
in Note 1 to our financial statements for fiscal 2006. The critical accounting
policies used by management and the methodology for its estimates and
assumptions are as follows:

Valuation of Accounts Receivable and Chargebacks

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

Based on the age of the receivable, cash collection history and past dilution in
the receivables, we make an estimate of our anticipated bad debt, anticipated
future authorized deductions due to current period activity and anticipated
collections on non-authorized amounts that customers have currently deducted on
past invoices. Based on this analysis, we reserved $994,000 and $2,612,000 for
known and anticipated future credits and doubtful accounts at June 30, 2006 and
2005, respectively. The reserve was higher at June 30, 2005 primarily due to the
$1.6 million bad debt reserve related to one customer. We believe that this
estimate is reasonable, but there can be no assurance that our estimate will not
change given a change in economic conditions or business conditions within the
food industry, our individual customer base or our Company.

Valuation of Stockholder Note Receivable

We evaluated the collection of the $12,772,200 stockholder note receivable that
was due on June 15, 2006 from Angelo S. Morini, our Founder, stockholder and a
member of our Board of Directors. This stockholder note receivable is
non-recourse and is secured only by 2,914,286 shares of our common stock. During
our evaluation, among other things, we considered the current value of the
2,914,286 shares of our common stock and the remaining time before the
stockholder note was due to be paid. Due to the uncertainty that the value of
these shares would exceed the stockholder note value prior to its maturity, we
reserved $10,120,200 during the fiscal year ended March 31, 2006 for the
difference between the $2,652,000 share value and the $12,772,200 loan value as
of such date. The value of the shares was computed using the closing price of
our common stock on March 31, 2006 of $0.91 multiplied by the 2,914,286 shares.

On June 16, 2006, Mr. Morini failed to repay the non-recourse note obligation to
our Company. The 2,914,286 shares being held as collateral were deemed to be no
longer outstanding and thus considered as treasury stock. Based upon the $0.42
closing price of our common stock as quoted on the OTC Bulletin Board on June
16, 2006, the shares had an approximate value of $1,224,000 on such date.
Accordingly, we recorded an additional expense of $1,428,000 in the three months
ended June 30, 2006 in order to record the additional decline in the value of
the shares from its $2,652,000 value as of March 31, 2006. As of June 30, 2006,
the value of the Shares is reflected in treasury stock.


                                       19

<PAGE>

Deferred Taxes

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

Valuation of Non-Cash Compensation

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

SFAS No. 123R applies to new awards and to awards modified, repurchased, or
cancelled after the effective date, as well as to the unvested portion of awards
outstanding as of the effective date. We use the Black-Scholes model to value
our new stock option grants under SFAS No. 123R, applying the "modified
prospective method" for existing grants which requires us to value stock options
prior to our adoption of SFAS No. 123R under the fair value method and expense
the unvested portion over the remaining vesting period. SFAS No. 123R also
requires us to estimate forfeitures in calculating the expense related to
stock-based compensation. In addition, SFAS No. 123R requires us to reflect cash
flows resulting from the tax benefits related to tax deductions in excess of the
compensation cost recognized for those options to be classified as a cash inflow
from financing activities and a cash outflow from operating activities.

Prior to April 1, 2006 and beginning April 1, 2003, we accounted for stock
awards granted to employees under the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," and applied SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
prospectively to all employee awards granted on or after April 1, 2003. Prior to
April 1, 2003, we accounted for stock awards granted to employees under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees, and related Interpretations."
As a result, no compensation expense was previously recognized for stock options
granted to employees prior to April 1, 2003 other than as related to option
grants to employees and directors below the fair market value of the underlying
stock at the date of grant or as related to subsequent modifications to option
grants to employees and directors.

The Black-Scholes model requires subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The risk-free rate is based on the U.S Treasury rates in
effect during the corresponding period of grant. Expected volatilities are based
on the historical volatility of our stock. In the past, we input the expected
life of options granted as the contractual life of the options granted. For any
new awards, we will input the expected term of options granted based on
information derived from historical data on employee exercises and post-vesting
employment termination behavior. There is no expected dividend yield. These
factors could change in the future, which would affect the stock-based
compensation expense in future periods. SFAS No. 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.

Disposal Costs

We have recorded accruals in connection with the asset sale and outsourcing
arrangements with Schreiber. These accruals include estimates pertaining to
employee termination costs and abandonment of excess equipment and facilities
and other potential costs. Actual costs may differ from these estimates or our
estimates may change. In accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," costs associated with
restructuring activities are recognized when they are incurred rather than at
the date of a commitment to an exit or disposal plan. Given the significance and
complexity of these activities, and the timing of the execution of such
activities, the accrual process involves periodic reassessments of estimates
made at the time the original decisions were made, including evaluating
estimated employment terms, contract cancellation charges and real estate market
conditions for sub-lease rents. We will continually evaluate the adequacy of the
remaining liabilities under our restructuring initiatives. Although we believe
that these estimates accurately reflect the costs of our activities, actual
results may differ, thereby requiring us to record additional provisions or
reverse a portion of such provisions. If we do not sublease our facilities, our
estimate of excess facility expenses will increase.


                                       20

<PAGE>

Results of Operations

<TABLE>
<CAPTION>
                                3-Months Ended June 30,               2006    2005
                     ---------------------------------------------   -------------
                                                  $           %       % of    % of
                        2006        2005       Change      Change    Sales   Sales
                     ---------   ---------   ----------   --------   -----   -----
<S>                  <C>         <C>         <C>           <C>       <C>     <C>
Net Sales            7,832,562   9,851,153   (2,018,591)   -20.5%    100.0%  100.0%
Cost of Goods Sold   5,075,212   7,582,855   (2,507,643)   -33.1%     64.8%   77.0%
                     ---------   ---------   ----------    ------    -----   -----
Gross Margin         2,757,350   2,268,298      489,052     21.6%     35.2%   23.0%
                     =========   =========   ==========    ======    =====   =====
</TABLE>

Sales

For the three months ended June 30, 2006 and 2005, our gross sales were
$8,734,538 and $10,703,035, respectively. The following chart sets forth the
percentage of gross sales derived from our product brands during the three
months ended June 30, 2006 and 2005:

                                    Percentage of Gross Sales
                                   Three Months Ended June 30,
                                   ---------------------------
Brand                                    2006    2005
-----                                    ----    ----
Veggie                                   55.3%   50.1%
Private Label, Imitation & Other         24.5%   33.4%
Rice                                     10.6%    7.4%
Veggy                                     4.1%    4.6%
Wholesome Valley Organic                  2.8%    2.7%
Vegan                                     2.7%    1.8%

Net sales, after discounts, returns and allowances, in the first quarter of
fiscal 2007 decreased 20% from net sales in fiscal 2006 due to the elimination
of certain private label and Galaxy imitation products.

During fiscal 2007, we plan to continue to reduce marginally profitable private
label and Galaxy imitation sales, which we believe will improve our gross
margins. Additionally, we plan to increase the effectiveness of our price based
promotions in fiscal 2007 to generate higher sales on our branded products. We
anticipate that our sales in fiscal 2007 will continue to be lower than sales in
fiscal 2006 due to our specific focus to eliminate marginally profitable private
label and other products.

Cost of Goods Sold

Cost of goods sold was approximately 65% of net sales in the first quarter of
fiscal 2007 compared to 77% of net sales for the first quarter of fiscal 2006.
This sharp decrease in cost of goods sold is primarily due to the elimination of
production overhead through the outsourcing of our manufacturing operations in
November 2005 as discussed under Recent Material Developments. Our production
overhead was substantially higher than the current processing fee charged for
the production of our products due to an 85% underutilization of our
manufacturing equipment and facilities.

We anticipate that the cost of goods sold will remain improved over prior year
levels as a result of the outsourcing arrangement with Schreiber. However,
actual results could differ from our expectations.

Gross Margin

Despite a $2 million decline in sales, gross margin dollars in the first quarter
of fiscal 2007 was approximately $489,000 higher than in the first quarter of
fiscal 2006 due to the elimination of certain low margin private label and
Galaxy imitation business, the change in our product mix and the reduction in
excess overhead. Our anticipated higher margin sales combined with our lower
overhead burden, should produce higher gross margins in dollars and as a
percentage of sales throughout fiscal 2007.

EBITDA

We utilize certain GAAP measures such as Operating Income and Net Income and
certain non-GAAP measures, in order to compute key financial measures that are
reviewed by management, lenders and investors in order to effectively review our
current on-going operations and analyze trends related to our financial
condition and results of operations. Additionally, these measures are key
factors upon which we prepare our budgets and forecasts, and calculate bonuses.
In our calculation of key financial non-GAAP measures for adjusted Operating
Income, adjusted Net Income and adjusted EBITDA, we exclude items such as
non-cash compensation related to stock based transactions, disposal costs and
fixed asset impairment and disposal charges. These adjusted measures are not in
accordance with, or an alternative for, generally accepted accounting principles
and may be different from non-GAAP measures reported by other companies.


                                       21

<PAGE>

EBITDA, (a non-GAAP measure):

<TABLE>
<CAPTION>
                                              3-Months Ended June 30,                2006    2005
                                   ----------------------------------------------   -------------
                                                                  $          %       % of    % of
                                      2006         2005        Change     Change    Sales   Sales
                                   ----------   ----------   ----------   -------   -----   -----
<S>                                <C>          <C>          <C>          <C>       <C>     <C>
Gross Margin                        2,757,350    2,268,298      489,052     21.6%    35.2%   23.0%
                                   ----------   ----------   ----------   ------    -----   -----
Operating Expenses:
Selling                               965,979      936,245       29,734      3.2%    12.3%    9.5%
Delivery                              246,542      615,471     (368,929)   -59.9%     3.1%    6.2%
General and administrative,
  including $5,830 and $867,518
  non-cash stock compensation(1)      984,862    1,667,472     (682,610)   -40.9%    12.6%   16.9%
Research and development               42,334       91,042      (48,708)   -53.5%     0.5%    0.9%
Reserve on stockholder note
  receivable(2)                     1,428,000           --    1,428,000    100.0%    18.2%    0.0%
Cost of disposal activities(2)        101,744      189,069      (87,325)   -46.2%     1.3%    1.9%
Impairment of fixed assets(2)              --    7,896,554   (7,896,554)  -100.0%     0.0%   80.2%
  (Gain)/loss on disposal of
  assets                              (12,824)        (636)     (12,188)  1916.4%    -0.2%    0.0%
                                   ----------   ----------   ----------   ------    -----   -----
Total operating expenses            3,756,637   11,395,217   (7,638,580)   -67.0%    48.0%  115.7%
                                   ----------   ----------   ----------   ------    -----   -----
Loss from Operations(3)              (999,287)  (9,126,919)   8,127,632    -89.1%   -12.8%  -92.6%
Other Income (Expense), Net
Interest expense, net                (343,142)    (357,195)      14,053     -3.9%    -4.4%   -3.6%
Gain (loss) on FV of warrants              --      340,000     (340,000)  -100.0%     0.0%    3.5%
                                   ----------   ----------   ----------   ------    -----   -----
Total                                (343,142)     (17,195)    (325,947)  1895.6%    -4.4%   -0.2%
                                   ----------   ----------   ----------   ------    -----   -----
NET LOSS                           (1,342,429)  (9,144,114)   7,801,685    -85.3%   -17.1%  -92.8%
Interest expense, net                 343,142      357,195      (14,053)    -3.9%     4.4%    3.6%
Depreciation                           52,822      539,103     (486,281)   -90.2%     0.7%    5.5%
                                   ----------   ----------   ----------   ------    -----   -----
EBITDA, (a non-GAAP measure)         (946,465)  (8,247,816)   7,301,351    -88.5%   -12.1%  -83.7%
                                   ==========   ==========   ==========   ======    =====   =====
</TABLE>

(1)   In our calculation of key financial measures, we exclude the non-cash
      compensation related to stock-based transactions because we believe that
      this item does not accurately reflect our current on-going operations.
      Many times non-cash compensation is calculated based on fluctuations in
      our stock price, which can skew the financial results dramatically up and
      down. The market price of our common shares is outside our control and
      typically does not reflect our current operations.

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

(3)   Operating Loss has decreased due the changes in non-cash compensation
      related to stock-based transactions as discussed below under general and
      administrative, and certain non-standard expenses such as the reserve on
      stockholder note receivable, disposal costs and fixed asset impairment
      charges related to the Asset Purchase Agreement and the Supply Agreement
      with Schreiber as discussed under Recent Material Developments.


                                       22

<PAGE>

Selling

Selling expense is partly a function of sales through variable costs such as
brokerage commissions and promotional costs along with certain fixed costs for
employee salaries and benefits and marketing campaigns. Our selling expense
typically averages between 12% and 13% of net sales. Selling expenses were lower
in the first quarter of fiscal 2006 compared to the typical quarterly average,
as experienced in the first quarter of fiscal 2007, due to lower advertising and
promotion costs that were delayed until the future quarters of fiscal 2006.

We expect fixed selling expenses for advertising and market research in fiscal
2007 to be nearly the same level as in fiscal 2006, but with a more focused use
of funds. We sell our products through our internal sales force and an
independent broker network.

Delivery

Delivery expense is primarily a function of sales, and historically ranged from
approximately 5% to 6% of net sales. In fiscal 2007, delivery expense decreased
to 3% of net sales due to our Supply Agreement with Schreiber. The Supply
Agreement fixed the delivery charges based on a per pound rate that was lower
than our historical delivery cost per pound. However, this rate can be adjusted
by the parties as agreed upon from time to time.

Due to the Supply Agreement, we anticipate additional savings on delivery
charges related to the distribution of our products to our customers in fiscal
2007 as compared to fiscal 2006.

General and administrative

During the first quarter of fiscal 2007, general and administrative expenses
decreased approximately $683,000 compared to the first quarter of fiscal 2006
due to a reduction of approximately $862,000 in non-cash compensation related to
stock-based transactions, as detailed below, offset by increases of $56,000 in
consulting fees and $46,000 in additional legal fees due to our review of
strategic alternatives (including the potential sale of our Company that was
abandoned in April 2006).

Excluding the effects of non-cash compensation related to stock-based
transactions, which cannot be predicted, we anticipate that general and
administrative expenses will decrease on an annual basis due to the
non-recurrence of the highly intensive consulting, legal and audit services
related to major contracts, review of strategic alternatives and additional SEC
filings that were required in fiscal 2006. Additionally, we do not anticipate
the occurrence of liquidated damages related to stock registration that were
incurred in fiscal 2006.

The reduction of $861,688 in non-cash compensation related to stock-based
transactions included in general and administrative expenses was a result of the
following:

      Effective April 1, 2006, SFAS No. 123R applies to new awards and to awards
      modified, repurchased, or cancelled after the effective date, as well as
      to the unvested portion of awards outstanding as of the effective date. We
      use the Black-Scholes model to value our new stock option grants under
      SFAS No. 123R, applying the "modified prospective method" for existing
      grants which requires us to value stock options prior to our adoption of
      SFAS No. 123R under the fair value method and expense the unvested portion
      over the remaining vesting period. For the three months ended June 30,
      2006, our total stock-based compensation expense was $5,830.

      Prior to April 1, 2006 and beginning April 1, 2003, we accounted for stock
      awards granted to employees under the fair value recognition provisions of
      SFAS No. 123, "Accounting for Stock-Based Compensation," and applied SFAS
      No. 148, "Accounting for Stock-Based Compensation - Transition and
      Disclosure," prospectively to all employee awards granted on or after
      April 1, 2003. Prior to April 1, 2003, we accounted for stock awards
      granted to employees under the recognition and measurement principles of
      Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
      to Employees, and related Interpretations" ("APB No. 25"). As a result, no
      compensation expense was previously recognized for stock options granted
      to employees prior to April 1, 2003 other than as related to option grants
      to employees and directors below the fair market value of the underlying
      stock at the date of grant or as related to subsequent modifications to
      option grants to employees and directors. For the three months ended June
      30, 2005, our total stock-based compensation expense was $867,518
      including an expense of $1,036,959 for awards valued pursuant to SFAS No.
      123 and income of $169,441 for modification of awards valued pursuant to
      APB No. 25.

Reserve on stockholder note receivable

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


                                       23

<PAGE>

On June 16, 2006, Mr. Morini failed to repay the non-recourse note obligation to
our Company. The 2,914,286 shares being held as collateral were deemed to be no
longer outstanding and thus considered as treasury stock. On June 20, 2006, we
delivered notice to Mr. Morini that we intended to exercise our rights to the
Shares and retain all the Shares in full satisfaction of his obligations under
the stockholder note receivable. On July 6, 2006, Mr. Morini consented to our
acceptance of the Shares in full satisfaction of his obligations under the
stockholder note receivable. Based upon the $0.42 closing price of our common
stock as quoted on the OTC Bulletin Board on June 16, 2006, the Shares had an
approximate value of $1,224,000 on such date. Accordingly, we recorded an
additional expense of $1,428,000 in the three months ended June 30, 2006 in
order to record the additional decline in the value of the Shares from its
$2,652,000 value as of March 31, 2006. As of June 30, 2006, the value of the
Shares is reflected in treasury stock. In July 2006, we cancelled the Shares
along with our other 30,443 treasury shares.

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

Cost of disposal activities

We are accounting for the costs associated with the Schreiber transactions in
accordance with SFAS No. 146, "Accounting for Costs Associated with an Exit or
Disposal Activity," because the arrangements were planned and controlled by
management and materially change the manner in which our business will be
conducted. In accordance with SFAS No. 146, costs associated with disposal
activities should be reported as a reduction of income from operations. During
the year ended March 31, 2006, all 104 employee positions related to the
manufacturing and distribution of our products were eliminated. The remaining
employee termination costs are expected to be paid in fiscal 2007. In December
2005, we abandoned our distribution facility and the production portion of our
administrative facility and accrued $396,197 related to abandonment of these
facilities. This amount was calculated as the present value of the remaining
lease rentals, reduced by the estimated market value of sublease rentals. The
actual expense will exceed this estimate for the time that we do not sublease
these facilities. Other exit costs consist primarily of legal and professional
fees related to the disposal activities and maintenance costs on the abandoned
facilities.

We report disposal costs for the period as Costs of Disposal Activities in the
Statement of Operations. A summary of the total disposal costs incurred is as
follows:

<TABLE>
<CAPTION>
                                     Employee
                                    Termination      Excess     Other Exit
                                       Costs       Facilities      Costs        Total
                                    -----------   -----------   ----------   ----------
<S>                                   <C>           <C>          <C>         <C>
Three Months Ended June 30, 2005      $     --      $     --     $189,069    $  189,069
                                      ========      ========     ========    ==========
Three Months Ended June 30, 2006            --        88,955       12,789       101,744
                                      ========      ========     ========    ==========
Total Costs Incurred from
  inception through June 30, 2006     $451,002      $607,434     $689,798    $1,748,234
                                      ========      ========     ========    ==========
</TABLE>

We anticipate that in future periods, there will be additional disposal costs
related to professional fees, contract cancellation charges and higher lease
abandonment charges to reflect the cost of abandoned facilities that were not
subleased during the period.

Impairment of property and equipment and loss on sale of assets

In light of the Schreiber transactions discussed above under Recent Material
Developments, we determined that it is more likely than not that a majority of
our fixed assets related to production activities would be sold or disposed
prior to the end of their useful life. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Term Assets," we wrote down
the value of our assets to their estimated fair values in June 2005. We
estimated the fair value based on the $8,700,000 sales price to Schreiber and
the anticipated sales price related to any other assets to be held for sale plus
future cash flows related to the assets from July 1, 2005 until the end of
production in November 2005. Based on this estimate, we recorded an impairment
of property and equipment of $7,896,554 in order to reflect a net fair value of
our equipment in June 2005.


                                       24

<PAGE>

All assets continued to be used and depreciated under Property and Equipment
until the sale of substantially all of our production machinery and equipment on
December 8, 2005. For the three months ended June 30, 2006, we recorded a
$12,824 gain on the sale of assets sold or abandoned after production ceased in
December 2005.

We have reclassified our remaining assets available for sale as Assets Held for
Sale in the Balance Sheet and expect to sell these remaining assets by September
2006. We have estimated the fair value of these assets to be $56,200. Any
difference between the actual proceeds received and this estimated fair value
will be recognized as a gain or loss on the sale of assets in the period that
they are sold.

Other income and expense

Interest expense decreased approximately $14,000 or 4% in the first quarter of
fiscal 2007 compared to the first quarter of fiscal 2006. In the first quarter
of fiscal 2007, we saw interest expense related to our debt facilities decrease
by approximately $212,000 due to the lower principal balances and the payment in
full of our property taxes with the proceeds from the sale of our manufacturing
equipment to Schreiber. This decrease was offset by an increase in the
amortization of loan costs and non-cash debt discounts. The amortization of loan
costs increased by approximately $74,000 due to additional loan fees charged by
our lenders. Additionally, pursuant to several Note and Warrant Purchase
Agreements entered into in fiscal 2006, we issued warrants to purchase up to
600,000 shares of our common stock. We recorded the $444,731 initial fair value
of the warrants as a discount to debt. In the first quarter of fiscal 2007, we
amortized the remaining balance of $126,979 of this non-cash debt discount as
interest expense.

Several of our loans facilities accrue interest based on a variable prime plus
rate. Due to the increases in the prime rate (currently at 8.25%), we will
experience higher interest rates in fiscal 2007 as compared to fiscal 2006 (in
which the prime rate averaged 6.7%). However, we anticipate that our interest
expense will decrease nearly 50% in fiscal 2007, despite the higher interest
rates, due to lower debt balances and the completion of the non-cash debt
discount amortization in June 2006 as discussed above.

In accordance with EITF 00-19, if a contract requires settlement in registered
shares, then we may be required to record the value of the securities as a
liability and/or temporary equity. Any changes in the fair value of the
securities based on the Black-Scholes pricing model after the initial valuation
are marked to market during reporting periods. During the first quarter of
fiscal 2006, we recorded a gain on the fair value of warrants of $340,000
related to the change in the fair values of the warrants during the period.
Since the warrants were exercised in June 2005, there was no adjustment for
these warrants in the first quarter of fiscal 2007.

Liquidity And Capital Resources

<TABLE>
<CAPTION>
3-Months Ended June 30,                      2006       2005       $ Change   % Change
----------------------------------------   -------   ----------   ---------   --------
<S>                                        <C>       <C>          <C>          <C>
Cash from (used in) operating activities   287,208   (1,403,404)  1,690,612    -120.5%
Cash from (used in) investing activities   (22,920)     (60,650)     37,730     -62.2%
Cash from (used in) financing activities    19,268      902,272    (883,004)    -97.9%
                                           -------   ----------   ---------    ------
Net increase (decrease) in cash            283,556     (561,782)    845,338    -150.5%
                                           =======   ==========   =========    ======
</TABLE>

Future Capital Needs

Our current business plan eliminates certain low margin private label and Galaxy
imitation business from our sales mix. The elimination of these low margin items
and the elimination of excess overhead that was part of our former manufacturing
operations should continue to result in higher gross margins with lower
operating costs and produce positive cash flows from operations in fiscal 2007.
With the reduction in overall debt and property taxes, we expect to see annual
interest savings in excess of $800,000 in fiscal 2007. Additionally, we
anticipate improved gross margins to provide over $1 million in additional cash
in fiscal 2007.

As a result of the successful refinancing of the $2.4 million short-term notes
and credit available for our receivables financing and the positive cash flow
that we are currently experiencing from operations, we believe that we have
sufficient cash resources to meet our current liquidity needs.

Operating and Investing Activities

We completed the sale of substantially all of our manufacturing and production
equipment and fully implemented the outsourcing of our production to Schreiber
in December 2005. Without the cash-flow burden of carrying inventory and higher
operating expenses due to excess plant capacity, we are experiencing improved
cash flows from operations from the higher margins and faster collections on
accounts receivable. We are continually reviewing our accounts receivable
collection practices in order to maximize cash flow from operations.


                                       25

<PAGE>

Cash used in investing activities primarily related to additional security
deposits that we paid in the first quarter of fiscal 2007 for our leased
facilities and a small amount of proceeds received on the sale of our remaining
assets held for sale. In the first quarter of fiscal 2006, cash used in
investing activities primarily related to our purchase of office and
manufacturing equipment. We do not anticipate any large capital expenditures
during fiscal 2007. However, it may be necessary to pay additional deposits or
leasehold improvements when we move our administrative offices in the third
quarter of fiscal 2007.

Financing Activities

3-Months Ended June 30,                  2006       2005
------------------------------------   -------   ---------
Net borrowings (payments) on line of
credit and bank overdrafts              42,117    (180,706)
Payments of debt and capital leases    (22,849)   (648,582)
Issuances of stock                          --   1,731,560
                                       -------   ---------
Cash from financing activities          19,268     902,272
                                       =======   =========

     Debt Financing

     Secured Borrowings

On June 23, 2006, we entered into a Receivables Purchase Agreement with Systran
Financial Services Corporation, a subsidiary of Textron Financial Corporation
("Systran"), whereby Systran will provide financing to our Company through
advances against certain trade receivable invoices due to our Company (the
"Systran Agreement"). The Systran Agreement is secured by our accounts
receivable and all other assets. Generally, subject to a maximum principal
amount of $3,500,000 which can be borrowed under the Systran Agreement, the
amount available for borrowing is equal to 85% of our eligible accounts
receivable invoices less a dilution reserve and any required fixed dollar
reserves. The dilution and fixed dollar reserves have been initially set at 7%
and $100,000, respectively. Advances under the Systran Agreement bear interest
at a variable rate equal to the prime rate plus 1.5% per annum (9.75% on June
30, 2006). We paid a one-time closing fee of $35,000 and are also obligated to
pay a $1,500 monthly service fee. The initial term of the Systran Agreement ends
on June 23, 2009 and may renew automatically for consecutive twelve-month terms
unless terminated sooner.

On June 23, 2006, Systran advanced $2,379,262 under the Systran Agreement of
which $1,839,086 was used to pay in full and terminate our obligations under our
line of credit with Textron Financial Corporation which was to terminate on June
27, 2006.

     Related Party Notes Payable

Pursuant to a Note and Warrant Purchase Agreement dated September 12, 2005, we
received $1,200,000 as a loan from Mr. Frederick A. DeLuca, a greater than 10%
shareholder. In October 2005, pursuant to several Note and Warrant Purchase
Agreements dated September 28, 2005, we received a $600,000 loan from Conversion
Capital Master, Ltd., a $485,200 loan from SRB Greenway Capital (Q.P.), L.P., a
$69,600 loan from SRB Greenway Capital, L.P. and a $45,200 loan from SRB
Greenway Offshore Operating Fund, L.P. The combined total of these loans was
$2,400,000. The loans were evidenced by unsecured promissory notes (the "Notes")
held by the above referenced parties (the "Note Holders"). The Notes required
monthly interest-only payments at 3% above the bank prime rate of interest per
the Federal Reserve Bank and matured on June 15, 2006.

We did not have the short-term liquidity to pay our related party Note Holders
on the $2.4 million Notes that matured on June 15, 2006 in accordance with their
original terms. We received a letter on June 20, 2006 from all the Note Holders,
other than Mr. DeLuca, notifying the Company that its failure to pay the amounts
due and owing on the maturity date constitutes a default under $1.2 million of
the Notes held by those Note Holders. Pursuant to the terms of the Notes, since
we did not cure the default within 10 days after receipt of the notice of
default, we were obligated to pay interest at the default rate of 8% above the
Prime Rate beginning July 1, 2006. We amortized the final $126,979 of debt
discount costs related to the above transaction in the three months ended June
30, 2006.


                                       26

<PAGE>

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

Recent Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN 48"). FIN
48 provides guidance on the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We are currently evaluating the impact
of this standard on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk results primarily from fluctuations in interest
rates. The interest rate on our outstanding debt to Systran as of June 30, 2006
is floating and based on the prevailing market interest rate. For market-based
debt, interest rate changes generally do not affect the market value of the debt
but do impact future interest expense and hence earnings and cash flows,
assuming other factors remain unchanged. A theoretical 1% increase or decrease
in market rates in effect on June 30, 2006 with respect to our debt as of such
date would increase or decrease interest expense and hence reduce or increase
the net income of our Company by approximately $21,000 per year or $5,250 per
quarter.

Our sales during the quarters ended June 30, 2006 and 2005, which were
denominated in a currency other than U.S. Dollars, were less than 5% of gross
sales and no net assets were maintained in a functional currency other than U.
S. Dollars during such periods. While we believe that the effects of changes in
foreign currency exchange rates have not historically been significant to our
operations or net assets, we are unable to forecast the effects that foreign
currency exchange rates may have on our future operations.

Item 4. Controls and Procedures

As of June 30, 2006, an evaluation was performed under the supervision and with
the participation of our management, including the Chief Executive Officer
("CEO"), and the Chief Financial Officer ("CFO"), of the effectiveness of the
design and operation of our disclosure controls and procedures to insure that we
record, process, summarize and report in a timely and effective manner the
information required to be disclosed in reports filed with or submitted to the
Securities and Exchange Commission. Based on that evaluation, our management,
including the CEO and CFO, concluded that our disclosure controls and procedures
were effective in timely bringing to their attention material information
related to our Company required to be included in our periodic Securities and
Exchange Commission filings. During the quarter ended June 30, 2006, there were
no changes in our internal controls over financial reporting or in other factors
that materially affected, or are reasonably likely to materially affect those
controls.


                                       27
<PAGE>

                           PART II. OTHER INFORMATION

Item  1A. Risk Factors

Statements other than historical information contained in this Form 10-Q are
considered "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995. These statements relate to future events or our
future financial performance. These forward-looking statements are based on our
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions made by our Company. Words such as "anticipate,"
"expect," "intend," "plan," "believe," "seek," "project," "estimate," "may,"
"will," "could," "should," "potential," or "continue" or the negative or
variations of these words or similar expressions are intended to identify
forward-looking statements. Although we believe that these forward-looking
statements are reasonable at the time they are made, these statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to predict. Therefore, actual results may
differ materially from our historical results and those expressed or forecasted
in any forward-looking statement as a result of a variety of factors as set
forth below. We are not required and undertake no obligation to publicly update
or revise any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.

In addition to the other information in this Form 10-Q and risk factors
previously disclosed in our Annual Report on Form 10-K for the year ended March
31, 2006, the following are some of the factors as of August 11, 2006, that
could cause our Company's actual results to differ materially from the expected
results described in or underlying our Company's forward-looking statements.
These factors should be considered carefully while evaluating our business and
prospects. If any of the following risks actually occur, they could seriously
harm our business, financial condition, results of operations or cash flows.

We have incurred significant losses.

We have incurred substantial losses in recent years and, as a result, have a
stockholders deficit of $3,591,259 as of June 30, 2006. Losses for the years
ended March 31, 2006, 2005 and 2004 were $24,148,553, $3,859,783 and $3,299,277,
respectively. We received a report from our independent accountants relating to
our audited financial statements as of March 31, 2006 containing a paragraph
stating that because we were then in default of our notes payable, had suffered
recurring losses from operations and at March 31, 2006 had deficiencies in
working capital and equity, there was substantive doubt as to our ability to
continue as a going concern. Our ability to continue as a going concern depended
upon successfully obtaining sufficient cash resources to refinance our $2.4
million of unsecured notes payable that matured on June 15, 2006 and obtaining
positive cash flow from operations to sustain normal business operations.

Pursuant to a Note Purchase Agreement dated July 19, 2006, we issued a new
unsecured convertible note for $2,685,104.17 (the "Convertible Note") to
Frederick A. DeLuca, a greater than 10% shareholder. The proceeds from the
Convertible Note were used to repay or refinance $2,400,000 in unsecured
promissory notes that matured on June 15, 2006 (including one such note in the
principal amount of $1,200,000 owned by Mr. DeLuca) and a $285,104.17
registration rights penalty owed to Mr. DeLuca. The Convertible Note accrues
interest at 12.5% per annum. No interest or principal payments are required
under the Convertible Note until its maturity in fifteen months on October 19,
2007. Principal, together with any accrued and unpaid interest, on the
Convertible Note is convertible at any time prior to payment into shares of our
common stock at a conversion price of $0.35 per share. The market price of our
common stock as quoted on the OTC on July 19, 2006 was $0.28. As additional
consideration for making the loan, we issued Mr. DeLuca a warrant (the
"Warrant") to purchase up to 200,000 shares of our common stock at an exercise
price equal to $0.35 per share. The Warrant is fully vested and can be exercised
on or before the expiration date of July 19, 2009.

Our current business plan eliminates certain low margin private label and Galaxy
imitation business from our sales mix. The elimination of these low margin items
and the elimination of excess overhead that was part of our former manufacturing
operations should continue to result in higher gross margins with lower
operating costs and produce positive cash flows from operations in fiscal 2007.

As a result of the successful refinancing of the $2.4 million short-term notes
and line of credit for our receivables financing and the positive cash flow that
we are currently experiencing from operations, we believe that we have
sufficient cash resources to meet our current liquidity needs.


                                       28

<PAGE>

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

As of August 11, 2006, Frederick DeLuca, a private investor, owned approximately
23% of our outstanding common stock and held warrants and a convertible note
which, if exercised with accrued and unpaid interest on the convertible note as
of such date and assuming the exercise of no other outstanding options or
warrants, would give him ownership of approximately 48% of our outstanding
common stock. Investors who purchase common stock in our Company may be unable
to elect any specific members of the board of directors or exercise significant
control over us or our business as a result of Mr. Deluca's ownership.
Additionally, Mr. DeLuca may be able to exercise significant influence over our
policies and Board composition.

Stockholders may experience further dilution.

We have a substantial number of outstanding options, warrants and a convertible
note to acquire shares of common stock. As of August 11, 2006, we have a total
of 14,064,784 shares reserved for issuance upon exercise of options, warrants
and a convertible note that we have granted. Of this total, 7,927,665 are
exercisable securities that are "in the money." "In the money" generally means
that the current market price of the common stock is above the exercise price of
the shares subject to the option, warrant or note conversion. The issuance of
common stock upon the exercise of these options and warrants or note conversion
could adversely affect the market price of the common stock or result in
substantial dilution to our existing stockholders. In addition, any future
securities issuances by our Company, could result in the issuance, or potential
issuance, of a significant amount of equity securities that will cause
substantial dilution to our stockholders, particularly given the current low
trading price of our common stock.

Because we sell food products, we face the risk of exposure to product liability
claims.

We, like any other seller of food products, face the risk of exposure to product
liability claims in the event that our manufacturer's quality control procedures
fail and the consumption of our products causes injury or illness. In July 2006,
we initiated a voluntary product recall on one of our Vegan products after we
discovered that the product produced by a sub-manufacturer may contain traces of
undeclared milk ingredients. The recall was limited to our Vegan Parmesan Flavor
Soy Topping with expiration codes between April 2007 and May 2007 of which we
had sold approximately $65,000. With respect to product liability claims, our
insurance may not continue to be available at a reasonable cost, or, if
available, may not be adequate to cover liabilities. We generally seek
contractual indemnification and insurance coverage from parties supplying us
products, but this indemnification or insurance coverage is limited, as a
practical matter, to the creditworthiness of the indemnifying party, and their
carriers, if any, as well as the limits of any insurance provided by suppliers.
If we do not have adequate insurance or contractual indemnification available,
product liability claims relating to defective products could have a material
adverse effect on our financial condition, results of operations and cash flows.


                                       29

<PAGE>

Item  6. Exhibits

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

Exhibit No   Exhibit Description
---------    -------------------
*      3.1   Restated Certificate of Incorporation of the Company as filed
             with the Secretary of State of the State of Delaware on December
             23, 2002 (Filed as Exhibit 3.2 on Form 10-Q for the fiscal quarter
             ended December 31, 2002.)

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

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

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

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

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

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

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

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

*     4.25   Investor relations contract between Galaxy Nutritional Foods, Inc.
             and R.J. Falkner dated as of September 29, 2004 (Filed as Exhibit
             4.25 on Form S-3 filed March 14, 2005.)

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

*     4.27   Warrant to Purchase Securities of Galaxy Nutritional Foods, Inc.
             dated July 19, 2006 in favor of Frederick A. DeLuca (Filed as
             Exhibit 4.27 on Form 8-K filed July 25, 2006.)

*     4.28   Convertible Note in the principal amount of $2,685,104.17 dated as
             of July 19, 2006 by Galaxy Nutritional Foods, Inc. in favor of
             Frederick A. DeLuca (Filed as Exhibit 4.26 on Form 8-K filed July
             25, 2006.)

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

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

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


                                      30

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

*    10.16   Third Amendment to Loan and Security Agreement dated November 10,
             2004 between Galaxy Nutritional Foods, Inc. and Textron Financial
             Corporation (Filed as Exhibit 10.16 on Form 10-Q for the fiscal
             quarter ended December 31, 2004.)

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

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

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

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


                                      31

<PAGE>

*    10.21   Termination, Settlement and Release Agreement dated July 20, 2005
             between Galaxy Nutritional Foods, Inc. and Fromageries Bel S.A.
             (Filed as Exhibit 10.21 on Form 8-K filed July 26, 2005.)

*    10.22   Note and Warrant Purchase Agreement dated September 12, 2005
             between Galaxy Nutritional Foods, Inc. and Frederick A. DeLuca
             (Filed as Exhibit 10.22 on Form 8-K filed September 16, 2005.)

*    10.23   Note and Warrant Purchase Agreement dated September 28, 2005
             between Galaxy Nutritional Foods, Inc. and Conversion Capital
             Master, Ltd. (Filed as Exhibit 10.23 on Form 8-K filed October 4,
             2005.)

*    10.24   Note and Warrant Purchase Agreement dated September 28, 2005
             between Galaxy Nutritional Foods, Inc. and SRB Greenway Capital,
             L.P. (Filed as Exhibit 10.24 on Form 8-K filed October 4, 2005.)

*    10.25   Note and Warrant Purchase Agreement dated September 28, 2005
             between Galaxy Nutritional Foods, Inc. and SRB Greenway Capital
             (Q.P.), L.P. (Filed as Exhibit 10.25 on Form 8-K filed October 4,
             2005.)

*    10.26   Note and Warrant Purchase Agreement dated September 28, 2005
             between Galaxy Nutritional Foods, Inc. and SRB Greenway Offshore
             Operating Fund, L.P. (Filed as Exhibit 10.26 on Form 8-K filed
             October 4, 2005.)

*    10.27   First Amendment to Note and Warrant Purchase Agreement dated
             October 7, 2005 between Galaxy Nutritional Foods, Inc. and
             Frederick A. DeLuca (Filed as Exhibit 10.27 on Form 10-Q for the
             fiscal quarter ended September 30, 2005.)

*    10.28   Fifth Amendment to Loan and Security Agreement dated November 14,
             2005 between Galaxy Nutritional Foods, Inc. and Textron Financial
             Corporation (Filed as Exhibit 10.28 on Form 10-Q for the fiscal
             quarter ended September 30, 2005.)

*    10.29   Sixth Amendment to Loan and Security Agreement dated May 26, 2006
             between Galaxy Nutritional Foods, Inc. and Textron Financial
             Corporation (Filed as Exhibit 10.29 on Form 8-K filed June 1,
             2006.)

*    10.30   Receivables Purchase Agreement, together with Addendum, dated June
             23, 2006 between Galaxy Nutritional Foods, Inc. and Systran
             Financial Services Corporation (Filed as Exhibit 10.30 on Form 8-K
             filed June 29, 2006.)

*    10.31   Note Purchase Agreement dated July 19, 2006 between Galaxy
             Nutritional Foods, Inc. and Frederick A. DeLuca (Filed as Exhibit
             10.31 on Form 8-K filed July 25, 2006.)

*    10.32   Termination Agreement dated July 31, 2006 between Galaxy
             Nutritional Foods, Inc. and CLP Industrial Properties (Filed as
             Exhibit 10.32 on Form 8-K filed August 3, 2006.)

     10.33   Non-plan Option to Purchase Securities of Galaxy Nutritional Foods,
             Inc. dated August 7, 2006 in favor of Peter J. Jungsberger (Filed
             herewith.)

     10.34   Non-plan Option to Purchase Securities of Galaxy Nutritional Foods,
             Inc. dated August 7, 2006 in favor of Robert S. Mohel (Filed
             herewith.)

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

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

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

      31.1   Section 302 Certification of our Chief Executive Officer (Filed
             herewith.)


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<PAGE>

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

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

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

*            Previously filed and incorporated herein by reference.


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<PAGE>

                                  SIGNATURES

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

                                       GALAXY NUTRITIONAL FOODS, INC.


Date: August 14, 2006                  /s/ Michael E. Broll
                                       -----------------------------------------
                                       Michael E. Broll
                                       Chief Executive Officer
                                       (Principal Executive Officer)


Date: August 14, 2006                  /s/ Salvatore J. Furnari
                                       -----------------------------------------
                                       Salvatore J. Furnari
                                       Chief Financial Officer
                                       (Principal Accounting and Financial
                                       Officer)


                                      34